Varun Beverages - Beneficiary of rising in-home consumption - ICICI Securities

Post our latest interaction with the management and channel checks, we note (1) in-home consumption remains strong even after lifting of lockdown and travel restrictions. Increase in in-home consumption is a structural growth opportunity for Varun and the company is focussing on 1.25ltr SKU to capture it, (2) there were no changes in prices of beverages as there is negligible inflation in input prices and (3) the disruption in North India due to farmers protest and early onset of winter season has impacted consumption of beverages in Dec'20 (a transitory impact). We model Varun to report revenue and PAT CAGRs of 11.5% and 22.9%, respectively, over CY19-CY22E and maintain ADD with DCF based revised target price of Rs1,015 (34x CY22E; earlier TP: Rs970).

- Recovery momentum remains intact: We believe Varun has sustained its volume growth momentum even in Q4CY20 due to (1) gradual reopening up of the economy. Only 10-15% of trade channels (airports, railway stations etc.) are closed now, (2) gradual improvement in in-home consumption and (3) market share gain from road-side juices/beverages.

- Disruption in North India: Early onset of winter season and supply chain disruptions due to farmers protest had some impact on volumes in Dec'20. We believe this is transitory impact. However, we note there was healthy volume growth momentum in Oct-Nov'20.

- No price hikes and no launches: We note there were no pricing actions in Q4CY20 as there is negligible inflation in major raw material prices (packaging material and sugar). The company has not introduced any new product during the quarter. However new SKU (1.25ltr) continues to grow well.

- Investment in visicoolers to continue: Investment in visicoolers in CY21 is expected to be similar to CY20. Visicoolers have a life of ~12 years, and every year sales team of Varun analyses the performance of stores and replaces/ repairs visicoolers according to the performance. While we believe the maintenance capex may increase after some years (due to replacement of visicoolers), it is likely to increase materially only after CY25.

- Maintain ADD: We model Varun to report revenue and PAT CAGRs of 11.5% and 22.9%, respectively, over CY19-CY22E. Varun continues to benefit from its relationship with PepsiCo, pan-India distribution, backward integration, and increased in-home consumption. Maintain ADD with a revised target price of Rs1,015 (34x CY22E; earlier TP: Rs970).

Shares of Varun Beverages Ltd was last trading in BSE at Rs.965.65 as compared to the previous close of Rs. 954.05. The total number of shares traded during the day was 20677 in over 1608 trades.

The stock hit an intraday high of Rs. 977.9 and intraday low of 943.5. The net turnover during the day was Rs. 19960364.

Source : Equity Bulls

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