Varun Beverages (VBL) entered into the energy drink segment in CY17 with the launch of Sting in India, thereby competing with global players. With this move, domestic brokerage house Motilal Oswal (MOSL) believes that its newly launched segments - energy drinks, dairy beverages and juices will 'energise' the firm's growth path.
As per MOSL, the new segments are registering strong growth versus existing product segments. The contribution from this segment to overall VBL's portfolio has been moving up since the launch, it informed. Further, VBL is already selling Sting in the overseas markets and has recently launched the product in Nepal, it added.
The brokerage maintains a 'buy' call on the stock with a target price of ₹1,230, indicating an upside of 18 percent from the current market price. With the entry into the expanding energy drinks market in India, VBL -through Sting - has positioned itself at a favorable price point thus attracting masses, said the brokerage. It believes this segment would aid the company in driving up sales and margins going forward.
Stock price trend
The recent market volatility did not seem to have affected the beverage maker Varun Beverages. The scrip has risen 71 percent in the last 1 year and 74 percent in 2022 YTD.
In the 10 months of 2022 so far, the stock has been in the green in 7 of them with double-digit returns in 3 consecutive months - June, July and August, up 12, 11 and 17 percent, respectively. However, the stock was negative in Feb, May and October so far, down below 2.5 percent in each.
In the June quarter, the firm reported a two-fold rise in consolidated profit after tax at ₹802.01 crore on the back of growth in revenue from operations and improvement in margins. The company, which follows January-December financial year, had posted a PAT of ₹318.80 crore in April-June 2021. Its revenue from operations during the quarter stood at ₹5,017.57 crore, up two-fold as compared to ₹2,483.04 crore in the year-ago period.
Revenue from operations grew "on account of robust volume growth over last year and higher realization on a consolidated basis," said VBL in its earning statement.
Sting – Energizing the growth path
"VBL's latest entry into the energy drink segment through 'Sting' has garnered good response from the consumers leading to robust growth. The product has witnessed exponential volume growth of ~5.4x YoY to 23 million cases in CY21 and surged further by 2.9x YoY to 30 million cases in H1CY22. It accounted for 7.2 percent/11 percent of total domestic sales volumes /revenue of VBL in the H1CY22, respectively," the brokerage revealed.
According to MOSL's calculation, the revenue of Sting in CY21 has estimated at ₹560 crore, but it further crossed ₹720 crore in just the first half of CY22. As per Tofler, one of VBL's competitors in the premium segment, which have more than a decade of presence in the Indian market has been able to generate a domestic revenue of ₹500 crore in CY21, it pointed out.
"The high growth of Sting was further supported by increasing distribution outlets of VBL that stood at more than 3 million outlets, including the 0.4 million exclusive outlets for Sting. Management aims to expand VBL's distribution network by at least ~8-10 percent per annum going forward," noted MOSL.
The brokerage expects VBL to maintain its earnings momentum going forward, energized by: a) increased penetration in the newly acquired territories of South and West India, b) higher acceptance of newly launched products, and c) growing refrigeration in rural and semi-rural areas.
It predicts a revenue/EBITDA/PAT CAGR of 21 percent/26 percent/41 percent over CY21-24, respectively.
Disclaimer: The views and recommendations made above are those of individual analysts or broking companies, and not of MintGenie.