About the Company

Varun Beverages Ltd (VBL) is the second-largest franchisee in the world (outside the US) of carbonated soft drinks (“CSDs”) and non-carbonated beverages (“NCBs”) sold under trademarks owned by PepsiCo and a key player in the beverage industry. They produce and distribute a wide range of CSDs, as well as a large selection of NCBs, including packaged drinking water. PepsiCo CSD brands sold include Pepsi, Diet Pepsi, Seven-Up, Mirinda Orange, Mirinda Lemon, Mountain Dew, Seven-Up Nimbooz Masala Soda, Evervess Soda, Sting, and Gatorade. PepsiCo NCB brands sold by the company include Tropicana (100%, Essentials & Delight), Tropicana Slice, Tropicana Frutz, Seven-Up Nimbooz, and Quaker Oat Milk as well as packaged drinking water under the brand Aquafina.

Q4 CY20 Updates

Financial Results & Highlights

Standalone Financials (In Crs)
  Dec CY20 Dec CY19 YoY % Sep CY20 QoQ % CY20 CY19 YoY%
Sales 868 895 -3.02% 1315 -33.99% 4948 5714 -13.41%
PBT -66 -79 16.46% 104 -163.46% 203* 634 -67.98%
PAT -52 -54 3.70% 79 -165.82% 226 449 -49.67%

Consolidated Financials (In Crs)
  Dec CY20 Dec CY19 YoY % Sep CY20 QoQ % CY20 CY19 YoY%
Sales 1357 1276 6.35% 1843 -26.37% 6593 7291 -9.57%
PBT -19 -64 70% 192 -109.90% 363* 696 -47.84%
PAT -7 -54 87% 161 -104.35% 357 472 -24.36%

*contains an exceptional item of Rs 66.5 Cr for impairment of certain plant & equipment

Detailed Results

  1. The current quarter was down for the company with a 6.4% YoY rise in consolidated revenues & a PAT loss of Rs 7 Cr.
  2. CY20 numbers were dismal with a 9.6% YoY revenue decline and a 24.4% YoY PAT decline.
  3. The company saw an EBITDA rise of 48.8% YoY and a volume decline of 5.7% YoY in the quarter. CY20 EBITDA fell 17% YoY.
  4. Other income in Q4 fell 84.5% YoY.
  5. Sales volumes in CY20 fell 13.7% YoY and organic sales volumes fell 20.8% YoY.
  6. CSD constituted 63%, Juice 5%, and Packaged Drinking water 32% of total sales volumes in Q4 2020.
  7. EBITDA margin improved by 346 bps in Q4 2020 as compared to Q4 2019.
  8. Gross margins improved by 472 bps YoY during Q4 2020 & 231 bps in CY20 primarily due to favourable PET chips prices and a higher mix of CSD.
  9. Finance costs for the company declined 21.6% YoY due to the repayment of some debt and a lower average cost of borrowing.
  10. Debt to Equity ratio stood at 0.84x and Debt to EBITDA ratio stood at 2.51x as of Dec 31, 2020.
  11. Working capital days increased marginally to ~ 31 days as of Dec 31, 2020, due to lower sales volumes.
  12. The company announced a dividend of Rs 2.5 per share.

Investor Conference Call Highlights

  1. For CY 2020, total sales volumes stood at 425.3 million cases.
  2. VBL recently introduced a new product variance under the Mountain Dew brand which is a lemon juice based drink called Mountain Dew Ice.
  3. Realization per case has improved by 4.8% in CY20. This was essentially on account of favourable mix and improvement in realization in the international markets.
  4. CSD constituted 72.6%, juice constituted 6.3%, and packaged drinking water constitute 21.1% of the total sales volume mix in CY20.
  5. The management stated that the rise in water sales in Q3 & Q4 was due to the resumption of people consuming drinking water outside as compared to Q2 when all outside activities and consumption were suspended.
  6. In-home consumption was mostly in CSD and was geared towards large packs.
  7. On the go consumption reduced to 44% in CY20 from 60% in CY19.
  8. Glass volumes have declined a lot and all of the growth in CSD is coming from PET bottles.
  9. The company is planning to add a plant in Bihar in CY21. This expansion will be greenfield.
  10. The dairy segment is doing well so far. The management has stated that it will continue to monitor the response to it to see the results from the market before expanding into other territories.
  11. The company doesn’t have any plans to make any large investments into the dairy segment currently.
  12. Nepal has seen 25% volume growth in Q4. Sri Lanka has seen volume decline due to lockdowns. Morocco has stayed flat due to lockdown while Zimbabwe and Zambia volumes have grown 40% and 17% respectively.
  13. In CY21, any excess cash will be used for the reduction of debt only according to the management.
  14. Tax rate for CY21 should be close to 24%.
  15. Annual volumes for Nepal were close to 16 million; Sri Lanka was about 10.5 million; Morocco was about 18 million; Zimbabwe was 34 million; Zambia was 9.2 million.
  16. The management has stated that PET prices for VBL will not be affected by rising oil prices as VBL is reasonably covered for the major portion of its year.
  17. The company is open to international acquisition opportunities as the potential for market growth in India is limited. It is looking at areas in South East Asia and Africa primarily.
  18. The management reports that VBL has seen market share gains in CY20.
  19. Contrary to popular belief, VBL does not have 100% of India for Pepsi. It is operating in 85% of Indian territories for Pepsi only.
  20. There has been no change in territory from 2020 to 2021.
  21. The management has stated that it expects growth and expansion of the market to continue in 2021 for the recently acquired territories.
  22. The go-to-market was very weak before when PepsiCo is running it. VBL is improving on it by expanding routes, increasing outlets, and expanding on the number of visi coolers.

