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Home >Markets >Mark To Market >Varun Beverages’ recovery is on, with strong margins in Q4

MUMBAI : Varun Beverages Ltd (VBL) ended 2020 on a strong note, with better-than-expected December-quarter results. VBL’s consolidated Ebitda margin expanded from 9.5% in the year-ago period to 12.9% in Q4.

Ebitda, or earnings before interest, tax, depreciation and amortization, rose nearly 50% year-on-year to 172 crore. This comes on the back of 17% Ebitda growth in the September quarter and shows decent recovery after the 53% drop in Ebitda during the lockdown period in the June quarter. VBL follows a January to December financial year.

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VBL, the second-largest bottling company for PepsiCo outside the US, sustained certain cost-optimization measures implemented during the pandemic. In Q4, gross profit margin has expanded sharply, as raw material costs declined. Further, a slower rate of increase in employee expenses aided Ebitda margin expansion. “Ebitda margin continued to improve, aided by benign raw material costs, unprofitable plant closures and strong improvement in profitability of global operations," analysts at Emkay Global Financial Services said in client note.

Road to normalcy
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Road to normalcy

Further, the outlook for margins looks decent. “The management expects the higher margins to sustain as some cost-optimization measures are likely to stay," said Jefferies’ analysts.

Emkay’s analysts believe that the return of normalcy in India operations and sustained profitability in global operations can throw up potential margin upsides.

VBL’s revenues last quarter increased by 9% year-on-year led by 5.7% growth in sales volume and 2.8% increase in blended realisations. Increase in at-home consumption of carbonated soft drinks helped volume performance.

Of course, with mobility continuing to increase, consumption of soft drinks may rise further. “Normalization of volumes, market share gain opportunity in South and West territories, sustained cost savings and financial leverage benefits augur well for strong earnings growth over the next couple of years," said a report from Kotak Institutional Equities. Even so, the sharp appreciation in VBL’s shares may limit significant gains from a near-to-medium perspective. Since October-end, the VBL stock has increased by about 44%. They now trade at around 33 times estimated one-year forward earnings.

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