Varun Beverages Research Report By Emkay & Axis Direct

Research Report by Emkay

A bet on PepsiCo India

– We initiate coverage of Varun Beverages (VBL) with a BUY rating and a price target of Rs 674, implying 32% upside from here. VBL is the leading Indian soft drinks player and controls 45% of PepsiCo India’s volume through franchise model.

– PepsiCo’s rising focus on non-carbonates and plans to launch new products on the health platform will help VBL capture market share from competition. We view VBL’s long-term track record as impressive; largely driven by regular acquisitions of territories, which have
delivered scale benefits and synergies.

– Strong growth outlook (EPS CAGR 35% in CY16-19E), solid FCF generation of Rs11bn in CY17-19E, low D/E of 0.4x by CY19E, and trading at 11.7x CY18E EV/EBITDA, VBL’s financial profile and valuation look attractive.

– We value VBL on DCF model due to strong cash flow visibility. VBL should be compared to pure franchise owners like JUBI, PAG and WLDL. These are trading at 16.9x EV/EBITDA CY18E. Catalysts from new product launches and acquisition of new territories.

Research Report By Axis Direct

Good beginning to the summer

Consolidated net sales grew 1% YoY, aided by ~2% volume growth. Volume in CSD declined 4% YoY, was flat in juices and grew 36% in water. EBITDA margin expanded 198 bps YoY to 15.2% as gross margin expanded 313 bps YoY to 54.3%. Aided by reduced interest costs, the company has achieved an adj. PAT of Rs45mn, compared to PAT loss of Rs518mn in Q1CY16. As per management, the all critical summer season has begun well with healthy growth in April.

VBL is a long term structural play in the underpenetrated Indian soft beverages market. 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 it command apremium to global peers. VBL trades at CY18 EV/E of 11.3x and P/E of 32x. Maintain BUY with revised TP of Rs 545, based on fwd.EV/E of 11.5x (vs. Rs510 earlier).