Varun Beverages has corrected c.30% from its peak – a function of weak demand and rise in competitive intensity with aggression from Campa on pricing, channel margins, media visibility and distribution expansion. As per our checks: a) Campa is targeting states with higher salience of mass-end consumer/regional brands, b) within carbonated beverages, Campa has seen traction in INR 10 SKU (OOH consumption); while in large packs (in-home consumption), PepsiCo/Coca-Cola remain preferred brands, c) impact is likely to be higher in mass/mid segment packaged water/soda segment where regional brands have higher play and consumer pricing/product availability is more important than brand, & d) driving profitability in INR 10 PET remains a challenge. In CSD, brand equity, taste/flavours and availability are key elements for success. The latter part, especially, requires a strong manufacturing and distribution capability that further strengthens the brand, and VBL has built the same over a decade. Hence, Campa’s execution on these parameters needs to be monitored. Overall, India remains a key ‘Anchor market’ for Pepsico Inc. We believe VBL has many levers for growth in the domestic business (capacity/distribution/portfolio expansion), and the Africa opportunity is large and well intact. Moreover, a strong summer augurs (link) well for both the segment and VBL. Hence, we believe the recent correction is overdone and the prevailing market pessimism should be used as an opportunity to Add.
Competitive landscape of India beverage market: The Indian beverage market with a size
of c.2.4bn cases is largely a duopoly with Coca-Cola/PepsiCo having market share of
c.50-55%/30-35% and regional brands accounting for the balance c.15%. Competitive
intensity in the domestic market has been increasing with the re-launch of Campa by
Reliance Consumer Products in Mar'23. RIL, in its 3QFY25 concall, indicated that the
brand is expected to cross INR 10bn in sales in FY25, which translates to c.60mn-70mn
cases and low-single-digit market share as per our estimate.
Campa pushing hard at mass end: Campa has focussed on certain states like Tamil Nadu,
AP, Telangana, UP and West Bengal - the strategy is to target the mass-end consumer
who is price sensitive and less brand loyal through aggressive pricing - INR 10 PET bottle
(Campa CSD range on per ml basis is priced at c.30-40% discount vs. Coke/PepsiCo).
Also, some of these states have a high salience of regional brands - for e.g., Tamil Nadu
has regional players like Podaran and Kalimark who operate at mass price point and
provide a wide portfolio of flavours. While, visibility wise, Campa has gained grounds in
these markets, our checks suggest offtake is largely in smaller SKUs (OOH consumption
where consumer is price sensitive, not brand loyal & where Pepsico/Coca-Cola didn’t have
offering); in the large SKUs (750ml/2.25ltr), which are predominantly for home
consumption, PepsiCo/Coca-Cola remain strong. Also, in our view, the impact at the mass
end could be higher in packaged water (where pricing/shelf availability is important vs.
brand) and soda (where local flavours/pricing is important).
Incumbents responding through tactical promotions & remain strong in large SKUs: Both
PepsiCo and Coca-Cola have responded through promotional offers (RGB sold at INR 10 400ml (250ml+150ml free) SKU at INR 20 launched by both Pepsico/Coke, likely launch
of Zero sugar variants at INR 10 price point), which is the right thing to do especially
during upcoming summer season. Having said that, tactical promotions have been there
in past also. Moreover, as per our checks, both Pepsico & Coca-Cola have higher saliences
in 750ml/2,25ltr (we est. it to be c.60-70% of their domestic cola-carbonate volumes)
and offtakes here remain intact considering the liking for the taste and higher brand
loyalty.
Risk-reward favourable, recent pessimism provides an entry point for long-term investors:
We are currently building in low-double-digit sales CAGR for the domestic business and
42% CAGR (LTL c.30%) for the international business over CY24-26E. In the bear case, if
we assume competition weighs on both volumes and margins in India - which means
India business sales growth of 8% (vs. management guidance of double-digit volume
growth) all led by volumes, margin compression of c.100bps over CY24-26E (factoring in
higher brand investments) and a 38% CAGR in international business sales, we see c.5-
7% cut in our existing earnings estimate. At CMP, this will translate to valuation of c.42x
on CY26E, which is still attractive considering the company's growth profile (c.22%
CAGR over CY24-26E), which is much better vs. FMCG peers. We maintain our positive
stance on the name - superior execution, large opportunity size & net debt free status
provides confidence on the earnings growth (CAGR of 26% over CY24-26E). Maintain
BUY rating with TP of INR 675 (55x CY26E EPS).