Varun Beverages (VARUN) is superior ready to tackle the effect of second wave of Covid in CY21 than it was in CY20. Company has aggressively invested in driving in-household consumption more than the previous year and has also introduced 1.25 Ltr SKUs.
It is also comparatively superior ready now in terms of logistics and distribution. In the occasion of a further strict lockdown, volume off take will be materially impacted. However, if lockdowns are only on weekends, effect on volumes will be considerably significantly less, and it will be negligible in case of evening lockdown.
Varun is also most likely togain marketplace share from smaller sized/ unorganised players as buyers choose packaged beverages more than juices from street stalls due to security perceptions. We think, there will be some effect on HoReCa consumption which accounts for 6-7% of Varun’s all round volumes. Maintain ‘add’ with a target value of Rs 1,one hundred, implying 35x CY22E.
Major effect in Maharashtra and HoReCa segment: Maharashtra is one of the most impacted states by Covid and accounts for 6-7% of Varun’s revenues. HoReCa (hotels, multiplex, theatres, and so forth.) segment as well accounts for 6-7% of revenues. If Covid continues to surge, it may well have some effect on the company’s revenues in Maharashtra and HoReCa segment.
Focus on in-household consumption continues. Company has been investing aggressively in driving in-household consumption more than the previous year.
Impact on offtake in case oflockdown (if any): We have observed 3 forms of lockdown in India: 1) if it is ‘strict’, Varun’s volumes will be materially impacted 2) if lockdown is only on weekends, some volumes will be lost 3) if it is evening lockdown only, volume decline will be insignificant.
Market share gains from smaller sized players: Many buyers choose packaged beverages more than fruit drinks and juices sold by street shops. This makes it possible for Varun to acquire marketplace share from smaller sized/ unorganised players. Market share can be gained in packaged water segment as well as buyers do not choose tap water out-of-household.
We model Varun to report income and PAT CAGRs of 25.5% and 55.9% respectively, more than CY20-CY22E.