World's 2nd Largest Pepsico Franchisee Stock Could Surge, Motilal Oswal Has A "Buy"

The stock of Varun Beverages Limited is on a 'Buy' radar of Motilal Oswal, a leading broking firm.

This bluechip fast moving consumer goods (FMCG) company recently shared its quarterly numbers indicating robust growth. Based on the research report the brokerage house sees a significant potential gain of 27% from the stock of this world's second largest Pepsico franchisee player.

About Varun Beverages

Varun Beverages Limited is a part of the RJ Corp group, a diversified business conglomerate with interests in beverages, quick-service restaurants, dairy and healthcare. It is the second largest franchisee in the world (outside US) of carbonated soft drinks ("CSDs") and non-carbonated beverages ("NCBs") sold under trademarks owned by PepsiCo and a key player in the beverage industry.

The company produces and distributes a wide range of CSDs, as well as a large selection of NCBs, including packaged drinking water. Additionally the company also was granted the franchise for Ole brand of PepsiCo products in Sri Lanka. The company has been associated PepsiCo for over 2 and half decades since the 1990s. Over the years the company expanded its distribution reach across 27 states and 7 union territories in India. The company is PepsiCo's franchisee player even for the territories of Nepal, Sri Lanka, Morocco, Zambia and Zimbabwe.

It has 30 manufacturing plants in India and 6 manufacturing plants in international geographies. Additionally the company has set up backward integration facilities for production of preforms, crowns, corrugated boxes, plastic crates and shrink-wrap films in certain of the production facilities to ensure operational efficiencies and quality standards.

Quarterly revenue details of Varun Beverages

According to the Motilal Oswal coverage report, Varun Beverages saw robust growth in revenue, and margins improved. " Varun Beverages (VBL) posted robust revenue growth in 4QCY22, fueled by strong volume growth (up 18% YoY) and higher realization (up 9% YoY). Gross margin improved 90bp YoY, despite the inflationary raw material environment, aided by higher realization and early stocking of key raw materials. Gross margin/unit case grew 10% YoY to Rs 94.4. EBITDA per unit case improved 26% YoY to Rs 23.3, supported by operating leverage. Adj. PAT grew by 4.5x YoY to Rs 748 million (est. Rs 546 million), driven by higher sales growth, improvement in margins and transition to a lower tax rate in India."

Guidance from management

The management believes Varun Beverages will increase its distribution network and set a capex number, as per the report. "Expanding distribution network: VBL aims to increase its distribution
network from over 3 million outlets to ~3.5 million outlets and deploy ~70,000 to 80,000 visi-coolers in CY23. Management has guided for net capex of ~Rs 15 billion in CY23 (including the CWIP of ~Rs 6 billion as on Dec'22)."

Buy stock of Varun Beverages, with a price target of Rs 1,550 per share

In the research report the analyst explains the reason for suggesting investor to buy the stock of Varun Beverages, as the stock price per share would surge upto 27%. "We expect VBL to maintain its earnings momentum, underpinned by: 1) increased penetration in newly acquired territories of South and West India, 2) higher acceptance of newly launched products, and 3) growing refrigeration in rural and semi-rural areas. We largely maintain our CY23/CY24 earnings estimates. We expect a revenue/EBITDA/PAT CAGR of 16%/18%/27% over CY22-24. We value the stock at 42x CY24E EPS to arrive at a target price of Rs 1,550. Maintain BUY."

The latest stock price of Varun Beverage is Rs 1311.40, it has grown 7.42% on intraday basis. The market capitalisation is Rs 85,045.53 crore. In one year the stock has rallied by 107.67%

Disclaimer

The stock has been picked from the brokerage report of Motilal Oswal, 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 consult with certified experts before making any investment decision.