Varun Beverages Ltd (VBL), one of the largest franchisees of PepsiCo outside the US, has begun this financial year on a good note. The company follows a January to December financial year and the March quarter (Q1CY21) is its first.

Consolidated revenues for the quarter saw a robust growth of 34% year-on-year to Rs2,241 crore, slightly ahead of Bloomberg consensus estimate of Rs2,144.7 crore. VBL’s revenue growth was driven by 33% increase in volume to 151-million-unit cases. Volume performance was helped by recovery in business operations plus lower base of last year’s quarter owing to lockdown restrictions in the latter part of March.

Analysts from Kotak Institutional Equities said in a report on 4 May, “VBL’s underlying growth momentum was healthy with two-year organic volume compound annual growth rate of 11.7% in 1QCY21."

While that augurs well, gross profit margin has contracted by 294 basis points year-on-year to 55.8%. One basis point is one-hundredth of a percentage point. Gross margins were adversely hit mainly on account of change in product mix and lower gross margins from international operations.

Even so, the company fared well on the earnings before interest, tax, depreciation, and amortization (Ebitda) front owing to sustainable cost optimization measures implemented last year. As such, Ebitda margin expanded by 86 basis points to 17%.

The problem for VBL is that covid-19 related demand concerns have surfaced yet again with the second wave. Ravi Jaipuria, chairman of Varun Beverages said, “We are now witnessing more localized, micro lockdowns and restrictions being imposed rather than a nation-wide lockdown witnessed last year."

In keeping with these business conditions, many analysts have cut their earnings estimates for CY2021. For instance, Kotak has cut its CY2021 volume and Ebitda estimates by about 7-8% and has broadly maintained CY2022 estimates.

As such, the June quarter can be expected to be relatively muted. Analysts from Jefferies India Pvt. Ltd said in a report on 3 May, “The pandemic induced lockdowns & restrictions are coinciding with the peak season for VBL, as was the case last year. This is a key near-term worry although last year's experience should be handy and VBL is better placed to handle the supply-side challenges."

Meanwhile, VBL’s board of directors has recommended a bonus issue of one equity share for each two shares held. So far in this calendar year, shares of VBL have increased by 11%. The stock trades at around 30 times estimated earnings for calendar year 2022, based on Bloomberg data. Near-term upsides could well be limited on account of the uncertainty due to covid-19 restrictions.