Unseasonal rains took fizz out of Varun Beverages volume growth in June Quarter 2023. The second largest franchisee of PepsiCo outside the USA reported stable Q2CY23 results. Varun Beverages Ltd (VBL) produces and distributes carbonated soft drinks (CSDs), non-carbonated beverages (NCBs) and packaged drinking water sold under trademarks owned by PepsiCo. VBL produces and sells Pepsi, Pepsi Black, Mountain Dew, energy drink Sting, Slice, Tropicana Juices, sports drink Gatorade, and packaged drinking water, Aquafina to name a few. VBL is also PepsiCo’s franchise in Nepal, Sri Lanka, Morocco, Zambia and Zimbabwe. This geographic diversification paid off in June Quarter 2023 as northern India was hammered with unseasonal rains and floods. The company reported volume growth of 4.6% YoY in Q2CY23 on a high base of Q2CY22.
VBL sold 314 million cases in Q2CY23 compared to 300 million cases corresponding quarter previous year supported by growth in international markets.
Speaking on low volume growth, Ravi Jaipuria, chairman, VBL said, “Sales volume in India got affected due to abnormally high unseasonal rains throughout the quarter and has been very small.” Reverse seasonality in African countries compared to India aided volume growth in June Quarter 2023. VBL’s volume growth was strong in international markets especially in Morocco, Zambia and Zimbabwe.
Double-digit revenue growth, margins improve
Revenue from operations rose 13.3% YoY to Rs 5,611 crore in Q2CY23 compared to Rs 4,955 crore in the same period previous year. According to Jaipuria, VBL delivered a resilient performance supported by international markets despite facing a soft demand environment in India due to abnormally high unseasonal rains throughout the quarter. Improvement in net realization per case rose 8.3% YoY to Rs 179 per case and aided double-digit revenue growth in Q2CY23. Higher proportion of smaller SKUs (250 ml) in VBL’s portfolio led to increase in realisation per case in June Quarter 2023.
Operating margins improved to 26.9% in Q2CY23 against 25.2% in the same period previous year. Margins increased 170 basis points (bps) due to softening of polyethylene terephthalate (PET) chip prices and operational efficiencies.
Profit after tax (PAT) came in at Rs 994 crore in Q2CY23 compared to Rs 787 crore in Q2CY22 driven by growth in revenue from operations and improvement in margins.
South African markets, strong growth opportunity if materialized
Unlike other fast moving consumer goods (FMCG) players, seasonality is a significant coefficient in the Indian beverage industry. Primarily a north India player, after acquisition of south and west Indian franchise territories of Pepsi in 2019, VBL’s has considerably reduced seasonality impact on its Indian sales volumes. The company is looking to insulate itself further through international geographic diversification by entering South Africa. VBL recently incorporated a subsidiary in South Africa to explore the business of manufacturing and distribution of beverages. Speaking on South African markets, Jaipuria said, “South Africa looks like another big market after India. So, we are looking at it very seriously.” Reverse seasonality as summer season starts from October to January in Africa will balance out with Indian order of seasonality. Pepsi has weak market share in South Africa and would like VBL to replicate the Indian success story in the largest African country. Acquisition of South African franchise rights would be a strong long term growth driver for VBL.
Gatorade and dairy products, VBL’s next growth drivers
Energy drink Sting has played a significant role in increasing VBL’s volume growth in India over the past three years. Sting is now 15-20% of VBL’s total volumes. The company is now looking for new growth drivers. Sports drink Gatorade with its new accessible price point of Rs 20 will see traction from next year, said Jaipuria. He further added, “This is not produced in every unit of ours. There are specific units which only produce it and our capacities and our moulds, everything must be redone.” Next in line are the dairy based value-added products under the brand name ‘CreamBell’ mostly available in north India. VBL is setting up greenfield facilities in Uttar Pradesh, Maharashtra and Odisha which will cater to CSD, juice and dairy products to the southern and western Indian region in CY24. According to the management, realisation of dairy products is 15-20% higher than CSD and shelf life of nearly six months. And there is a huge basket of Pepsi products available in international markets still to be launched in India. Pepsi Mango zero sugar, Pepsi Caffeine, Milkis, Mug to name a few. VBL has just scratched the surface. With strong production and distribution facilities, VBL is one the best performing FMCG stocks, just the weather Gods should also be happy.
