The company’s profits surged 36% year-on-year (YoY) to ₹196 crore, and total revenue soared 38% YoY to ₹3,689 crore. While the numbers indicated solid operational performance, investors remained wary, leading to a significant sell-off. This raises a critical question: why did the stock take a dive despite impressive financials?
Strong earnings, but markets disappointed
Varun Beverages’ latest earnings reflected a strong year-on-year expansion, with Q4 Ebitda climbing 39% to ₹580 crore and Ebitda margins remaining steady at 15.7%. The company’s India business performed well, witnessing an 11% increase in sales volume. It also recently achieved net debt-free status, using proceeds from a qualified institutional placement (QIP) issue to repay outstanding loans. This financial flexibility allows it to fund aggressive expansion without over-leveraging its balance sheet.
However, the broader market reaction was dictated by factors beyond headline numbers. Projections of an even stronger profitability and a miss in the international segment dampened sentiment. The underperformance of South Africa and the Democratic Republic of Congo (DRC) businesses led to concerns about consistency in earnings as the company continues aggressive global expansion.
Another key factor was the stock’s high valuation. Over the past year, the stock had rallied significantly, trading at premium multiples. Any deviation from expectations in such high-growth stocks tends to trigger profit-booking. In addition, the competitive landscape in India has intensified. While management is confident that PepsiCo’s premium positioning keeps it insulated from price wars, investors remain cautious about potential market share disruptions.
How brokerages reacted
Despite the stock’s sharp correction, leading brokerages remain optimistic about Varun Beverages’ long-term growth. Motilal Oswal reiterated a ‘buy’ rating with a target price of ₹680, emphasizing the company’s strong growth trajectory in India and international markets. The brokerage forecasts sustained double-digit volume growth, driven by expanding distribution networks and increasing retail penetration.
“Varun Beverages is expected to maintain its earnings momentum, aided by: 1) increased penetration in newly acquired territories in Africa, 2) stable growth in the domestic market, 3) continued expansion in capacity and distribution reach (10% annual addition in outlets), and 4) growing refrigeration in rural and semi-rural areas. We value the stock at 55x CY26E EPS to arrive at a target price of ₹680,” said Motilal Oswal.
Emkay Global issued a higher target price of ₹800, citing aggressive capacity expansion, product innovations such as Sting Gold and Jeera, and strategic acquisitions. Meanwhile, Morgan Stanley reaffirmed its ‘overweight’ rating with a target price of ₹674, underscoring the potential of international markets and continued volume growth in India.
Citi revised its target price to ₹750, down from ₹800, yet maintained confidence in the company’s ability to drive expansion. JM Financial, while lowering its price target from ₹725 to ₹675, still anticipates a 26% earnings CAGR from CY24 to CY26. The consensus among analysts suggests that the stock’s fundamentals remain strong, and the recent dip may present an attractive buying opportunity.
According to Bloomberg data, 23 out of 26 analysts covering the company have a ‘buy’ rating, while the remaining three suggest a ‘hold’. The average 12-month consensus price target indicates a potential upside of 31.6%.
Challenges in international business
Despite international expansion being a significant growth driver, challenges remain. Consolidated sales volume rose by 23.2% in CY24, largely driven by new territories, yet international margins have been under pressure due to high operating costs. In South Africa, where the company recorded a 12.5% volume growth in its first year, management remains optimistic about profitability improving through backward integration and better channel mix.
“We are consciously reducing our reliance on the modern trade channel and expanding our distribution network in general trade. To support this, we have placed more visi-coolers in the South African market in a single year than all previous operators combined. We are also working on plans for backward integration in the region,” chairman Ravi Jaipuria said in the company’s press release announcing the financial results for Q4 and the calendar year 2024.
He also stated that the company has entered into a share purchase agreement to acquire PepsiCo’s business in Tanzania and Ghana, subject to approvals. Additionally, he mentioned that integrating these acquisitions with their South African operations will strengthen their international presence. He highlighted that new facilities in India and the DRC will enhance manufacturing and distribution, positioning them to meet rising consumer demand. Furthermore, their entry into the snacks business with PepsiCo in Morocco, Zimbabwe, and Zambia represents a key step in diversification and leveraging existing infrastructure.
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Rising competition
The Indian beverage market has evolved into a highly competitive arena, with newer brands challenging the dominance of established players. While PepsiCo’s brand equity gives Varun Beverages an edge, it must stay ahead in innovation and distribution to maintain its leadership. The rise of healthier beverage options, including functional drinks and value-added dairy, presents both an opportunity and a challenge.
Varun Beverages has already begun capitalizing on this trend, expanding its Sting energy drink line and exploring the growing sports drink market with Gatorade. The company’s strategic focus on increasing refrigeration and last-mile delivery in semi-urban and rural areas is another critical initiative to expand its reach and improve market penetration.
Road ahead for investors
Despite the recent market correction, Varun Beverages remains well-positioned for long-term growth. India’s continued growth momentum, driven by increasing distribution reach and penetration in tier-2 and tier-3 cities, will remain a critical driver.
The company’s push to improve international margins, particularly in Africa, where backward integration efforts are underway, is another essential factor that could enhance profitability. Capacity expansion and new product categories, including non-carbonated beverages and snacks, will help the company diversify its revenue streams.
The company’s ability to sustain high-volume growth is evident from its expansion plans and execution strength. As Varun Beverages continues to penetrate newer markets, increase distribution, and expand its product portfolio, it is expected to maintain its upward trajectory.
Final verdict
While the market’s knee-jerk reaction to an earnings miss has dented short-term sentiment, Varun Beverages’ fundamental strengths remain intact. As global demand for beverages continues to grow and the company expands operations, the fizz in this stock is far from gone.
The company’s financial discipline, strong execution, and aggressive expansion strategy provide compelling reasons to stay invested. However, near-term risks such as competition, international margin pressures, and consumer preference shifts must be monitored.
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About the author: Suchitra Mandal is a financial writer with expertise in delivering well-researched insights and detailed analyses of companies’ performance and market trends.
Disclosure: The author does not hold any shares of Varun Beverages at the time of writing this article. The views expressed are for informational purposes only and should not be considered investment advice. Readers are encouraged to conduct their own research and consult a financial professional before making any investment decisions.
Views are personal and do not represent the stand of this publication.
