Buy This Multibagger Mid Cap Beverage Franchise Stock, Target Price Rs 1,150: Axis Securities

Axis Securities has assigned a buy call to Varun Beverages Limited (VBL) for potential gains up 6% with a target price of Rs 1,150 per share. VBL is a mid-cap beverage sector stock having a market cap of Rs 70,774.93 crore.

VBL is the 2nd largest franchisee of PepsiCo in the world (outside the USA). Products manufactured by VBL include Carbonated Soft Drinks - Pepsi, Mountain Dew, Seven Up, Mirinda; Non-Carbonated Beverages - Tropicana Slice, Tropicana Frutz; and Bottled water - Aquafina. The company operates in India and is also the exclusive bottler for PepsiCo in Nepal, Sri Lanka, Morocco, Zambia, and Zimbabwe.

Stock Outlook & Returns

On the NSE, VBL's Current Market Price (CMP) stood at Rs 1,089.60 per share. Shares of the company have surged 1.81% in a week. It gave 28.41% in the past 3 months, and over a year, it gave 81.45%. It gave multibagger returns of 302.83% and 615.03 in the 3 and 5 years, respectively.

Its 52-week low is Rs 539.20, which was recorded on October 25, 2021, and its 52-week high is Rs 1,194.70, which was recorded on September 22, 2022. The company delivered an ROE of 17.01% in the year ending 31 December 2021 outperforming its 5-year average of 13.57%.

 

 

Strong off-take to continue

After a strong Q2CY23 management expects double digit volume growth for the next 3-4 years aided by market share gains in weaker territories (Bihar, Jharkhand, Chhattisgarh and West Bengal) and expansion in other geographies. Moreover strong festive demand outlook will further aid the growth in near term and newly acquired territories in 2018-19 has been impacted due to due to COVID 19 disruptions which will now see full recovery in coming quarters. VBL has posted a sales volume CAGR of 20% from 279mn unit cases in 2017 to 569mn unit cases in 2021. 

New upcoming plants at Bihar and Jammu & Kashmir

Bihar and Jammu plants are now operational: During Q2CY22, the new beverage manufacturing plant in Bihar is running at full capacity, per capita consumption in Bihar is at 8- 9 bottles versus the India average of 24 bottles would enable VBL to penetrate and deliver healthy volume growth in the medium term. Both these plants will grow their presence closer to customers, increase penetration, garner a higher market share, build cost efficiencies and also help improve profitability.

Distribution reach

VBL currently has over 3 Mn outlets reach - International (250,000), Domestic - overall (2.5 million) and Sting (400,000) outlets. The management highlighted it will add additional 8-10% outlets every year across geographies. Moreover, it will utilize current Sting outlets to distribute other core products. 

Favorable macro indicators

India's per-capita soft drink consumption of 24 bottles stands much lower than 271 bottles in China, 1,496 bottles in the USA, and 1,489 bottles in Mexico, offering massive growth headroom. The soft drinks industry in India is expected to report healthy growth across categories on the back of better demographics, improving retail penetration across markets, better macroeconomics, and a rising trend of in-home consumption.

Outlook

According to the brokerage, VBL could emerge as a winner in the long term due to 1) aggressive placement of visi-coolers in acquired territories of South & West and underpenetrated East India, 2) consolidating existing distributors and increasing distribution in underpenetrated regions, 3)scale-up of new product launches (energy drink, juices, nectars) across territories, 4) penetrating new geographies through inorganic expansion. Further, CY22 is likely to be a normal operational year and company's strategic measures to use light-weight PET bottles would aid in mitigating RM pressures as it's a strategic and structural cost optimization measure initiated by VBL. 

Valuation

Commenting on the valuation, the brokerage said, "We believe all near-term challenges (RM inflation, top-line growth) are behind the company and VBL is expected to perform well going ahead on account of 1) Newly acquired territories that will see normalcy of operations and market share gains post COVID-19 disruptions, 2) The management's continued focus on the efficient go-to-market execution in acquired and underpenetrated territories as can been seen from its recently commissioned Bihar plant operations (it has started gaining market share) 3) Expand distribution reach by 8-10% from current 3 Mn outlets as it penetrates further into weaker territories, 4) Robust growth in the International geographies, and 5) Sustenance of healthy double-digit volume growth in the medium to longer term. we factored in Revenue/EBITDA/ PATCAGR of 25%/30%/45% over CY21-24E and arrive at a revised Target Price of Rs 1,150/share."

Disclaimer

The stock has been picked from the brokerage report of Axis Securities. Greynium Information Technologies, the Author, and the respective Brokerage House are not liable for any losses caused as a result of decisions based on the article. Goodreturns.in advises users to check with certified experts before making any investment decision.