KRChoksey Research has issued a BUY recommendation for Varun Beverages Limited (VBL), with a target price of Rs 770, suggesting a potential upside of 22.2% from the current market price of Rs 630. The report highlights VBL's strategic acquisitions in Tanzania and Ghana, which align with its Pan-African expansion strategy. The acquisitions, coupled with backward integration and market share growth, are expected to drive revenue, EBITDA, and PAT growth at 23.5%, 25.1%, and 28.5% CAGR respectively over CY23–CY26E.

KRChoksey Recommends a BUY on Varun Beverages

Recommendation Overview
KRChoksey Research underscores the robust growth potential of Varun Beverages, supported by strategic acquisitions and market leadership in emerging regions. The report assigns a BUY call with a revised target price of Rs 770, up from Rs 738 previously.

Strategic Acquisitions in Africa

Acquisition of SBC Tanzania and SBC Ghana

SBC Tanzania:

Acquired for Rs 13,040 million, SBC Tanzania operates five manufacturing units and reported Rs 15,050 million in revenue for FY24.
PepsiCo commands a 56% market share in Tanzania's carbonated soft drink (CSD) market.
With underutilized capacity (current utilization at 74%), VBL sees room for growth in production and distribution.
SBC Ghana:

Acquired for Rs 1,270 million, SBC Ghana operates a single facility with revenue of Rs 320 million in FY24.
PepsiCo's market share in Ghana is modest at 13%, providing significant opportunities for growth in the West African market.
The acquisition complements VBL's Pan-African strategy by providing an entry into the underpenetrated Ghanaian market.
Integration Synergies

The acquisitions are expected to temporarily weigh on EBITDA margins due to integration costs. However, VBL's proven track record in post-acquisition margin expansion, as demonstrated in previous deals, underscores its operational efficiency.

Expansion of Supply Chain Capabilities

Backward Integration with Lunarmech Technologies

VBL plans to acquire the remaining 39.93% stake in Lunarmech Technologies for Rs 2,000 million, bringing it under full ownership.
Lunarmech manufactures plastic caps for PET bottles, generating Rs 1,830 million in revenue in FY24.
Full integration of Lunarmech will optimize the supply chain and reduce operational costs, enhancing VBL's margins.

Market Outlook and Financial Performance

Revenue Growth Projections

Net sales are forecasted to grow at a 23.5% CAGR, reaching Rs 302,121 million by CY26E from Rs 160,426 million in CY23.
EBITDA is projected to grow at a 25.1% CAGR, with margins stabilizing at approximately 23.7%.
Profitability Enhancements

PAT is expected to increase at a 28.5% CAGR, from Rs 20,559 million in CY23 to Rs 43,645 million in CY26E.
EPS estimates for CY26E have been revised upward by 4% to Rs 13.4, reflecting incremental earnings from acquisitions.
Key Financial Ratios

Return on Equity (RoE): Declining slightly to 24.5% in CY26E due to increased equity base.
Net Profit Margins: Improving steadily to 14.5% by CY26E, driven by cost optimization and scale benefits.

Regional Opportunities and Challenges

Tanzania: Strength in an Established Market

VBL benefits from PepsiCo’s dominant position in Tanzania’s CSD market.
Potential for margin improvement exists through efficiency gains and backward integration.
Ghana: Untapped Growth Potential

With a 13% market share, PepsiCo has significant room to grow in Ghana, especially in the face of Coca-Cola’s dominance.
VBL's entry into the Ghanaian market opens avenues for expansion into snacks and other high-growth categories.

Valuation and Investment Rationale

Revised Valuation and Target Price

VBL is valued at a PE multiple of 57x, reflecting the premium commanded by its leadership and growth prospects.
The revised target price of Rs 770 accounts for incremental EPS contributions from recent acquisitions.