Varun Beverages Limited’s Q2 & H1 CY2024 Analysis: Key takeaways!!

Business Outlook:
Varun Beverages (VBL) reported strong performance in Q2 CY2024, with consolidated sales volume growth of 28.1% and revenue growth of 28.3% YoY. The Indian market grew by 22.9%, while international markets remained flat. The company is optimistic about maintaining double-digit growth for the full calendar year, driven by expanding capacities, an enhanced distribution network, and a strong summer season.

Strategic Initiatives:

1. Expansion into snack foods: VBL has entered exclusive franchising agreements with PepsiCo to manufacture, distribute, and sell “Simba Munchiez” in Zimbabwe and Zambia, and Cheetos in Morocco.
2. African expansion: The company has commenced commercial production of carbonated soft drinks and packaged drinking water at its greenfield facility in the Democratic Republic of Congo (DRC).
3. Capacity expansion: VBL has added 9 new plants in H1 2024, including 5 in South Africa, 3 in India, and 1 in DRC.
4. Portfolio diversification: The company is focusing on low sugar and no sugar products, which now constitute about 46% of consolidated sales volume.

Trends and Themes:

1. Shift towards healthier beverages: Increasing focus on low sugar and no sugar products.
2. Expansion in African markets: VBL is capitalizing on the underpenetrated African markets, especially in countries like DRC and South Africa.
3. Diversification into snack foods: Complementing existing beverage distribution with snack food manufacturing and distribution.

Industry Tailwinds:

1. Growing consuming class and young population in India.
2. High per capita consumption of soft drinks in African markets.
3. Increasing demand for healthier beverage options.

Industry Headwinds:

1. Currency fluctuations in some African markets, particularly Zimbabwe.
2. Seasonal variations affecting demand, especially in African markets.
3. Regulatory challenges, such as sugar taxes in some countries.

Analyst Concerns and Management Response:

1. Concern: Impact of less out-of-home travel on water business.
   Response: Management acknowledged some impact but emphasized that they are not aggressively pushing water sales.

2. Concern: Sustainability of double-digit growth in India given high base and seasonality.
   Response: Management expressed confidence in maintaining double-digit growth, citing stability in South India and potential growth from new territories.

3. Concern: Working capital days increase.
   Response: Management explained this was due to strategic purchasing of PET chips and expects normalization in the coming months.

Competitive Landscape:

VBL maintains a strong partnership with PepsiCo and is gaining market share in various territories. In Zimbabwe, the company reported a 71% market share, 35% in Zambia, and about 30% in Morocco (including water). In South Africa, the market share is currently low but growing.

Guidance and Outlook:

The management consistently expressed confidence in achieving double-digit growth for the full calendar year 2024, both in India and on a consolidated basis.

Capital Allocation Strategy:

VBL is investing heavily in capacity expansion, with a planned capex of Rs. 3,600 crore for CY2024 and about Rs. 2,600 crore for CY2025. The company is also focusing on strategic acquisitions, such as BevCo in South Africa, to expand its market presence.

Opportunities & Risks:

Opportunities:

1. Expansion in underpenetrated African markets.
2. Diversification into snack foods.
3. Growing demand for healthier beverage options.

Risks:

1. Currency fluctuations in international markets.
2. Regulatory challenges, such as sugar taxes.
3. Seasonal variations affecting demand.

Regulatory Environment:

The company is adapting to regulatory changes, such as the requirement to use 30% recycled PET content from April 2025. VBL is preparing for this through a joint venture plant and has already started trials with recycled PET.

Customer Sentiment:

Customer sentiment appears positive, with strong volume growth in India and stable performance in international markets. The shift towards healthier options indicates changing consumer preferences, which VBL is addressing through its product portfolio.

Top 3 Takeaways:

1. Strong Q2 performance with 28.1% volume growth and 28.3% revenue growth, driven by robust Indian market performance.
2. Strategic expansion into African markets and diversification into snack foods through PepsiCo franchising agreements.
3. Continued focus on healthier beverage options, with low sugar and no sugar products now constituting 46% of consolidated sales volume.

Is SSSG up due to the BK Cafe’s being added to existing stores?

SBFC Finance Q1 FY25 Analysis: Key takeaways!!

Business Outlook:
SBFC Finance maintains a positive business outlook despite facing some headwinds in Q1 FY25. The company reported 35% year-on-year AUM growth to INR 7,167 crores, though quarterly growth was at the lower end of guidance at 5%. Management remains confident in their ability to deliver 5-7% quarter-on-quarter AUM growth going forward. The company is focused on steady, sustainable growth in secured lending to MSMEs and gold loans.

Strategic Initiatives:

• Diversifying funding sources away from banks to reduce dependency
• Expanding distribution deeper into Tier 3 towns
• Investing in technology upgrades including new LOS, LMS, data warehouse, and disaster recovery systems
• Maintaining a balanced approach to growth, profitability, and risk management
• Exploring potential expansion into housing finance pending regulatory approval

Trends and Themes:

• Shift towards lower ticket size loans as distribution expands to smaller towns
• Increasing focus on secured lending to MSMEs and gold loans
• Rising interest rates putting pressure on spreads industry-wide
• Regulatory push for more affordable lending rates

Industry Tailwinds:

• Growing credit demand from MSMEs
• Government focus on financial inclusion and MSME growth
• Rising gold prices benefiting gold loan business

Industry Headwinds:

• Rising interest rate environment
• Regulatory pressure on lending rates
• Increased competition for prime customers leading to potential over-leveraging
• General economic slowdown impacting credit quality

Analyst Concerns and Management Response:

1. Asset quality deterioration
   Management: Q1 saw muted collections due to temporary factors. Expects stabilization going forward. Maintains credit cost guidance of 80-100 bps.

2. Declining ticket sizes
   Management: Intentional strategy as distribution expands to smaller towns. Helps maintain yields and spreads.

3. High employee attrition
   Management: Attrition high industry-wide. Taking steps to reduce through training and retention efforts.

Competitive Landscape:
SBFC operates in a highly competitive space with multiple banks and NBFCs targeting MSMEs. The company aims to differentiate through its secured lending focus, technology investments, and expanding distribution network.

Guidance and Outlook:

• Maintains 5-7% quarter-on-quarter AUM growth guidance
• Expects to achieve 15% ROE by Q4 FY26
• Credit costs expected to remain in 80-100 bps range
• Targeting opex reduction of 50 bps annually

Capital Allocation Strategy:
Currently focused on reinvesting profits to fund growth rather than paying dividends. Aims to delay next capital raise by leveraging internal accruals.

Opportunities & Risks:

Opportunities:

• Expansion into underserved Tier 3 markets
• Potential entry into housing finance
• Growing MSME credit demand

Risks:

• Asset quality deterioration in economic downturn
• Regulatory changes impacting business model
• Rising competition squeezing margins

Regulatory Environment:

• Increasing scrutiny on lending rates and practices
• Push for more affordable credit to MSMEs
• Restrictions on cash disbursements benefiting digital lenders

Customer Sentiment:
Management notes continued strong demand from MSME customers. Gold loan demand also remains robust.

Top 3 Takeaways:

1. Company maintains growth guidance despite Q1 headwinds, indicating confidence in business model
2. Focus on secured lending and technology investments to drive sustainable growth
3. Asset quality and employee attrition key areas to monitor going forward