Varun Beverages gives investors taste of hope
PremiumVolume outlook for Varun Beverages remains strong in CY22 if no covid-led disruption arises
Varun Beverages Ltd’s (VBL’s) shares have risen 4% in the past two trading days compared with the 1.8% drop in Nifty 50 index. Investors seem to be hoping that its entry into snacks making would in time pave the way for bigger opportunities in the foods segment.
VBL’s board has cleared a plan for the company to enter into an agreement to manufacture Kurkure Puffcorn for PepsiCo India. As of now, this is a contract manufacturing pact and the initial impact on VBL’s financials is expected to be insignificant.
“Depending on Varun’s progress in the Kurkure Puffcorn business, we expect PepsiCo to offer more products and regions to Varun," said analysts from ICICI Securities in a report on 3 March. VBL is expe-cted to invest ₹20 crore- ₹25 crore to set up a manufacturing unit in Uttar Pradesh where it already has a beverages line.
Kotak Institutional Equities sees a possibility of PepsiCo and VBL expanding the scope of this partnership over time.
“Even as the packaged snacks category operates at about 40% gross margin and 10-15% Ebitda margin versus 60-65% gross margin and 25-30% Ebitda margin of beverages, its asset turnover at about 4X is better than 1.5-2X of the beverages business," the brokerage said. Ebitda is earnings before interest, taxes, depreciation, and amortization.
“The return profile of this business would be key if and when it scales up," Kotak’s analysts said in a report on 3 March.
Meanwhile, VBL, which is one of the largest franchisees of PepsiCo outside the US, saw its total sales volumes in calendar year 2021 (CY21) increase by about 34% year-on-year (y-o-y) to 569 million cases. Growth was partially helped by a favourable base as CY20 volume had declined by 13% y-o-y.
Nevertheless, the volume recovery can be expected to continue with the diminishing impact of the covid-19 pandemic. Note that VBL’s peak season sales were hit in the past two years because of the restrictions put in place to contain the spread of coronavirus. As such, the volume outlook for CY22 is looking upbeat, provided there are no covid-led disruptions. Improving mobility and reopening of offices should have a positive influence on demand.
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Investors are sitting on smart gains. In the past one year, the VBL stock has risen about 40%, suggesting that investors have factored in the optimism to some extent, at least. Margin performance is a monitorable, given the volatile input costs environment.
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