Varun Beverages: Why Citi Believes 25% Drop is Overblown Amidst Strong Portfolio and Resilient Distribution

In the ever-evolving beverage landscape, Citi’s analysis sheds light on the competitive dynamics surrounding Varun Beverages Ltd. and the emerging Campa brand from Reliance. Despite facing a 25% decline in stock this year, primarily due to intensified competition, Citi suggests that this downturn may be overstated. The brokerage maintains a Buy rating on Varun’s stock, predicting a target price of Rs 750, driven by its robust portfolio and distribution capabilities.

Campa’s Market Impact

Campa, launched in 2023, has rapidly claimed approximately 10% of the market share in several states. Its aggressive pricing strategies and high-profile marketing efforts, including co-presenting rights for the IPL, have certainly stirred the pot. However, Citi emphasizes that Campa is more likely to siphon off market share from smaller local brands rather than pose a serious threat to industry giants like PepsiCo and Varun Beverages.

Varun Beverages’ Advantages:
- Extensive distribution network of over 4 million outlets
- Strong brand portfolio that includes popular beverages like Mountain Dew and Sting
- A market focus that prioritizes general trade, covering 90% of the market

Competitive Landscape

While the entry of Campa may pressure margins, Citi believes Varun Beverages possesses strategic advantages that can mitigate these challenges. These include:

A diversified product mix
Potential benefits from declining crude oil prices
Strategic support from partnerships with PepsiCo
Recent investments in Hindustan Coca-Cola Beverages, which may help stabilize pricing dynamics

During a recent call with Neeraj Garg, Citi gained valuable insights into the competitive landscape. Garg noted that heightened competition often stimulates overall market growth. He highlighted that maintaining a low cost to serve is essential for capturing market share, achievable through streamlined manufacturing and distribution processes.

Future Outlook

Interestingly, while glass bottles have become less prevalent in India, their cost-effectiveness could see a resurgence, allowing brands to offer competitive pricing. New entrants like Campa might adopt aggressive pricing strategies to entice consumers, further amplifying competition in the sector.

Given Varun Beverages’ promising growth trajectory, particularly with the approaching hot summer season in India and its ongoing acquisitions in Africa, Citi expresses a confident outlook on the stock. On Tuesday, shares of Varun Beverages surged by as much as 3.45%, reaching Rs 524.75, before settling at a 2.90% increase, at Rs 521.95 by 11:10 a.m. This uptick contrasts with the 1.11% rise in the NSE Nifty 50 Index.

In conclusion, while the beverage market is witnessing a transformation with new challengers like Campa, Varun Beverages’ strategic positioning and adaptability could prove vital in maintaining their competitive edge.