Motilal Oswal has initiated coverage on the stock of Varun Beverages, with a price target of Rs 1,101, which is 21 per cent higher from the current levels.
According to the brokerage firms report, Varun Beverages single-handedly accounted for 80% of PepsiCo India's business in CY19 (v/s 45% in CY17) on the back of various expansions and acquisitions in the last few years.
"Penetration level in the newly acquired territories is comparatively lower compared to existing territories. Replication of existing distribution network model, coupled with supply-chain, should increase penetration in these new territories and help gain incremental market share. The newer geographies (South and West) would also provide consistent volume sustainability in the medium to long term. The company's newly set-up Tropicana plant in Pathankot should further boost push volumes as it has acquired the rights to sell and distribute Tropicana fruit juices from PepsiCo India," Motilal Oswal has said in its report.
Varun Beverages is engaged in the manufacture, sale, bottling, and distribution of PepsiCo's beverages in pre-defined territories in India (27 states and seven Union Territories). Its India operations contributed 82% to CY19 revenue. The company is also present in Sri Lanka, Nepal, Morocco, Zambia, and Zimbabwe.
VBL is PepsiCo's second-largest bottler outside the US and handles over 80% of the cola giant's India business. While its link with PepsiCo provides it with long-term growth sustainability, robust distribution and supply-chain network should improve its market share in newly acquired territories and push volume growth.
The company is diversifying its product portfolio with the commencement of the new Tropicana plant in Pathankot. This should help reduce concentration risk and improve margin as realizations in non-carbonated beverages (NCB) are 10% higher than in carbonated soft drinks (CSD). Inorganic expansion in the Water segment and increasing share of the international business should help it diversify further.
"Increasing electrification per household in rural and semi-rural areas, growing refrigeration penetration, and rising per capita income, is expected to drive overall consumption of beverages. VBL is poised to gain market share from the consolidation in new territories," Motilal Oswal report says.
According to the report, capacity utilization during peak months (May-June) is barely 60%. This surplus capacity provides enough headroom to meet increasing demand without additional capex. Higher sweating of assets should further improve its operating profit.
"We estimate 12%/31% revenue/PAT CAGR over CY19-22E, driven by newly acquired territories and stable operating margin. We value the stock at 30x CY22E EPS of Rs 36.2 to arrive at our target price of INR1,100. We initiate coverage with a Buy rating," the broking firm has stated.