PepsiCo Acquisitions And African Expansion Will Drive Future Success

Key Takeaways

• Expansion into African territories and potential acquisitions in Tanzania and Ghana signal significant future growth potential and increased market presence.
  
• Strategic financial moves and operational improvements, such as backward integration and product diversification, aim to enhance margins and drive future earnings growth.
  
• Heavy reliance on modern trade and high capital expenditures may pressure margins, while competition and regulatory shifts challenge revenue and market share.

Catalysts

Operates as the franchisee of carbonated soft drinks (CSDs) and non-carbonated beverages (NCBs) sold under trademarks owned by PepsiCo.

• The company's expansion into new territories, including South Africa and starting operations in the Democratic Republic of Congo, along with acquiring distribution rights for Namibia, Botswana, Mozambique, and Madagascar, signal significant future growth potential. These geographic expansions are expected to drive revenue growth.
  
• Varun Beverages is working on reducing reliance on modern trade in South Africa by expanding its distribution network in general trade, which could lead to improved net margins due to increased pricing power and better cost management.
  
• The planned acquisition of PepsiCo's business in Tanzania and Ghana, pending necessary approvals, is a potential catalyst for strengthening the company's presence in key international markets, leading to an increase in consolidated revenues.
  
• The capital raised through Qualified Institutional Placement of ₹7,500 crores is set to enhance Varun Beverages' financial flexibility, enabling strategic expansion and operational capability improvements, potentially driving future earnings growth.
  
• Continuation of efforts such as backward integration, increasing the mix of no-sugar products, and strategic capacity expansion through greenfield facilities in India and DRC is likely to support margin improvement and cater to growing consumer demand, which could positively impact EBITDA and earnings.

Varun Beverages Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Varun Beverages's revenue will grow by 16.4% annually over the next 3 years.
• Analysts assume that profit margins will increase from 13.0% today to 14.7% in 3 years time.
• Analysts expect earnings to reach ₹46.4 billion (and earnings per share of ₹13.6) by about March 2028, up from ₹25.9 billion today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 78.3x on those 2028 earnings, up from 70.5x today. This future PE is greater than the current PE for the IN Beverage industry at 33.8x.
• Analysts expect the number of shares outstanding to grow by 4.09% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 12.53%, as per the Simply Wall St company report.

Varun Beverages Future Earnings Per Share Growth

Risks

• The company's reliance on modern trade in South Africa, which offers lower margins compared to general trade, might impact overall profitability until further diversification and market penetration are achieved. (Impact: Net Margins)
  
• Competition from local brands like Campa in India, offering lower prices and higher margins to retailers, could pressure Varun Beverages to adjust pricing strategies, potentially affecting revenue and market share. (Impact: Revenue)
  
• The shift towards a no-sugar or low-sugar portfolio driven by regulatory changes such as the sugar tax in Zimbabwe could temporarily restrict growth in international markets, affecting the overall sales volume. (Impact: Revenue)
  
• Currency volatility in international markets like South Africa might pose a risk to financials, as significant revenue portions are generated in such regions. (Impact: Earnings)
  
• High capital expenditure and expansion, including acquisitions and the development of new production facilities, may strain financial resources and require careful management to maintain profitability. (Impact: Net Margins/Earnings)

Valuation

• The analysts have a consensus price target of ₹667.864 for Varun Beverages based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of ₹800.0, and the most bearish reporting a price target of just ₹549.0.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be ₹315.3 billion, earnings will come to ₹46.4 billion, and it would be trading on a PE ratio of 78.3x, assuming you use a discount rate of 12.5%.
• Given the current share price of ₹540.9, the analyst price target of ₹667.86 is 19.0% higher.
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.