Varun Beverages has been in our Top Picks portfolio since long. Buy for target price of Rs 1450 (24% upside): Axis Securities

Expanding its Footing in the African Market

Company Background

VBL is the second largest franchisee of PepsiCo in the world (outside the USA). Products manufactured by VBL include Carbonated Soft Drinks – Pepsi, Mountain Dew, Seven Up, and Mirinda; Non-Carbonated Beverages – Tropicana Slice, and Tropicana Frutz; and Bottled water – Aquafina. The company accounts for ~90% of PepsiCo’s beverage sales volume in India and is present in 27 States and 7 UT. It is also the exclusive bottler for PepsiCo in Nepal, Sri Lanka, Morocco, Zambia, and Zimbabwe.

► Acquires 100% stake in South Africa-based company – The Beverage Company (BevCo): VBL has acquired a 100% stake in South Africa-based The Beverage Company along with its wholly-owned subsidiaries “BevCo” at EV valuation of Rs 1,320 Cr (~0.8x FY23 TTM sales). The company is engaged in the business of manufacturing and distribution of licensed (Pepsico) and own-branded non-alcoholic beverages in South Africa.

► BevCo business operation: The company is engaged in the business of manufacturing and distribution of Pepsico (15% of sales volume) and its own brands (85% of sales volumes). BevCo has franchise rights from Pepsico in South Africa, Lesotho and Eswatini, and it also has distribution rights for Namibia and Botswana. Furthermore, it has five manufacturing facilities across Africa – two in Johannesburg and one each in Durban, East London and Cape Town. These five facilities have a total capacity of 3600 BPM and a peak month capacity of ~22 Mn cases (8 oz). The plants have 15 beverage manufacturing lines (13 for PET bottles and two lines for cans). Furthermore, it operates one BIB line and one pouch line at its facilities.

► Strong Industry tailwind: South Africa is one of the largest soft drinks markets in Africa with an industry volume growth projected to grow ~5% CAGR over CY22-27 to 1,537 Mn cases. Moreover, Namibia, South Africa, and Botswana (BevCo core market) have one of the highest per capita of CSD consumption in Africa. Factors such as Favourable demographics and Pepsico’s low single-digit market share coupled with thrust on the GTM strategy (VBL’s core strength) are expected to drive the company’s long-term sustainable growth across segments.

Key Triggers

► BevCo has a low market share in its own brands (~17%) and PepsiCo (low single-digit) coupled with VBL’s execution capability provides a huge long-term sustainable growth trajectory.  Large market opportunity in Africa – 1,186 Mn cases, ~50% of India), which is expected to grow at 5.3% CAGR over CY22-27 to 1,537 Mn cases.

► Total population is 60 Mn of which 65% is between the age group of 15-64 years and urbanisation is between 60 -80%.

► Industry growth is led by rising affluence in South African households, 2) Longer working days and emerging interest from female consumers.

Outlook

We believe VBL’s acquisition of BevCo provides a much-needed thrust to expand its geographical footprint in Africa coupled with the expansion of other businesses – Energy Business, Dairy and Juice would be key growth drivers for the company in the coming years. Moreover, VBL is a strong candidate in the entire FMCG space on account of 1) Normalcy of operations and market share gains in newly acquired territories (post COVID-19 disruptions), 2) The management’s continued focus on the efficient go-to-market execution in acquired and underpenetrated territories especially in rural markets, 3) Expansion of its distribution reach to 3.5 Mn outlets in CY23 from 3 Mn currently, 4) Focus on expanding high-margin Sting energy drink across outlets coupled with increased focus on expansion of value-added Dairy, Sports drink (Gatorade), and Juice segment.

VBL has been in our Top Picks portfolio since long and we continue to remain positive on the stock on a mid to long-term basis. We estimate Revenue/EBITDA/PAT CAGR of 23%/30%/35% over CY22-25E as we revised our CY24-25 PAT estimates upwards by 5%/12% based on the abovementioned rationales. We maintain our BUY rating on the stock with the revised TP of Rs 1,450/share (47x CY25EPS) vs. the earlier TP of Rs 1,200/share (45x CY25 EPS), implying an upside of 24% from the CMP.

Click here to download Varun Beverages – Company Update – 20122023