Varun Beverages Remains BofA's Preferred Pick Among Consumer Companies

Shares of Varun Beverages Ltd. rose on Wednesday after it remained Bank of America's "preferred pick" among Indian consumer companies due to good visibility of outsized revenue and better earnings growth than its peers.

"VBL remains a preferred pick among Indian consumers given the good visibility of outsized revenue and earnings growth (20%+ CAGR), better than most peers, which should support stock valuation," the brokerage said. "We believe the pullback after June quarter results is an enhanced buying opportunity."

BofA reiterated its 'buy' call for the stock with a price target of Rs 1,840, implying a 23% upside.

The company's business momentum is healthy, and it sees upside from distribution expansion, new products including dairy beverages, energy/sports drinks, and snacks, along with new territories, the brokerage said.

"Africa expansion remains a large opportunity, and we believe the BevCo South Africa acquisition and snack foray from next year may help diversify and de-risk VBL's overseas operations," BofA said.

"We expect a good uptick in the organic business in the coming quarters; Zimbabwe has recovered after the portfolio transition in 2Q following the sugar tax," it said. Moreover, commercialisation of the Congo plant would add to growth from September quarter onwards.

On reports of the listing of the bottling arm of beverage major Coca-Cola Hindustan Coca-Cola Beverages, BofA said that it is premature to predict how things pan out.

"While HCCB has a comparable scale to VBL, Coke's bottling business in India is more fragmented (10+ bottlers); it has refranchised bottling operations in 3 territories this year," it said. "On the headline, VBL's operational and financial metrics appear better."

Not just this, the brokerage also noted that for the past decade, a part of VBL's growth narrative has been acquiring new bottling territories for PepsiCo. "Now with rights to more than 90% of India, we think incremental upside is possible with distribution expansion; management targets double-digit CAGR for multiple years in India," it said.

The stock rose as much as 4.14% to Rs 1,553.40 apiece, the highest level since Aug. 7. It pared gains to trade 3.7% lower at Rs 1,546.05 apiece, as of 12: 50 p.m. This compares to a 0.1% advance in the NSE Nifty 50 Index.

The stock has risen 25% on a year-to-date basis and 71.93% in the last 12 months. Total traded volume on the NSE so far in the day stood at 0.66 times its 30-day average. The relative strength index was at 51.6.

Out of the 21 analysts tracking the company, 18 maintain a 'buy' rating and three recommend a 'hold', according to Bloomberg data. The average 12-month consensus price target implies an upside of 13.5%.