by Suhani Adilabadkar
The bottler for PepsiCo, Varun Beverages, is among the best proxy plays on the Indian soft drink industry and continued with its CY18 growth momentum with robust June quarter results. Strong organic growth both domestically and internationalally, faster consolidation of acquired south and west sub-territories and extended summers all led to double-digit growth across major financial parameters. Varun Beverages' share price has been on the upswing, and it managed to double investor wealth over the past three years as the company has been aggressively expanding its reach across India, acquiring Pepsi’s sub territories since 2015.
Quick Takes:
- VBL, is the largest bottler for PepsiCo in South Asia and the second largest globally behind Tingyi Holdings Corp of China.
- CSDs (Carbonated Soft Drinks) constitute 75% of revenue mix followed by packaged drinking water at 18% and juice-based drink forming 6%.
- The company has acquired Pepsi franchise rights of south and western regions in seven states and five union territories in February 2019.
- PepsiCo has renewed its license with VBL till 2039.
VBL Story
Varun Beverages, as a major PepsiCo franchisee possesses rights to manufacture, distribute and sell CSDs (carbonated soft drinks), fruit juice-based drinks, packaged drinking water, sports drinks and energy drinks. In other words, VBL has manufacturing, selling and distribution rights to PepsiCo’s several popular brands, Pepsi, Mountain Dew, Mirinda, 7UP, Tropicana, Aquafina(packaged drinking water), Slice, Evervess, and Gatorade. The company has presence across 6 countries, 3 in the Indian Subcontinent, India, Sri Lanka, Nepal contributing approx. 80% revenues followed by African countries, Morocco, Zambia and Zimbabwe constituting the remaining 20%.
As on December 31, 2018, VBL has a total of 26 plants with CSDs constituting 75% of revenue mix followed by packaged drinking water at 18% and juice-based drink forming 6%.
Robust June quarter Performance
The June quarter is the strongest performing period or the peak season for the soft drink industry, and VBL reported robust financial performance on the back of strong volume growth of 43%, sturdy international operations, and consolidation of its recently acquired south and west territories. Climate change resulted in extremely hot summers across the Indian sub-continent, and thirstier people meant sales strength for the bottler. Consequently, all is well into double digits, Revenue grew 36.5% YoY at Rs. 2810 cr against Rs. 2059 cr same period previous year. Operating profit also moved on a similar plane and jumped 37% YoY from Rs. 575 cr to Rs. 788 cr in Q2 CY19 with margin expansion of just 11 bps as higher expenditure cost, 36% rise YoY curtailed operating margins to 28.03% against 27.92% in Q2 CY18. Net Profit grew 32% YoY on the back of robust volume growth from Rs. 306 cr in Q2 CY18 to Rs. 404 cr in June quarter ended CY19.
Total sales volumes for the quarter was up 43% YoY at 195.5 mn cases compared to 136 mn cases in Q2 CY18. Robust volume growth was supported by strong seasonal domestic organic growth of 18.5% along with international organic growth of 34%. Morocco and Zimbabwe were the major growth drivers for international business along with Sri Lanka which came back to growth plane after sugar tax abolition by the end of last year. South and West India sub-territories have been consolidated from 1st May 2019, adding strong volume growth and balancing the seasonality factor in the overall VBL’s revenue equation.
Future Growth Fizz
In layman terms, VBL is the contract manufacturer and the largest bottler for PepsiCo. in South Asia and the second largest globally behind Tingyi Holdings Corp of China. The company procures raw material (concentrate), undertakes manufacturing, bottling and packaging at its production facilities and through its extensive distribution network transports finished goods to retail outlets whereas brand development and consumer marketing is undertaken by PepsiCo. This being its basic fundamental operational premise, VBL has strengthened its symbiotic relationship with Pepsi Co over the past 27 years evident from the later divesting its sub territories in favour of VBL in the past few years. Starting with acquisition of Delhi sub-territory in 2013 followed by parts of Uttar Pradesh, Uttarakhand, Himachal Pradesh, parts of Haryana, Punjab and the union Territory of Chandigarh in 2015. Madhya Pradesh and Orissa came in 2017 and then 2018 brought in acquisition of sub-territories of Jharkhand, Chhattisgarh and Bihar. This being mainly North and Eastern goblets, coming to about 51% of total Pepsi volumes.
Though the stock has moved in conjunction with VBL’s aggressive expansion exercise over the past three years, there has been 20% upswing since February 2019. The reason being acquisition of franchise rights in underpenetrated south and western regions in seven states – Gujarat, Maharashtra, Karnataka, Telangana, Andhra Pradesh, Kerala and Tamil Nadu and five union territories. With this, VBL now accounts roughly 83% of PepsiCo India’s beverage sale volume from 51% earlier and expanding its footprint across 27 states and 7 union territories.
Clarifying with respect to VBL’s latest acquisition, Mr. Ravi Jaipuria, Chairman, Varun Beverages said, “Seasonality in the North and East is 17 – 18%, whereas in South and West it would be 12 - 12.5%. So, seasonality wise, new regions are much better and the utilization of manufacturing plants would be much better in the South and West”. The company has spent Rs. 1850 cr for south and west rights to ease out this seasonal impact from its business model as sales drop significantly after June in north and eastern markets, thus ingraining relatively stable south and west regions in its revenue mix.
In addition to this outlined trajectory, there are other ingredients adding to its long term growth fizz. International operations namely Morocco got profitable within 10 months of commencement and has grown during the quarter with the commissioning of second line of water unit, Zimbabwe is growing in double digits and Srilanka moving back to growth plane after the abolition of sugar tax. International operations also provide seasonal respite as unlike India, third quarter is peak season for Morocco and overall second half of the year is volume heavy for Africa whereas Srilanka and Nepal follow Indian seasonal patterns.
Apart from accretive acquisitions and strengthening international operations, VBL initiated product portfolio enhancement by launching Fizzy drink in seven flavors, and expanding flavors in Gatorade, Quaker Value-Added Dairy, Slice and undertook green field expansion at Pathankot for manufacturing Tropicana, (which was earlier a supply and distribution arrangement), commencing operations from June and would be adding to the revenue stream from next quarter. On the juice front, VBL management indicated that Juice as a category has been growing at a rapid pace with the company accounting for about 100% of Tropicana volumes from April 2019. Thus, higher proportion of Juice and NCD segment will boost long term profitability by reducing seasonality and improving realizations. Last but not the least VBL is looking to manufacture value added dairy products under its brand which would be reflected in revenues by Q3CY19.
Moving on to future capex plan for VBL, Mr Jaipuria said, “For the next two years, we are not looking at any greenfield expansion”. After attaining 83% of Pepsi’s India volumes and renewing its license with the global giant for 20 years, till 2039, the longest pact with any company.