Brokerage houses remained positive on Varun Beverages after the company narrowed its consolidated loss to Rs 72.12 crore for December quarter 2017, from Rs 111.65 crore in year-ago.
Revenue from operations grew by 21 percent to Rs 527.4 crore compared to same quarter last year, led by volume growth from territory acquisition in MP, Odisha earlier this year. The company also acquired territory in Bihar, Jharkhand and Chhattisgarh during the quarter.
Operating profit declined to Rs 22.5 crore against Rs 36.3 crore in the corresponding quarter. Q4 is seasonally weak for the company as volumes of carbonated beverages decline substantially during winter. However, fixed cost remained same.
ICICIdirect believes a 400 bps decline in raw material to sales was mainly on account of lower sugar prices that declined significantly.
While having Buy call on the stock, brokerage houses expect the stock can give up to 37 percent returns over 12-15 months.
Brokerage – ICICIdirect | Rating – Buy | Target – Rs 840 | Return – 28%
We remain positive on Varun Beverage as the company has continuously been looking for newer territories to expand its base in untapped geographies and remain a proxy play on soft drink industry in India.
We expect revenue, PAT to grow at a CAGR of 16.8 percent, 37.8 percent, respectively, in CY17-19E with an operating margin of 21.6 percent in CY19E.
With the comfort of earnings visibility and expected improvement in return ratios, we revised target price to Rs 840 per share.
Brokerage – CLSA | Rating – Buy | Target – Rs 855 | Return – 30%
While maintaining Buy call on the stock with a target price at Rs 885 per share, CLSA said the outlook was fairly strong for 2018.
The company has been able to secure the rights for more territories and is now over half of PepsiCo volume in India.
New territories & products give company an opportunity to expand volume & market share. Recent correction in the sugar price also improved margin visibility.
Brokerage – Emkay | Rating – Buy | Target – Rs 902 | Return – 37%
We maintain Buy on Varun Beverages with new street-high target price of Rs 902. The 2017 profit increased 31 percent backed by strong international business performance and margin expansion.
We expect this momentum to continue with earnings growth of 32 percent in 2018 and 30 percent in 2019. This will be on the back of recovery in India business.
The India business revenue would rise 18 percent in 2018 supported by recovery in sales volume (post GST shock) and benefits from recently acquired new territories (inorganic growth).
Current valuations (PER of 33.2x and EV/EBITDA of 12.9x CY19E) are attractive given strong EPS growth and ROE expansion. Target price of Rs 902 is based on EV/EBITDA of 17x CY19E (much lower than peer average).
At 14:48 hours IST, the stock price was quoting at Rs 650.05, down Rs 1.95, or 0.30 percent on the BSE.