In the form of shares of Varun Beverages Ltd (VBL), investors are sitting on hefty returns. The stock price has increased by more than a factor of two since January 1 of year 22. Outside of the US, VBL is one of PepsiCo’s biggest franchisees. It adheres to the January through December calendar year.
Among the elements that improved sentiment for the company in calendar year 22 were strong volume growth and improved operating leverage. Recall that disruptions brought on by the epidemic in the previous two years had an impact on peak season sales. High demand growth and distribution expansion enabled VBL to increase volumes by 41% year over year (yoy) in CY22. Moreover, VBL’s energy drink Sting, which has a greater net realization, performed well and above expectations. In CY22, Sting accounted for one-tenth of all sales in India. Overall, the EBITDA margin increased 240 basis points from the previous year. On the other side, expansion spending caused net debt to rise by 3,409 crores by December 31, 2022, from 3,005 crores the previous year.
As a result, it is anticipated that the arrival of summer and the expectation for a hot summer will aid VBL’s volume performance in Calendar Year 23. “The company is poised to capitalize on the opportunity,” said analysts at Kotak Institutional Equities. “Thanks to the early ramp-up (pre-stocking of finished goods from December 2022 to summer 2023) for peak utilisation and (1) capacity addition (about 30% increase in carbonated soft drinks (CSD) capacity in India by end-March 2023) and (2) adequate stock for the peak season. This year, Sting is anticipated to be a significant growth driver.
Due to Reliance Industries’ relaunch of Campa Cola, investors must be aware of any potential risk risks. In the short term, a significant impact is not anticipated. Analysts at ICICI Securities noted that after examining the potential risk associated with the relaunch, they do not currently model any meaningful risk to VBL in the immediate future, but they would be closely watching Campa Beverages’ development. He emphasizes that among other things, Campa had to make investments in a number of manufacturing facilities around India (because beverages are a “low-value high-volume” commodity), distribution networks, and visicoolers. According to ICICI Securities analysts, it may take these investments several years to recover, according to a March 20 report by Antique Stock Broking. The brokerage business anticipates the start of summer to be positive for the industry.
To be sure, the sharp rise in VBL shares may limit meaningful upside here.
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