“BUY” This Large Cap FMCG Stock With A Target Price of Rs. 1073: HDFC Securities

HDFC Securities Limited, Indias leading broking firm has placed a BUY call on the stock of Varun Beverages Limited (VBL) with a target price of Rs. 1073. The brokerage expects the stock to climb 21% in 6 months from its current market price of Rs. 883. Varun Beverages Ltd is a global franchisee for manufacturing carbonated soft drinks (CSDs) and non-carbonated beverages (NCBs). The company is also a leading player in the beverage sector and one of PepsiCos largest franchisees worldwide. According to the brokerage the companys Revenue from operations grew by 33.0% YoY in Q3CY21 to Rs. 2398 Cr led by 28.4% volume growth & 3.6% realisation increase. Volumes stood at 153.3 million cases in Q3CY21 as compared to 119.5 million cases in Q3CY20. Carbonated Soft Drinks (CSD) constituted 70%, Juice 5% and Packaged Drinking water 25% of total sales volumes in Q3CY21. On a two year CAGR basis, organic volumes grew at 11% CAGR. Realisation increase was largely driven by increasing realisation in international territories (~10%) despite a high proportion of water in the product mix. Gross margins contracted 278 bps mainly on account of higher PET & sugar prices, which have gone up by 18% & 2% YoY respectively. The brokerage has also said in its research report that The company was able to save 163 bps in employee spends (percentage to sales) & 65 bps in overhead spend due to the operating leverage. EBITDA grew 30% to Rs 494.7 Cr. EBIDTA margins contracted 50 bps to 20.6%. Led by higher operating profit and a 26% dip in interest expense, PAT grew at a splendid 59.8% to Rs 257.9 Cr. The company has repaid Rs 600 Cr of debt in the last six months while current debt levels are Rs 2400 Cr. The average cost of debt for the company has come down by 100 bps in the last one year to 5.5%. According to the brokerages research report VBL has planned to set up a new plant in the state of Bihar as it was unable to service the market in the region, leading to lower market share. Earlier, products were transported to Bihar from neighboring states to meet the requirement. With Bihar being one of the most populous states in India, VBL aims to capitalize on the growing demand in the region. The new plant is expected to be commercialized over the next 6-8 months (in CY22) at a CAPEX cost of Rs 285 Cr. Furthermore, VBL is setting up a new plant in Kutwa (close to the Pathankot facility) to manufacture PET bottles and closures. The new capacity is expected to be operational by Mar22.Advertisement HDFC Securities in its research report has claimed that VBL has delivered a healthy revenue CAGR of ~22% over CY12-19 (pre-Covid), with 21% CAGR in domestic revenue growth, aided by 20% volume CAGR which again is driven by the acquisition of territories. The international business (~23% of CY20 revs.) has witnessed a strong growth of 23% CAGR over CY12-19, on a low base and with the entry in newer international markets. Likewise, it has delivered 36% PAT CAGR over the last 10 years. Going ahead, we expect VBL to report strong Revenue/EBIDTA/PAT CAGR of 24%/28%/51% over CY20-23E, driven by a) continuous focus on distribution expansion and sustained share gains from the consolidation of South and West territories, b) focus on expanding fast-growing NCBs through constant product innovation and new launches and c) healthy growth momentum in International business. The brokerage has also commented that The company had been on an acquisition spree for last few years, which impacted its Free Cash Flow (FCF). However, with already 90% volumes of PepsiCos India beverage under VBL, the growth for VBL in the future would be largely led by the organic route in India. Improvement in capacity utilisation, margin expansion and consolidation of operations will lead to improvement in FCF going forward. It has repaid debt to the extent of Rs. ~2200 Cr over the past 2 years and with strong FCF generation, we expect a sharp reduction in debt over the next 2-3 years. Reduced CAPEX intensity and focus on debt reduction, better margins and improved asset turnover would lead to a steady improvement of ratios. According to the brokerages call Improving financial strength, solid business model with well-established brand portfolio, along with robust growth prospects (low per capita consumption, favourable demographics, increasing penetration with rising electrification) makes VBL an attractive investment bet, in our view. We think the base case fair value of the stock is Rs 999 (32x CY23E EPS) and the bull case fair value is Rs 1,073 (34x CY23E EPS). Investors can buy the in stock Rs 908-916 band (29x CY23E EPS) and add more on dips to Rs 817-823 band (26x CY23E EPS). At LTP of Rs 912, it quotes at ~31x CY23E EPS. The stock has been picked from the brokerage report of HDFC Securities Limited. Investing in equities poses a risk of financial losses. Investors must therefore exercise due caution. Greynium Information Technologies, the author, and the brokerage house are not liable for any losses caused as a result of decisions based on the article.