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Jefferies sees multiple re-ratings and up to 70% upside in this Pepsi bottler

NEW DELHI: Thanks to nearly two-and-a-half fold returns since March lows, Varun Beverages has just recently entered the largecap category, leaving its peers behind. But, this may be just the beginning of another leg of the rally.

The company was among the most impacted companies due to Covid-19 disruption, but has seen spectacular recovery in the first half of this calendar year as the economy opened up and now the analysts are gung ho on the stock.

Varun Beverages, the PepsiCo bottler, is set to see a growth acceleration ahead, and we forecast 49 per cent EPS CAGR led by recovery in volumes, new launches, distribution expansion, margin normalisation and reduction in interest cost,” said Vivek Maheshwari of Jefferies.

Analysts hope that the company’s balance sheet will continue to de-lever and RoE will expand to 25 per cent by CY23. “With all ingredients in place, we see a case for multiple re-ratings and highlight as a high conviction stock,” said Maheshwari.

He has a ‘buy’ rating on the scrip with base case target at Rs 1,200, up from Rs 930 earlier. But on the upside, the target stands at Rs 1,450, meaning an upside of 71 per cent from previous close. In case things deteriorate, he has a target of Rs 740 on the stock in a downside scenario.

In its base case, Jefferies forecasts 20 per cent annual growth in revenues over CY20-23 with 260bps margin expansion. They see Ebitda to rise at 25 per cent CAGR over CY20-23E, which would be back-ended as CY21 is likely to have some impact of Covid-19 crisis.

Increase in distribution reach and cooling infrastructure in rural and newly acquired regions offer a multi-year growth headroom for Varun Beverages and will help expand RoCEs, the broker said.

“In an upside scenario, we forecast 22 per cent annual growth in revenues over CY20-23E with a 360 bps margin expansion. We forecast Ebitda to rise at 29 per cent CAGR over CY20-23, which builds in a strong recovery after some Covid impact in CY21,” said Maheshwari.

He said among the key factors that may work for the company are rising penetration of visi-coolers in rural areas and increased distribution reach, longer runway of growth in the newly-acquired regions and strong economic recovery in CY21.

The Refinitiv database also echoes his thoughts. A consensus of 13 analysts peg the stock as a ‘strong buy’ candidate. Varun Beverages has a median price target of Rs 908 in 12 months by 13 analysts. They provided a high estimate of Rs 990 and a low estimate of Rs 800 for the company. The stock is among the highest rated against its peers, as per the database.

On Friday, the stock ended 2.84 per cent higher at Rs 907.

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