Varun Beverages Ltd – 25 Years of adding taste to thirst – Pervade Investing

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About the company :

VBL is a Part of RJ corp. Group. Promoter and chairman of the group is Ravi Kant Jaipuria.

VBL has been associated with PepsiCo since the 1990s and have over two and half decades consolidated our business association with PepsiCo, increasing the number of PepsiCo licensed territories and sub-territories covered by VBL, producing and distributing a wider range of PepsiCo beverages, introducing various SKUs in their portfolio, and expanding distribution network. VBL have been granted franchisees for various PepsiCo products spread across 27 States and 7 Union Territories (except Jammu & Kashmir and Andhra Pradesh) in India

VBL is the second largest franchise in the world outside the USA in the Carbonated soft beverages(CSBs) and Non Carbonated beverages(NCSBs). VBL has increased its share from 26% in 2011 to 80% now in India.

Below image shows how VBL works with PepsiCo.

Presence of VBL:

VBL has been granted franchisees for various PepsiCo products spread across 27 States and 7 Union Territories (except Jammu & Kashmir and Andhra Pradesh) in India.Although, India is our largest market, we have also been granted the franchise for various PepsiCo products for the territories of Nepal, Sri Lanka, Morocco, Zambia and Zimbabwe.

VBL has 30 manufacturing plants in India (Gr. Noida 1, Gr. Noida 2, Kosi, Sathariya 1, Sathariya 2, Bazpur, Jainpur & Hardoi in Uttar Pradesh, Bhiwadi & Jodhpur in Rajasthan, Nuh & Panipat in Haryana, Phillaur and Pathankot in Punjab, Kolkata in West Bengal, Guwahati Unit 1 & 2 in Assam, Goa, Mandideep in Madhya Pradesh, Bargarh & Cuttack in Odisha, Jamshedpur in Jharkhand, Bharuch in Gujarat, Mahul, Roha and Paithan in Maharashtra, Nelamangala in Karnataka, Palakkad in Kerala, Sri City in Andhra Pradesh, Sangareddy in Telangana and Mamandur in Tamil Nadu) and 6 manufacturing plants in international geographies (two in Nepal and one each in Sri Lanka, Morocco, Zambia and Zimbabwe). In addition, VBL has set up backward integration facilities for production of preforms, crowns, corrugated boxes, plastic crates and shrink-wrap films in certain of our production facilities to ensure operational efficiencies and quality standards.

Pepsi Co has launched a diet cola which seems interesting to me as India is getting more health conscious day by day. 

As we can see that VBL is constantly increasing sales volume which is a good indicator.

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Products Break-up :

PepsiCo CSD brands sold by us include Pepsi, Diet Pepsi, Seven-Up, Mirinda Orange, Mirinda Lemon, Mountain Dew, Seven-Up Nimbooz Masala Soda, Evervess Soda, Duke’s Soda and Sting. PepsiCo NCB brands sold by us include Tropicana (100%, Essentials & Delight), Tropicana Slice, Tropicana Frutz, Seven-Up Nimbooz, Gatorade and Quaker Oat Milk as well as packaged drinking water under the brand Aquafina. In addition, VBL have also been granted the franchise for the Ole brand of PepsiCo products in Sri Lanka.

Carbonated soft drink contains : Pepsi,Mirinda,Mountain dew,7up,Pepsi black,Pepsi diet,Evervess.

Packaged drinking water contains : Aquafina and Aquavess

Fruit Pulp and Juice contains : Tropicana and 7 up Nimbuzz

Market share :

As per recent data, PepsiCo India’s market share stood at around 20%. In India as India is a significant market for the Carbonated soft beverages and Non carbonated soft beverages and still under penetrated.

Brand wise market share :

Pepsi : As per data Pepsi has a market share of 13% as of 2016.

Aquafina : Aquafina is bottled drinking water brand having a market share of 10%

Slice : It’s under tropicana brand and having a market share of 19% in the Juice market.

They also have dairy products like Mango shake,Cold coffee and belgian choco shake. 

They also have some sports drinks and energy drinks Products.

In India Sting energy drink has a volume share of 21.2% and Value share of 8.4%

Sting Energy drink has the 2nd highest Volume and Value share in energy drink after Red bull(73.8%,89.3%) respectively according to FORBES INDIA.

Gatorade Sports drink enjoys leadership in the sports drink category with a market share of 82.9% in the Indian Sports market. 

