Varun Beverages is the second largest PepsiCo franchisee of carbonated soft drinks (CSD) and non-carbonated beverages in the world, outside of the US. The company came out with strong results for the September 2020 quarter aided by a healthy recovery in demand as lockdowns receded. 

Varun Beverages accounts for about 80% of PepsiCo’s beverage sales volumes in India and is spread across 27 states and 7 union territories. As a whole, India, Sri Lanka and Nepal constitute 85% of the company’s revenue mix. The remaining 15% comes from Morocco, Zambia and Zimbabwe. The peak season for consumption of its products in India starts from March, right around the Holi festival, and ends with Diwali. The company’s stock rose 34% after the September quarter results were announced, buoyed by robust numbers.

Quick Takes:

• Rural demand has made up for the faltering growth in revenues from urban areas. Sales in rural areas contributed close to 40% of total volumes

• In-home consumption has been a major driving force for revenues, rising 25-30% YoY  in the quarter ended September 2020

• The company has also recently launched a consumer pack of 1.25 litres that easily fits in household refrigerators at a special price of Rs 50

• ‘On the go’ consumption has declined from 70% of sales before Covid19 hit, to below 50% in the June 2020 quarter, and to just 15% in the quarter ended September 2020.

Volumes Bounce Back

Varun Beverages witnessed a healthy recovery in demand in the second half of the calendar year (CY2020) as the country moved into the unlock phase, and international markets reported faster-than-expected recovery. The September quarter (Q3) numbers surpassed the historically strong June quarter, reporting a 90% YoY jump in net profit. Revenues rose 3.6% YoY to Rs 1,083 crore supported by a favourable mix of products (that aided a higher realization) and rationalized trade promotions. Volumes fell on a consolidated basis by 4%. India revenues fell  6.7% while international territories volumes rose 6% YoY.

Operating profit jumped 17% YoY to  Rs. 380 crore in Q3 CY2020. Margins expanded 240 bps YoY to 21.1% driven by cost efficiency measures and lower promotional spends. Aided by strong operating profit and lower finance cost (down 33% YoY), net profit (PAT) for the quarter  rose 90% YoY. Ravi Jaipuria, Chairman Varun Beverages said that reopening of theatres, restaurants, mass transportation and outdoor facilities is reviving demand on a month-to-month basis. He further added, “Our well-oiled distribution model consisting of owned-logistics supply chain and end-to-end infrastructure facilities has held us in good stead in such challenging times.”

Covid Impact

Lockdown measures in the last 10 days of March impacted organic sales volumes for the quarter ended March 2020. Sales volume fell 13.7% YoY during the March 2020 quarter in India, and 9.3% on a consolidated basis. This did not affect the quarter’s result too much as revenue and PAT came in strong and healthy, growing 23% and 35% YoY, respectively in Q1 CY2020. 

Covid impact was the severest in the June quarter, which is the quarter when sales of beverages are highest. There were  some production facilities that were closed till the third week of April 2020, which led to fall in volumes.. Organic volumes fell 50% in India and 33% in international territories in the June 2020 quarter. Consequently, revenue decline was 42% YoY and PAT dipped 65% YoY in Q2 CY2020. 

Consumption witnessed a steady uptick in July, especially from rural and semi-urban regions and positive momentum gathered pace month-on-month. After a 20% decline in volumes in July 2020, fall in volumes in August was restricted to 6-7%. Growth in volumes in September was 12% in YoY terms. Sales in international territories improved substantially and were back to 90% of pre-Covid levels from July onwards. Quarterly sales volume for Q3 CY2020 stood at 119 million unit cases. The product mix constituted CSD, juice and water at 74%, 6% and 20%, respectively. On a yearly basis, while juice (Tropicana, Slice, Nimbooz etc) proportion in revenue was constant, water (Aquafina) declined from one-third to one-fifth of the total product mix.

Water volumes have been impacted by fall in ‘on the go’ consumption from 70% pre-Covid levels to below 50% in the June quarter and to just 15% in Q3 CY20. Nevertheless, lower water composition in the product mix has improved realizations and margins. CSD has made up for the loss, as it now constitutes 74% of volumes in Q3, up 500 bps YoY. The company’s  CSD product portfolio comprises Pepsi, Pepsi Black, Mirinda, Mountain Dew and 7 up.

Rural and In-home Consumption Driving Volumes

Rural India is guzzling colas and snacking more than their urban counterparts. According to Varun Beverages’ management, the rural, semi-urban and urban split which used to be 30:30:40, has tilted towards rural being the largest contributor. Since the pandemic broke out, rural has made up for tapering urban growth and is currently contributing close to 40% of total volumes. 

In-home consumption has gone up by 25-30% YoY in the quarter ended September 2020, according to the management. The company has also recently launched a consumer pack of 1.25 litres at a special price of Rs 50 that fits into a household refrigerator. Talking about sustainability of in-home consumption beyond the September 2020 quarter, Jaipuria said, “People have started getting used to drinking beverages at home, which was much less than what it should have been. As metros, buses and railways start opening up, we expect growth across both segments to start happening instead of only in-home consumption growth”. 

More To Come

Varun Beverages has been following a two-pronged growth strategy--geographic expansion and portfolio enrichment. Product portfolio has been beefed up by adding Tropicana, sports drink Gatorade, energy drink Sting and dairy based products. On the geographic front, the most recent expansion has been through acquisition of franchisee rights of southern and western sub-territories across seven states and five union territories. With this acquisition, the company now accounts for more than 80% of PepsiCo’s beverage sales volumes in India.

In the current scenario, even with reduced volumes, margins have been well maintained by the company. Earnings before interest, depreciation and tax margins came in at 21% in the September quarter CY2020. But these levels might not be sustainable. Covid uncertainty still hangs on and major raw material, crude (at 9-month high) and sugar might play spoilsport in the near future. High sugar prices directly impact margins. Packaging materials are derivatives of crude, and their costs are influenced by movement of crude prices. In addition, urban India might witness the waning of the carbonated soft drinks fad. This has been seen in many developed countries as consumers have started avoiding high calorie sweetened carbonated drinks.

But Varun Beverages’ management feels that there is more growth in the pipeline in the post-pandemic market.