Analyst’s View

Varun Beverages have been one of the biggest bottlers in India and has been quite proactive in international expansion for some time now. The company has seen a good YoY recovery in the quarter with sustained margins. Post lockdown demand has remained resilient and water volumes have risen dramatically as on-the-go consumption comes back to normalcy. VBL has also seen good growth in African territories except for Morocco. The company has also done well to shield itself from rising oil prices by covering for PET earlier on. It remains to be seen whether there is a further economic disruption in the future from the resurgence of COVID-19 cases which may have severe second-order effects on the company’s performance. Nonetheless, given the resilient sales network, the rising demand for the company’s products, and the arrival of the peak season for the beverages industry, Varun Beverages is a good consumption stock to watch out for at present. However, as it is a capital-intensive business, the current pandemic can put a strain on the Balance Sheet which is already laden with debt. The valuation at current levels does not provide any margin of safety.


Q3 CY20 Updates

Financial Results & Highlights

Standalone Financials (In Crs)
Sep-20 Sep-19 YoY % Jun-20 QoQ % 9MSep20 9MSep19 YoY
Sales 1315 1350 -2.59% 1421 -7.46% 4081 4819 -15.31%
PBT 104 99 5.05% 159 -34.59% 335 713 -53.02%
PAT 79 65 21.54% 122 -35.25% 278 503 -44.73%

 

Consolidated Financials (In Crs)
Sep-20 Sep-19 YoY % Jun-20 QoQ % 9MSep20 9MSep19 YoY
Sales 1843 1779 3.60% 1668 10.49% 5236 6015 -12.95%
PBT 192 116 65.52% 182* 5.49% 381* 760 -49.87%
PAT 161 81 98.77% 143 12.59% 365 526 -30.61%

*contains an exceptional item of Rs 66.5 Cr for impairment of certain plant & equipment

Detailed Results

  1. The current quarter was mixed for the company with a 3.6% YoY rise in consolidated revenues.
  2. Consolidated Profits were up with over 98% YoY rise.
  3. 9M numbers were dismal with 13% YoY revenue decline and 31% YoY PAT decline.
  4. The company saw an EBITDA rise of 17% YoY and a volume decline of 4% YoY in the quarter. 9-Month EBITDA fell 22.7% YoY.
  5. Other income in Q3 grew 93% YoY.
  6. Sales volumes in India fell 6.7% YoY while in international territories it grew 5.8% YoY.
  7. CSD constituted 74%, Juice 6%, and Packaged Drinking water 20% of total sales volumes in Q3 2020.
  8. Gross margins declined by 149 bps during Q3 2020 primarily due to an increase in the mix of promotional packs like Pepsi PET1, 250ml, Sting PET 250ml, etc.
  9. Finance costs for the company declined 33.2% YoY due to the repayment of some debt from the funds from the QIP.

