Why Jefferies is bullish on Varun Beverages stock and raises the target price


Varun Beverages (VBL), the bottler of PepsiCo, is expected to experience accelerated growth, driven by recovery in volumes, new launches, expansion of distribution, normalization of margins and reduction in interest costs , according to estimates by brokerage firm Jefferies. The Indian beverage company is one of Pepsico’s largest franchisees.

Varun Beverages was among the businesses most affected by the Covid-19 disruptions due to higher out-of-home consumption as well as the timing of restrictions during peak season (April-May) in CY20 and CY21.

“With a pick-up in 1HCY21 economic activity, VBL also recorded a strong recovery, although the 2-year CAGR still remains negative. With the economy opening up and the pace of vaccinations accelerating, the outlook for LAV volumes remains strong for the next few quarters, ”Jefferies said in a note Friday.

The brokerage firm added Varun Beverages to a high conviction ‘Buy’ and raised its price target to ??1,200 per share, with a bullish scenario of ??1450 and bearish scenario of ??740. However, Jefferies sees another disruption related to Covid, a sharp rise in input costs, aggressive overseas mergers and acquisitions, among others, as key risks.

Among the new launches, the energy drink brand Sting continues to grow well and has become the market leader. Jefferies expects the recent launch of Mountain Dew Ice, a lemon-based fruit drink, to open up a new market for LAV.

VBL acquired the south and west territory of PepsiCo in May 2019. “Our interactions with the industry indicate that PepsiCo has lost market share in the territory over the past several years. VBL, after the acquisition, needed to focus on execution of market share gains.However, restrictions during peak season have impacted LAV’s plans to ramp up, but that should now change as LAV focuses on CY22 growth, resulting in share gains, in our opinion, ”added Jefferies.

The opinions and recommendations expressed above are those of individual analysts or brokerage firms, not Mint.

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