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ICICI Securities
Varun Beverages (Buy)
CMP: ₹939.8
Target: ₹1,106
Varun Beverages is engaged in manufacturing, selling, bottling and distribution of beverages of Pepsi brand. The company produces and distributes a range of carbonated soft drinks (CSDs), as well as a selection of non-carbonated beverages (NCBs), including packaged drinking water.
While investors consider terminal value of carbonates as ‘zero’ due to perceived health hazards, we differ. Comparing carbonates on various factors, we note 1) carbonates do not have FATs; and 2) the sugar and calorie content is similar to other beverages. Though there is worry about caffeine in cola drinks, other beverages also face some issues such as lactose (milk-beverages), higher sugar content (juices and fruit drinks). We believe investors are unduly worried about terminal value of Varun as it sells a portfolio of beverages and not just cola carbonates. With macro tailwinds such as population growth (about 1.5 per cent), nominal GDP growth (over 10 per cent), low per capita consumption of carbonates, we believe 3 per cent terminal growth is justified.
We expect it to report PAT CAGR of 34 per cent over CY18-21 with rising RoCE and maintain DCF-based target price of ₹1,106 (28.6x CY21E).
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