Investor Conference Call Highlights

  1. A rise in demand is expected for the company with the reopening of theatres, restaurants, mass transportation, and outdoor facilities.
  2. The major factor in the big jump in PAT YoY is the big reduction in finance expenses.
  3. The management has stated that margins near about 21% are healthy margins for the company in the long term.
  4. The key focus for the company has remained in-home consumption. The company’s launch of the 1.25 ltr pack at Rs 50 has been very well received. Although go-to-market is expected to rise going forward, the in-home consumption seems to be sustainable.
  5. In-home consumption has gone up by 20% to 25% YoY.
  6. Large PET bottle consumption has grown more than 10% YoY.
  7. The present inventory level is at Rs 848 Cr. It is elevated due to the offseason currently.
  8. In terms of monthly YoY recovery, the company finally saw positive growth in September with 12% YoY growth.
  9. The management has stated that it is difficult to provide any specific guidance on margins and RM costs going forward.
  10. The management expects the company to maintain its pace of adding visi-coolers of less 40,000 units each year.
  11. The current debt is at Rs 2830-2840 Cr.
  12. Institutional sales have been very low at only 2-3% of sales.
  13. Rural & semi-urban sales were at almost 30% each.
  14. The company has spent around Rs 400 Cr in Capex in the year and this figure represents the majority Capex for the year.
  15. The management has stated that VBL is among the most profitable soft drink companies in the world. It also stated that the main commodities that affect the company are oil and sugar.
  16. The company is indeed looking for ways to reduce seasonality in the beverages business but the management acknowledges that this is a deeply embedded and structural characteristic of this industry everywhere. The company sees main newcomer additions in peak summer season and it is looking to reduce seasonality by increasing volumes for these same customers in the rest of the year.
  17. The management is aiming to maintain >10% growth in the next 3-5 years.
  18. The company saw a good response to its dairy-based products but had to almost withdraw these products due to the pandemic. The company is now looking to relaunch this segment in Jan or Feb next year.
  19. The company has stopped making the fizzy Slice juice-based product as it didn’t get a good response in its pilot locations.
  20. The company is indeed looking at much larger plants and scaling down the smaller plants as operating these smaller plants is much costlier and it is more feasible to either convert into a large plant or shut it down.
  21. The company has enough plants in South & West and is not looking to add any plants in these zones.
  22. Tropicana is the only space where the company is running out of capacity and is looking to open a new plant. The Capex required would be at least Rs 200 Cr but this will not happen in the next at least.
  23. The juice business has grown by 19% in Q3. The main advantages of Tropicana over market rivals is VBL’s distribution reach which is much larger than rivals and the huge volume number of Visi-coolers in the market which the big competitors like Real & B-Natural do not have.
  24. The compensate pricing with Pepsi has been fixed for 20 years and will not be renegotiated.

Analyst’s View

Varun Beverages have been one of the biggest bottlers in India and has been quite proactive in international expansion for some time now. The company has seen a good recovery in the quarter with a big rise in margins. Post lockdown demand seems to have stayed resilient as in-home consumption has risen along with juice consumption as on-the-go consumption slowly comes back to normalcy.  It remains to be seen whether there is a further economic disruption in the future from COVID-19 which may have severe second-order effects on the company’s performance. Nonetheless, given the resilient sales network, the rising demand for the company’s products, and the arrival of the peak season for the beverages industry, Varun Beverages is a good consumption stock to watch out for at present. However, as it is a capital intensive business, the current pandemic can put a strain on the Balance Sheet which is already laden with debt. The valuation at current levels does not provide any margin of safety.

 


 

Q2 CY20 Updates

Financial Results & Highlights

Standalone Financials (In Crs)
Jun-FY21 Jun-FY20 YoY % Mar-FY21 QoQ % 6MFY21 6MFY20 YoY%
Sales 1421 2469 -42.45% 1344 5.73% 2766 3469 -20.27%
PBT 159 537 -70.39% 5* 3080.00% 165* 614 -73.13%
PAT 122 382 -68.06% 77** 58.44% 199 438 -54.57%

 

Consolidated Financials (In Crs)
Jun-FY21 Jun-FY20 YoY % Mar-FY21 QoQ % 6MFY21 6MFY20 YoY%
Sales 1669 2855 -41.54% 1725 -3.25% 3393 4237 -19.92%
PBT 182 582 -68.73% 8* 2175.00% 190* 645 -70.54%
PAT 143 405 -64.69% 60*** 138.33% 203 445 -54.38%

*contains an exceptional item of Rs 66.5 Cr for impairment of certain plant & equipment

**Contains negative tax expenses of Rs 71.8 Cr

*** Contains negative tax expenses of Rs 52.2 Cr


Detailed Results

    1. The current quarter was dismal for the company with a 42% YoY fall in consolidated revenues.
    2. Consolidated Profits were down with over 65% YoY decline.
    3. The company saw an EBITDA decline of 52% YoY and volume decline of 66% YoY in the quarter.
    4. Organic volume growth in India declined by 50% due to disruption caused by COVID-19. The same declined by 33% in international territories and 48% on a consolidated basis.
    5. EBITDA margins declined 501 bps YoY and increased 685 bps QoQ. The EBITDA margin in the current quarter was 23%.
    6. Sales volumes started picking up gradually from about 25% in April to about 75% in June.
    7. CSD accounted for 85%, Juices 7%, and packaged water was 8% of total sales volumes.
    8. Finance costs for the company declined 12.5% YoY due to the repayment of some debt from the funds from the QIP.
    9. Net debt stood at Rs 2939 Cr as of 30th June 2020 vs Rs 3246 Cr 6 months ago.
    10. Net capex in the last 6 months was at Rs 243 Cr. Capacity utilization in the peak month was at around 60%.
    11. Working capital days increased to 20 days vs 14 days last year due to lower sales.
    12. The company announced an interim dividend of Rs 2.5 per share.