Another top product of Pepsico India is Lipton ICE Tea. (Major competitor is Tata consumer brand Tetley)

Lipton Brand is JV by Hindustan Unilever and Pepsico Together.

This pie chart shows other competitors of Pepsico in India

Financial Performance :

  • During the last 5 years, companies’ financial health increased with good profit growth with lower D/E ratio.
  • Company constantly increased their EBITDA margin and PAT margin which is again a good sign.
  • VBL has a robust supply chain facility with 90 depots,2500 owned vehicles and 1500+ Primary distributors.
  • Inventory turnover days are 39, which is also a good sign.
  • ROE and ROCE both are around 18% which is positive.
  • Debt of the company stands at 3400 crore which causes worry but they have a cash reserve of 3000 crore and maintain the d/e ratio = 1
  • VBL pany mentioned that Morocco,Sri Lanka and Zimbabwe have all grown in double digits which is positive.
  • Gross margins declined by 120 bps during 2019 due to change in product mix, higher PET prices and higher sales realization in USD terms in Zimbabwe in previous year
  • Net cash flow from operations increased from 99 crore to 130 crore YoY.
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From Above data, the only concern is debt. 

VBL clarified that the reason behind the spike in debt is acquisition of franchise rights for new regions as they raised fresh debt for that.

New Capacity expansion :

  • During 2019, net capex of ~Rs. 25,800 million included setting-up of a new plant primarily forTropicana products at Pathankot (~ Rs. 5,500 million), acquisition of certain parts of Maharashtra, Karnataka and Madhya Pradesh along with plant at Dharwad (~ Rs. 1,250 million), acquisition of South and West India sub-territories (~ Rs. 16,150 million net of investment fund), acquisition of co-packers at Tirunelveli and Sricity (~Rs. 300 million) and organic capex of (~ Rs. 2,600 million).
  • Capacity utilization in India during the peak month has come down to ~ 60% post consolidation of South and West India sub-territories, providing significant scope for growth on existing investments
  • Working capital days have remained stable at ~ 26 days as on Dec 31, 2019 on account of efficient working capital management even after consolidation of new sub-territories in India during the period 
  • Inventory, creditor and debtor days have remained stable even with increase in net revenues and number of production facilities.

Major Advantages:

  • RJ Corp has another firm name devyani international, which is in the same business of distribution. Devyani International Limited is the largest franchisee for Pizza Hut, KFC AND Costa Coffee in India. With this distinguished track record and expertise in the QSR segment, Devyani International Limited has launched its own brand Vaango – a world class south Indian QSR chain and plans to take it across India. 
  • As we see Pizza Hut is the world’s largest casual dining restaurant chain with over 13,000 restaurants across 97 countries and 143 stores across 34 cities in India.
  • DIL is the largest franchisee for Pizza Hut & KFC. It owns & operates more than 100 outlets of Pizza Hut & KFC in India, Nepal & Nigeria and is continuously geared to provide diners with the ideal place to build memories and relationships over delicious food.
  • Costa coffee operates 90 stores in India and DIL has very big plans for this company for expansion. Costa coffee store located in the premium area of India.
  • Vaango is another DIL’s own chain which serves south indian food. They also have good expansion plans for this chain.
  • VBL can push its products  more through this chain of DILs which is another firm of its parent company.
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Impact of CoronaVirus:

As the whole world is suffering from a coronavirus outbreak, companies will struggle in the short term.

VBL Products has an expiry of 6 to 10 months ranging from product to product would see less impact than other consumer businesses.

Essential items have been sold during lockdown, hence these products are also sold. However we have to see the impact on Receivable days due to lockdown.

To handle a debt during the crisis will remain key challenge for VBL.

Conclusion :

  • From above points company’s future growth looks good as they have good products and some of are highest market share in India.
  • Debt spiked because of acquisition of sub-territories and territories across india.
  • VBL has a competitive advantage due to Devyani international Ltd, which can play a major role for VBLs products push.
  • We are positive on stock because company’s business future looks bright.
  • VBLtargeting the middle class and India has the highest middle class population growth. Their product pricing is very much suitable for the Middle class public.

Disclaimer: These are my personal views. I am Not a SEBI registered Advisor hence please consult your advisor before taking any action.

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Adish Vakharia

Adish Vakharia

Adish believes in identifying future opportunities, studying well about the sectors, and developing a circle of competence.
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