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Varun Beverages - Q2CY20 Result Update - ICICI Securities

Posted On: 2020-08-05 09:25:51

Varun Beverage's Q2CY20 results were on expected lines with 41.6% sales fall and 46.4% volume de-growth. Realisation improved 8.9% with cut down in promotions & product mix change (decline in water business was even more severe). The results were impacted by lockdown with manufacturing, supply chain operations staying disrupted in April. Though the company started production quite early in April, demand conditions were slack with significant fall in 'on the go' consumption. Moreover, shutting down of restaurants, cafes, multiplex (comprising ~10% of sales) also negatively impacted volumes. Volumes were down 75% in April. They slowly improved in June with 25% decline with the start of unlocking phase. Operating margins were down 500 bps to 23% with employee spends & overhead spends up (percentage of sales) by 506 bps & 207 bps, respectively, largely due to negative operating leverage. However, some of this was mitigated by 212 bps gross margin expansion. The gross margin expansion was largely due to 12.5% decline in PET chip prices & 6% decline in sugar prices (in April, May). Net profit was down 64.7% to Rs. 143 crore impacted by lower operating profit. Interest cost was down from Rs. 84.4 crore to Rs. 74.2 crore mainly due to reduction in debt from Rs. 3246 crore to Rs. 2932 crore.

Valuation & Outlook

Carbonated drinks, juices & water businesses are discretionary in nature with ~70% of sales contributed by 'on the go' consumption with single serve pack selling the most. The current disruption has significantly curtailed 'out of home' activity impacting growth. Moreover, being the bottler, the company does not have A&P lever to reduce the cost to protect margins. We expect a full recovery only in Q1CY21 with sales returning to CY19 levels. We value the stock at 17x CY21 EV/EBITDA with a revised target price of Rs. 700/share and HOLD rating.

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Shares of Varun Beverages Ltd was last trading in BSE at Rs.748.1 as compared to the previous close of Rs. 715.6. The total number of shares traded during the day was 17039 in over 1206 trades.

The stock hit an intraday high of Rs. 752 and intraday low of 725. The net turnover during the day was Rs. 12625593.

Source: Equity Bulls

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