Hiren Ved Of Alchemy Capital Recommends FMCG Stock With “Multiple Levers For Growth”

AUM of Alchemy Capital surges to Rs. 3,250 crore even as gains compound at 26% CAGR

First, we have to compliment Hiren Ved, the illustrious fund manager of Alchemy Capital PMS, for his splendid achievement.

The AUM of the PMS stands at Rs. 3,250 crore as of 31st March 2017.

When I had last checked the status in August 2016, the AUM was barely Rs. 2,470 crore.

This means that there is a hefty growth of 32% in the AUM in just six months, which is a major achievement given the number of PMS funds and mutual funds that are vying for the investor’s money.

The PMS has 2,326 individual clients. The average contribution per head works out to Rs. 1.40 crore.

Prima facie, these appear to be HNI clients and not Mom and Pop investors given the high level of investment.

What is commendable is that the PMS has given a CAGR return of 26% over the past fifteen years.

This means that a paltry sum of Rs. 1 lakh invested in the PMS is worth Rs. 32 lakhs today.

Nikunj Dalmia & Tanvir Gill extort recommendation from Hiren Ved

Normally, Hiren Ved does not offer stock recommendations to novice investors. He is old-school and believes that while novices must be tutored on theoretical aspects of investing, they must be left to fend for themselves on practical aspects.

However, he was no match for the combined guile and tact of Nikunj Dalmia and Tanvir Gill.

“On a public forum recently, you have made a presentation that you like Varun Beverages. It is in public domain now. Varun Beverages falls in which bucket?,” Nikunj asked out of the blue in response to some theoretical point that Hiren was making about putting stocks into different buckets.

Hiren was taken by surprise. However, to his credit, he realized that once the cat is out of the bag, there is no point in playing coy.

He provided a masterful explanation on why Varun Beverages is the stock to bet on for multibagger gains.

(i) The capex phase is completed and we will now going to see the benefit of growth;

(ii) We are also likely to see significant savings from logistics cost because it is a very freight intensive industry and as they get contiguous regions to sell, the asset utilisation will improve from here onwards;

(iii) The focus by the Government on power 24×7 means that the sale of soft drinks and juices will be facilitated. Earlier, with only a couple of hours of power, it was not feasible to invest in refrigeration and stock beverages.

At the end, Hiren opined that Varun Beverages has “multiple levers for growth” and the “relative under penetration in the market” augers well for it.

[*C] Consolidated     [*S] Standalone    

(Source: Business Standard)

Varun Beverages is a bet on Pepsico, the global beverages behemoth: Emkay

Surprisingly, Hiren Ved made no reference to Pepsico or the role that it plays in Varun Beverages’ fortunes.

However, this aspect has been considered in depth by Anubhav Gupta and Nikhar Jain of Emkay.

Benefiting from strong relationship with PepsiCo

The duo have issued an initiating coverage report in which it is pointed out that Varun Beverages is the 2nd largest franchiser of PepsiCo globally (excluding USA).

It is stated that Varun plays a critical role in manufacture and distribution of PepsiCo’s beverages. The company also has a presence in other South Asian and African markets which form 24% of the overall revenue.

It is also stated that Varun Beverages is a solid proxy play on the long-term growth story of the soft drinks category in India. With end-to-end execution capabilities and presence across the entire beverage value chain, the company’s profile is not restricted to being just a bottler. Soft drinks pose a good opportunity in India given low per-capita consumption and underpenetrated rural market.

It is opined that PepsiCo’s rising focus on non-carbonates and plans to launch new products on the health platform will help Varun capture market share from competition. Varun’s long-term track record is said to be impressive; largely driven by regular acquisitions of territories, which have delivered scale benefits and synergies.

Scorching growth in volume and value of carbonated beverages

According to Euromonitor, a market research agency, carbonated beverages is expected to grow 6.8% in volume and 9.6% in value for the next five years in India.

Non-carbonates (water & juices) are expected to post a 22.5% CAGR over CY16-21E in value.

This is music to the ears of Varun Beverages because carbonates form 81% of the volumes. Non-carbonated beverages (non carbonates) like packaged water and juices are relatively small but are likely to grow faster than carbonates.

