Varun Beverages Stock: Varun Beverages Ltd. (VBL)'s share price surged more than 4 percent in the previous trading session. VBL shares touched an intraday high of Rs 771.95 and an intraday low of Rs 742.00 on June 14. Varun Beverages is a major player in the beverage industry and one of the largest franchisees of PepsiCo outside the US. Last week, the company's board recommended bonus shares in the proportion of 1:2, i.e., 1 equity share for every 2 equity shares held by the shareholders of the company as on the record date. For the January-March quarter, VBL posted a robust 26.2 percent on-year sales growth. The company’s profit after tax (PAT) nearly doubled or advanced 98.2 per cent on-year to Rs 271 crore from Rs 137 crore, driven by improvement in margins, reduction in finance costs, and higher profitability from our international operations.
(Stock Price History)
Varun Beverages stock has rallied nearly 33.33 percent so far in 2022, 48 percent in the last year, and has given hefty returns to investors in the last two years at nearly 180 percent. Going forward, brokerages see a further potential rally of up to 20 per cent.
In the previous session, it touched an intraday high of Rs 771.95 and an intraday low of Rs 742.00. It was trading with volumes of 32,738 shares, compared to its thirty-day average of 185,636 shares, a decrease of -82.36 per cent. The share touched its 52-week high Rs 1,166.50 and 52-week low Rs 710.00 on June 2, 2022 and July 5, 2021, respectively. Currently, it is trading 34.05 percent below its 52-week high and 8.35 percent above its 52-week low.
What Should Investors Do?
Analysts at Motilal Oswal Financial Services expect the strong recovery to continue going forward, led by growing out-of-home consumption, with the opening up of offices and traveling activity; an uptick in volumes in new territories; robust growth in launched products; and growing refrigeration in rural and semi-rural areas.
"Factoring in its 1QCY22 performance, we raise our CY22/CY23 earnings estimates by 7 per cent and 6 per cent as the growth trajectory is expected to continue with robust demand from out-of-home consumption and strong support from newly launched products. "We expect a revenue/EBITDA/PAT CAGR of 16 per cent, 21 per cent, and 38 per cent over CY21-23," the domestic brokerage firm said. It maintained a ‘buy’ rating on the stock with a target price of Rs 1,230 per share, implying 16 per cent upside. "Growth was limited due to capacity constraints (100 per cent utilization at present). Once new capacities come on stream (maybe by CY23), growth will be exponential, "it added.
Analysts at ICICI Securities model Varun Beverages to report revenue and PAT CAGRs of 13.8 percent and 29.3 percent, respectively, over CY21-CY23. "It continues to benefit from its relationship with PepsiCo, pan-India distribution, backward integration, and an increase in in-home consumption. "However, we believe at the current valuations (40x CY23E), the stock price upside is capped and downgraded the stock to a HOLD rating with a DCF-based target price of Rs 1,030 (38x CY23E)," the brokerage said.
According to analysts, key downside risks include a steep rise in competitive pressures and input prices; delays in the launch or failure of new products; and a slowdown in urban and rural economies. "While we remain positive on Varun’s business model, the stock price upside is capped at current valuations," they added.
VBL reported strong 16 per cent and 32 per cent on-year growth in domestic and international volumes, respectively, led by strong execution and an early onset of summer. Kotak Securities in its institutional equities report stated, "Even as we were expecting a good CY22, VBL is set to exceed our expectations on the back of strong volume growth aided by (1) distribution-led share gains in the South/West, (2) stellar growth of Sting (6-7 per cent of sales growing at 100 per cent+) and (3) an unusually hot summer. "We raise CY22-24E volumes and revenues by 8-10 per cent to factor in robust underlying industry growth, market share gains and strong traction in Sting, Tropicana and dairy beverages (up to 9 per cent of volumes in 1QCY22 from about 2-3 per cent in CY19)."
The brokerage upgraded CY22-24 EPS estimates by 10-12 per cent, rolled over and revised FV to Rs 1,275 from Rs 1,100 earlier. It reiterated the ‘buy’ call on the stock.