Maintain ‘add’ on Varun Beverages, TP at Rs 1,100

Top five highights, — management remains confident on higher growth led by multiple tailwinds such as low per capita consumption, improving penetration in rural and semi-urban markets and rising in-home consumption, Varun has increased investments in trade with the installation of 25,000+ visi-coolers in CY20, there is reduction in trade discounts largely due to lower turnover.

Most dealers were unable to achieve turnover targets, in our view, there is increase in net working capital days due to lower sales but working capital in rupee terms has also increased by Rs 0.5 billion YoY and EVA creation remains negative with RoE (7.3% in CY20) < cost of capital. However, there is healthy FCF generation of Rs 3.1 billion in CY20.

Maintain ‘add’ with a target price of Rs 1,100 (35x CY22E).

Increase in trade investments: In spite of Covid and lockdown, the company has increased its investments in trade. The number of visi-coolers stands at 800,000+ in CY20 compared to 775,000 in CY19. Total reach also stands at 2mn retail outlets with 1,500 primary distributors in CY20.

Management confident on higher growth: The company believes the soft drink consumption to remain on a steady-growth trajectory. Tailwinds such as rising young population, low per capita consumption, improving retail penetration across semi-urban and rural markets, better agroeconomics and rising trend of in-home consumption make soft drinks an attractive growth market.

Increase in working capital and days: Varun’s net working capital days increased to 23 in CY20 compared to 18 in CY19. The key reason was lower sales. However, we note the working capital in rupee terms has increased from Rs 3.6 billion in CY19 to Rs 4.1 billion in CY20. EVA creation remains negative.