Varun Drinks Ranking: Add: Robust volumes for firm in Q4CY20


With higher out-of-home consumption, rising in-home consumption will present one other development alternative in CY21-22.

Although peak quarter (Q2CY20) was impacted by lockdown, Varun has managed to arrest natural quantity decline in CY20 at 20.8%. Restoration in financial system and better in-home consumption have been key causes for robust volumes in Q4CY20. Three pointers: (i) We consider when the enterprise exercise returns to normalcy, some shoppers will nonetheless proceed with larger in-home consumption.

This opens up new window of beverage consumption; (ii) Varun has initiated a number of cost-saving programmes and a few of the financial savings are prone to be structural in nature; and (iii) the corporate has launched Mountain Dew ICE, lemon fruit juice primarily based drink in Feb’21. It competes in giant market of lime and lemon primarily based drinks (~600 mn instances p.a.). We mannequin Varun to report PAT CAGR of 53.9% over CY20-22 with enhancing RoE. Keep Add with TP of Rs 1,015 (33x CY22e).

Q4CY20 outcomes: Varun reported income and Ebitda development of 9.1% and 48.8%, respectively. Nonetheless, adjusted PAT declined 86.6%. Quantity development was 5.7%. The corporate has managed to report quantity decline of 9.5% (natural 20.8%) in CY20 even after its peak quarter Q2CY20 was impacted by Covid-led lockdown. Gross margins expanded 470bps because of change in income combine and decrease enter prices. Ebitda margin was up 350bps because of cost-saving initiatives.

Larger in-home consumption to drive development: Whereas out-of-home consumption continues to be decrease, there’s enhance in in-home consumption of CSD. With re-opening of markets and transit factors akin to railway stations, bus stations, there’s revival in out-of-home consumption. With higher out-of-home consumption, rising in-home consumption will present one other development alternative in CY21-22.

Launch of Mountain Dew ICE: Varun has launched a brand new variant as Mountain Dew Ice in Feb’21. It’s lemon fruit juice primarily based drink and is launched in 250ml PET and 650ml PET SKUs. Lime and Lemon primarily based drink is a big market with annual gross sales of ~600 mn instances. Mountain Dew ICE could have GST fee of 12% in comparison with 40% for carbonated smooth drinks.

Rising share of PET bottles to avoid wasting prices: Shoppers are preferring to purchase PET bottles as a substitute of glass bottles as it’s comparatively safer. Therefore, the share of PET bottles is rising. As firm has already contracted the provides of PET bottles for CY21, it doesn’t count on materials inflation even when crude oil costs enhance. We count on firm’s prices to be decrease with larger share of PET bottles.

Keep ADD: We mannequin Varun to report income and PAT CAGRs of 25.4% and 53.9%, respectively, over CY20-CY22e. Varun continues to learn from its relationship with PepsiCo, pan-India distribution, backward integration, and elevated in-home consumption. Keep Add with DCF-based unchanged TP of Rs 1,015 (33x CY22e). Key draw back dangers are sharp enhance in aggressive strain and enhance in uncooked materials costs.

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