Investors in shares of Varun Beverages Ltd are buzzing with excitement. They were already sitting on handsome gains with the stock up 77% this year till Tuesday. What’s more, the company’s decision to venture into South Africa via the acquisition of The Beverage Co (BevCo) pushed the VBL stock to a new 52-week high of ₹1,380, up 7% on Wednesday. Intraday, the stock jumped 18%.
Investors in shares of Varun Beverages Ltd are buzzing with excitement. They were already sitting on handsome gains with the stock up 77% this year till Tuesday. What’s more, the company’s decision to venture into South Africa via the acquisition of The Beverage Co (BevCo) pushed the VBL stock to a new 52-week high of ₹1,380, up 7% on Wednesday. Intraday, the stock jumped 18%.
BevCo holds franchise rights from PepsiCo Inc. in South Africa, Lesotho and Eswatini, and distribution rights for Namibia and Botswana.
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BevCo holds franchise rights from PepsiCo Inc. in South Africa, Lesotho and Eswatini, and distribution rights for Namibia and Botswana.
The Street’s enthusiasm towards the deal stems from two factors. One, the move is in-line with the company’s ambition to tap the African market. Two, the valuation is attractive.
The deal is at an enterprise value of ₹1,320 crore, valuing BevCo at 0.8 times FY23 EV/sales and at about 7 times EV/Ebitda. The acquisition may be funded partly through debt, but VBL also has the option to accept a minority co-investment from a large equity fund for this acquisition, subject to approvals. As part of the acquisition, VBL would get five manufacturing plants of BevCo. The deal is expected to be closed by July.
Given that PepsiCo has a negligible market share in South Africa, there is a significant value-creation opportunity for VBL. Currently, Coca-Cola dominates the South African beverage industry. Besides PepsiCo, BevCo’s portfolio also has its own brands, such as Coo-ee, JiVE and Refreshhh.
“Improving PepsiCo’s market share means that VBL can enter new geographies, leading to significant growth in sales and volume,” said Amit Purohit, vice president, Elara Securities (India). Sure, South Africa is an entirely new market. “But VBL’s track record of successfully expanding market share in Zimbabwe instils confidence that similar gains could be achieved in South Africa too,” added Purohit.
BevCo clocked sales volume of 117 million cases in FY23, of which 15% was contributed by PepsiCo’s products and the rest by its own brands. It clocked FY23 revenue of ₹1,590 crore, which is roughly 12% of VBL’s revenue.
So, besides monitoring volume growth in the core carbonated soft drinks portfolio that includes PepsiCo, investors should keep an eye on the expansion of the high-margin energy drinks segment, the scaling up of the international presence, and the growth of the drinks and juice portfolio, said Preeyam Tolia, an analyst at Axis Securities.
That said, investors should not get carried away, just yet. Currency volatility is a key risk in Africa, even as ZAR (South African rand) is among the most stable African currencies, caution analysts. Plus, VBL’s valuations are expensive, trading at FY25 price-earnings multiple of 53 times, according to Bloomberg.
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Source link : https://www.livemint.com/market/mark-to-market/big-game-opportunity-for-varun-beverages-in-south-african-safari/amp-11703079866851.html
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Publish date : 2023-12-20 08:00:00
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