JM Financial sees 38% upside in Varun Beverages, says correction overdone, reaffirms Buy rating

JM Financial has reiterated its ‘Buy’ rating on Varun Beverages with a target price of Rs 675, implying 38% upside from the previous day’s closing price. The brokerage believes the recent 30% correction in the stock is overdone, citing strong growth drivers in both domestic and international markets.

The Indian beverage market, with an estimated size of 2.4 billion cases, is largely a duopoly, with Coca-Cola and PepsiCo holding a combined market share of around 80-90%. However, competitive intensity has increased following the relaunch of Campa by Reliance Consumer Products in March 2023.

According to JM Financial, Campa has been targeting price-sensitive consumers in states like Tamil Nadu, Andhra Pradesh, Telangana, Uttar Pradesh, and West Bengal. “Campa has focused on the mass-end consumer through aggressive pricing, offering PET bottles at a 30-40% discount compared to Coca-Cola and PepsiCo,” the brokerage noted. While Campa has gained visibility in smaller stock-keeping units (SKUs) for out-of-home consumption, larger SKUs for home consumption continue to see strong preference for PepsiCo and Coca-Cola.

JM Financial highlighted that the impact of Campa’s push is likely to be more pronounced in packaged water and soda segments, where pricing and shelf availability matter more than brand loyalty.

Despite the rising competition, JM Financial believes PepsiCo and Coca-Cola have taken the right steps to counter Campa’s challenge. Both companies have introduced promotional offers, such as reduced prices for returnable glass bottles (RGBs) and new value-pack SKUs like 400ml bottles at Rs 20.

PepsiCo and Coca-Cola continue to dominate the large SKUs segment, which we estimate accounts for 60-70% of their domestic cola-carbonate volumes, JM Financial stated.The brokerage added that strong brand loyalty and consumer preference for taste remain key advantages.Also Read: Can Bitcoin drop to $20K if Nasdaq falls into a bear market?

JM Financial remains optimistic about Varun Beverages’ long-term prospects, noting multiple growth levers in both domestic and international markets. “India remains a key ‘anchor market’ for PepsiCo, and Varun Beverages is well-positioned to drive growth through capacity, distribution, and portfolio expansion,” the firm stated.

The company is expected to invest Rs 2,000 crore in capital expenditure for 2025, setting up new facilities in Prayagraj, Damtal, Buxar, and Meghalaya. Additionally, it aims to add 300,000-400,000 retail outlets and install 100,000 visi-coolers annually to strengthen its distribution network.

Also Read: Russia leans on cryptocurrencies for oil trade, sources say

JM Financial also highlighted Africa as a major opportunity for Varun Beverages. Coca-Cola’s Africa unit recorded volumes of approximately 2.5 billion cases in 2023, with Coca-Cola Beverages Africa alone contributing around 1 billion cases.

“Varun Beverages, with an estimated 400 million cases in 2025, has enough headroom for growth in Africa through capacity and distribution expansion, as well as potential acquisitions in key markets like Nigeria,” JM Financial noted. The company is also exploring opportunities in the food business across Zimbabwe, Zambia, and Morocco, targeting $100 million in sales over the next two years.

Despite concerns over rising competition, JM Financial sees Varun Beverages as an attractive long-term bet. “We are building in a low double-digit sales CAGR for the domestic business and a 42% CAGR for the international business over CY24-26E. Even in a bear-case scenario with margin compression, the stock remains attractive at 42x CY26E earnings,” the brokerage stated.

Maintaining its positive stance, JM Financial believes the company’s strong execution, large addressable market, and net debt-free status provide confidence in sustained earnings growth. The brokerage has reaffirmed its ‘Buy’ rating with a target price of Rs 675, translating to a 55x multiple on CY26E EPS.

On Monday’s trade, Varun Beverages shares surged over 3% to Rs 505.2 on BSE.

Also Read: Trump’s Strategic Bitcoin Reserve plan: What’s next for crypto? Here’s what experts think

(Disclaimer: Recommendations, suggestions, views and opinions given by the experts are their own. These do not represent the views of the Economic Times)