Investor Conference Call Highlights

  1. The capex mentioned above was primarily towards commitments made prior to March for brownfield expansion at certain plants for new tetra lines for Slice and backward integration.
  2. The company has not availed moratorium for its debt repayments and has been timely servicing all its debt obligations.
  3. The management has stated that the company’s go-to-market sales have dropped along with sales in public spaces like theatres. But in-home consumption has increased drastically.
  4. The management has admitted that Rs 10 is a very competitive price point for juices and the company already has a presence at this price point.
  5. The company is not looking to change its product mix and add new products. It will instead be focussing on promoting its juices particularly Tropicana brand.
  6. The management has stated that at least 50% of the current cost savings are sustainable for the long term for the company.
  7. The company does not see any need to approach PepsiCo for any support currently.
  8. The main reason for realizations going up is the decline in sales of water in public spaces.
  9. The company has close to 25% market share but increasing penetration or market share for the current year is still uncertain due to COVID-19.
  10. The company has indeed gained some market share from local competitors which didn’t open up in time due to COVID-19 at the start of the peak season after Holi.
  11. The management has stated that the company will aim to keep capex at lower than 50% of depreciation from next year.
  12. The company has not faced any repayment issues in Zimbabwe in the quarter.
  13. More in-home consumption has led to an increase in sales of medium and large bottles vs single-serve bottles for the company.
  14. The company is working on digital and e-commerce channels as per its media strategy.
  15. The management has stated that as lockdowns are being lifted, the company is slowly coming back to its normal sales levels.
  16. The management expects performance from international regions to be better than last year as the peak season for the African regions starts from November.
  17. Realizations have grown 8-9% QoQ in the current quarter.
  18. The management expects the current volume share to persist as long as public spaces like hotels, theatres, etc come back to normalcy.
  19. The management expects to run out of capacity for Tropicana by the end of 2021 as the same equipment is used for ambient temperature value-added products under the brand of Cream Bell.
  20. On-the-go consumption including water was close to 70% pre-covid for the company. Now it is less than 50%.
  21. The company is not looking to do any capex on juices in the next year so far.
  22. The company does not need any capacity expansions for at least 20-25% rise in volumes.
  23. Going forward, discounts or promotions will be dependent only on market demand and competition.
  24. Around 84.6% of volumes sold in the quarter were domestic and the rest was international.
  25. Urban areas have been negative or neutral for the company while rural areas have been the fastest-growing segment. The revenue share of rural has gone up by 5-10%.
  26. The company has held back on the launch of the dairy product due to the COVID-19 outbreak and is looking to launch it again next year.
  27. Currently, less than 50% of outlets are open for the company. At the domestic level, UP is the largest selling state for the company.
  28. The company is now looking to focus its marketing efforts towards home consumption and larger pack size.
  29. The company has shut down a small unprofitable plant in Bargarh Odisha.

Analyst’s View

Varun Beverages have been one of the biggest bottlers in India and has been quite proactive in international expansion for some time now. The company has seen a major decline in the quarter with a massive fall in on-the-go consumption. The lockdown has hit the company’s sales hard but demand seems to have stayed resilient as in-home consumption has risen along with juice consumption.  It remains to be seen whether there is a further economic disruption in the future from COVID-19 which may have severe second-order effects on the company’s performance. Nonetheless, given the resilient sales network, the rising demand for the company’s products, and the arrival of the peak season for the beverages industry, Varun Beverages is a good consumption stock to watch out for at present. However, as it is a capital intensive business, the current pandemic can put a strain on the Balance Sheet which is already laden with debt. The valuation at current levels does not give any margin of safety at the moment.


 

 

 

Q1 CY20 Updates

Financial Results & Highlights

Standalone Financials (In Crs)
Mar CY21 Mar CY20 YoY % Dec CY20 QoQ %
Sales 1344.2 1000 34.42% 894.7 50.24%
PBT 5 77 -93.51% -78.8 106.35%
PAT 76.9 55.4 38.81% -54 242.41%

 

Consolidated Financials (In Crs)
Mar CY21 Mar CY20 YoY % Dec CY20 QoQ %
Sales 1724.5 1382 24.78% 1275.5 35.20%
PBT 7.8 62.5 -87.52% -64.2 112.15%
PAT 60 40 50.00% -53.95 211.21%


Detailed Results

    1. The current quarter was very good for the company with 25% YoY growth in consolidated revenues.
    2. Consolidated Profits were excellent with over 50% YoY growth.
    3. The company saw an EBITDA growth of 24% YoY and volume growth of 26% YoY in the quarter.
    4. Organic volume growth in India declined by 13.7% due to disruption caused by COVID-19 in the last 10 days of March. The company saw organic volume growth 14% and 42% in Jan and Feb respectively.
    5. A consolidated organic volume decline of 9.3%. Realization per case came down 2.3% due to lower sales realization in Zimbabwe in USD terms.
    6. CSD accounted for 67%, Juices 7%, and packaged water was 26% of total sales volumes.
    7. EBITDA margins improved by 11 bps YoY as savings in material costs were offset by higher fixed costs amid low sales in the last 10 days of March.
    8. Depreciation increased 36.4% YoY due to the consolidation of the South and West India sub-territories.
    9. Finance costs also rose 47.3% YoY as the acquisition of the South and West India territories was funded through debt.
    10. The company reported exceptional items of Rs 66.5 Cr which represents provision for impairment in the value of certain plant and equipment, glass bottles & plastic shells.

