Tactical Growth In Emerging Markets Set To Boost Revenue And Margins

Key Takeaways

• Expansion in India and Africa, especially through new facilities, aims to drive revenue by targeting high-growth markets and improving efficiencies.
  
• Equity issuance will fund expansion and acquisitions, strengthen the balance sheet, and enhance profitability by focusing on high-margin product categories.
  
• Increased finance costs, competition, and weather-related challenges pose risks to growth and profitability, while fundraising and new facilities may affect margins and shareholder returns.

Catalysts

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

• Expansion of the distribution network in India and international markets, especially in high-growth areas like Africa, is expected to drive significant volume growth and increase revenue.
  
• Successful commissioning and high utilization of the new facility in the Democratic Republic of Congo (DRC) points to potential revenue growth from a previously under-penetrated market.
  
• Expansion plans, including the set-up of new production facilities in India and additional capacity in DRC, as well as the focus on backward integration, are likely to improve operational efficiencies and enhance EBITDA margins.
  
• The approved proposal to raise funds through equity issuance aims to support expansion into new territories and potential acquisitions, while also strengthening the balance sheet to enhance future profitability at the PAT level.
  
• Focus on non-carbonated beverages and strategic market penetration is likely to continue driving sales in higher-margin product categories, positively impacting net margins.

Varun Beverages Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Varun Beverages's revenue will grow by 17.5% annually over the next 3 years.
• Analysts assume that profit margins will increase from 13.4% today to 15.5% in 3 years time.
• Analysts expect earnings to reach ₹47.6 billion (and earnings per share of ₹14.4) by about November 2027, up from ₹25.4 billion today.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 69.9x on those 2027 earnings, down from 76.3x today. This future PE is greater than the current PE for the IN Beverage industry at 25.6x.
• Analysts expect the number of shares outstanding to grow by 0.6% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 12.15%, as per the Simply Wall St company report.

Varun Beverages Future Earnings Per Share Growth

Risks

• The company's growth in India was significantly impacted by excessive rainfall, leading to only a 5.7% increase in the Indian market, which could pose a risk to future revenue growth if similar weather patterns persist.
  
• Finance costs have increased by 89.7% due to new capital expenditures and higher borrowing costs, which may strain net margins and earnings if interest rates rise or if new facilities do not yield the expected returns.
  
• The company faces increasing competition, notably from Campa Cola, a formidable player in the market whose presence may affect Varun Beverages' market share and potentially impact revenue and EBITDA growth.
  
• The fundraising plan through QIP to raise ₹7,500 crores, aimed at debt reduction and funding new acquisitions, introduces the risk of shareholder dilution, which might affect earnings per share negatively if the returns on investments are not as high as anticipated.
  
• Depreciation has increased by 50.2% due to acquisitions and new facilities, including the plant in the DRC, which imposes a burden on profitability and could affect net margins if the new facilities do not operate as efficiently as projected.

Valuation

• The analysts have a consensus price target of ₹713.8 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 ₹827.0, and the most bearish reporting a price target of just ₹606.0.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2027, revenues will be ₹307.8 billion, earnings will come to ₹47.6 billion, and it would be trading on a PE ratio of 69.9x, assuming you use a discount rate of 12.2%.
  
• Given the current share price of ₹597.25, the analyst's price target of ₹713.8 is 16.3% 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.