VARUN BEVERAGES LTD. -BUY

Company Overview

Varun Beverages Ltd. (VBL) is a significant player in the beverage industry, known for its association with PepsiCo. It is the second-largest franchisee for PepsiCo globally (outside the US) and the largest in India. Additionally, VBL operates as the sole franchisee in several other countries, including Nepal, Sri Lanka, Morocco, Zambia, and Zimbabwe. The company has a diverse product portfolio that can be grouped into three main categories:
Carbonated Soft Drinks (CSD) Brands (74% Revenue Mix): This category includes popular brands like Pepsi, Pepsi Black, Mountain Dew, Sting, Seven-Up, Mirinda Orange, Seven-Up Nimbooz Masala Soda, and Evervess.
Non-Carbonated Beverages (NCB) (7% Revenue Mix): VBL offers non-carbonated options such as Tropicana Slice, Tropicana Juices (100% and Delight), Seven-Up Nimbooz, Gatorade, and packaged drinking water under the Aquafina brand.
Dairy-Based Beverages: Through a licensing agreement with the Creambell brand, VBL has entered the dairy-based beverages segment.
VBL has a vast presence in India, covering 27 states and seven union territories (except Andhra Pradesh, Jammu & Kashmir, and Ladakh). In fact, they contribute to more than 85% of PepsiCo’s beverage sales in India. The company operates a total of 39 state-of-the-art production facilities, with 33 located in India and 6 in international territories. Their extensive supply chain network includes over 110 depots, 2,400 primary distributors, and a fleet of 2,500+ owned vehicles.

Why to invest in VARUN BEVERAGES LTD

• Despite facing challenges like unseasonal rains affecting demand, VBL has demonstrated impressive performance, making it an attractive investment option:

• Strong Revenue Growth: In the second quarter of 2023 (Q2CY23), VBL achieved a remarkable year-on-year (YoY) revenue growth of 13.6%. Their revenue reached Rs. 56,997.3 million, surpassing market expectations of Rs. 53,746.6 million. This growth was driven by a 4.6% increase in volume, reaching 314 million cases compared to 300 million cases in Q2CY22.

• Improved Profit Margins: VBL saw notable improvements in its EBITDA and PAT (Profit After Tax) margins. These margins expanded by 159 basis points (bps) YoY and 166 bps YoY, respectively, in Q2CY23. This growth was in line with the expansion of GP (Gross Profit) margins, primarily due to softening PET prices.

• Higher Realisation per Bottle: VBL’s net realisation per bottle increased by 8.3% to Rs. 179 per case in Q2CY23 compared to Rs. 165 per case in Q1CY23. This improvement was attributed to the stronger performance of the smaller SKU mix, particularly the “Sting” brand, which commands higher prices.

• Capacity Expansion: The company has been actively investing in expanding its production facilities. They have commissioned new production facilities in Rajasthan and Madhya Pradesh and have increased capacity in six of their existing locations. Additionally, they are embarking on green-field expansion projects in Maharashtra, Uttar Pradesh, and Odisha. This expansion aligns with their goal of strengthening their presence in the juice and dairy-based beverages segment while reducing reliance on the North region.

• Focus on Growth Areas: VBL places a strategic focus on growth areas within its business. This includes emphasising their energy drink “Sting,” which has been performing well, and their dairy-based offerings, which not only enjoy better realisation but also benefit from a favourable tax structure compared to other portfolio brands.

• International Expansion: VBL has incorporated a new subsidiary called “Varun Beverages South Africa (PTY) Ltd.” in Johannesburg, South Africa. This move positions the company to tap into the South African market, which has significant growth potential. The market size in South Africa is estimated at around 1 billion cases, with the industry size expected to be roughly 50% of the Indian market

Outlook

VBL has shown consistent revenue growth over the years, with a four-year CAGR (Compound Annual Growth Rate) of 24.2% in its total domestic sales volume from CY2018 to CY2022. Looking ahead, the company is actively focused on expanding its presence in the domestic market, particularly in the South and West regions of India.To support this growth, VBL is undertaking both greenfield and brownfield expansions to meet the increasing demand for their juice and dairy-based beverage brands. This expansion is crucial, especially after facing production shortfalls in CY2022, which impacted their juice portfolio. Furthermore, the rising popularity of “Sting,” their energy drink, is expected to contribute positively to the company’s revenue. The brand enjoys higher per-case realisation, making it a valuable asset.On the operational front, VBL has set margin guidance in the range of 21-22%, assuming stable commodity prices. Additionally, the increasing penetration of refrigerators in semi-urban and rural areas is creating opportunities for VBL’s products. As more consumers gain access to refrigeration, the customer base is expanding rapidly in these regions. In summary, VBL remains optimistic about the growth prospects of its expanding brands, including value-added dairy beverages, sports and energy drinks like Gatorade and Sting, and its juice portfolio. The company is also closely monitoring developments in its South African subsidiary. Considering these factors, VBL presents a positive outlook and is well-positioned for future growth and investment opportunities.