Varun Beverages stock upside

Varun Beverages Stock Receives ‘Buy’ Call from Citi | 38% Upside Projection

Citi, a major international brokerage firm, has initiated a ‘buy’ rating on Varun Beverages Ltd. with a target price of ₹800, forecasting a potential upside of 38%. This call comes despite the stock witnessing some recent downturns, with shares trading 2% lower at ₹577.70 at the time of the report. Citi’s bullish outlook is rooted in the company’s strong market position and the immense growth potential within the soft drinks sector.

Key Drivers of Citi’s Rating:

1. Strong Market Position:
   • As the key franchisee for PepsiCo in India, Varun Beverages has a significant presence in both carbonated soft drinks (CSDs) and non-carbonated beverages (NCBs), including packaged drinking water.
2. Growth Potential in Soft Drinks Sector:
   • Citi emphasizes the company’s aggressive go-to-market (GTM) strategy, which enables it to penetrate deeper into existing markets and introduce new product categories.
3. Geographical Expansion:
   • Expansion into new territories, particularly in Africa, is considered a positive medium-term growth catalyst. Citi expects the company’s geographic reach to fuel revenue growth.
4. Financial Growth Estimates (CY23-26):
   • Revenue CAGR: 23%
   • Earnings Per Share (EPS) CAGR: 29%

Stock Performance and Market Activity:

• Year-to-Date Performance: Varun Beverages’ shares have gained 16%, keeping pace with the benchmark Nifty 50 index.
• 12-Month Performance: The stock surged 56% in the last year, outperforming the Nifty 50, which returned 30% during the same period.
• Recent Downturn: In the past month, the stock has fallen by 5%, attributed to profit-booking in the FMCG sector.

Corporate Actions:

• Stock Split:
  • Varun Beverages has announced a stock split, reducing the face value of each share from ₹5 to ₹2. This move is seen as an attempt to improve liquidity and make the stock more accessible to retail investors.

Advantages of Investing in Varun Beverages:

1. Strong Market Presence:
   • Varun Beverages has a dominant market share in India’s beverage sector, supported by its exclusive franchise agreement with PepsiCo for manufacturing and distribution. This established relationship with a global beverage giant enhances its credibility and growth potential.
2. Geographical Expansion:
   • The company’s growth in Africa and other regions outside India positions it well for long-term expansion, enabling access to new markets that are underserved by global beverage brands.
3. Impressive Growth Projections:
   • With an estimated 23% revenue CAGR and 29% EPS CAGR from 2023 to 2026, Varun Beverages is positioned for solid financial growth, making it an attractive stock for long-term investors.
4. Favorable Stock Price Target:
   • Citi’s price target of ₹800 represents a 38% upside, which is appealing to investors looking for potential gains in the beverage sector.
5. Share Price Momentum:
   • The stock has outperformed broader market indices over the past 12 months, surging by 56% compared to Nifty’s 30% gain, demonstrating resilience and strong investor interest.
6. Stock Split Potential:
   • The upcoming stock split could attract a larger pool of retail investors by lowering the share price, thus increasing market liquidity.

Disadvantages and Risks:

1. Profit-Booking and Recent Downturn:
   • In the short term, the stock has seen a 5% decline due to profit-booking. Investors might remain cautious, especially in the face of broader FMCG sector weakness.
2. Dependence on PepsiCo:
   • As a franchisee of PepsiCo, Varun Beverages’ business model is highly dependent on its relationship with PepsiCo. Any changes in this partnership or shifts in PepsiCo’s strategic direction could impact the company’s future performance.
3. Competition in the Beverage Market:
   • The soft drinks industry is highly competitive, with significant global and local players like Coca-Cola. Market share battles and aggressive promotions could put pressure on margins.
4. Volatility in Emerging Markets:
   • While expansion into Africa presents growth opportunities, it also exposes the company to risks associated with emerging markets, such as currency fluctuations, political instability, and operational challenges.
5. Commodity Price Risks:
   • The cost of raw materials, such as sugar, water, and packaging materials, can fluctuate, impacting the company’s production costs and profit margins.

Conclusion:

Varun Beverages presents a compelling investment opportunity, particularly due to its strong market position as PepsiCo’s franchisee, aggressive growth strategies, and expansion into new regions like Africa. While the recent downturn and risks associated with competition and dependency on PepsiCo are noteworthy, Citi’s price target of ₹800 indicates a potential 38% upside, making this stock attractive for investors with a long-term horizon. The upcoming stock split could further enhance the stock’s appeal by increasing liquidity and accessibility.

FAQs:

1. Why did Citi issue a ‘buy’ call for Varun Beverages?
   • Citi issued a ‘buy’ call due to Varun Beverages’ strong market position, impressive growth potential in the soft drinks sector, and expected financial growth, with a revenue CAGR of 23% and EPS CAGR of 29% from 2023 to 2026.
2. What is Citi’s target price for Varun Beverages?
   • Citi has set a target price of ₹800 for Varun Beverages, representing a 38% upside from current levels.
3. Why is Varun Beverages’ stock trading lower despite a positive rating?
   • The stock has recently witnessed a 5% decline due to profit-booking by investors, which is common after significant gains. The long-term outlook remains positive, according to Citi.
4. What does the stock split mean for investors?
   • The stock split will reduce the face value of shares from ₹5 to ₹2, making shares more affordable and increasing liquidity, potentially attracting more retail investors.
5. What are the key growth drivers for Varun Beverages?
   • Key growth drivers include geographic expansion into Africa, the introduction of new product categories, and its well-established partnership with PepsiCo for manufacturing and distribution.
6. What are the risks associated with investing in Varun Beverages?
   • Risks include dependence on PepsiCo, competition in the beverage sector, commodity price fluctuations, and challenges related to international expansion into emerging markets like Africa.

Varun Beverages stock upside

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