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Business News/ Markets / Mark To Market/  Varun Beverages set to gain from robust growth outlook
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Varun Beverages set to gain from robust growth outlook

Measures aimed at enhancing distribution and strengthening product portfolio are likely to benefit the firm

Photo: iStockPremium
Photo: iStock

Varun Beverages Ltd (VBL), one of the largest franchisee of PepsiCo outside the US, has had it comparatively tougher in the ongoing covid-19 pandemic. For two years, the lockdowns fell during the company’s busy season, adversely impacting sales. However, for the half-year ended June, consolidated revenue growth at 41% looks strong, helped by a favourable base.

VBL follows a January to December financial year. In 2020, VBL’s revenues declined by 9.5% and Ebitda margin contracted 167 basis points (bps) as revenues fell at a faster pace than expenses. Ebitda is earnings before interest, tax, depreciation and amortization. One basis point is one-hundredth of a percentage point.

Even so, the valuations of the Varun Beverages’ stock seem to be capturing a good share of the anticipated recovery ahead. The stock currently trades at 38 times the estimated earnings for the calendar year 2022, based on Bloomberg data.

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While there is a general threat from a potential third wave that could hit the country, a higher pace of vaccinations and demand rebound are expected to keep VBL’s growth prospects upbeat.

Analysts expect margin performance to improve as volume growth inches up. Further, in a report on 3 September, analysts from Jefferies India Pvt. Ltd said, “Reduction in net debt coupled with rate reduction should further help, and we forecast CY20-23 earnings per share CAGR at 49%." CAGR is the compound annual growth rate.

The broker further added, “Balance sheet would continue to deliver and return on equity is set to expand to about 25% by CY23."

During the June quarter, VBL’s sales were robust in April, but pandemic restrictions meant moderation in the month of May.

In the results update, analysts from JM Financial Institutional Securities Ltd said: “The case for Varun Beverages is highly dependent upon the performance in the June quarter, given its high salience (accounted for nearly 39% of revenues in CY19)." The broker added, “However, two consecutive years of lockdown impact in the seasonally strong June quarter implies that the efforts of the company on enhancing distribution and strengthening product portfolio is not yet visible in the financials."

The company is expected to reap the benefits of the above steps. But the stock’s valuations are not exactly cheap, which may limit significant upsides in the near future.

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ABOUT THE AUTHOR
Pallavi Pengonda
Pallavi is a deputy editor at Mint and heads the Mark to Market team. This column covers wide-ranging topics related to the stock markets, offering an in-depth analysis of financial reports of companies. She writes and edits across verticals, covering the breadth of the Indian stock market. Pallavi has done her master of management studies, specializing in finance.
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Published: 05 Sep 2021, 09:51 PM IST
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