Varun Beverages Ltd.

Varun Beverages Ltd.

Fizzing on opportunities!

PepsiCo’s largest Indian bottler, VBL, is a significant player in India’s beverage industry. It operates in six countries and accounts for over 90% of PepsiCo’s sales volume in India. Leveraging its extensive manufacturing infrastructure and well-established distribution channels, the company is responsible for manufacturing, marketing, and distributing a range of PepsiCo-owned products. VBL has consistently focused on expansion and growth across categories through various customer push strategies in licensed territories.

Industry Analysis

The global beverages market is expected to grow from $3.56 tn in 2023 to $4.39tn by 2028 at a CAGR of 4.26% during the forecast period. The Indian energy drinks market size is estimated at $0.74bn in 2024 and is expected to reach $1.01bn by 2030, growing at a CAGR of 5.46% during the forecast period.

The global beverages industry is categorized according to type, distribution channel, and nature. Within the type category, the beverages industry is further divided into alcoholic beverages and non-alcoholic beverages, which include bottled water, carbonated soft drinks, fruit juice, milk, and others. The market is broken down into distribution channels, such as supermarkets, hypermarkets, convenience stores, e-commerce, and other distribution channels. The market is further classified as organic or conventional in terms of nature.

The market for soft drinks in India is set for considerable expansion, influenced by various key factors. The changing trends among the young demographic, characterized by rising disposable income, rapid urban development, and greater engagement in rural markets, are anticipated to significantly increase soft drink consumption nationwide. Improved electrification in villages will also make cooling facilities more accessible, facilitating the industry’s growth.

The sector is significantly connected to multiple supporting industries, including packaging, advertising, logistics, and transportation. The Indian government has launched various programs to promote the sector’s growth. Initiatives like ‘Gati Shakti’ and the ‘Production-Linked Incentive (PLI) Scheme’ are designed to enhance efficiency, increase domestic production, and attract foreign investments.

Limited storage space, seasonality-induced demand variability, fragility, limited shelf life of perishable goods, and a stringent regulatory environment in the form of industry standards, quality control measures, and safety regulations pose significant challenges for the industry players.

VBL vs NIFTY 50

CMP₹648.70
Stock P/E84.02
Dividend Yield0.15%
Market Capitalization₹2,05,257cr
Enterprise Value₹2,05,257cr
EPS₹13.66
Book Value per share₹20.59
52 Week High₹681.12
52 Week Low₹478.56

As on 2nd January, 2025

Shareholding Pattern

Business Model

The company produces and supplies a diverse array of carbonated soft drinks alongside a wide variety of non carbonated beverages, which also encompasses bottled drinking water.

PepsiCo supplies brand, concentrates, and above-the-line marketing assistance to VBL. In exchange, VBL takes full responsibility for the production and supply chain operations, promoting market share growth, improving cost-effectiveness, and overseeing capital allocation strategies.

The company manages 48 state-of-the-art production facilities, 36 in India & 12 in international territories. Moreover, it has a strong supply network that includes over 120 depots, a fleet of over 2,500 owned vehicles, more than 2,400 primary distributors, and over 10,00,000 visi-cooler installations across different markets.

Revenue Distribution

Porter's 5 Forces Analysis

Threat of New Entrants

The threat of new entrants is relatively low for VBL. The sector presents considerable obstacles for new entrants, primarily because of substantial upfront capital expenses, robust distribution channels, and entrenched
brand loyalty.

Bargaining Power of Suppliers

The bargaining power of suppliers in the case of VBL iscmoderate. VBL is a key bottler for PepsiCo, which gives PepsiCo considerable leverage over VBL. However, the company also has the advantage of being a large customer for these suppliers, which might help them negotiate better terms.

Bargaining Power of Buyers

Buyers’ bargaining power is relatively high. VBL primarily deals with large retailers and distributors. Due to their large volume, they can negotiate for better prices and discounts. Low switching costs and the availability of broader alternatives with negligible product differentiation further increase their power.

Competitive Rivalry

The beverage industry is highly competitive, and product quality and marketing efforts play crucial roles. VBL’s focus on regional growth, strategic partnerships, and cost-efficient operations places it in a competitive position in the South Asian and emerging market beverage industry.

Threat of Substitution

VBL faces a high threat of substitution. As more consumers prioritize their health, the consumption of sugary soft drinks is on the decline, leading to a trend towards healthier alternatives such as natural juices, sparkling waters, and beverages without added sugars.

Key Risks

Business Agreement Risk: The company depends on strategic partnerships and contracts with PepsiCo. Ending these contracts or the possibility of less advantageous renewal conditions could negatively impact profitability.

Demand Risk: A cyclical recession may decrease the company’s target markets, impacting its sales pace. To mitigate the risk, the company has been focusing on delivering the right brand, price, product, and channel for its customers.

Consumer Preference Risk: The inability to adjust to evolving consumer health trends and clarify misunderstandings regarding the health implications of soft drink consumption could negatively impact demand.

Regulatory Risk: Laws related to consumer health and the possibility that the company’s products may be subjected to targeted taxes and requirements for packaging waste recovery could negatively affect business. A hike in taxes on aerated beverages, a sin good, also poses a risk for the company.

Business Feasibility Risk: Failure to assimilate operations or capitalize on potential operational and cost efficiencies from the newly obtained territories and sub-territories could negatively impact the company’s business and future financial results.

Q3 CY24 Update

1. The quarter demonstrated consolidated revenue growth of 24.1%, reaching ₹4,804.68cr. Heavy rains impacted the Indian market, growing by a mere 5.7%, while international markets rose by 7.9%.

2. Compared to the depreciation expense of ₹170.8cr in Q3 CY23, the depreciation expense this quarter grew to ₹256.6cr, increasing by 50.2% Y-o-Y, primarily due to the acquisition of BevCo – a South African bottler, new production facilities in India, and the plant in the Democratic Republic of Congo (DRC).

3. Finance costs increased by 89.7% on a Y-o-Y basis, reflecting the impact of new capex and higher borrowing costs.

4.Recent Indian legislation has made it mandatory for the beverage industry to use 30% rPET in its products. The company has announced that its first rPET plant will be operational by the second quarter of next year. This move will help the company fulfill its regulatory requirements in a timely manner.

Financial Analysis

In the calendar year 2023, VBL showed robust performance, exhibiting significant growth in all major aspects. Despite the hefty unseasonal rainfall during the peak season, the company achieved impressive double-digit volume growth in domestic and international markets.

In CY23, the company saw an increase of 21.9% in revenue from operations, reaching ₹1,63,210cr. Net profits for the year rose to ₹2,101.8cr, resulting in a net profit margin of 13.1%.

During the fiscal year, the gross margin for VBL increased to 53.8% from 52.5%, primarily driven by the softening of PET chip prices, notwithstanding a slight uptick in sugar prices. The current ratio has risen in CY23, so the company’s liquidity has relatively improved. However, the earnings retention
ratio has decreased slightly, indicating reduced liquidity.

Current Ratio

Earnings Retention Ratio (%)

27.3% was the Return on Capital Employed (ROCE) for VBL in CY23.

11.22 was VBL’s interest coverage ratio for CY23. Thecompany can cover the interest payments for its debts easily.

₹15.82 per equity share is what VBL earned in CY23, increasing by ~37% on a Y-o-Y basis.

Disclaimer

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