ICICI Direct's research report on Varun Beverages
Varun Beverages reported strong Q3CY20 results with 3.6% revenue growth given beverage remains largely an out of home consumption category. Volume were down 4% to 119 million (mn) cases with India business volume down 6.7% and international business seeing volume growth of 5.8%. Realisation increased 8%, mainly on the back of a cut in trade promotions and mix change in favour of carbonated soft drinks (CSD) Despite hotel, restaurants & cafes remaining closed, the company was able to restrict volume de-growth to single digits. India business growth of 12.9% in September month is also a sign of normalised growth. Gross margins contracted 149 bps mainly due to increase in sales of consumer promotional packs. However, a 50 bps saving in employee spends to sales & 343 bps savings in overhead spends to sales resulted in operating profit increase of 16.9% to Rs 380.8 crore. Operating margins expanded 241 bps to 21.1%. Interest cost declined 33.2% to Rs 58 crore mainly due to repayment of debt with QIP proceeds in September 2019 and reduction in cost of debt to 7%. This resulted in a robust jump in net profit by 99% to Rs 161.5 crore.
Outlook
Carbonated drinks, juices & water businesses are discretionary in nature with ~70% of sales contributed by ‘on the go’ consumptions with a single serve pack selling the most. With a significant reduction in ‘out of home’ category, the company has been able to recoup its volume by focusing on increasing ‘at-home’ consumption. We expect the full recovery to happen only in CY21 with sales surpassing CY19 levels. We value the stock at 14x CY22 EV/EBITDA with a revised target price of Rs 730/share and HOLD rating.
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