In its latest research note, Motilal Oswal has reiterated a ‘BUY’ rating on Varun Beverages (VBL), India’s largest PepsiCo bottler, citing strong volume growth, robust operational efficiency, and improved profitability. The brokerage has maintained a target price of Rs. 1,750, implying an upside from current levels. Riding on a solid Q1 2024 performance and a promising demand outlook, the company is positioned as a long-term compounder in the FMCG space. Varun Beverages continues to benefit from growing penetration, favorable macroeconomic tailwinds, and a premiumizing product mix, with analysts lauding its steady margin trajectory and strong rural distribution network.

Strong Revenue and Volume Performance in Q1CY24

Varun Beverages reported a 10% year-on-year growth in revenue during the first quarter of calendar year 2024, with total sales reaching Rs. 4,275 crore. Notably, organic volume growth stood at 7% YoY, supported by double-digit growth in both India and international operations. The total sales volume for the quarter reached 272 million cases, marking an 8.6% YoY growth.

India, which remains the company’s largest market, saw consistent momentum across geographies, particularly in tier-2 and tier-3 cities. Internationally, African markets such as Morocco and Zambia also delivered double-digit volume expansion, further enhancing the company’s global footprint.

Margin Expansion Boosted by Operational Efficiency

The company’s EBITDA grew 15% YoY to Rs. 949 crore, while EBITDA margin expanded by 100 basis points to 22.2%, primarily due to:

• Operating leverage from higher volumes
• Improved realizations driven by product mix shift
• Lower input costs and better supply chain efficiency

The gross margin expanded by 130bps YoY to 55.5%, aided by a better mix and subdued PET chip prices. Net profit for the quarter came in at Rs. 547 crore, up 25% from the previous year.

Premiumization and Penetration Driving Sustainable Growth

Varun Beverages’ strategy to drive premiumization is bearing fruit, with non-carbonated beverages contributing 10% of total volumes. The company continues to focus on expanding its offerings in the value-added dairy, juice-based drinks, and energy drink segments.

Moreover, penetration-led growth in under-served rural regions and smaller urban centers remains a key driver. The recent launch of a new PET line in Bihar and enhanced logistics in Rajasthan and UP are examples of VBL’s execution on its rural expansion strategy.

Capacity Expansion and Network Strengthening

VBL is actively ramping up its production capabilities with seven new greenfield plants either commissioned or under construction. These facilities are expected to increase capacity by over 25 million cases annually. As of Q1CY24, capital expenditure stood at Rs. 300 crore, with plans to invest an additional Rs. 1,000 crore over the next few quarters.

The company also maintains a strong distribution network, now exceeding 3.6 million retail outlets across India. VBL’s “go-deep” approach into rural markets is yielding tangible results in terms of volume growth and brand visibility.

International Business Gaining Traction

International revenues now contribute approximately 15% of total sales. The company has turned its focus to African markets where per capita beverage consumption remains low, offering significant headroom for growth.

With favorable demographics and a burgeoning middle class, geographies like Morocco, Zambia, and Sri Lanka are expected to be meaningful contributors to long-term growth. Management noted that operating margins in international markets are improving steadily, reflecting better scale and execution.

Balance Sheet and Return Ratios Remain Healthy

VBL ended the quarter with a net debt-to-EBITDA ratio of 0.8x, well within the comfort zone. The return on capital employed (RoCE) stood at 21.5%, while return on equity (RoE) was at 23%, supported by strong earnings and efficient capital utilization.

Valuation and Target Price

Motilal Oswal remains constructive on the long-term prospects of VBL, citing strong brand positioning, favorable demographics, and a scalable business model. The brokerage values the stock at 46x one-year forward EPS, assigning a fair value target of Rs. 1,750.

Investment Levels and Risk Considerations

Conclusion: A Long-Term Compounder in the Making

With its robust quarterly numbers, efficient cost structure, and aggressive market expansion, Varun Beverages is reinforcing its place as a leading consumer play in India’s rapidly evolving beverage sector. The stock offers a compelling long-term investment case, anchored by strong earnings visibility, an expanding footprint, and a resilient brand portfolio under the PepsiCo umbrella.

While near-term risks such as commodity inflation or competitive pricing remain, the company's execution record, innovation pipeline, and favorable demand environment justify its valuation premium. Motilal Oswal’s bullish stance underlines a broader market confidence in VBL’s trajectory as it scales new heights.