Varun Beverages back in growth mode, stock still has upside left after doubling

Varun Beverages Ltd (VBL), PepsiCo Inc.’s exclusive bottler in India, will soon be looking to expand its operations into relatively under-penetrated markets and integrate its southern and western territories in the country. 

The company is also looking to expand its international operations and build distribution channels for other Pepsi brands, according to a report by IIFL Securities Ltd.

Citing senior VBL executives, IIFL Securities said the Jaipuria family-owned bottling company is looking to scale up operations in states like Bihar and Jharkhand.

“Per-capita consumption in under-penetrated territories such as Bihar and Jharkhand is one-third of the national average and has significant potential to grow via market-development efforts,” the report said. 

VBL is also looking beyond Pepsi and build its distribution channels for other brands including Tropicana juices and more recently launched ones like Mountain Dew Ice and Sting. 

Interestingly, VBL’s bid to focus more on Tropicana comes even as PepsiCo is reportedly looking to sell the brand along with other juice brands for $3.3 billion to a joint venture majority owned by private equity firm PAI Partners.

Varun Beverages eyes foreign shores

Apart from looking for growth prospects within India, VBL is also looking to raise PepsiCo’s market share across countries as diverse as Nepal and Zimbabwe, where the beverage company already controls 45% and 55% of the market, respectively. VBL is also looking to expand its presence in Morocco. 

“In Morocco, Pepsi’s mkt share is about 14% and the company has been constrained by the non-compete agreement for water as well as the foreign language (French and Arabic) barrier. However, it now has the rights for water and would focus on expanding market share,” the report said. 

VBL executives also say that it could look at expanding to more English-speaking countries across Asia and Africa, provided there is little political and currency volatility risks.

Higher capex

As the bottler eyes expansion across India and other regions, VBL executives say the company’s capital expenditure for the year 2022 will be higher than depreciation. 

A significant proportion of this rise will come on account of VBL looking to add a new bottling plant in Bihar as well as invest in PET capacities. 

The company will also have to significantly ramp up its investment towards backward integration, as it looks to combine its southern and western operations. 

VBL is one of PepsiCo’s biggest franchisees outside of the US. The company was set up in 1995. It currently operates across 27 Indian states and several countries including Nepal, Sri Lanka, Morocco, Zambia and Zimbabwe, where, like India, it is PepsiCo’s exclusive bottler.  

VBL gets 74.2% of its business from India, 13.3% comes from Zambia and Zimbabwe, and 5% each from Morocco and Nepal. Sri Lanka generates just over 2% of the company’s revenue. 

While carbonated beverages make up for a lion’s share of the company’s business, 21% of its revenue comes from packaged water and 6% from non-carbonated beverages.

Outlook for Varun Beverages

The Covid-19 pandemic dampened the company’s performance in the past two years, but its management is now confident of volumes bouncing back as the situation normalises.

Indeed, the company’s revenue fell 9.5% in calendar year 2020 to Rs 6,450 crore from Rs 7,129.6 crore the year before. Its EBITDA margin shrank to 18.6% in 2020 from 20.3% in 2019 while profit after tax dropped to Rs 329 crore from Rs 469 crore. But the company is back on the growth path, IIFL Securities said.

According to the IIFL report, Varun Beverages is likely to record a 60% jump in profit after tax to Rs 634 crore in 2021 and a 55% increase next year. The EBITDA margin is expected to expand to 19.3% this year and to 21.1% next year.

IIFL retains a “buy” call on the Varun Beverages stock, with a target price of Rs 1,050 apiece over the next one year. That’s a 13% upside on the company’s current market price. The shares have already more than doubled over the past year.