Varun Beverages to benefit from strong growth outlook

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

Nevertheless, the valuation of Varun Beverages’ stock looks to be capturing a good portion of the expected recovery in future. The stock currently trades at 38 times estimated earnings for calendar year 2022 based on Bloomberg data.

While there is a general threat from a possible third wave in the country, a high pace of vaccination and a return to demand are expected to keep the growth prospects of VBL upbeat.

Analysts expect margin performance to improve with increased volume growth. Further, in a report dated 3 September, Jefferies India Pvt. Ltd said, “The reduction in net debt along with rate reduction should further help, and we forecast CY20-23 earnings per share at CAGR of 49%.” CAGR is the compound annual growth rate.

“The balance sheet will continue to deliver and the return on equity is set to grow to around 25% by CY23,” the broker further added.

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

In a results update, analysts at JM Financial Institutional Securities Ltd said: “Varun Beverages’ case is highly dependent on performance in the June quarter, given its high prominence (accounted for around 39% of revenue in CY19).” Dalal added, “However, the two consecutive years of lockdown impact in the seasonally strong June quarter means that the company’s efforts to increase distribution and strengthen the product portfolio are yet to be financially visible.”

The company is expected to get the benefit of the above steps. But the stock’s valuation isn’t exactly cheap, which could limit significant upside in the near future.