Varun Beverages: Being In A Cool Spot

Varun Beverages: Being In A Cool Spot

Soft drink consumption in India is observed to be on a steady growth trajectory. Rising young population, low per capita consumption, improving retail penetration across semi-urban and rural markets, better agro-economics and rising trend of at-home consumption contributes to make it an attractive growth market. This is what gives Varun Beverages its healthy growth outlook

 

Varun Beverages Limited (VBL) is a key player in the beverage industry and one of the largest franchisee of PepsiCo in the world outside USA. The company produces and distributes a wide range of carbonated soft drinks (CSDs) as well as a large selection of non-carbonated beverages (NCBs), including packaged drinking water sold under trademarks owned by PepsiCo. PepsiCo CSD brands produced and sold by VBL include Pepsi, Diet Pepsi, Seven-Up, Mirinda Orange, Mirinda Lemon, Mountain Dew, Mountain Dew Ice, Seven-Up Nimbooz Masala Soda, Evervess, Sting, Gatorade and Slice Fizzy Drinks.

PepsiCo NCB brands produced and sold by the company include Tropicana Slice, Tropicana juices such as 100 Per Cent Delight, Essentials, Nimbooz as well as packaged drinking water under the brand Aquafina. VBL has been working with PepsiCo since the 1990s and has over two and a half decades consolidated its business association with PepsiCo, enhancing the number of licensed territories and sub-territories covered by VBL, producing and distributing a wider range of PepsiCo beverages, introducing various stock keeping units (SKUs) in the portfolio and expanding the distribution network.

As of date, VBL has been granted franchises for various PepsiCo products across 27 states and seven Union Territories in India. VBL has 31 manufacturing plants in India and six manufacturing plants in international geographies with two in Nepal and one each in Sri Lanka, Morocco, Zambia and Zimbabwe. VBL’s share of PepsiCo beverages’ volume sales increased from approximately 26 per cent in fiscal 2011 to more than 85 per cent now. Although India is VBL’s largest market, it has also been granted the franchise for various PepsiCo products for the territories of Nepal, Sri Lanka, Morocco, Zambia and Zimbabwe.

Sector Overview

In the beginning of 2020, the domestic soft drinks market witnessed improved consumption and reported broad-based growth across categories. However, in March 2020, the widening spread of the corona virus led to significant uncertainty across the domestic and global markets. Lockdown measures and restrictions caused unparalleled disruption across economic and business activities in India, thus impacting overall demand and consumption in markets, particularly in the key season of summer. In addition, severe supply chain issues impacted soft drink volumes during the first half of 2020. The lockdown period witnessed a shift in consumer purchase patterns. Even if the at-home consumption expanded, out-ofhome consumption, which historically contributes to higher volumes, was considerably impacted during the first phase of the lockdown.

As lockdown restrictions were relaxed gradually, there were notable changes in purchase patterns of consumers from basic necessities to items such as beverages, snacks, processed foods and ice creams. This elevated the sales for at-home consumption across regions. Towards the latter half of the year 2020, the country witnessed healthy recovery in demand, especially in rural and semi-urban areas, which boosted the momentum. In future, the soft drinks industry in India is expected to report normalised growth across categories. The main segments constituting the soft drinks market in India are carbonates, juices and bottled water. In value terms, carbonates are the largest category.

Financial Overview

VBL follows the calendar year of reporting. During Q1CY21, the total sales volume zoomed by 45.4 per cent on a YoY basis to 152.3 million cases in Q2CY21 as compared to 104.8 million cases in Q2CY20. Despite the second wave of the pandemic and related lockdowns, which led to de-growth in the month of May 2021, the volumes cheered on the back of strong growth in the month of April 2021 compared to the low base of the previous year same month and a steady recovery in the month of June 2021. Revenue from operations i.e. net of excise and GST showed a growth of 49.4 per cent in Q2CY21 to Rs 2,449.85 crore primarily because of robust volume growth over last year and marginal increase in realisations per case.

