Nuvama Adjusts Varun Beverages Target Amidst Triple Threat Concerns

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Nuvama Institutional Equities has revised its price target for Varun Beverages Limited (VBL), a key bottler for PepsiCo, while maintaining a ‘Buy’ rating. The adjustment reflects a cautious outlook on potential headwinds, including a weaker-than-expected summer, persistent competitive intensity, and the impact of significant capital expenditure on profitability in the near term.

Varun Beverages, which bottles and distributes PepsiCo products across India and several international markets, recently reported its first-quarter results for the calendar year 2025 (Q1 CY25). While consolidated net profit showed a modest increase, overall volumes, particularly in India, declined by 7.1% year-on-year. This was largely attributed to an unseasonal summer, with cooler temperatures and early monsoons affecting beverage consumption. Despite this, the company’s EBITDA (Earnings Before Interest, Taxes, Depreciation, and Amortization) margins expanded, driven by operational efficiencies and stronger performance in international markets, notably South Africa.

Nuvama has highlighted three critical risks that could influence VBL’s performance moving forward. Firstly, the brokerage noted that the September quarter could be significantly impacted by heavy monsoon rainfall across India, further dampening sales during a traditionally key period for beverage consumption. This weather-dependent nature of the business makes it susceptible to climatic shifts.

Secondly, competitive intensity in the Indian beverage market remains a significant concern. The re-emergence and aggressive pricing strategies of local players, such as Campa Cola, are putting pressure on established brands. While VBL has been enhancing its go-to-market strategies, the low-price offerings from competitors could lead to sustained pressure on volumes and potentially necessitate increased marketing expenditures or price adjustments, impacting overall profitability.

Lastly, VBL’s substantial capital expenditure (capex) in the first half of CY25, totaling ₹2,500 crore, presents a near-term risk to earnings per share (EPS). This investment includes ₹1,450 crore for four new greenfield plants in Uttar Pradesh, Bihar, Himachal Pradesh, and Meghalaya, along with ₹450 crore for international projects. While these investments are crucial for long-term growth and capacity expansion, they will incur depreciation and finance costs before fully contributing to incremental volumes, potentially impacting profitability in the short to medium term.

Despite these risks, Nuvama’s continued ‘Buy’ rating indicates confidence in VBL’s long-term growth trajectory, driven by its extensive distribution network, ongoing expansion into new territories, and strategic focus on higher-margin products like the Sting energy drink. Investors will be closely watching how VBL navigates these challenges to maintain its market position and capitalize on future growth opportunities.