Varun Beverages shares rally as much as 5% after new Pepsi unit starts operations

Mumbai: PepsiCo.’s India franchisee Varun Beverages rallied 5% intraday on Friday after it started commercial production and operation of a new manufacturing unit of Pepsi range of products in Uttar Pradesh from 3 May.

The scrip, however, closed up 2.71% at Rs484.40 on the BSE.

Varun Beverages is PepsiCo.’s second-largest carbonated soft drinks (CSD) and non-carbonated beverages (NCB) franchisee outside the US.

The stock has climbed 23.16% in 3 months, jumping 27.21% in 2017. The stock was listed on the exchanges in November last year.

Kotak Institutional Equities sees the company as a solid proxy play on the long-term growth story of soft drinks category in India with end-to-end execution capabilities and presence across the entire beverage value chain and not just as a bottler.

The brokerage firm estimates 11% earnings before interest, tax, depreciation and amortisation (Ebitda) over 2016-19. It expects Varun Beverages’s earnings per share (EPS) to grow at 33% compounded annual growth rate (CAGR) over 2016-19 aided by lower interest expenses and reduction in minority interest.

“We expect Varun Beverages to grow its consolidated revenues by 13% CAGR aided by 10.1% volume CAGR and 2.6% realization CAGR. We expect free cash flow generation to improve materially, debt levels to reduce and return ratios to improve to mid-teens over this timeframe,” said Kotak Institutional Equities in a report authored by Rohit Chordia and Anand Shah.

However, the brokerage firm pointed out that some key risks for the company are material influence of PepsiCo. on Varun Beverage’s operations, especially on price paid for concentrate, product pricing, growth plans, managerial and competitive challenges involved in integration of acquired territories and high exposure to seasonal variations.