Buy This Multibagger Mid-Cap Stock For Aggressive 22% Gains, Posted 22% Revenue Growth

Stock Outlook

The stock of Varun Beverages Ltd was opened at Rs 785/share and ends at the Current Market Price (CMP) of Rs 790.55/share. The stock surged 0.62% from the previous close. The 52-week low of the stock is Rs 472.67/share, touched on 05 July 2021, and the 52-week high at Rs 805/share, recorded on 15 June 2022. As per the brokerage's estimated target price of Rs 959/share and the CMP of the stock, the investors could see a potential upside of 22% in its share price.

Varun Beverages Ltd in the past 5 years has given multibagger returns of 412.15%, and 181.8% in 3 years of investment, respectively. In the past 1 year, the stock moved up nearly 62.53%, and 23.42% in 3 months. The stock has also performed well in terms of returns on investment in the past 1 month. It gave 9.02% in 1 month, and 4.91% in past 1 week.

Investment Rationale

Appeasing seasonality (summer season) by focusing on International territories/acquiring South & West region/entry into food products 

Varun Beverages recently acquired South and West regions in CY19 (volume growth of 45%) where it has lower than avg. market share, thus huge scope of growth. Moreover, VBL's International market (19% of total volume) with higher realization than India, having clocked lofty CAGR volumes of 24% compared to 14% growth in India over CY15-21. Production of "Kurkure Puffcorn" (started in Q3CY22) will reduce seasonality in the business.

Extension of franchise agreement for another 20 years

Varun Beverages's franchise agreement with PepsiCo extended till April 2039, the first time ever for 20 years. Earlier, it used to have contract only for a 10-year period, this makes VBL the only franchisee to have such a long-term contract.

Growth Drivers

Improving Product mix to attract diverse market - Aggressive expansion into higher realization SKUs like Juices (Tropicana), energy drinks (Sting, which posted massive 400% growth in CY21) and dairy products (Cream bell) to capture the diverse market.

Building backward integrated facilities & in-house production of "Tropicana" will boost production - In-house plant of "Tropicana" with backward integration at "Pathankot" (2019) and 2 new plants in J&K and Bihar will be the key growth drivers.

Cost-cutting initiatives & debt reduction to boost margins by 240 bps

Improving EBITDA margins (13% in CY12 to 19% in CY21, which peaked at 21% in CY19) on the back of reduced weight of preforms (bottles) & closures (caps) by 10 to 20%, and adding visi-coolers and outlets. Also, we expect a sharp debt reduction in the next 2-3 years (Rs 24,418 to Rs 15,376 Mn by CY24E) due to less CAPEX requirement leading to fall in interest cost (Rs 1847 in CY21 to Rs 923 in CY24E).

Brokerage suggests buy for Target Price of Rs 959

The brokerage said, "Varun Beverages Ltd should sustain its premium valuations on the back of improving return ratios (18% ROCE in CY21 to 24% in CY24E), and reducing D/E (0.7x to 0.2x in similar period), we expect the company to deliver Revenue/EBITDA/PAT CAGR of 19%/18%/29% respectively over CY22-24E. We initiate coverage with a Buy and value the stock at 45x (10 yr avg. P/E of Dabur, TCPL, HUL, Britannia, Marico) CY23E EPS of Rs 21.3 to arrive at our Target Price of Rs 959 with a potential upside of 23%."

About - Varun Beverages Ltd

Varun Beverages Ltd is a key player in the beverage industry and one of the largest franchise of PepsiCo in the world (outside the USA). The Company produces and distributes a wide range of carbonated soft drinks (CSDs), as well as a large selection of non-carbonated beverages (NCBs), including packaged drinking water sold under trademarks owned by PepsiCo. PepsiCo CSD brands produced and sold by Varun Beverages include Pepsi, Diet Pepsi, Seven-Up, Mirinda Orange, Mirinda Lemon, Mountain Dew, Mountain Dew Ice, Seven-Up Nimbooz Masala Soda, Evervess, Sting, Gatorade and Slice Fizzy Drinks. PepsiCo NCB brands produced and sold by the Company include Tropicana Juices (100%, Delight, Essentials), Tropicana Slice, Nimbooz, as well as packaged drinking water under the brand Aquafina.