Goldman Sachs sees 22% upside in Varun Beverages, starts coverage with Buy on long-term growth potential

Goldman Sachs has initiated coverage on Varun Beverages with a ‘buy’ rating and a target price of Rs 600, citing strong execution and long-term growth potential in India’s underpenetrated ready-to-drink (RTD) beverage market. The Pepsi bottler’s shares climbed as much as 1.9% to Rs 491.75 on Tuesday following the call.

The brokerage said the company is well-positioned to “unlock market potential through superior execution” as India’s per capita consumption of ready-to-drink (RTD) beverages remains among the lowest globally. Goldman Sachs’s target price of Rs 600 implies a potential upside of 22% from current levels.

Goldman Sachs highlighted that India offers high growth headroom in the RTD category, with Varun Beverages (VBL) emerging as a key beneficiary due to its strong execution and increasing market share. The company has expanded Pepsi’s share in India’s soft drinks market from 28% in 2015 to 38% in 2024, according to the brokerage.

“Expect VBL to continue gain share driven by high market share in the fastest growing segments like energy drinks and hydration,” Goldman Sachs said in its note. It added that VBL’s earnings compound annual growth rate is likely to outpace the sector average, “implying relatively attractive risk reward.”

The brokerage also dismissed potential threats from new entrants like Campa Cola. “Our scenario analysis to assess the impact of new entrant ‘Campa Cola’ indicates no disruptive impact on VBL,” Goldman Sachs said.

The confidence stems from VBL’s strong distribution network and product mix in segments that are seeing the fastest expansion. Goldman Sachs believes this puts the company on a strong footing to ride the next wave of growth in India’s under-penetrated RTD market.Also read | IndiGo shares slip 3% as co-founder Rakesh Gangwal likely offloads Rs 11,988 crore stake via block deal

Solid financials back optimism

Varun Beverages reported a 35% year-on-year rise in net profit for the first quarter of the calendar year, with consolidated profit reaching Rs 726.49 crore compared to Rs 537.27 crore a year earlier. The company follows a January-December fiscal calendar. The board has also approved an interim dividend of Rs 0.50 per share.

With robust earnings momentum and favourable sector dynamics, Goldman Sachs’ bullish call positions Varun Beverages as a top pick in India’s consumer space.

(Disclaimer: Recommendations, suggestions, views and opinions given by the experts are their own. These do not represent the views of the Economic Times)