Varun Beverages - Expect 100% volume recovery by end of Q3CY20 - ICICI Securities

With opening up of general trade and HoReCa, Varun's volumes are expected to be ~100% of pre-Covid levels by end of Q3CY20. That's the insight we got post interacting with management and channel checks. Other highlights: (1) packaged beverages are gaining market shares from road-side juices / coconut water, (2) there is better recovery in North and East compared to West and South India, (3) Packaged water segment volumes are ~90% of pre-Covid levels whereas there is low single digit growth in off-take of carbonated soft drinks and juices. With deflation in input prices (sugar and packaging material), there is likely gross margin expansion in H2CY20. We model Varun to report PAT CAGR of 7.7% over CY19-21 with improving RoE. However, we need more comfort on valuations to turn bullish. Retain HOLD with target price of Rs750 (40x CY21E).

- Expect 100% recovery by end of Q3CY20: Post interacting with management and channel checks, we believe 100% volume recovery is possible by end of Q3CY20. Key reasons are (1) most general trade stores are open now, (2) HoReCa outlets are too open now and (3) market share gains from roadside juices/ coconut water.

- Segment-wise performance: Carbonated soft drinks (CSD) and Juice segments are growing at low single digits. Increase in in-home consumption is higher than loss of out-of-home consumption. Packaged drinking water (mostly out-of-home consumption) has also recovered to ~90% compared to pre-Covid levels.

- Region-wise performance: There is better recovery in North and East India as the Covid cases are relatively lower. However, there is still some impact on volumes in South and West India. There is healthy growth in North-East.

- International business doing better than India: Covid cases were lower in Varun's International markets (Morocco, Nepal, Zimbabwe, and Sri Lanka). Also the lockdown was less stringent than India. Hence, we expect low single digit volume growth in International business in H2CY20.

- Deflationary trend in input prices indicate higher gross margin: There is still deflation in key input prices (sugar and packaging material). We expect Varun can report better gross margin without resorting to price hikes.

- Maintain HOLD: We model Varun to report revenue and PAT CAGRs of 4.9% and 7.7% respectively over CY19-CY21E. While Varun will benefit from its relationship with PepsiCo, pan-India distribution and backward integration, we believe the stock price upside is capped at current valuation and maintain HOLD with revised target price of Rs750 (40x CY22E).

Shares of Varun Beverages Ltd was last trading in BSE at Rs.724.4 as compared to the previous close of Rs. 727.65. The total number of shares traded during the day was 206742 in over 399 trades.

The stock hit an intraday high of Rs. 737.45 and intraday low of 715. The net turnover during the day was Rs. 148854120.

Source : Equity Bulls

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