Varun Beverages Ltd (VBL) saw its shares drop by 6 per cent following lower-than-expected Q2 sales and an in-line Ebitda figure for the June quarter. Analysts were pleased with the 22.9 per cent year-on-year (YoY) increase in India volumes, which was driven by expanded capacity, an enhanced distribution network, and a strong summer season. The gross margin increased by 222 basis points to 54.7 per cent, thanks to timely procurement and storage of PET chips to benefit from favorable pricing, as well as efforts to reduce sugar content and lighten packaging. The Ebitda margin rose to 27.7 per cent, up 74 basis points year-on-year.
Analysts said Varun Beverages also announced a further expansion in its partnership with PepsiCo, having entered into an Exclusive Snacks Franchising Appointment to manufacture, distribute and sell "Simba Munchiez" in Zimbabwe by October 2025 and Zambia by April 2026.
What they did not like was the flattish net realisation per case. International markets remained relatively flat while it was a seasonally weak quarter for the African market, they said. For now, analysts are assigning 55-58 times multiple to VBL and are neutral to positive on the stock.
Elara Securities has cut its earnings estimates by 7.3 per cent for 2024 and by 5 per cent for 2025 to factor in lower-than-anticipated revenue growth. It reiterated its 'Accumulate' with a higher target price of Rs 1,780 from Rs 1,590 on 55 times (unchanged) FY26E P/E, as it rolled forward estimates to September 2026.
Efforts to improve go-to-market strategy and backward integration in South Africa are likely to drive margin in the long term, it said adding that VBL'sgrowth would be led by a new beverage plant in the Democratic Republic of Congo (DRC) and a franchising agreement for snacks in Morocco, Zambia and Zimbabwe.
"The Q2 depreciation increased 41 per cent on account of acquisition of BevCo and setting-up of new production facilities. The finance cost increased by 86.2 per cent in Q2CY24 due to new production facilities, acquisition of BevCo as well as increased cost of borrowing," Nuvama said.
Factoring in a soft Q2CY24 against its estimates and a strong monsoon in Q3CY24, Nuvama cut its EPS target by 5-6 per cent for 2024-2026 and suggested a 'Buy' with revised target price of Rs 1,854 from Rs 1,865 earlier.
Emkay Global said VBL expects double-digit growth to endure in H2 on a strong India base, and the International business returning to growth after a blip in Zimbabwe (sugar tax).
"Cash capex (including Rs 1,100-1,200 crore for the BevCo acquisition) is estimated at Rs3500 crore for 2025, likely to be partly serviced by a Rs 1,000-1,100 crore rise in net-debt and partly via internal accruals. Higher interest outgo results in a 1-2 per cent cut in earnings. Snacking rights (PepsiCo) in 3 African countries is a big opportunity, with better return ratios against the beverage business. We build-in this opportunity, giving a 4 per cent nudge to the target price multiple to 58 times. Maintain ADD with revised target price to Rs 1,650 per share," Emkay Global said.
The Varun Beverages board announced sub division of existing shares of the company, such that each equity share having face value of Rs 5 each fully paid-up, be split into such number of equity shares having face value of Rs 2 each, fully paid-up, subject to the approval of Equity shareholders of the company through postal ballot. This is intended for wider retail participation, said Ravi Jaipuria, Chairman at Varun Beverages.
Varun Beverages also declared an interim dividend of Rs 1.25 per share. The PepsiCo bottler said its profit after tax rose 25.5 per cent to Rs 1,261.83 crore for the June quarter compared with Rs 1,005.42 crore in the same quarter last year. The profit growth was driven by volume growth and improved margins, Varun Beverages said.
MOFSL expects VBL to maintain its earnings momentum, aided by increased penetration in newly acquired territories in Africa, higher acceptance of newly launched products, continued expansion in capacity and distribution reach, growing refrigeration in rural and semi-rural areas, and a scale-up in international operations. This brokerage has retained its 'Buy' rating on the VBL stock, with a target price of Rs 1,850.