Stock to Buy - Varun Beverages Know why Kotak puts a BUY on this stock with target price Rs 1150

Kotak Institutional Equities say that Varun Beverages underlying growth momentum was healthy with a two-year organic volume CAGR of 11.7% in 1QCY21. Robust growth continued in the first fortnight of April driving flat volumes in the month notwithstanding a sharp decline in the second fortnight following lockdown/restrictions. Near-term outlook remains uncertain as localized lockdowns/restrictions would impact about 30-40% of business (out-of-home/on-the-go consumption + institutional sales) which would be partly offset by a rise in in-home consumption. Management expects continued momentum in rural markets. Net impact on offtake is expected to be much lower compared to the first wave.

Medium-term triggers look good due to:

(1)    distribution ramp up led share gains in South/West India
(2)    good traction on new launches
(3)    sustainable cost savings

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Kotak Institutional Equities says that Varun beverages registered 34% yoy volume growth in the domestic business aided by pick-up in out of home consumption and continued strong in-home consumption demand. On a two-year CAGR basis, consolidated organic volumes grew 11.7% yoy. Rural demand continues to outpace urban with 50%+ yoy volume growth in 1Q. International business also registered strong 26% yoy volume growth during the quarter. North and East registered 38% yoy growth in Q1, ahead of South and West markets. Near term outlook remains uncertain with rising Covid cases necessitating localized lockdowns.

Varun Beverages Management highlighted that the supply chain was a bit impacted towards April month end with closure of retail outlets in multiple cities, even as the net impact is expected to be much lower compared to the previous year’s lockdown. Manufacturing units are operating at normal levels currently.

Kotak cuts CY2021 volume and EBITDA estimates by about 7-8% and broadly maintains CY2022 estimates. Kotak models 15% decline in domestic volumes in May-Jun 2021 versus May-June 2019,  3% growth in domestic volumes in 3QCY21E over 3QCY19, and healthy growth thereafter. Kotak rollover and revised DCF-based FV to Rs 1150 (Rs 1125), implying 29X Jun-23E earnings and 15X EV/EBITDA