Varun Beverages, an Indian firm that operates the franchisee of PepsiCo and produces, bottles and distributes beverages, has come under the radar of several brokerages ever since it signed a co-packing agreement to manufacture ‘Kurkure Puffcorn’ for PepsiCo India Holdings in February 2022.
Brokerages feel the Kurkure deal, which is the company's first extension into a non-beverage category, could usher in a bright tomorrow for the company.
The Stock Price Conundrum
Amid the sharp selloff in the market, the stock of Varun Beverages has climbed about 3 percent since February while the benchmark Nifty has fallen more than 6 percent in the same period. However, as of 10.10 am on March 7, 2022, the stock is down nearly 4.8 percent, at ₹887.50 on NSE following the broader market fall due to Russia-Ukraine War.
The counter is witnessing interest by investors as brokerages have started to see healthy growth potential in the firm after its Kurkure deal with PepsiCo.
Market sentiment on the stock is ‘moderately positive’, according to a MintGenie poll and an average of 14 analysts have a ‘strong buy’ call on the company.
Global brokerage firm Jefferies believes this deal could be a precursor to something big over time as the company enjoys a strong relationship with PepsiCo and is known for its execution capabilities.
Jefferies has a buy call on the stock with a target price of ₹1,215, which is a 23 percent upside from the stock's last closing price of ₹984.30 on NSE.
Domestic brokerage firm Motilal Oswal Financial Services, too, has a buy call on the stock with a target price of ₹1,175.
The company has a diversified growth strategy, with multiple levers in place to drive its long-term growth. We expect volume growth momentum to continue, with (a) a gradual gain in market share on increasing penetration in underpenetrated markets, (b) higher acceptance of recently launched products, and (c) ramp-up of operations in new regions (South and West India)," Motilal Oswal said in a fresh report.
Motilal Oswal expects the out-of-home consumption mix for Varun Beverages to return to normal levels (nearly 65 percent) after the lifting of Covid-related restrictions, with increasing intensity in domestic and international travel.
Motilal Oswal pointed out that Varun Beverages is setting up a new manufacturing facility in Uttar Pradesh at a dedicated capex of ₹20-25 crore to manufacture Kurkure Puffcorn.
"Pepsi’s snacking business is valued at ₹4,000-4,300 crore as per industry sources. In the long-term, Varun Beverages may acquire additional manufacturing and distribution rights of other food products of PepsiCo," Motilal Oswal said.
With a ramp-up in operations due to increased demand and the impact of the Covid-19 pandemic gradually subsiding, the brokerage firm expects the company's operating leverage to kick in and complement margin expansion.
Motilal Oswal expects a revenue, EBITDA, PAT CAGR of 15 percent, 20 percent and 35 percent, respectively, over 2021-23.
The December quarter numbers of the company were healthy as it had reported a consolidated net profit of ₹32.59 crore for the December quarter of FY22 against a loss of ₹7.24 crore during the same quarter a year ago.
Brokerage firm Kotak Securities has a buy call on the stock with a target price of ₹1,100. The brokerage firm expects normalisation of volumes, market share gains in South and West, sustained cost savings and financial leverage to drive strong earnings growth CY2020-22E. "Varun Beverages has procured PET inventory of ₹700 crore (covered for 9 months) and hence is well placed to defend margins," Kotak said.
ICICI Securities has an 'add' call on the stock with a target price of ₹1,030. "We continue to stay positive on the company due to its competitive advantages and strong relationships with Pepsi. We model Varun to report a PAT
CAGR of 29.3 percent over CY21-23E with an improving return on equity (RoE)," ICICI Securities said.