Varun Beverages Ltd. (VARB.BO): Announces strategic alliance with Asahi Group to introduce "CALPIS" in India; Buy

Research evidence excerpt

Varun Beverages Ltd. (VARB.BO): Announces strategic alliance with Asahi Group to introduce "CALPIS" in India; Buy

Goldman Sachs Varun Beverages Ltd. (VARB.BO)

Investment Thesis — Varun Beverages

We rate Varun Beverages (VBL) as Buy. VBL is well positioned to ride the high growth

potential of India’s ready to drink beverages market. VBL’s execution has led to Pepsi

gaining ~1,000bps market share in India over the past decade, making it one of the

strongest markets for Pepsi across large markets. We expect VBL to continue gaining

share over CY25-28E driven by higher market share in the faster growing segments such

as energy drinks and expansion of visicooler retail infrastructure.

VBL has demonstrated a strong track record of turning around profitability of acquired

international territories in Africa by following a playbook which includes backward

integration in manufacturing and improving distribution. We expect VBL to deliver a

turnaround in South Africa’s profitability over CY25-28E, taking up EBITDA margins from

~10% to ~17%. We expect a major inflection in FCF generation for VBL as the high

CapEx phase is behind. The key downside risks are (1) higher than expected impact from

increased competitive intensity and (2) weaker than expected execution in the

proposed acquisition of the South Africa business.

Price Target Risks and Methodology — Varun Beverages

Our 12M target price of Rs 600 is based on a 48x Q5 to Q8 EPS, which is in-line with the

5-year average 1-year forward P/E for the stock. As we expect an inflection in free cash

flow for the company over CY25-28E, we expect historical valuations to remain

supported. Key downside risks: (1) adverse impact on revenue growth from rise of

competitive intensity, (2) margin decline from sharp increase in input costs, (3)