Target: ₹1,540

CMP: ₹1,310.30

Incorporated in 1995, Varun Beverages Limited (VBL) is PepsiCo’s second- largest franchisee (outside the US). The Company produces and distributes a wide range of Carbonated Soft Drinks (CSDs), as well as a large selection of Non-Carbonated Beverages (NCB), including packaged water sold under trademarks owned by PepsiCo.

Currently, out of about 3 million retail outlets where VBL is present (out of the addressable market of about 10-11 million), about 60 per cent don’t have a visi-cooler because of the non-availability of electricity or a competitor has already set up one of its visi-cooler. The company has a target to add 40-50,000 visi-coolers every year.

VBL got into a co-agreement to manufacture Kurkure Puffcorn, and in Q3 CY22, they commenced trial production in their Uttar Pradesh plant for PepsiCo India Holdings Private Ltd.

We initiate our coverage on Varun Beverages limited with a Buy rating and a target of ₹1,540 (58x CY23 EPS). Compared to FMCG companies, VBL is a capital-intensive business leading to lower return ratios. Due to this, we are valuing it at a 10% discount to an average FMCG company (Average 5-year PE multiple: 64.7).