Varun Beverages only Nifty FMCG stock to turn multibagger; will spirits remain high?

It’s the only stock, part of the Nifty FMCG index, to have turned a multibagger in 1 year among its largecap and midcap peers.

The interest in the stock further increased after the company last month did a stock split in the ratio of 2-for-1.

Varun Beverages is Pepsico’s second largest franchise in the world outside the US, and its consistent earnings growth upgrades, a near monopoly position in the beverages segment, and a stronger outlook is what has driven the stellar performance of the stock.

“Varun Beverages which was probably a pure soft drinks manufacturer, franchisee for Pepsi, we did not realise that it is going to give a return of 70-80% every year, so that is what happened with that stock and frankly, multi-baggers come along that way,” says Dinshaw Irani, CIO, Helios India.

For 2022, the company reported a more than 2-fold rise in net profit to Rs 1,270 crore, on the back of a sharp 60% jump in revenue to Rs 10,596 crore. The company follows the calendar year.

Further, the management guided for maintaining a double-digit revenue growth momentum on the back of execution capabilities, expanded capacities, and increased distribution reach.Varun Beverages’ strategy to enter into unpenetrated territories has helped it in gaining significant market share. The recently commissioned manufacturing unit in Bihar is one such effort it has taken to widen its distribution reach.

South Africa Dreams
With India growth on a strong footing, Varun Beverages is exploring international opportunities, and the incorporation of a wholly-owned subsidiary in South Africa is on those lines.

According to Kotak Institutional Equities, Pepsico has a negligible 1% share in the $2.5 billion soft drinks market in South Africa. Coca Cola is the market leader with an over 60% share.

Considering Varun Beverages’ exceptional track record, it won’t be surprising if the company acquires franchise rights for the South Africa market in the foreseeable future.

If that happens, it could drive meaningful value creation in the medium term for the company, believes Kotak Equities.

Stock Talk
The earnings growth potential notwithstanding, the stock isn’t a screaming “buy” for Dalal Street currently given the strong run it has already had.

Earlier this week, Kotak Institutional Equities downgraded its rating on the stock by one notch to “add” from “buy”. However, it increased the fair value by 10% to Rs 875, stating that it sees a modest upside in the short term.

However, analysts at Sharekhan have held their positive stance on the stock and see potential upside of more than 21% from the current levels over the next 12 months. They expect the company to deliver a compounded annual growth of 30% earnings over 2022-2024.

So, even as the momentum fizzles out in the near term, bulls’ spirit on the stock is set to remain high in the longer run.

(Disclaimer: Recommendations, suggestions, views and opinions given by the experts are their own. These do not represent the views of Economic Times)