Investors are sitting on handsome returns in Varun Beverages Limited (VBL) shares. Since the start of calendar year 22, the stock has more than doubled. VBL is one of PepsiCo’s largest franchisees worldwide outside the US. It follows the January to December financial year.
Strong volume growth and better operating leverage in calendar year 22 are among the factors that boosted sentiment for the stock. Recall that peak season sales were affected in the last two years due to pandemic-induced disruptions. Strong demand recovery and distribution expansion helped VBL grow 41% year-on-year (yoy) volumes in CY22. Also, VBL’s energy drink, Sting, which has higher net realization, put in a strong performance, beating expectations. Sting accounts for one-tenth of the total sales volume in India in CY22. Overall, EBITDA margin expanded 240 basis points year-over-year. On the other hand, net debt increased 3,409 crore by 31 December 2022 3,005 crore a year ago due to growth capex.
Therefore, the onset of summer and forecast of a hot summer are expected to support VBL’s volume performance in Calendar Year 23. “The company is poised to capitalize on the opportunity led by (1) capacity addition (about 30% increase in carbonated soft drinks (CSD) capacity in India by end-March 2023) and (2) adequate stock for the peak season. Thanks to the early ramp-up of peak utilization (pre-stocking of finished goods from December 2022 to summer 2023), said analysts at Kotak Institutional Equities. Sting is expected to be a key growth driver this year.
But investors need to be mindful of any risk factors due to the relaunch of Campa Cola by Reliance Industries. A meaningful impact is not expected in the near term. After analyzing the potential risk to VBL due to the relaunch, analysts at ICICI Securities said they are not modeling any material risk to VBL in the near term, but will be closely monitoring the progress of Campa Beverages. do. Among other factors, he points out, Campa needed to invest in multiple manufacturing units across India (as beverages are a ‘low-value high-volume’ product), distribution networks and visicoolers. “These investments may require several years to materialise,” said analysts at ICICI Securities. It has been said that how the receipts can be viewed. “The recovery may come under pressure due to additional discounting and relaxations to Campa Cola to counter the loss of market share,” said a report by Antique Stock Broking on March 20. The broking firm expects The start of summer will be positive for the industry.
To be sure, the sharp rise in VBL shares may limit meaningful upside here.
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