Varun Beverages (VBL) reported a strong growth in volumes, Ebitda and earnings during Q1CY20. This was, however, led by the acquired territories of south & west not there in the base.
Varun Beverages (VBL) reported a strong growth in volumes, Ebitda and earnings during Q1CY20. This was, however, led by the acquired territories of south & west not there in the base. Organic volume decline of 14% in India reflects the pain caused by the lockdown. The management refrained from providing its growth outlook for CY20, given the level of uncertainty, though it expects to retain margins. The stock may stay range-bound in the near term, but we are buyers on a 12M view.
Consolidated volumes grew 27% boosted by acquisition of south & west. The lockdown had a significant impact on India which saw a 14% decline, while consolidated business saw an organic decline of 9%. International business grew 8%. Blended realisations declined 2.5% due to change in product mix following the acquisition in addition to lower realisation in Zimbabwe. Ebitda grew 24% to Rs 270 crore which was broadly in line with our forecasts. Pre-ex earnings grew 50% to Rs 60.6 crore.
Lower input prices (PET chips) drove 280 bps expansion in gross margins to 59%. But benefits could not flow into Ebitda margins due to revenue loss during the lockdown. VBL still managed to largely maintain its Ebitda margins. Gradual lockdown relaxation is helping, but we note Q2 is the most important quarter, and hence, full-year performance will be impacted.
VBL carries debt of around Rs 3,200 crore which implies around 2.5x debt to Ebitda, which is manageable. Focus is high on cash conservation and VBL also has around Rs 480 crore of unutilised credit lines. Despite a likely tough CY20, we expect VBL to generate rising FCF. The stock is down ~30% from peak on growth concerns and trades at 13×1-year forward Ebitda. We expect valuations to sustain, though the stock may stay range-bound in the near term until growth visibility is back. We retain ‘buy’ with a 12M view.