This is an updated post of our 2021 article
The soft drinks industry in India has experienced significant growth and transformation in recent years. Enjoying a chilled cola during the hot summers is something most Indians are fond of.
Yet, the market still is underpenetrated and shows lower per capita consumption in comparison to other developing countries.
In CY2023, despite facing challenges such as unseasonal rainfall that dampened sales during the crucial summer season, the industry adjusted to changing demographics and maintained a steady growth trajectory.
The industry looks poised for further growth supported by tailwinds like rising incomes, increased discretionary spending, a large and youthful population, expanding urbanization, and improved electricity and cooling infrastructure in rural areas, all of which bode well for the future of the soft drinks market in India.
And whenever we think of Cola – Coca-Cola and Pepsi are the two brands that we all recall.
Varun Beverages Ltd. (VBL) is one of the largest franchises of PepsiCo. (Outside the USA) with a strategic partnership for over 31 years. Its operations span across 6 countries and 2 continents. Out of these, 3 are in the Indian subcontinent (India, Nepal, and Sri Lanka) and the other 3 are in Africa (Morocco, Zambia, and Zimbabwe).
83% of its revenues in CY23 came from the Indian subcontinent, while the remaining 17% were from the African countries.
They manufacture, distribute, and sell a wide variety of carbonated soft drinks (CSDs), as well as non-carbonated beverages(NCBs) including packaged drinking water under the trademarks owned by PepsiCo. Below are the brands licensed to VBL :
*Source: VBL’s CY23 Annual Report
Note: ‘CreamBell’ is another established brand that has been licensed to be used by VBL for value-added dairy-based beverages.
It has a presence in about ~3-5 million outlets out of a total of ~ 12 million FMCG outlets in India and plans to add 10% to 12% outlets every year. VBL has also ventured into PepsiCo’s food business in two different geographies. In Morocco, it will distribute and sell Lays, Doritos, and Cheetos. While in India, it has started co-manufacturing Kurkure Puffcorns.
India is the largest market for VBL and contributed ~79% of its revenues in CY23. It has a presence in 27 states and 7 union territories of India, accounting for ~90% of PepsiCo India’s beverage sales volume. As of CY23, VBL has 40 manufacturing facilities (34 in India and 6 overseas).
*Source: VBL’s CY23 Annual Report
Not The Usual FMCG Business
VBL though operating in the fast-moving consumer goods (FMCG) sector, is better characterized as a contract manufacturer rather than a traditional FMCG company.
VBL lacks several core attributes typically associated with consumer-driven businesses, such as pricing power, brand ownership, new product development, and control over raw materials. These operational and financial distinctions set VBL apart from typical companies in the FMCG sector.
Nonetheless, it’s crucial to recognize that VBL is one of PepsiCo Inc.’s largest bottlers outside the USA, handling approximately 90% of PepsiCo’s sales in India.
This prominence is the result of a strategic and aggressive expansion in the Indian subcontinent and Africa over the past decade.
By the end of CY23, VBL’s expansive distribution network included 120+ depots, 2400+ primary distributors, and 2500+ owned vehicles, establishing its near-monopoly in India’s bottling business through exceptional distribution capabilities.
And they aren’t stopping here!
CAPEX Driving Growth & Expansion
In CY23, VBL spent a total of Rs 2,100 Cr toward capital expenditure. Out of which, Rs 850 Cr was invested in establishing two new greenfield production facilities located in Bundi, Rajasthan, and Jabalpur, Madhya Pradesh.
Additionally, Rs 800 Cr was dedicated to brownfield expansions at six of their existing facilities across India, and Rs 150 Cr was used for land acquisitions in anticipation of future plant construction.
The remainder of the capital was utilized for brownfield expansions in international markets, writing off assets, and managing forex fluctuations.
According to the management, once the capex planned for CY23 and CY24 are fully commissioned, they are expected to boost the company’s peak monthly domestic production capacity by ~45% compared to the base year of CY22
That being said, VBL is also keen on expanding its global presence. While already being present in 5 overseas markets, VBL is entering a 6th.
Expanding Global Presence
VBL recently entered into a binding agreement to acquire a 100% equity stake in a South African beverage company, ‘BevCo.’ and its wholly owned subsidiary, ‘Little Green Beverages Proprietary Ltd.’ for a total cash consideration of Rs 13.2 billion. This acquisition is expected to be completed by July 2024 subject to regulatory approvals.
VBL’s entry into the South African market is considered to be a welcome move as South Africa is the largest soft drink market in Africa, with volume of ~1,186m cases in CY22. It is expected to reach ~1,537m cases by CY27 driven by factors like:
- Young Population (65% between the age group of 15-64 years).
- Growing Urbanization
- Increasing earnings of South African households
Currently, the South African soft drinks market is dominated by Coca-Cola, with a market share of ~50%. PepsiCo only holds a low single-digit market share.
BevCo – A Key Player in African Markets
BevCo has an agreement with PepsiCo to bottle and distribute its products in Southern Africa. It is the sole licensed bottler in South Africa, Swaziland, and Lesotho and also has distribution rights in Botswana and Namibia.
Apart from PepsiCo brands, BevCo also manufactures and sells its own brands such as Refreshhh (high caffeine content drinks), Reboost (energy drinks), Coo-ee (carbonated drinks), and JiVE (Lemonade and Soda).
It recorded a sales volume of ~117m cases in FY23. The below chart gives a better understanding of its distribution:
*Source: BevCo Acquisition Presentation
BevCo has 5 manufacturing facilities in South Africa, 2 in Johannesburg, and 1 each in Durban, East London, and Cape Town.
Let’s see how VBL’s manufacturing footprint in Africa will look like after this acquisition:
*Source: BevCo Acquisition Presentation
Financial Overview
Before we dive into the financials, let us see how has VBL’s sales volumes grown over the years.
*Source: VBL’s CY23 Annual Report. Click on the image to enlarge.
From CY19 to CY23, VBL’s sales volume have grown at a healthy 17% CAGR. Even though CY23 was a tough year for the soft drinks industry (unseasonal rainfalls affecting critical summer season), VBL grew its sales volume by ~14%, reporting strong double digit growth in both the Indian and International markets.
In CY23, VBL sold a total of 913 million cases. Of these, carbonated soft drinks formed for 72%, juice-based drinks comprised 6%, and the remaining 22% were packaged drinking water.
Additionally, the realization per case increased by 7% to Rs 175.7 in CY23. This improvement was driven by a strategic shift towards smaller SKUs (250 ml) in the Indian market and higher realization per case in international markets.
*Click on the image to enlarge.
Over the past 5 years, VBL has translated its volume growth into consistent revenue growth at 22.5% CAGR. With higher volumes and improving realizations, VBL’s revenue grew by ~22% YoY in CY23.
This sustained growth is primarily driven by VBL’s strategic diversification of its product portfolio. Notable additions included the energy drink ‘Sting’ along with new ventures into the dairy, hydration, and juice segments.
*Click on the image to enlarge.
Its EBITDA too has grown significantly at ~25.7% CAGR over the past 5 years, while EBITDA margins have improved by ~2% during the same period.
Despite an uptick in sugar prices in CY23, which could have adversely affected profitability, VBL managed to improve its margins primarily due to lower prices for PET chips. PET chips are a primary raw material used in the manufacturing of PET bottles.
*Click on the image to enlarge.
VBL has seen remarkable PAT growth, which has surged at 45% CAGR from CY19 to CY23. During the same period, PAT margins have significantly improved, rising from 6.6% in CY19 to 13.1% in CY23.
In CY23, depreciation expenses at VBL increased by 10.3%, largely due to the capitalization of assets and the establishment of new production facilities. Additionally, interest expenses rose by 44%, driven by an increase in the average cost of borrowing, reflecting the interest rate trends in India..
Despite these increased costs, VBL achieved a notable PAT growth of 35.2% YoY, reaching Rs 2,102 Cr.
*Click on the image to enlarge.
As of CY23, VBL experienced a significant increase in its net debt to Rs 4,734 Cr from Rs 3,410 Cr in CY22. The primary driver behind this escalation was a substantial investment in Construction Work in Progress (CWIP) and capital advances, totaling Rs 1,200 Cr.
Out of which, Rs 900 Cr was spent on the new manufacturing facility in Supa, Maharashtra, which commenced operations on January 25, 2024.
Looking ahead, VBL’s management has outlined an ambitious CAPEX plan for FY24, earmarking a total of Rs 3,600 Cr. This includes Rs 3,000 Cr for domestic markets and Rs 600 Cr for international.
Despite these substantial financial commitments, VBL has successfully maintained a healthy financial structure. The company’s Debt-to-Equity ratio stood at 0.67x, and its Debt-to-EBITDA ratio was at 1.31x as of CY23.
Current Outlook And Valuation
VBL showed robust performance in Q4 CY23:
- Sales volumes grew by 18% YoY to 156 Mn.
- Out of the total sales volume, CSDs contributed 68%, Juices formed 5% and 27% came from its water segment.
- Revenues grew by 20.5% YoY to Rs 2,668 Cr.
- EBITDA showed 36% YoY growth to Rs 418 Cr.
- PAT showed significant growth YoY growth of 76.3% to Rs 143 Cr.
VBL has multiple tailwinds in the form of macro factors supporting the industry, capacity expansion, entry into newer territories and products.
Consistent ramp up in operations through both organic and inorganic routes have strengthened their position in the market and overall geographical reach. VBL is currently only present in 3.5 Mn outlets out of the total 12 Mn FMCG outlets in India which gives it greater headroom for expansion.
With the visible growth potential of VBL in the domestic markets and expansion in the African continent, the business seems poised for further growth.
In terms of valuation, the stock has doubled in last 1 year’s time and is currently trading at a PE of ~92 times. The stock seems overly stretched. However, considering the robust growth drivers previously discussed – including its dominant market position and status as a near-monopoly in India’s bottling business, the market is likely to continue assigning a premium to VBL stock.
What are the Risks?
Despite these growth opportunities, there are few inherent risks in VBL’s business. Competition from branded and regional players in the overall beverage category has been on the rise. All key segments of VBL– carbonated, juices, and packaged drinking water – face competition from many players. Big names like Reliance have also entered the industry with its brand ‘Campa Cola’ (however, not much success was seen there).
Along with this, its business also faces seasonality issues. Summer is the most important quarter for VBL. Any prolonged adverse weather conditions or disease outbreak during this period will impact its performance.
Capitalmind Checklist
Can Varun Beverages stand the competitive intensity in the Industry?
VBL holds a near-monopolistic position in PepsiCo’s India operations, accounting for ~90% of PepsiCo’s sales in the country. Over the years, VBL has not only maintained but expanded its market share. With ongoing capacity expansions and strategic entries into new territories, there is a strong potential for VBL to further increase its market share in the near future.
Is the company financially healthy?
VBL has consistently maintained a healthy net debt-to-equity ratio of 0.7 times over the past three years, reflecting a strong balance sheet. Furthermore, the management is confident in their strategy of leveraging debt for expansion, believing that the additional capacity being created will generate sufficient profits to service this debt.
Is the management/promoter sketchy?
So far there has not been any instance of misappropriation by the promoter. The company has also not entered into any materially significant related party transactions.
Who are the other key holders in the stock? Has there been a drastic change in key shareholders?
The promoter holding has remained consistent at ~63%.
FII holding has increased to ~26% from ~21% three years back.
Is the stock cheap?
Surely not. The stock is currently trading at a PE of 92 times. However, we expect the market to give premium as long as the growth continues for the company.
Can the current sales and earnings growth sustain?
Going forward, VBL has multiple tailwinds like macro factors, capacity expansion, entry into newer products and territories. With the visible growth potential of VBL in the domestic markets and expansion in the African continent, the business seems poised for further growth.
Video summary:
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Disclosure: Varun Beverages Ltd (VBL) is a part of our Capitalmind Premium Portfolio. This article is intended solely for informational purposes and should not be considered as an investment recommendation.
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