Broker's call: Varun Beverages (Buy)

CMP: ₹806.3

Target: ₹900

Varun Beverages reported another strong quarter with domestic organic volume growth of 28 per cent, partly aided by phasing of festive season sales on a low base. Consolidated volumes grew 39 per cent — Domestic +38 per cent and International +40 per cent (aided by the new Zimbabwe territory). December quarter is, however, off-peak season and hence contribution to annual operating profit is expectedly negligible. What we are excited by, however, is the company’s announcement of the acquisition of PepsiCo-operated territories of South & West India for a consideration of ₹1,850 crore; the deal is expected to close by March 19.

The acquisition will add 50 per cent to VBL’s existing domestic volumes and could also help improve return ratios over the coming few years — lower seasonality factor in these regions would aid better asset-utilisation, in our view. The acquisition would be funded by a mixture of debt and equity to ensure balance sheet remains healthy. This large acquisition along with the Tropicana arrangement will help sustain the inherent volume growth potential for the business at double-digit level, given reasonable degree of under-penetration in these geos. Scale-up of operating margin in the newly acquired territories (significantly below VBL’s existing level, in our view) also presents another source of profit-growth opportunity.