Brokerage firm Emkay Global Financial Services is bullish on Varun Beverages stock. The brokerage firm has a buy call on the stock with a target price of ₹1,220.
Emkay believes the potential long-term Africa opportunity will drive a valuation upgrade for the stock.
The stock has been on a roll this year so far. It has surged 75% this year till October 25 against a 2% gain in the benchmark Sensex.
The company posted nearly 19% revenue CAGR in CY12-21, led by a revenue CAGR of 18% in India and 23% in international geographies. The robust global growth was driven by a strong ramp-up in three-country Africa operations and sustained growth in Nepal, said Emkay.
Emkay said PepsiCo’s low penetration in Africa, distribution expansion with the acquisition of Pioneer Foods in CY20, and sizable mix of regional players offer it a long-term growth opportunity in the continent.
"We estimate PepsiCo’s bottlers cater to 40-45% of the Africa market (value terms) via presence in 13 countries, while TCCC (The Coca-Cola Company) addresses the entire Africa population of more than 1.25bn ( more than 50 countries). Besides TCCC (with a healthy share in most African markets), competition is regional and can likely be beaten by improving affordability, affinity and availability of PepsiCo products," said Emkay.
Emkay sees a potential of USD25bn incremental retail sales for PepsiCo in Africa by CY35E, provided it expands its presence further.
With strong execution in Zimbabwe/Morocco (31%/21% revenue CAGR in CY18-21), Emkay expects Varun to capture 30% of this opportunity.
"This incremental opportunity, along with nearly 15% CAGR in existing geographies, should help Varun Beverages to deliver nearly 26% CAGR in Africa, over the next decade. Led by long-term Africa opportunity, we raise our CY25-35 growth expectations by 300bps to 18%," said Emkay.
Emkay highlighted that CCBA, a Coca-Cola bottler, handles 40% of TCCC’s volumes in Africa. Energy Drinks contribute a healthy value share of nearly 14% in CCBA markets (versus less than 5% in India), which suggests a strong demand for the category in Africa.
"PepsiCo has built a robust energy-drinks portfolio via the acquisition of Rockstar, its partnership with Starbucks/Bang in the USA, and through organic investments in Mountain Dew/Sting. We reckon that a broad-based energy-drinks portfolio across price points should help PepsiCo gain traction in this category in Africa," said Emkay.
According to a MintGenie poll, an average of 14 analysts have a ‘strong buy’ call on the stock.
Disclaimer: The views and recommendations given in this article are those of the broking firm. These do not represent the views of MintGenie.