Profit after tax increased strongly by 123 per cent to Rs 318.8 crore in Q2CY21 from Rs 142.98 crore in Q2CY20. In line with the guidelines of its dividend policy, the Board of Directors recommended an interim dividend of Rs 2.50 per share. Hence, the total cash outflow was derived to be approximately Rs 108.26 crore. If we consider the performance of the company in H1CY21, revenue from operations i.e. net of excise and GST improved 41.4 per cent on a YoY basis to Rs 4,690.74 crore in H1CY21 as compared to Rs 3,316.62 crore in H1CY20.

EBITDA zoomed by 46.8 per cent to Rs 952.42 crore in H1CY21 from Rs 648.85 crore in H1CY20. PAT was higher by 124.4 per cent at Rs 455.56 crore in H1CY21 from Rs 203.4 crore in H1CY20. In terms of debt and credit rating, the company’s net debt was recorded at Rs 2,549.2 crore as on June 30, 2021 as against Rs 3,015.8 crore as on December 31, 2020. The debt to equity ratio stood at 0.63x as on June 30, 2021 whereas the debt to EBITDA ratio stood at 1.69x for the trailing 12 months’ EBITDA.

Meanwhile, credit rating from CRISIL, an S & P global company, continues to be CRISIL AA for long-term debt and CRISIL A1+ for short-term debt. As regards capex and working capital, during H1CY21, the net organic capex of approximately Rs 1,900 million including for ex-adjustments was on a key basis towards expansion in India, Morocco and Zimbabwe. Working capital days improved marginally to around 24 days as on June 30, 2021 from 20 days as on June 30, 2020 primarily due to higher stock of pet resin and preform inventory accumulated to take the advantage of lower pricing at the start of the year.

Sustainability Initiatives

Sustainability is a business approach to creating long-term value by analysing how a given organisation operates in the ecological, social and economic environment. The base for this assumption is that developing such strategies fosters company longevity. Around 62 per cent of executives consider a sustainability strategy necessary to be competitive today, and another 22 per cent think it will be in the future. Let’ have a look at some sustainability initiatives taken by VBL:

• VBL consumed about 66,000 MT PET for its finished product in CY20. These are high-quality food grade virgin PET or HDPE chips which can be easily recycled to make various products for diverse industries and end users.

• During the year CY20, 43,700+ MT of PET waste was recycled (approximately 66 per cent of PET resin consumed) and during H1CY21, 30,700+ MT of PET DS waste was recycled (around 59 per cent of the PET resin consumed).

• VBL engaged TUV India (P) Ltd. for the company’s water footprint assurance wherein water mass balance and its various initiatives towards water conservation and water recharge were verified.

"The company also focuses on continuing to expand its product portfolio and distribution reach along with increasing volumes, particularly in markets with lower penetration."

Outlook

The soft drink consumption in India is observed to be on a steady growth trajectory. Rising young population, low per capita consumption, improving retail penetration across semi-urban and rural markets, better agro-economics and rising trend of at-home consumption contributes to make it an attractive growth market. The Indian soft drinks’ segment possesses huge potential and some of the key drivers for these markets can be:

• Demographic profile n Rising affordability and urbanisation
• Improving trend in consumer purchase patterns
• Uptick in rural demand and electrification
• Innovative offerings
• Residence of majority population in hot and dry locations

The future growth aims of the company include being wellpositioned to leverage the PepsiCo brand to increase market penetration in licensed territories, penetrating into newer geographies to complement existing operations in India, periodically launch innovative products in select markets in line with changing consumer preferences, focus on non-cola carbonated beverages and NCBs. It also includes optimisation of logistics and production and technology to improve sales and operations processes. The company also focuses on continuing to expand its product portfolio and distribution reach along with increasing volumes, particularly in markets with lower penetration. VBL’s comprehensive infrastructure, diversified product portfolio, well-established distribution network, unique business model and seasoned management team continues to hold the company in a healthy pace and will enable it to achieve scale and business efficiency in the coming years. Hence, we recommend BUY.

 

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