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A bottle of Pepsi is seen in this file photo illustration February 10, 2015.Reuters file

Varun Beverages Ltd. (VBL), PepsiCo franchise bottler, is proving that selling soft drinks is a profitable business even if volume sales take a temporary hit due to factors such as the goods and services tax (GST). The company's sales, both value-wise and volume-wise, saw a dip during the GST-hit quarter but profit margins expanded, apart from overseas operations remaining buoyant.

VBL debuted on the stock exchanges last November at a 3 percent discount to the issue price of Rs 445 and was trading at Rs 524 at around 1 pm on the BSE on Thursday (August 10).

Analysing the performance for the June quarter (Q2) and the first six months of calendar year 2017 (H1), financial services firm JM Financial Research listed multiple factors in favour of the company and upgraded the stock price to Rs 635 over a 12-month period. 

"Varun Beverages' 2QCY17 overall performance held-up quite well driven by a healthy growth in International business and cost savings on the domestic side though domestic revenues were impacted by destocking pre-GST implementation," JM Financial said in a note.

The company's consolidated revenues (net of excise) stood at Rs 1,633.4 crore in Q2 as against Rs 1,660.5 crore in the year-ago period but net profit rose 20 percent YoY to Rs 245 crore.

"We remain positive on VBL given its attractive product portfolio which would help capture growth opportunities in Indian beverage segment, its capability in driving cost efficiencies across value-chain and inorganic growth opportunities available," JM Financial said.

EBIDTA margin for Q2 expanded to 24.9 percent from 23.6 percent in the corresponding period last year while interest expenses dropped 53.9 percent, YoY.

The company's volume sales dipped in India but was more than compensated by an increase overseas. "Consolidated volumes declined 6.1 percent on impact from pre-GST destocking across channels and early onset of monsoon in certain regions which was partially offset by price hikes aiding 2.9 percent realisation growth. Domestic revenues declined 4.5 percent which implies that domestic volumes probably fell by 6-7 percent," the financial services firm said.

International business performance though surprised positively with a 12.5 percent growth aided by Nepal, Sri Lanka and Morocco operations which, as per management, grew in high-teens in 1HCY17," JM Financial added.