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Varun Beverages witnesses strong recovery from low base

News: Revenue witnessed a growth of 33% led by 28.4% volume growth & 3.6% realisation increase. The company sold 153.3 million cases during the quarter.  CSD contributed 70%, Juices 5% & Water 25% of the total volumes. The realisation increase is largely driven by increasing realisation in International territories despite high proportion of water in the product mix. We believe the company has taken price hikes in international territories. Gross margins contracted 278 bps mainly on account of higher PET (Up 18%) & Sugar prices (Up 2%). The company was able save 163 bps in employee spends (% to sales) & 65 bps in overhead spend Operating profit grew by 30% to Rs.494.7 crore. Operating margins contracted by 50 bps to 20.6%. Net profit grew by splendid 59.7% to Rs.257.9 crore due to 26% dip in interest expense.

Views: the company would be able to grow at a faster pace given the acquired South India territories would be growing faster than northern territories in the lean winter quarter. Further the company is making all the efforts to gain market share in south & west India territories. Though, the input cost pressure related to PET & Sugar prices would be substantial in next few quarter, we believe the company would be able to mitigate the margins pressure with price increase & cost rationalisation measures in medium term. With very low capex in next one year, the company would be able to reduce the debt consequently we expect considerable dip in interest cost, which would augur well for profitability growth.