Investor Conference Call Highlights

  1. The management has stated that the company is focusing on preserving the interests of all stakeholders and shoring up cash flows for the disruptive times ahead.
  2. The company has built up an additional stock of inventory in March in anticipation of disruption in industrial and manufacturing activities.
  3. The management is confident of good growth post the lockdown period.
  4. The management has mentioned that the plant shutdown was only till 20th April and operations with reduced shifts have started in all manufacturing facilities for the company.
  5. The company is witnessing good demand as sales are going up for the company in April.
  6. The company has less than 10% of sales from institutional clients, all of which have gone to 0.
  7. The management has stated that margins should suffer in the coming quarter mainly due to high fixed costs and low volumes on account of the lockdown.
  8. The company had gross debt of Rs 3200 Cr on 31st March 2020 and a cash credit line of around Rs 476 Cr.
  9. The management has mentioned that the distribution network is working well outside of red zones and the company is seeing demand rising in these areas. The management has also stated that its distributors are not facing any big issues that would require monetary or financial assistance from the company.
  10. The management believes that its distributors have adequate inventory and they shouldn’t face any shortages.
  11. The management is confident of maintaining EBITDA margins by offsetting the impact of fall in savings with cost savings initiatives.
  12. The management states that a lot of the sales of packaged water is from institutional clients which are mostly used in gatherings. This is expected to stay down in the coming quarter and thus affect product mix accordingly.
  13. Rural markets are comparatively open as compared to urban markets. Thus volumes from rural areas are marginally higher than urban areas. In normal times, rural sales are 30% of total sales. Semi-urban areas account for another 30% while urban areas account for 40%.
  14. The EBITDA per case should go up as discounting has gone down due to the supply crunch.
  15. The company has not lost any distributors to poaching from competitors.
  16. The company does not carry an inventory of more than 30 days and thus there shouldn’t be any problems with overstocking or understocking at current inventory levels.
  17. The management does not feel that the company’s products should face any demand slowdown due to economic damage to the country. This is because its products are in the small ticket discretionary item which is low on the list of things to cut down in economic slowdowns.
  18. The management believes that post lockdown, the company shouldn’t face any challenge in logistics, and volumes should return as normalcy returns to different territories.
  19. In FY20, 30-40% of total consumption was from on the go sales.
  20. The company sold 114 million cases in the quarter out of which 94 million was sold domestically while the rest was international.
  21. The management has mentioned that around 60% of employee costs are for permanent employees and the rest is for temporary and contractual workers.

Analyst’s View

Varun Beverages have been one of the biggest bottlers in India and has been quite proactive in international expansion for some time now. The company has seen good growth in the quarter with good organic volumes growth in Jan and Feb. The lockdown has hit the company’s sales hard but demand seems to have stayed resilient as sales volumes have been rising since the opening of sales since 20th April. The company has indeed been hit hard with low sales volumes for more than a month into its peak season. But the rising sales patterns are expected to continue as more and more areas come out of lockdown. It remains to be seen whether there is a further economic disruption in the future from COVID-19 which may have severe second-order effects on the company’s performance. Nonetheless, given the resilient sales network, the rising demand for the company’s products, and the arrival of the peak season for the beverages industry, Varun Beverages is a good consumption stock to watch out for at present.  However, as it is a capital intensive business, the current pandemic can put a strain on the Balance Sheet which is already laden with debt. The valuation at current levels does not give any margin of safety at the moment.


