The shares of this FMCG beverage-based company are in focus after it has corrected by over 31 percent from its peak and in the last year has delivered a negative return of 28 percent, despite strong fundamentals. So, what’s leading to the correction?
With a market capitalization of Rs 1,55,636 crores, the shares of Varun Beverages Ltd are currently trading at Rs 460 per share. However, over the past five years, the stock has delivered a robust return of 662 percent.
The company is the second largest franchisee of PepsiCo in the world (outside the US) with operations spanning across 10 countries with franchise rights and an additional 4 countries with distribution rights. It has a vast portfolio in which major names like Pepsi, 7 Up, Sting, Aquafina, etc are included.
In December 2023, VBL announced that it had acquired Bevco, along with its other subsidiaries, which is a major South African bottler and holds franchise rights in South Africa, and got key approvals from the Competition Commission of India in March 2024. Also, it acquired SBC Beverages Tanzania Ltd, and after that, this acquisition proved to be a good bet as its African business is growing in double digits.
Interestingly, Varun Beverages’ PE was trading in the range of around 40x during COVID, which later breached the 100 P/E mark in August 2020. It is now that the stock is trading at a P/E of 56x, which is less than its median P/E of 59.5x.
Many brokerages like HSBC, Goldman Sachs, Jefferies expect its price to rise by upto 46 percent, expecting a rise in its year-on-year sales. If we look at its financials closely, we can see that over 34 percent of its annualised revenue is contributed by its June quarter itself. It recorded its highest units sold in the June quarter, followed by September and the March quarter in C.Y 2024
Financial Highlights
VBL reported a consolidated revenue of Rs 5,567 crores in Q1 FY25, up by 29 percent from its Q1 FY24 revenue of Rs 4,317 crores. It reported a net profit of Rs 731 crores in Q1 FY25, up by 33.4 percent from its Q1 FY24 profit of Rs 548 crores.
However, Q2 may not maintain this growth momentum primarily because of weak summer season. Between 2019 to 2024, the company’s Net Worth has risen significantly with a CAGR of 38 percent.
The stock delivered an ROE and ROCE of 22.49 percent and 24.85 percent, respectively, and is currently trading at a P/E of 56.12x as compared to its industry peers of 80.25x.
Varun Beverages Limited is one of the largest bottlers for PepsiCo, and oversees several different products in its portfolio, such as soft drinks (Pepsi, 7UP, Mountain Dew), juices (Tropicana, Slice), water (Aquafina), and snacks (Lay’s, Doritos, Kurkure), among others. Varun operates in India and overseas in international markets such as Sri Lanka, Nepal, and parts of Africa. Varun has a firm foundation.
Despite its recent 31 percent drop, Varun Beverages seems fundamentally strong and ready for long-term growth. It has solid earnings, with a 33.4 percent profit increase in Q1 FY25 compared to Q1 FY24.
The company relies on a strong franchisee model with PepsiCo and is expanding into fast-growing African markets. Its current price-to-earnings ratio of 56x is close to its median and lower than the industry average of 76.77x. This makes it a potential long-term opportunity; however, investors are advised to conduct their research before making any investment decisions.
Written by Satyajeet Mukherjee
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