Varun Beverages Ltd. 2QCY19 – Hot summer boosts beverage sales

Dated: 2nd August 2019

Varun Beverages Ltd. (VBL) reported consolidated revenue growth of 36.5% YoY to Rs 28,105 mn in 2QCY19.
• Consolidation of South and West regions from 1St May 2019, extended summers, penetration into existing geographies and good growth from international geographies led to volume growth of 44% YoY. Out of total volume sales of 192 mn cases, 172 mn were sold in India and 24 mn cases in international markets (Sri Lanka, Morocco and Zimbabwe).
• Organic volume growth in India was 18.5% whereas it was 34.2% in international geographies. 
• Realisation per case declined by ~5% due to change in product mix in India post-acquisition of South and West sub-territories, the introduction of packages water in Morocco and lower sales realisation in Zimbabwe to avoid forex fluctuations. 
• Gross Margins declined by 70 bps as sugar prices increased by ~3%. Management expects raw material prices to be stable for CY19.
• Net debt stood at Rs. 37,295 mn as on June 30, 2019, as against Rs. 26,715 mn as on 31st December 2018. Debt: Equity ratio stood at 1.49x as on 30th June 2019 and Debt: EBITDA ratio stood at 2.95x for the trailing twelve months EBITDA. 
Management Commentary
• Company will start selling beverages in Zimbabwe in local currency now instead of USD. Hence, revenues may move up in the coming quarters, but there is a possibility of providing for higher currency depreciation. 
• Production of Tropicana Juices at its Pathankot plant has commenced from 1st Jul’19.
• The company plans to enter the dairy products market under its own brands in the coming quarters. It will be required to pay 1% royalty to Pepsi for selling these dairy brands.
• Capex for CY19 and CY20 is expected to remain less than depreciation cost.
• Company is running at ~60% capacity utilisation levels after the newly acquired regions.
• EBITDAM are expected to be in the range of 21-22% for consolidated business.
• Management expects ROCE levels to improve by 200-250 bps every year.

Consensus Estimate (Source: market screener website)
The closing price of VBL was Rs 623/- as of 02-August-19. It traded at 43x/ 34x the consensus EPS for CY 20E / CY 21E EPS of Rs 14.6/18.6 respectively· Consensus target price of Rs 713/- implies a PE of 38x on CY21E EPS of Rs 18.6