Varun Beverages trading down by 30%; Should you buy, sell or hold?

Synopsis: Varun Beverages has fallen nearly 30 percent from its highs, raising concerns over what went wrong. Weather disruptions, pricing pressure, and rising costs impacted performance, but the bigger question remains, can recovery drivers like demand improvement, capacity benefits, and new growth segments help the company bounce back in the coming year?

Varun Beverages has fallen nearly 30 percent from its 52-Week highs, leaving investors worried about what went wrong. Weak demand during key months and pricing pressure have hurt performance, but the sharp correction has also raised a bigger question, could this just be a temporary setback or something more serious?

What Went Wrong?

Varun Beverages’ performance during CY2025 was largely impacted by unfavourable weather conditions, especially during the peak summer season. Management highlighted that unprecedented heavy rainfall across key periods of the year disrupted beverage consumption, which is highly seasonal in nature. This led to weaker volume growth in India for a significant part of the year, even though demand saw a recovery in the fourth quarter.

The company also faced a challenging competitive environment, with players resorting to aggressive discounting during periods of weak demand. Instead of matching these price cuts, Varun Beverages focused on protecting market share through volume-led growth, along with initiatives like pack upsizing. This resulted in a gap between volume and revenue growth, as realizations were impacted by pricing pressure and changes in product mix.

Additionally, the company undertook significant capacity expansion during the year, including new greenfield plants, which led to higher costs such as employee expenses and depreciation. However, due to weak demand conditions, these capacities did not contribute meaningfully in CY2025, delaying operating leverage benefits. The impact was further compounded by incremental costs from the implementation of new labour codes during the period.

What’s Next?

Looking ahead, Varun Beverages remains optimistic about its growth trajectory, with management indicating that CY2026 could see a meaningful recovery, provided weather conditions remain supportive. The company has maintained its stance on delivering double-digit volume growth in India, supported by a favourable base, especially in the peak summer quarters which were impacted last year. Management believes that even a normal summer could significantly improve demand, given the weak season in the previous year.

A key driver for the upcoming year will be the benefits from recent capacity expansion. The company added significant manufacturing capacity over the past two years, including multiple greenfield plants, which remained underutilized due to weak demand. As volumes recover, these facilities are expected to contribute meaningfully, leading to better operating leverage and improved efficiency. Management also indicated that there will be no major capex in India in the near term, as existing capacity is sufficient to support growth, allowing the company to focus on extracting returns from past investments.

In terms of margins, while the company has consistently guided for a range of around 22 to 23 percent, current margins are significantly higher. Management indicated that it would be satisfied if margins remain close to current levels, with higher volumes expected to offset any pressure from pricing or mix. The focus will continue to be on volume growth while maintaining profitability, rather than chasing short-term price increases.

The international business is expected to play a much larger role going forward, particularly with the proposed acquisition of Twizza in South Africa. This acquisition is expected to significantly enhance manufacturing capacity, improve distribution reach, and reduce logistics costs by bringing production closer to key markets. Along with ongoing backward integration initiatives, management expects international margins to gradually improve and move closer to domestic levels over the next few years.

The company is also expanding into new product categories and adjacencies. The snacks business, which is still in its early stages, is expected to scale up in CY2026 as recently commissioned facilities in Morocco and Zimbabwe begin contributing for a full year. Management sees this as a large opportunity, with the potential to build a meaningful revenue stream over time. In beverages, the company is focusing on innovation, with plans to expand its presence in categories such as energy drinks and launch new variants under existing brands, including products in the jeera and juice-based segments.

Additionally, the company has taken initial steps to enter the alcoholic beverages segment in Africa, starting with a partnership involving Carlsberg. While this remains a relatively small initiative for now, it reflects the company’s intent to diversify its portfolio and tap into adjacent opportunities in international markets.

Motilal Oswal Financial Services has assigned BUY rating along with a target price of Rs. 550 to Varun Beverages on March 23, 2026, implying a potential upside of 37.22 percent from the current closing price of Rs. 400.80.

Overall, with a strong balance sheet, expanded capacity, and improving demand outlook, Varun Beverages appears well positioned to deliver sustained growth in volumes and profitability, with FY2026 likely to benefit from both operating leverage and a more favourable external environment.

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