Global stock broker Jefferies has a buy call on Varun Beverages stock with a target price of INR 1,540 representing an upside potential of 28% from the stock’s current market price of INR 1,200 per share. Jefferies describes the stock as a strong conviction buy.
According to Jefferies, the downfall of about 20% of the shares of Varun Beverages, from their peak, seems attractive to buy the shares which currently trades at 40x CY23E P/E. “We anticipate the company will have revenue and earnings growth that is the fastest in the sector. The balance sheet should keep de-levering, and RoCE appears destined to increase to 30% this year. High-quality execution with appealing industry opportunity-management guidelines for double-digit medium-term volume growth”, he stated.
“India has a sizable soft drink market, but compared to developed and developing economies, it has low per capita consumption. With double-digit volume growth forecasts for the medium term, VBL management anticipates the strong industry growth momentum to remain. We plan for an 11–12% increase in India volume over CY23–CY24E, one of the greatest increases in our coverage ” the brokerage reported.
Monday’s intraday BSE trade, shares of Varun Beverages rose more than 6% to INR 1,205.8. The share price increased by over 40% over the past six months, and over the past year, it has increased by around 91%. It has beaten the Nifty FMCG index.
“The Covid-19-affected CY20/1HCY21 saw a resumption of distribution expansion in CY22. In CY22, VBL introduced 40K visi-coolers; moving forward, we anticipate a constant addition of 40–50k p.a. Our estimates indicate that distribution expansion offers considerable growth headroom even though the existing territory also presents this possibility, with the South and West accounting for a third of the total >850K coolers “, it said.
“In our FMCG coverage, VBL is probably going to experience some of the highest EPS growth in CY23 (22%). The stock is trading at a discount to peers, at 40x CY23E & 34x CY24E P/E, down 20% from the most recent peak. Any seasonality concerns are a major risk because the peak season (Q2) contributes 40–50% to EBITDA/PAT “. In addition, Jefferies set a target price of INR 1,540 per share.
