Varun Beverages’s entry into South Africa with the acquisition of South Africa-based Beverage Company (BevCo) has been met with positivity and cheer from brokerages, who offer an upside of up to 20 percent.

PepsiCo’s largest franchise bottler declared the complete acquisition of BevCo for a total consideration of Rs 1,320 crore. Jefferies said that the deal was along expected lines, given the previous communication regarding the acquisition.

South African market to aid growth

The deal will help Varun Beverages expand its footprint in African markets. Domestic brokerage Emkay Global noted that with the acquisition of BevCo, VBL has access to 10 African nations (including 5 existing nations) and now controls most of southern Africa.

South Africa is the largest soft drink market in Africa, with an industry volume of 1,186 million cases in CY22. The market is expected to reach 1,537 million cases by CY27, registering a 5.3 percent CAGR over CY22-27E, according to Motilal Oswal.

CLSA added that while South Africa is the largest beverage market in Africa, Pepsico has a limited share. Currently, the South African beverage industry is dominated by Coca-Cola with a market share of ~50 percent.

Emkay added that while the market is mature, it is confident of share gains for VBL, given its strong track record in Zimbabwe and Nepal (over 50 percent share now). “Portfolio-led pricing gain is also a big opportunity, given ~50 percent lower realizations for Bevco vs. CCBA, a Coke bottler,” said Emkay.

BevoCo’s own brands to drive sales?

With five manufacturing facilities, BevCo clocked a sales volume of 117 million cases in FY23. The distribution of volumes stood at 14.6 percent for the company’s own proprietary energy drink (Reebost), 14.9 percent for Pepsi brands, and 70.5 percent for other in-house brands.

The company would likely focus on PepsiCo's brands in a bid to better operating margins despite royalty (concentrate price) payouts as India experience suggests making money in B-brands is always tough, as they fail to see brand pull,” said the global brokerage.

However, Motilal Oswal offers a varying opinion. The domestic broking firm believed that VBL’s focus will be on product portfolio innovation with favorable demographics. Coupled with the thrust on the Go To Market Strategy, this should drive lateral growth across segments, not just on the PepsiCo brand.

Outlook

Jefferies retained its ‘buy’ call on Varun Beverages, with a target price of Rs 1,100 per share, which the counter has already surpassed. As of close on December 19, Varun Beverages stock settled at Rs 1,132. The valuation is at 55x Sep-25E EPS, which the brokerage noted was at a premium to most consumer staple companies, but was justified by the firm’s stronger growth trajectory. Some of the key risks include a slowdown in category growth, increased competition, and increases in input prices.

CLSA upgraded the counter to ‘buy’, issuing a fresh target price of Rs 1,419 apiece, up from Rs 1,070. Nuvama Institutional Equities and Motilal Oswal also retained their ‘buy’ calls, with price targets of Rs 1,031 and Rs 1,285 respectively.

Emkay is the sole outlier, with a ‘reduce’ rating on the scrip. The acquisition multiple at 0.7x CY23E sales is attractive, in-line with the previous acquisitions and provides a 5x-7x value creation opportunity. Following the 70 percent run-up of the counter over the past year, the brokerage has a negative stance. However, Varun Beverages’ outperformance compared to peers and value creation provides scope for re-rating in the future.