Pepsi maker Varun Beverages set to ride on growth in refrigerator sales in rural areas

By Srushti Vaidya

Varun Beverages, which makes and sells soft drinks and juices for Pepsi, is set to grow in the long run thanks to refrigeration expanding farther and wider. The company’s growth will also be fuelled by beverage launches and dairy products in the near term, analysts said.

The Indian beverage industry is poised for growth due to the rise in refrigerator sales in rural areas. Consumers can now store beverages for longer, and this will drive up sales for beverage companies, the analysts noted.

What are Varun Beverages’ growth drivers?

The market for refrigerators in India is expected to grow at a compound annual growth rate (CAGR) of 9.3 percent over FY 2023-28, said Mordor Intelligence, a market research consultancy firm. It said that increasing household income, improving living standards, rapid urbanisation, the rising number of nuclear families, a largely untapped market and environmental changes are key growth drivers for the refrigerator industry. Analysts say that Varun Beverages is expected to capitalise on this growing refrigerator reach in the country in the long term.

However, in the near term, analysts expect Varun Beverages to play on its beverage launches. Some of its recent launches — Sting, Gatorade, Pepsi Black — were well received by consumers and are set to perform well going ahead. “We remain optimistic on demand, given under-penetration in core categories, strong acceptability for energy drink Sting and entry into new categories,” said Emkay in a report dated August 3.

Dairy bet

Varun Beverages is tripling its capacity in the dairy-based beverages category. No other player in the dairy industry can match its distribution network, the company’s management said in its Q1FY24 earnings conference call. Also, realization in dairy is 15-20 percent higher than other products, said the management. A wide distribution network gives the company the upper hand in scaling up its dairy segment.

“Varun Beverages will capitalize on its robust distribution network and well-established supply chain of existing products for the dairy segment,” said brokerage firm Motilal Oswal in a report dated August 3. It also noted that no other player in the dairy industry possesses such an extensive and far-reaching distribution network.

Growing beyond borders

Varun Beverages has set up a subsidiary in South Africa. The South African market is expected to be a billion-case market thanks to its high per capita consumption, said Motilal Oswal.

Pepsi has around 20 percent market share in South Africa, “If Varun is able to acquire franchise rights for South Africa, it will add significant growth tailwinds,” said ICICI Securities in a report dated August 3.

How Varun Beverages stacks up against its peers

Varun Beverages is well ahead of its competitor, Orient Beverages, the packager for Bisleri. Orient Beverages has reported compound profit growth of 20 percent for the last five years, whereas Varun Beverages recorded compound profit growth of 49 percent over the same period. Varun Beverages’ return on equity grew at a CAGR of 22 percent over the 5-year period, against Orient Beverages’ -(9) percent.

Growth projections

Varun Beverages is expected to deliver a revenue CAGR of 17 percent over CY23-25, according to Motilal Oswal. Net profit is estimated to grow at a CAGR of 26 percent over CY23-25, it added. ICICI Securities expects the company’s revenue and net profit to grow at a CAGR of 21.1 percent and 20.6 percent, respectively, over CY23-24.

The stock is currently trading at 46 times its FY25 EPS estimates. Although the current valuations are stretched, and there is a limited near-term upside on the stock, it has strong growth prospects for the long-term