Varun Beverages stock price has more than doubled over the past one year. The stock price has gained 130% from its 52-week low of Rs 550. The second largest Pepsi franchise in the world has grown its net profit at a CAGR of 50% over the past five years. Varun Beverages (VBL) produces and distributes carbonated soft drinks (CSDs), non-carbonated beverages (NCBs) and packaged drinking water Aquafina. PepsiCo popular brands produced and sold by VBL include Pepsi, Pepsi Black, Mountain Dew, Sting, Seven-Up, Mirinda, Slice, Tropicana Juices, Seven-Up Nimbooz and Gatorade to name a few. VBL reported robust September Quarter 2023 driven by double-digit YoY growth in volumes, revenues and profit after tax (PAT). While formidable peers Reliance and Tata Consumer have entered its arena, VBL is unperturbed and is focussed on intensifying its foothold in India, expansion in Africa and aims and strengthening its position in the global beverage industry.
Double-digit volume growth, margins expand in Q3CY23
A volume driven Q3CY23 for VBL despite a washout in July due to unseasonal heavy rains in North India. With recovery in the months of August and September, the company reported 220 million case sales, a 15.4% YoY volume growth in September Quarter 2023. Thus even with realization per unit case of just 5.6%, VBL delivered double-digit revenue, PAT and operating profit in Q3CY23.
Supported by strong volume growth, revenue from operations jumped 22% YoY to Rs 3,871 crore in September Quarter 2023 compared to 3,177 crore, a year ago.
Operating margins came in at 22.8% expanding 80 basis points (bps) YoY supported by softening of polyethylene terephthalate (PET) chip prices in Q3CY23. Speaking on margins, Varun Jaipuria, Executive Vice Chairman and Wholetime Director at VBL said that higher contribution by its popular energy drink Sting also aided margin expansion in September Quarter 2023. Sting’s margins are higher than VBL’s CSD products. Net profit came in at Rs 500 crore in Q3CY23 compared to Rs 381 crore, same period previous year.
Strong rural growth, volume growth agenda for VBL
VBL is not facing any headwinds in rural India unlike its well-established peers. Formidable FMCG players like Dabur reported volume fall of 10% YoY in its beverages segment in September Quarter 2023. Speaking on VBL’s strong rural growth, Ravi Jaipuria said, “We are expanding our go-to market very aggressively, which everybody is not doing as fast as we are doing. Secondly, with the power situation improving in the country, we have been able to penetrate much deeper into rural India.” Better road connectivity, availability of electricity which helps in putting up visi-coolers in remote rural areas aided strong distribution network and robust volume growth for VBL. The company’s volumes have been on the rise since 2019 after the acquisition of franchise rights of western and southern India from Pepsi. Volumes have increased from 78 million cases in Q3CY18 to 220 million case in Q3CY23. The sobering of North India seasonality impact on volumes have led to rampant growth in all significant growth parameters. Revenue, operating profit and PAT grew at a CAGR of 22%, 24% and 47% respectively over the past three years. Thus the company is highly focussed on increasing volumes by adding new products, aggressive pricing and expanding distribution network. VBL plans to launch new products from the Pepsi international portfolio in the near future especially in the energy drink segment. Speaking on VBL’s aggressive pricing strategy, Varun Jaipuria said,” We have played price pack architecture very aggressively in the market. Consumers can consume more at a similar value or pay a slightly higher value and get more quantity. India is a very value-conscious country, if you give the right value to the consumer and the right volume, you can really get some numbers going.” VBL is also focused on increasing its reach to a higher number of FMCG outlets. There are 12 million FMCG outlets and VBL has reached only 3.5 million outlets in India. Thus, with availability of wide scope for increase in distribution, volumes will definitely multiply for Varun Beverages.
Capacity increase and greenfield projects to be commissioned in CY24
With volume acceleration as its major growth agenda, Varun Beverages plans to expand its capacity. Capacity expansion is being achieved by setting up greenfield production facilities in Bundi (Rajasthan) and Jabalpur (MP), Gorakhpur (UP), Supa (Maharashtra), Khorda (Odisha) and in Congo (Africa) in CY24. Supa facility was commissioned in January 2024. The company has also signed a Memorandum of Understanding (MOU) with Government of Jharkhand on December 18, 2023 for another manufacturing plant in Patratu, Jharkand with a total capital outlay of Rs. 450 crore.
VBL incurred capital expenditure (capex) of Rs 2,000 crore in the nine months of CY23 and pre-spent Rs 1,600 crore out of capex of Rs 2,500 crore of CY24. The combined capex of CY23 and CY24 will lead to 45% increase in capacity by the end of March 2024 vs CY22. With the commissioning of greenfield plants in CY24, the juice and value added dairy segment supply constraints will be removed, aiding volumes. The management expects the juice and value-added dairy segment to be around 7-8% of overall volumes in the near future.
The company has recently acquired 100% stake in South African company, BevCo engaged in the business of manufacturing and distribution of licensed (PepsiCo Inc.) non-alcoholic beverages in South Africa. Bevco has franchise rights from PepsiCo Inc. in South Africa, Lesotho and Eswatini and also has distribution rights for Namibia and Botswana. PepsiCo has insignificant low single digit market share in South Africa which is expected to be augmented by Varun Beverages in the near future. International volumes grew 17.5% in Q3CY23 and constituted 18% of total volumes in 9MCY2023.
While VBL moves on with rampant growth, new players have forayed in the highly competitive and price sensitive Indian beverage market. Reliance has launched Campa Cola and Tata Consumer ‘Say Never’ energy drink both at deep discounts. But with heavy investments in plants, visi-coolers and distribution networks required in the Indian beverage industry, it’s a long way to go.
