Shares of Varun Beverages Ltd surged more than 2% on Tuesday, March 4, after brokerage firm CLSA upgraded the stock’s rating to ‘high conviction outperform’ from ‘outperform’, citing its attractive risk-reward ratio. CLSA slightly reduced the target price to Rs 802 from Rs 770, implying a 70% upside potential.
The current pricing scenario indicates a 5% bear case downside for the company’s Earnings Before Interest, Tax, Depreciation and Amortisation (EBITDA), and a 6.2% bear case downside to its Earnings Per Share (EPS) estimates for the calendar year 2025, the brokerage firm mentioned in its note.
CLSA pointed out that Varun Beverages’ capital expenditure (capex) peaked in 2023, which could lead to a moderation in its capex intensity going forward. However, it is expected to remain higher than that of FMCG firms.
The company’s total addressable market share remains substantial and continues to grow. CLSA sees significant potential for upside in soft drink consumption, particularly given that India’s per capita soft drink consumption remains well below that of its peers. Varun Beverages continues to hold a strong position in both India and Africa.
On Monday, the stock fell to its 52-week low of Rs 419.40 on the National Stock Exchange (NSE). Over the last three months, the stock has fallen more than 28%, and its 12-month forward PE multiple has decreased from 62.8x to 43.8x. The stock reached a record high of Rs 682.84 on July 29, 2024.
At the time of writing, the stock was trading at Rs 478, up 21.05 points or 4.5% from the previous day’s close of Rs 456.95 on the NSE.
This underperformance can be attributed to several investor concerns, including heightened competition from Campa Cola’s Rs 10 offering, potential challenges arising from Coca-Cola’s restructuring of its bottling operations, and an increase in the company’s capital expenditure guidance.
Additionally, worries about slowing urban consumption in India have weighed on sentiment. However, CLSA believes these concerns are overdone, as the stock is currently trading below its average valuation multiple, while the company’s growth and profitability outlook remain strong.
In the December 2024 quarter, Varun Beverages reported a 36.1% year-on-year (YoY) increase in its net profit, which rose to Rs 195.64 crore, compared to Rs 143.76 crore in the same period last year. The company’s net revenues jumped by 38.3% to Rs 3,688.79 crore, compared to Rs 2,730.98 crore in the same quarter of the previous year.
