Fast-growing Indian drinks company resists selling

Covid-19 lockdowns dealt a blow to India Varun Beverages (IN:BOM)the second-largest bottler and distributor of PepsiCo beverages outside the United States.

In September 2019, just six months before the pandemic hit, Varun completed the takeover of PepsiCo franchises in South and West India. It had begun investing heavily to boost market penetration in its new territories when growth ambitions unexpectedly collided with the grim realities of widespread shutdowns.

Varun did a few battening down the hatches in response to the sudden change in fortune, but he didn’t lose sight of his original plan and continued to invest. He is enjoying it now as demand soars with India emerging on the other side of its Covid troubles.

Long-term growth trends linked to emerging prosperity coupled with expansion opportunities in recently acquired territories mean that the world’s best investors are followed by Fix the future see the business as more than just a Covid recovery story. Stocks were recently highlighted by our screen for hot growth picks backed by these elite investors.

The strength of Varun’s rebound and growing excitement about the company’s longer-term prospects have underpinned a massive 77% share price rise over the past 12 months. This makes Varun’s stock one of the best performing stocks based on share price momentum out of the 13 identified by our screen and worthy of closer examination.

Source: Citywire/Morningstar, Latest Portfolio Holdings Data

Boon for Varun

At the height of the pandemic, many consumers changed their behavior. Investors have found themselves grappling with the question of which new habits are here to stay and which are fleeting.

In the Indian soft drink market, a key change from the lockdown was that more people started drinking their soft drink at home. Unlike more fickle trends, such as gambling and crypto trading, Indians have maintained this trend. They are also reverting to their old out-of-home consumption habits. This proves to be a boon for Varun.

The same goes for the launch of a new energy drink called ‘Sting’. The company managed to convince 400,000 new retailers to pick up the drink, compared to 2.6 million for its other products. The hope is that as these relationships grow, new Sting dealers will start taking the other drinks of the band.

Based on its experience in the under-penetrated new territories it gained in 2019, there is strong demand for the other PepsiCo beverages that Varun markets and distributes, including Tropicana, 7Up, and Mountain Dew, as well as the eponymous Pepsi. .

Demand has been so strong in the new territories that the capacity Varun has added and is expected to use over three years has only filled one.

During the company’s second-quarter earnings call, its management described business conditions and growth as “virtually unknown.” It provides for more investment in production capacities.

Push on!

One of the problems with growth at this level is that it is difficult to sustain. Take the year-over-year sales doubling reported in the company’s most recent results, covering transactions from the second quarter through the end of June. Much of this reflected the Covid rebound and need not be repeated, but there were also encouraging signs of underlying strength in the business.

Management expects the company to achieve double-digit volume growth over the next two years as it continues to grow its presence in the under-penetrated territories it took over three years ago. year. Its planned investment of INR12bn ($151m; £131m) until the end of 2023 is expected to increase capacity by 30%.

The company also expects its margins to hold up despite runaway cost inflation around the world. This should be facilitated by high capacity utilization (or operational leverage in investment jargon). Confidence seems particularly important given that the company’s margins have recently been supported by changes in the sales mix as well as a decision to source raw materials before prices start to climb.

Still, there’s a risk that big rival Coca-Cola’s increased capacity and similar plans could cause problems down the road.

In terms of longer-term growth, Varun looks like a bottler that is in the right place at the right time, with three-quarters of sales coming from its home market, India.

Research by Neilsen in 2016 estimated India’s per capita consumption of soft drinks to be around 5% of that of the United States. While these estimates may be dated, they still suggest great growth potential as incomes rise in India, a country that is expected to overtake China as the world’s most populous country next year.

Varun’s operations in other countries, including struggling Morocco, Nepal and Sri Lanka, also offer similar long-term opportunities to capitalize on emerging prosperity.

Price in?

Like many Indian companies exposed to the country’s much-vaunted growth prospects, Varun’s shares are not cheap – and they have become more expensive recently.

Nonetheless, while the valuation is high by past five-year standards, it is not stratospheric by recent history. It would appear that many high-level managers still believe the growth outlook makes Varun’s stock worth the high rating.

Leave a Reply

%d bloggers like this: