Varun Beverages is one of the largest franchisees of PepsiCo in the world. The company produces & distributes Carbonated drinks, Juices & packaged drinking water in six countries including India. Some of the PepsiCo brands produced by VBL include Pepsi, Diet Pepsi, Seven-Up, Mirinda, Mountain Dew, Nimbooz, String, Slice, Tropicana, and Aquafina among others.
Varun Beverages: Growth in newer brands to support overall volumes
The company has operations in India (except Andhra Pradesh, J&K & Ladakh), Sri Lanka, Nepal, Morocco, Zambia & Zimbabwe.
VBL has a strong clientele base
Key triggers for future price performance
The underpenetrated territories of Bihar, MP, Jharkhand & southern & western territories are growing to their potential after distribution expansion to 3 million outlets.
The growth in newer brands like ‘Sting’ & milk-based beverages growing at faster pace, supporting overall volume growth. With strong volume growth & capacity utilisation touching 90%, VBL would be expanding its capacity by 30% with a capex of 1200 crore in CY23.
Company witnessed an excellent quarter
VBL witnessed a revenue growth of 102.3% to 4,954.8 crore led by 96.9% volume growth & 2.7% realisation growth. The company sold 300 million cases during the quarter, which include 73% of the cases of carbonated soft drinks, 18% cases of water & 9% of the cases of Juices.
Realisation growth was 2.7% to 165 cases led by price hikes in select SKUs & reduction in discounts & incentives. On a three-year CAGR basis, sales & volume growth was 20.8% & 15% respectively.
Capacity expansion to expand to new territories
VBL expanding the distribution network (3 Mn outlets, out of which, 0.4 Mn are exclusive for “Sting”), into new territories where it has very small market share indicates huge scope to grow.
VBL is also getting demand recovery after two consecutive years of pandemic related disruptions during the peak season. Company expects this high growth momentum to continue for the next 2-3 years.
VBL is planning to add more facilities in Bihar, as it has run out of capacity in just one year of operation and even adding to markets like MP, Rajasthan, and AP with a CAPEX of ₹ 1,200 Cr, which will enhance the overall capacity by 30%.
The Juice segment has doubled QoQ and is now contributing a record high of 9% of the total volume mix. As of now VBL’s dairy plant in Punjab is restricted to the North region only, its focus on expanding to other regions, along with doubling its capacity by the beginning of CY24E will boost further growth.
Total CAPEX incurred by H2CY22 is ₹ 670 Cr, primarily for setting up of new Greenfield production facilities in Bihar & Jammu and Brownfield expansion at Sandila facility. CAPEX for CY23E is ₹ 1,200 Cr which will increase the total capacity by 30%. Out of this ₹ 1,200 Cr, 60% would be Greenfield. Capacity utilisation in India during the peak month was close to 90%. Certain categories (CSD PET, Tropicana, etc.) reached a near full capacity.
Chairman’s message – Highly proud and positive about future perspectives
Commenting on the performance for Q2 and H1 CY2022, Mr. Ravi Jaipuria, Chairman – Varun Beverages Limited said: “We are pleased to share that we have delivered an all-time high performance during the quarter. Our continuous effort to invest in our business despite the pandemic led to disruption of peak season during the last two years and return of normalcy in day-to-day activities translated to robust demand leading to consolidated sales volume growth of 96.9% YoY."
In addition, we were able to improve our realisation per case by taking price hikes in select SKUs, reduction in discounts/incentives, and improving the mix leading to doubling of our topline during the quarter as compared to last year.
On the profitability front, despite the inflationary raw material environment we witnessed limited impact on our gross margins during the quarter because of early stocking of key raw materials and improvement in realisations. Further, operating leverage due to high volume growth translated into improved EBITDA margins of 25.2%.
Healthy cash flows during the period enabled us to significantly reduce our debt thereby strengthening our balance sheet position. I am happy to share that in recognition of our operational excellence, end to end execution capabilities, governance practice and strong track record, VBL was recently awarded by PepsiCo as ‘Best Bottler in Africa, Middle East, and South Asia (AMESA) region’ for the year 2021.
"I am also pleased to share that in-line with our dividend policy, the Board of Directors has recommended an interim dividend of Rs. 2.5 per share. With sustainability being a core principle of our business model, we continue to undertake efforts towards PET recycling and improving energy & water efficiencies with a goal of having a net positive impact on the planet. On the demand front, we are seeing enhanced consumption trends across markets. Directionally, we continue to implement strategic initiatives to solidify our market position as a key player in the global beverage industry and are confident of continuing our journey of sustainable value creation for all stakeholders," he added.
Future growth potential
The management is expecting double-digit volume growth going forward as the juices, energy drink, and dairy products segment are growing very well. It expects to sustain current margin levels, which can improve further if the price of key raw material – PET resins – softens.
VBL’s under penetrated territories (with a market share of 15-20%) such as Madhya Pradesh, Odisha, Bihar, Jharkhand, and Chhattisgarh have shown robust growth in 2QCY22. It will keep on improving distribution in underpenetrated markets, with more visi-coolers and vehicles, as the management sees huge growth prospects in such markets.
Note: This article is for informational purposes only. Please speak to a SEBI-registered investment advisor before making any investment related decision.
Shuchi Nahar is a Certified Research Analyst. She can be found on Twitter at @shuchi_nahar