Stock Analysis: Shareholders of Varun Beverages Ltd (VBL) are sitting on substantial profits

The stock’s sentiment was bolstered by a number of factors, including strong volume increase in CY22 and improved operating leverage. Recall that the disruptions brought on by the epidemic in the preceding two years had an effect on peak season sales. VBL recorded 41% year-over-year (y-o-y) volume growth in CY22 thanks to a strong demand recovery and distribution expansion. Moreover, Sting, an energy drink produced by VBL with a greater net realisation, performed well and beyond expectations.

In India, Sting made up roughly ten percent of all sales in CY22. Overall, Ebitda margin increased year over year by 240 basis points. On the other hand, net debt increased because of growth capex from 3,005 crore to 3,409 crore as of December 31, 2022.

As such, the early onset of summer and the forecast of a hot summer is expected to support VBL’s volume performance in CY23. “The company is prepared to capitalize on the opportunity, led by (1) capacity addition (about 30% increase in carbonated soft drinks (CSD) capacity in India by end-March 2023) and (2) adequate stocks for the peak season, thanks to early ramp-up to peak utilization (pre-stocking of finished goods starting in December 2022 for summer 2023),” said analysts at Kotak Institutional Equities. Sting is expected to be a key growth driver this year.

But investors need to be watchful of any threat owing to the relaunch of Campa Cola by Reliance Industries. A meaningful impact is not expected in the near-term. After analysing the potential risk to VBL due to the relaunch, analysts from ICICI Securities said they are not modelling any material risk to VBL in the near-term but will closely monitor the progress of Campa beverages. Among other factors, they point out that Campa needs to invest in multiple manufacturing units across India (as beverages are ‘low value high volume’ products), distribution network and visicoolers. “These investments may require multiple years,” said the ICICI Securities’ analysts.That said, how realizations pan out remains to be seen. “Realization may come under strain due to additional discount and rebate extended to counter market share loss to Campa Cola,” said a report by Antique Stock Broking on 20 March. The broking firm expects the early onset of summer to be positive for the industry.

To be sure, the sharp run up in VBL shares could limit meaningful upsides hereon.