 

 

 

 

Q2 2020 Updates

Financial Results & Highlights

Standalone Financials (In Crs)
Q2FY20 Q2FY19 YoY % Q1FY20 QoQ % 9 Months (Sep ’19) 9 Months (Sep ’18) YoY%
Sales 1350.24 837.05 61.31% 2468.5 -45.30% 4818.95 3499 37.72%
PBT 98.76 82.83 19.23% 537.3 -81.62% 713.1 531.88 34.07%
PAT 65.23 63.6 2.56% 382.1 -82.93% 502.8 386.18 30.20%

 

Consolidated Financials (In Crs)
Q2FY20 Q2FY19 YoY % Q1FY20 QoQ % 9 Months (Sep ’19) 9 Months (Sep ’18) YoY%
Sales 1778.66 1205.04 47.60% 1205.04 47.60% 6015.46 4433.07 35.70%
PBT 115.62 65.35 76.92% 582.3 -80.14% 760.43 520.39 46.13%
PAT 81.12 44.15 83.74% 404.99 -79.97% 526.15 370.68 41.94%

 

Detailed Results

    1. The current quarter was very good for the company with 48% YoY growth in consolidated revenues.
    2. Consolidated Profits were excellent with 84% YoY growth.
    3. The company saw an EBITDA growth of 54% YoY and volume growth of 60.4% YoY in Q2.
    4. Organic volume growth in India was at 17.5% due to the consolidation of South and West India Sub territories.
    5. International territories saw organic volume growth of 27% with Morocco, Zimbabwe, Nepal and Sri Lanka growing more than 10% each.
    6. CSD accounted for 69%, Juices 6%, and packaged water was 25% of total sales volumes.
    7. Gross margins improved 223 bps in Q1 due to lower PET prices in India, lower sugar prices in Zimbabwe in USD terms and change in product mix.
    8. Depreciation increased 27.5% YoY due to capitalization of Pathankot plant and consolidation of the South and West India sub-territories.
    9. Finance costs also rose 83.9% YoY as the acquisition of the South and West India territories was funded through debt.
    10. The entire proceeds of the QIP amounting to Rs 900 Cr were utilized for repayment of debts during Q3 2019.
    11. The company launched three variants of ambient temperature value-added dairy beverages under the Cream Bell brand – Belgian Chocolate, Cold Coffee and Mango shake at a price of Rs. 30 for 200ml PET bottle with a long shelf life of 180 days.
    12. The company acquired 20% shareholding in Lunarmech Technologies Pvt Ltd for Rs 15 Cr which brings the effective shareholding of VBL in Lunarmech Technologies to 55%.

Investor Conference Call Highlights

  1. The company saw total volume growth of 60.4% driven by healthy offtake in the domestic market and increasing growth in international markets.
  2. The company acquired 2 new facilities in the quarter, one in Dharwad in Karnataka for Rs 74.7 Cr and the other in Tirunelveli in Tamil Nadu for Rs 20 Cr.
  3. CRISIL has upgraded the company’s long term debt to AA from AA-.
  4. The management believes that rural expansion for the company and its products has been instrumental in maintaining their volume growth despite industry slowdown.
  5. The growth rate in CSD is faster than the growth rate in water in India.
  6. The management states that the growth in margins was mainly due to the improved product mix and the rise of water in the overall product mix.
  7. The company has improved its GTM strategy and has made a good level of new hires in the new territories to capitalize on its expansion and drive growth.
  8. The management has maintained that the Capex plans in the future would be smaller than in the past and only expansions to existing facilities would be taking place.
  9. The management maintains that their PET is completely recyclable and they are also submitting a model to the govt detailing how they will be collecting and recycling all the PET that the company has produced and thus the company’s products should not be adversely affected by the proposed plastic ban that is going around the country.
  10. The annualized volumes for Pepsi should be around 135 million cases in FY19 and the company accounted for 60% of it.
  11. The company is evaluating the impact of the reduced tax rate and they will take any actions after December due to the calendar year-end in that month for the company.
  12. The company has not made any new additions to the provision for Zimbabwe and any changes to it have been due to mark to market. This provision is to mitigate and hedge foreign currency risk in the country. If the foreign currency remains stable until the maturity of the contract (2.5 years) then the entire contents of the provision (Rs 137 Cr) will be added back to the P/L.
  13. The average realization should go up as Tropicana and the ambient milk beverages share in the product mix goes up since these are high realization products.

Analyst’s View

Varun Beverages have been one of the biggest bottlers in India and has been quite proactive in international expansion for some time now. They have successfully acquired exclusive rights for Pepsi bottling and distribution in West and South India which has helped them achieve phenomenal volume growth. The company has also seen very good organic growth across all of their territories and have maintained that it will continue its growth pace on the back on increased rural penetration and greater consolidation in new territories. The company has raised equity which it has used to pay off some of its existing debt and has also issued interim dividends. The company’s foray into ambient milk beverages is encouraging but it remains to be seen how it will capture market share in an already crowded market. Nonetheless, given the rapid rate at which the company has grown in the recent past and the potential for increased penetration into rural markets, Varun Beverages is a good stock to look out for, particularly given their performance so far this year.

