Fundamentally strong stock to buy now for an upside potential of over 60%; Do you own it?

According to the different, India’s Fast Moving Consumer Goods (FMCG) sector is poised for significant growth, with a projected market size of $220 billion by 2025, growing at a CAGR of 14.9 percent from $167 billion in 2023. The sector employs around 3 million people and is driven by trends like premiumization and digital transformation.

Price movement

With a market capitalization of Rs 1.58 lakh crore, the shares of Varun Beverages Ltd were trading at Rs 468.00 per share, increasing around 2.20 percent as compared to the previous closing price of Rs 456.95 apiece.

Brokerage Recommendation

CLSA, one of the well-known brokerages in India, gave a ‘Buy’ call on the FMCG stock from a target price of Rs 770 apiece, indicating a potential upside of 64 percent from Friday’s closing price of Rs 468 per share.

Recommendation Rational

Despite rising competition, the brokerage sees a compelling risk-reward with a potential 70 percent upside. While CY25 pricing scenarios indicate a 5 percent EBITDA downside, capital expenditure peaked in CY23, leading CLSA to expect a decline in capex intensity, potentially improving financial stability moving forward.

Moreover, Varun Beverages’ total addressable market and the overall soft drink market are expanding, with significant growth potential for soda consumption. However, the brokerage lowered its CY25-27 earnings estimates by 4-5 percent due to increased competition.

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Financial analysis

In Q4 CY2024, the company’s consolidated revenue rose 24.7 percent to Rs 200,076.5 million, with sales volume up 23.2 percent to 1,124.4 million cases. EBITDA grew 30.5 percent to Rs 47,110 million, PAT increased 25.3 percent to Rs 26,342.8 million, and EBITDA margin improved by 105 bps to 23.5 percent.

Market Strategy

The company aims to reduce reliance on modern trade by strengthening general trade distribution. It has increased visi-cooler placements in South Africa, exceeding previous operators’ totals, and plans backward integration in South Africa to enhance margins and improve operational efficiency.

Capital Expenditure (Capex)

The company raised Rs 75 billion via QIP, with a net CAPEX of Rs 45 billion in CY2024, focusing on Greenfield facilities in India and DRC. For CY2025, Rs 31 billion is projected for new facilities and expansions, reinforcing its growth and infrastructure development.

Future Outlook

The company remains confident in sustaining strong growth in Indian and international markets, driven by strategic capacity expansion and investments in technology and sustainability. Management sees the soft drink industry outpacing other FMCG categories and anticipates no threats to its growth trajectory.

Company profile

Varun Beverages Ltd is a key player in the beverage industry and one of the largest franchisees of PepsiCo in the world. The company produces and distributes a wide range of carbonated soft drinks, non-carbonated drinks, and packaged water sold under trademarks owned by PepsiCo.

Written by Abhishek Singh

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