Varun Beverages - Strengthens International Play: KRChoksey

KRChoksey Research Report

The acquisition of BevCo fits in with Varun Beverages Ltd.’s strategy and our anticipation that it will enter into new territories for incremental growth beyond India.

It has the potential to add at least 10.0% incremental revenue to Varun Beverages in CY25E, as the acquisition is proposed to be completed sometime in H2 CY24E. BevCo has grown at a higher rate in the last two years compared to the industry, which augurs well for further growth.

Varun Beverages’ demonstrated strength in distribution capabilities in other countries, may help to increase market share in South Africa as well. While it will add to the revenues, the BevCo business will be margin dilutive for the company as it is currently operating at Ebitda margin levels of ~12.0% versus best-inclass levels of ~21.0% for Varun Beverages.

We believe there is scope for margin improvement in the acquired business due to operating efficiencies and proximity benefits from Varun Beverages' operations in countries like Zambia and Zimbabwe.

We remain positive on the company as it has multiple tailwinds in India as well as international markets in the form of macro factors, distribution expansion, capacity expansion, entry into new territories and products, and a strong financial position.

We also view this acquisition as a strengthening of Varun Beverages’ relationship with PepsiCo.

We retain our estimates for CY23E/ CY24E/ CY25E currently and expect net revenue/ Ebitda/ adjusted profit after tax to grow at a compound annual growth rate of 17.3%/ 20.2%/ 26.2% over CY22-CY25E.

Varun Beverages is currently trading at 81.5 times / 67.7 times/ 55.0 times its CY23E/ CY24E/ CY25E adjusted earnings per share.

We assign a higher price/earning multiple of 65.0 times (55.0 times previously) to CY25E EPS of Rs 23.2 (unchanged), as we like the prospects of the acquired business and remain bullish on the existing business of Varun Beverages.

We assign a target price of Rs 1,505 per share (Rs 1,273 per share previously), with an 18.1% upside from current levels.

Accordingly, we maintain a 'Buy' rating in the shares of Varun Beverages.

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