 


 

Q1 2020 Updates

Financial Results & Highlights

Standalone Financials (In Crs)
Q1FY20 Q1FY19 YoY % Q4FY19 QoQ %
Sales 2468.5 1755.6 40.61% 1000.2 146.80%
PBT 537.3 403.9 33.03% 77 597.79%
PAT 382.1 289.1 32.17% 55.45 589.09%

 

Consolidated Financials (In Crs)
Q1FY20 Q1FY19 YoY % Q4FY19 QoQ %
Sales 2854.8 2097.5 36.10% 1382 106.57%
PBT 582.3 424 37.33% 62.5 831.68%
PAT 405 306.8 32.01% 40 912.50%

Detailed Results

    1. The current quarter was very good for the company with 36% YoY growth in consolidated revenues.
    2. Consolidated Profits were excellent with 32% YoY growth.
    3. The company saw an EBITDA growth of 37% YoY and volume growth of 43.3% YoY.
    4. Organic volume growth in India was at 18.5% due to increased penetration and extended summer.
    5. Capacity utilization during peak month has come down to 60% post consolidation of South and West India sub-territories.
    6. The board of directors has recommended a bonus share issue of 1:2 and an interim dividend of Rs 2.5.
    7. The company now accounts for more than 80% of PepsiCo India beverage volumes.
    8. International territories saw organic volume growth of 34.2% with Morocco and Zimbabwe acting as growth drivers overseas.
    9. CSD accounted for 74%, Juices 8%, and packaged water was 18% of total sales volumes.
    10. Gross margins declined 74 bps in Q1 mainly due to a rise in sugar prices and preforms.
    11. Depreciation increased due to capitalization of Pathankot plant and consolidation of the South and West India sub-territories.
    12. Finance costs also rose 63.9% YoY as the acquisition of the South and West India territories was funded through debt. Net debt to equity ratio stand at 1.49 times on 30th June ’19.
    13. Net Capex of Rs 2350 Cr to be incurred in H1FY20.
    14. Working capital days remained stable at 14 days.

Investor Conference Call Highlights

  1. The company has made a provision of Rs 65 Cr in Q1 for currency-related issues in Zimbabwe.
  2. The company has crossed 12% in market share in Morocco and has 80% growth in volumes in the last 6 months.
  3. The management does not see the FMCG slowdown affecting sales volumes of their products.
  4. The CAPEX for the quarter has gone up to Rs 2132 Cr while operating cash flows before interest was at Rs 1214 Cr.
  5. The organic growth rate for juices was 24.6% while the same for water came in at 17.2%.
  6. The company is expecting margin improvement on account of the commencement of in house juice production in the Pathankot plant from July onwards.
  7. The company will not be looking for any new expansion for the next few years except for maybe Tropicana.
  8. The management does not expect large margin enhancement and is satisfied with current margin levels.
  9. The company is holding on to its plan for QIP equity issuance later in the financial year.
  10. The company will not undergo any CAPEX in the South and West territories as they have enough excess capacity in these regions for a few years.
  11. The company sold 172 million in domestic volumes and 24 million in international volumes.
  12. Out of the domestic 172 million, around 30-33 million were in the South and West territories.
  13. The management had expected the consolidation of new territories to take at least 6 months to 1 year and margins to stay subdues in this period but the consolidation went smoothly without any detriment to margins.
  14. The main reason for consolidated margins to inch back to 5% is said to be Morocco performance. Morocco used to be a loss-making unit for the company which turned profitable on the introduction of water into the market and brought up margins and EBITDA on a consolidated basis.
  15. The management has stated that if in case they face any water shortages in their plants, they will get it transported. The company has so far not faced any problems due to this issue and they maintain that they are a water surplus company, i.e., they put more water into the ground than they take out.
  16. The management expects to keep margins at current levels of 21-22%.
  17. Q3 can be expected to be better than last year’s Q3 mainly because of the return to profitability of Morocco operations and the fact that internationally Q3 is the best quarter for the company seasonally.
  18. The company won’t be undertaking any price hikes as preform prices have normalized and sugar prices are lower in South & West thus easing raw material price pressures.
  19. The company will start making its own dairy products from next month onwards in the Tropicana plant.
  20. The capex guidance for FY20 is that it won’t exceed the depreciation for the company.
  21. The company expects to be growing at a pace of 17-18% in water as they have for the past 2 years.
  22. In percentage terms, the margins in CSD are similar to water.

Analyst’s View

Varun Beverages have been one of the biggest bottlers in India and have been quite proactive in international expansion for some time now. They have successfully acquired exclusive rights for Pepsi bottling and distribution in West and South India which should add to their already large volumes. The company has provided phenomenal operating results in the last quarter mainly due to the start of profitability and huge growth in Morocco operations and the extended summer which has enabled the company to boost sales volumes a lot. The integration of the newly acquired territories has gone better than expected and this is expected to bring higher sales in the near future. It remains to be seen how long the company will be immune to the demand slowdown in the FMCG industry. Nonetheless, based on their strong performance in the last 6 months and their international growth potential, VBL seems like a prime investment to investors of all types.  Valuation, though, is a little stretched at current levels.

