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

By: |
March 27, 2021 8:34 AM

Company has been investing aggressively in driving in-home consumption over the past year.

We model Varun to report revenue and PAT CAGRs of 25.5% and 55.9% respectively, over CY20-CY22E.

Varun Beverages (VARUN) is better prepared to tackle the impact of second wave of Covid in CY21 than it was in CY20. Company has aggressively invested in driving in-home consumption over the past year and has also introduced 1.25 Ltr SKUs.

It is also relatively better prepared now in terms of logistics and distribution. In the event of another strict lockdown, volume off take will be materially impacted. However, if lockdowns are only on weekends, impact on volumes will be much less, and it will be negligible in case of night lockdown.

Varun is also likely togain market share from smaller/ unorganised players as consumers prefer packaged beverages over juices from street stalls due to safety perceptions. We believe, there will be some impact on HoReCa consumption which accounts for 6-7% of Varun’s overall volumes. Maintain ‘add’ with a target price of Rs 1,100, implying 35x CY22E.

Major impact in Maharashtra and HoReCa segment: Maharashtra is one of the most affected states by Covid and accounts for 6-7% of Varun’s revenues. HoReCa (hotels, multiplex, theatres, etc.) segment too accounts for 6-7% of revenues. If Covid continues to surge, it may have some impact on the company’s revenues in Maharashtra and HoReCa segment.

Focus on in-home consumption continues. Company has been investing aggressively in driving in-home consumption over the past year.

Impact on offtake in case oflockdown (if any): We have seen three types of lockdown in India: 1) if it is ‘strict’, Varun’s volumes will be materially impacted; 2) if lockdown is only on weekends, some volumes will be lost; 3) if it is night lockdown only, volume decline will be insignificant.

Market share gains from smaller players: Many consumers prefer packaged beverages over fruit drinks and juices sold by street shops. This allows Varun to gain market share from smaller/ unorganised players. Market share can be gained in packaged water segment too as consumers don’t prefer tap water out-of-home.

We model Varun to report revenue and PAT CAGRs of 25.5% and 55.9% respectively, over CY20-CY22E.

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