Stock Market

Is Pepsico franchisee Varun Beverages IPO too expensive?

As Varun Beverages initial public offer (IPO) opens for subscription on October 26, analysts think its valuation is expensive. The company has fixed price band at Rs 440-445 per share and aiming to raise Rs 1112.50 crore through the offer.

The RJ Corp group company issue which will close on October 28 is selling up to 2.5 crore shares. The IPO consists of a fresh issue of 1.5 crore equity shares of Rs 10 each. Promoters are offloading 1 lakh equity shares of the company and will have 73.7 percent stake post IPO.  It will use Rs 540 crore of the issue proceeds to repay its debt which currently stands at Rs 2138 crore.

So, why is the issue expensive?

Reliance Securities feels that its valuations are stretched, even after considering performance in first half of 2016 and factoring debt repayment. It says that while there are no listed peers in India, there are several bottlers listed overseas, which trade at significant discount to these multiples . Based on reported profit of Rs 87 crore in 2015, the stock would trade at price to equity ratio of 93x CY15 earnings at upper end of the price band, while EV/EBITDA multiple stands at 14.9x.

Way2Wealth also agrees that the issue is expensive. “At the offer price band of Rs 440-445 per share the issue is available at price to equity of 60-65x its 2016 earnings per share (EPS), valuing the stock at 12.3-13x EV/EBITDA. Though we believe the beverage market in India is just heating up, especially in the non-carbonated drinks space, risk-return trade-off for the IPO investors doesn’t seem to leave much value on the table post-listing,” it says in a note.

Choice has an avoid rating. “At the higher price band of Rs 445, Varun Beverage share is valued at a P/E multiple of6 2.5 times,” it says.

However, recommends subscribing to the issue and finds its valuations fair considering  market  growth opportunity and strong brand name  associated with it. It Varun  has  a  strong  opportunity  for  growing  volume  sales. 

Varun Beverages is largest franchisee of PepsiCo in the world, excluding the USA. It manufactures and distributes PepsiCo products that include Carbonated Soft Drinks (CSD), Non-Carbonated Beverage (NCB) & Packaged Drinking Water.

Some of the key brands manufactured and distributed by VBL include Pepsi, 7 Up, Mirinda, Mountain Dew, Tropicana and Aquafina among others.

Associated with PepsiCo since 1990, VBL now enjoys manufacturing and distribution rights in 17 states and 2 Union Territories (UTs) that covers North & North-East India. VBL has also been granted franchisee rights in international geographies i.e. Sri-Lanka, Nepal, Morocco, Mozambique and Zambia.

Its consolidated Revenues and EBITDA  was up 24 percent and 41 percent CAGR through CY12-15, while PAT grew to Rs 87 crore from Rs 25.1 crore in the same period.  Its volume CAGR from existing sub-territories through CY11-15 stands at 7.4 percent.

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