 


Q4 2019 Updates

Financial Results & Highlights

Standalone Financials (In Cr)
Q4FY19 Q4FY18 YoY % Q3FY19 QoQ %
Sales 1000 906.3 10.34% 459.5 117.63%
PBT 77 45 71.11% -68.9 -211.8%
PAT 55.45 33.5 65.52% -53.8 -203.1%

 

                                                                Consolidated Financials (In Cr)
Q4FY19 Q4FY18 YoY % Q3FY19 QoQ % FY19 FY18 %  Change
Sales 1382 1130.5 22.25% 816.9 69.18% 5105.26 4003.4 27.52%
PBT 61.7 29.9 106.35% -87.25 -170.72% 433.8 290.9 49.12%
PAT 40 19.7 103.05% -70.8 -156.50% 299.8 214 40.09%

 

Detailed Results

    1. The company witnessed strong growth in the last quarter with consolidated revenues rising 22% YoY and profits rising more than 100% YoY.
    2. The FY19 performance has also been good with 28% YoY rise in revenues and 40% YoY rise in profits.
    3. The company also recorded a robust volume growth of 12.3% in the last quarter driven mainly by expansion into Morocco and Zimbabwe.
    4. VBL extended its agreement with PepsiCo which was set to expire in 2022 to 2039.
    5. They also acquired franchise rights for bottling, sales and distribution in 7 States and 5 Union Territories covering South and West regions of the country.
    6. Total Sales volumes breakup is as follows:
      • CSD: 71%
      • Juices: 6%
      • Packaged Drinking Water: 23%
    7. Sales volumes for India grew only 4.6% in the last quarter due to extended winter. Volume growth in international territories has been more than 58%.
    8. Gross margins of 55.9% in the last financial year while EBITDA margin came at 16.1%.
    9. Net debt to equity ratio stayed stable at 1.3 times in the last financial year.

Investor Conference Call Highlights

  1. VBL accounts for more than 80% of PepsiCo’s India sales volumes.
  2. The company has added a new installed facility in Pathankot this year and acquired 9 new manufacturing facilities in West and South India.
  3. The company’s current distribution network consists of 90+ depots, 2500+ owned vehicles, 1400+ primary distributors and have installed 750,000 visi-coolers.
  4. The company introduced Aquafina water in Morocco which has been vital to pushing volumes in the country and overall sales volumes in general.
  5. The company’s market share in Zimbabwe stands at 50%+ currently.
  6. The company is also exporting some volumes soon from their Zimbabwe facility to Botswana and Malawi.
  7. The company is currently not planning any major capex this year.
  8. The company has guided that they will focus on keeping overall capex below 40% of their depreciation.
  9. Around 80% of sales volumes is domestic while the rest is in international territories.
  10. The company has improved its supply chain by eliminating extra warehouses and delivering directly from plant to big distributors and hubs.
  11. The production in the new Pathankot facility is expected to start from next month onwards.
  12. The new production should help margins since it will be producing Tropicana products which yield higher margin and would eliminate extra expenses in freight that the company incurs for current Tropicana product sales.
  13. The company does not see any requirement of conducting capex to upgrade the newly acquired plants in South and West India.
  14. The current debt at consolidated basis should roughly come to Rs 4000 Cr.
  15. The Morocco business was loss making till last quarter because there was a non-compete agreement in place which expired in the last quarter. Due to the introduction of packaged drinking water, sales volumes rose more than 70% QoQ and is expected to stay high going forward given the high demand for packaged water in the arid country of Morocco.
  16. VBL estimates that they will reach peak capacity utilization of 70% in their peak month of the year.
  17. The annual revenues from Tropicana business is around Rs 300 Cr.
  18. The company estimates that it will take them around a year to fully utilise and ramp up their new territory acquisitions.

Analyst’s View

Varun Beverages has been one of the biggest bottlers in India and has been proactive in international expansion for some time now. They have successfully acquired exclusive rights for Pepsi bottling and distribution in West and South India which should add to their already large volumes. The company has also proved themselves by maintaining good margins for a bottler and have capitalized well on their inorganic acquisitions and expansions. The critical factor to evaluate is how VBL meets its capex and working capital requirement. It is a highly capital intensive business. While it generates a decent cash from operations, all of that is utilized for meeting their capex requirements. They have sizeable debt on the books. Debt equity ratio is 1.6 and interest coverage ratio of just a shade under 3 warrant a close monitoring on the cash generation ability of the company. Moreover, while they are selling brands of Pepsi, they do not possess any pricing power.  Nonetheless, VBL is a stock to watch out for anyone believing in the general consumption of beverages which includes CSDs, NCBs fruit juices and packaged drinking water segments on sheer growth in volumes and increasing scale of their operation.

Disclaimer

This is not an investment advice. Please read our terms and conditions.