In its latest report, KRChoksey Research has reiterated a confident BUY rating on Varun Beverages Limited (VBL), projecting significant growth potential driven by robust volume expansion, strategic acquisitions, and improved margin performance. In Calendar Year 2024 (CY24), VBL delivered impressive results with consolidated revenues up by 24.7% YoY, buoyed by increased volumes, strategic international expansions, and aggressive infrastructure investments. Notably, EBITDA and profit after tax (PAT) surged by 30.5% and 25.3% respectively, supported by cost efficiency, prudent capital allocation, and a strengthened market presence in both Indian and global territories.

Robust Topline Growth Driven by Volume Expansion

Varun Beverages Limited reported a commendable 24.7% YoY increase in net revenue for CY24, reaching Rs. 200,077 million compared to Rs. 160,426 million in the previous year. This growth was underpinned by a notable 23.2% year-on-year rise in consolidated sales volume, reaching 1,123 million cases. Notably, the company observed strong momentum domestically, with Indian operations volumes climbing by 11.4%, while international volumes surged significantly by 72.2% year-over-year.

Enhanced Product Portfolio and Strategic International Integration

VBL's diversified beverage product portfolio has played an instrumental role in driving consistent revenue growth. During CY24, Carbonated Soft Drinks (CSD) constituted 74.2% of total sales, Juice-Based Drinks accounted for 6.2%, and Packaged Drinking Water contributed 19.6%. The realization per case notably improved by 1.3% YoY, averaging Rs. 177.9, primarily driven by an upgraded product mix.

Additionally, the acquisition and seamless integration of The Beverage Company Proprietary Limited (BevCo) bolstered VBL's South African operations, while strategic expansions into markets such as Tanzania and Ghana further enhanced the company's international footprint. These initiatives underscore management’s intention to strategically align geographical presence with diversified offerings, thereby improving overall competitive strength.

Margin Expansion through Strategic Cost Management

Operational efficiencies and astute procurement strategies greatly enhanced profitability margins in CY24. Gross margins improved notably by 165 basis points, standing at 55.5% compared to 53.8% last year. This positive movement was attributed to strategic procurement, optimized storage of PET chips to benefit from favorable pricing, and effective implementation of backward integration strategies.

EBITDA growth significantly outpaced revenue, expanding by 30.5% YoY to Rs. 47,111 million, while EBITDA margins expanded by 105 basis points to 23.5%. Although partially offset by integration costs related to BevCo and underutilized fixed costs from newly established production facilities, the robust operational performance maintained impressive bottom-line profitability.

Strategic Capital Expenditure and Debt Reduction

VBL executed significant capital expenditures totaling Rs. 45,000 million in CY24, considerably higher compared to Rs. 24,000 million in CY23. Major investments include the establishment of four greenfield production facilities in Supa (Maharashtra), Gorakhpur (Uttar Pradesh), Khordha (Odisha), and Kinshasa (Democratic Republic of Congo), with a combined capital allocation of Rs. 32,000 million. Additional funds of approximately Rs. 8,000 million were utilized for international expansion and backward integration, furthering VBL's robust supply chain capabilities.

Moreover, VBL significantly strengthened its financial position, achieving a near debt-free status in CY24. Leveraging the proceeds from its Qualified Institutional Placement (QIP) issue worth Rs. 75,000 million, the company systematically reduced its net debt from Rs. 51,891 million in CY23 to a mere Rs. 5,600 million. This strategic deleveraging sharply improved the company’s gearing ratio from 42.79% to just 3.26%, signaling enhanced financial stability.

Positive Trajectory in Earnings and Dividend Distribution

Net profit after tax surged 25.3% YoY to Rs. 26,343 million, compared to Rs. 21,018 million in the preceding year. This increase resulted primarily from higher sales volumes and improved margin realization. Consequently, adjusted earnings per share (EPS) improved by an impressive 21.2%, reaching Rs. 7.7 in CY24.

The company declared a total dividend of Rs. 1.75 per equity share for CY24, including an interim dividend of Rs. 1.25 per share (face value Rs. 5) declared mid-year and a final dividend of Rs. 0.50 per share (face value of Rs. 2, pending AGM approval). Such distribution reflects VBL's stable profit trajectory and robust cash flow generation capabilities.

Expansion into the Snacks Segment: Diversifying Growth Avenues

Continuing its successful collaboration with PepsiCo, Varun Beverages broadened its horizon into snacks manufacturing, acquiring exclusive production and distribution rights for popular brands like Cheetos in Morocco, Simba Munchiez in Zimbabwe and Zambia. This strategic diversification leverages VBL’s existing infrastructure, further synergizing operations and amplifying profitability potential in these emerging markets.

ESG Initiatives: A Commitment to Sustainability and Social Responsibility

VBL has continued emphasizing its Environmental, Social, and Governance (ESG) commitments:

Environmental Initiatives: The company has significantly exceeded water conservation targets, recharging 15.54 billion liters against 7.27 billion liters consumed. Its plastic waste recycling initiatives have reached an impressive 88% PET bottle recycling rate. Renewable energy usage increased to 16%, targeting a further rise to 30% by 2030.

Social and Community Initiatives: VBL's community-driven programs, such as AARU Care, provided extensive healthcare to underserved populations. Furthermore, educational initiatives continue to support thousands of underprivileged students annually.

Governance Practices: Corporate governance remains stringent, focusing on transparency, ethical conduct, and regulatory compliance, leading to recognition in global ESG standards such as inclusion in CDP’s A-List for Climate and Water Security.

Investment Outlook and Target Price Recommendation

KRChoksey forecasts strong growth momentum for VBL, estimating a CAGR of 22.1% for revenue, 23.2% for EBITDA, and 27.9% for adjusted PAT between CY24 and CY26E. The brokerage firm retains its valuation multiple at 52.0x projected CY26E EPS of Rs. 12.6, consequently arriving at an updated target price of Rs. 657 per share, offering an upside potential of 34.6% from the current market price (CMP) of Rs. 488.