Varun Beverages Downgraded to Sell Amid Technical Weakness and Valuation Concerns

Technical Trends Shift to Bearish

The most significant trigger for the downgrade is the shift in Varun Beverages’ technical grade from mildly bearish to outright bearish. Key technical indicators reveal a mixed but predominantly negative picture. The Moving Average Convergence Divergence (MACD) shows a mildly bullish signal on the weekly chart but turns mildly bearish on the monthly timeframe, indicating weakening momentum over the longer term.

Relative Strength Index (RSI) readings on both weekly and monthly charts provide no clear signals, suggesting a lack of strong directional conviction. However, Bollinger Bands on both weekly and monthly charts are bearish, signalling increased volatility and downward pressure on the stock price. Daily moving averages also confirm a bearish trend, reinforcing the negative technical outlook.

Other technical tools such as the Know Sure Thing (KST) indicator present a conflicting view, with weekly readings bullish but monthly readings bearish. Dow Theory assessments on both weekly and monthly scales remain mildly bearish, while On-Balance Volume (OBV) trends also lean towards mild bearishness. Collectively, these indicators suggest that the stock is under sustained selling pressure, with limited short-term recovery prospects.

Valuation Concerns Amid Expensive Metrics

Varun Beverages’ valuation profile has also contributed to the downgrade. The company’s Price to Book (P/B) ratio stands at a high 8.3, reflecting a very expensive valuation relative to its book value. This is despite the stock trading at a discount compared to its peers’ average historical valuations, indicating that the market may be pricing in risks or uncertainties not yet fully reflected in peer comparisons.

The company’s Return on Equity (ROE) is 15.5%, which, while respectable, does not justify the elevated valuation multiples in the current market context. Furthermore, the Price/Earnings to Growth (PEG) ratio is 3, signalling that earnings growth expectations are not sufficiently aligned with the stock price, raising concerns about overvaluation.

Over the past year, Varun Beverages has underperformed the broader market significantly. While the BSE500 index generated returns of 9.12%, the stock declined by 22.57%. This divergence highlights the market’s cautious stance on the stock despite its underlying earnings growth of 17% over the same period.

Flat Financial Performance and Efficiency Metrics

Financially, Varun Beverages reported flat results in the third quarter of fiscal year 2025-26, which has raised concerns about the company’s near-term growth trajectory. The Return on Capital Employed (ROCE) for the half-year period is at a low 18.92%, indicating subdued efficiency in generating returns from capital investments.

Additionally, the Debtors Turnover Ratio for the half-year is 17.79 times, the lowest in recent periods, signalling potential challenges in receivables management or slower collections. These factors contribute to a cautious outlook on the company’s operational momentum.

Despite these short-term challenges, Varun Beverages maintains strong long-term fundamentals. The company boasts an average Return on Equity (ROE) of 22.82% over the years, reflecting robust profitability. Net sales have grown at an annualised rate of 27.44%, while operating profit has expanded even faster at 41.61%, underscoring solid growth capabilities.

The company’s debt servicing ability remains healthy, with a low Debt to EBITDA ratio of 0.88 times, indicating manageable leverage and financial stability.

Market Position and Institutional Confidence

Varun Beverages is the largest company in the beverages sector by market capitalisation, valued at ₹1,52,629 crores. It accounts for 41.60% of the entire sector’s market cap, underscoring its dominant position. Its annual sales of ₹21,685.38 crores represent 34.14% of the industry’s total, further highlighting its scale and influence.

Institutional investors hold a significant 33.87% stake in the company, reflecting confidence from well-resourced market participants who typically conduct rigorous fundamental analysis. This institutional backing provides some support amid the current market volatility and rating downgrade.

Price Performance Relative to Benchmarks

Examining Varun Beverages’ price performance relative to the Sensex reveals a stark underperformance over recent periods. The stock declined by 4.29% in the past week compared to a 2.30% gain in the Sensex. Over one month, the stock fell 8.56% while the Sensex dropped 2.36%, and year-to-date returns show a decline of 7.87% against a 1.74% fall in the benchmark.

Over the last year, the stock’s return of -22.57% contrasts sharply with the Sensex’s 8.49% gain, signalling significant investor caution. However, the stock has delivered strong long-term returns, with a 3-year return of 94.35% and a 5-year return of 471.36%, well ahead of the Sensex’s respective 37.63% and 66.63% gains.

Summary of Rating Change

On 3 February 2026, MarketsMOJO downgraded Varun Beverages Ltd’s Mojo Grade from Hold to Sell, with the current Mojo Score at 44.0. The downgrade reflects a combination of factors:

• Quality: While the company retains strong long-term fundamentals, recent flat quarterly performance and lower efficiency ratios have weakened the quality outlook.
• Valuation: The stock’s expensive P/B ratio of 8.3 and a PEG ratio of 3 indicate overvaluation relative to earnings growth, prompting caution.
• Financial Trend: Flat results in Q3 FY25-26 and a low ROCE of 18.92% suggest a pause in financial momentum despite healthy long-term growth.
• Technicals: The shift from mildly bearish to bearish technical grade, supported by multiple negative indicators, signals increased downside risk in the near term.

These combined factors have led to a more cautious stance on Varun Beverages, despite its sector leadership and institutional backing.

Investor Considerations

Investors should weigh the stock’s strong historical growth and market dominance against the current technical weakness and valuation concerns. The stock’s recent underperformance relative to the broader market and peers suggests that near-term risks may outweigh immediate opportunities.

Long-term investors with a focus on fundamentals may find value in the company’s robust sales growth and profitability metrics, but those seeking momentum or technical strength may prefer to consider alternatives.

Conclusion

Varun Beverages Ltd’s downgrade to Sell reflects a nuanced assessment of its current market position. While the company’s long-term fundamentals remain solid, the combination of flat recent financial results, expensive valuation, and deteriorating technical indicators has shifted the investment outlook towards caution. Market participants should monitor upcoming quarterly results and technical developments closely to reassess the stock’s trajectory.

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