It is also stated that the low per-capita consumption and under penetration in the rural market provides a good opportunity for soft drinks.

Varun beverages is a long term structural play in the underpenetrated Indian soft beverages market: Axis Direct

Axis Direct has described Varun as a “long term structural play in the underpenetrated Indian soft beverages market”.

It has emphasized that the higher growth potential (low per capita) and strong margin profile (OPM to sustain at ~20% in the medium term) are the key factors which will make Varun Beverages command a premium to global its peers.

Axis has also opined that VBL’s Valuations of CY18 EV/E of 11.3x and P/E of 32x are not expensive having regard to the prospects.

Varun Beverages is not just a bottler, it has presence across the entire beverage value chain: Kotak

Some investors make the mistake of equating Varun Beverages as a mere captive bottler of Pepsico, earning petty conversion charges.

Kotak has rubbished this impression. It has pointed out that VBL has end-to-end execution capabilities and presence across the entire beverage value chain and is not just a bottler.

“We see Varun Beverages as a solid proxy play on the long-term growth story of the soft drinks category in India,” the mandarins of Kotak said.

“Varun Beverages’ capture of the value chain is what one should focus on and the business’ return ratios reflect the picture. A valuation framework that captures the fundamentals well does not need to bother with nomenclature issues, in our view,” they added.

Kotak referred to three “growth drivers” which make Varun Beverages a strong buy:

Growth drivers

Among growth drivers for the stock include leveraging PepsiCo’s brand strength and innovation capabilities. This would include its strong focus on non-cola carbonates, NCBs and packaged drinking water to tap into changing consumer preferences.

Secondly, acquisition of additional production and distribution rights to expand presence and drive sales volume.

Lastly, the expansion of distribution network and optimizing them to drive healthy long-term profitable growth.

Financials

VBL is expected to grow consolidated revenues over CY16-19 by 13 percent CAGR, aided by 10.1 percent volume CAGR and 2.6 percent realisation CAGR. Along with this, the company is expected to deliver 33 percent EPS CAGR, aided by lower interest expenses, lower ETR and reduction in minority interest.

What about Manpasand Beverages?

At this stage, we must note that Manpasand Beverages is the arch rival of Varun Beverage in the market place.

Manpasand Beverages has received a vote of confidence from Sanjoy Bhattacharyya, the doyen amongst value investors.

He has opined that Manpasand Beverages has “higher growth potential” and is “a genuine long term investment opportunity”.

Fortunately, the size of the market in India is so vast that both rivals can prosper without hurting each other’s interests.

What about Tata Global Beverages?

If one is scouting for stocks in the beverages sector, Tata Global Beverages is also a strong contender.

We saw earlier that Rajen Shah of Tradebulls has recommended a buy of TGBL on the basis that it is quoting at “dirt cheap” valuations in relation to its peers and that there is a possibility of “value unlocking”.

The “value unlocking” theory appears to be coming true because it was reported today that the shares in Tata Chemicals and some other companies held by TGBL would be sold to Tata Sons. The proceeds would be used by TGBL to reduce the debt and/or invest in new projects.

Also, CNBC TV18 reported that TGBL is headed for a “massive restructuring of portfolio”.

Tata Global Beverages to undergo restructuring; To sell non-branded biz: Srcs @CNBCTV18Live #CNBCTV18Exclusive @kritika_saxena1 @blitzkreigm pic.twitter.com/F784FzmV8v

— CNBC-TV18 News (@CNBCTV18News) July 12, 2017

There is also talk of a “merger” with Tata Coffee to maximize market share in the consumer space.

#CNBCTV18Exclusive | Sources Say Tata Global Beverages Explores Merger With Tata Coffee To Maximise Market Share In Consumer Space

— CNBC-TV18 (@CNBCTV18Live) July 12, 2017

So, Rajen Shah’s confident prophecy that TGBL is destined to be a multibagger may come true sooner than later.

Conclusion

We have to keep a close eye on Varun Beverages as well as its arch rivals and tuck into the appropriate one at the appropriate time!