Hi Narendar, the company has a health balance sheet if you look at the Net Debt/EBITDA or interest coverage ratios. They can sustain 30%+ dividend payout without really hurting the balance sheet so by paying a dividend they send a positive signal into the market. Also, the capex need of the business has reduced relative to last few years and this a good cash conversion business. If they hoard this cash on their balance sheet the returns will get impacted so net net its a positive that they do pay dividend while keeping a relatively healthy balance sheet

Narayan Hrudayalay.pdf (155.2 KB)

Disc: Invested

Analysis of Varun Beverages Limited (VBL) – Focus on the Indian Market

Industry Overview:

The Indian non-alcoholic beverage industry is projected to experience varying growth rates across different segments in the medium term:

Carbonated Soft Drinks (CSD): Mid single-digit growth
Packaged Drinking Water: High single-digit growth
Juices: Low double-digit growth
Sports Drinks/Energy Drinks: Mid-double-digit growth

Major Players: Coca-Cola and PepsiCo dominate the market.

Growth Drivers:

1. Climate: Increased temperatures boost demand for beverages.
2. Demographics: A youthful population drives consumption.
3. Urbanization/Rising Income/Household Spending: Higher disposable incomes and increased urbanization fuel beverage consumption.
4. Rural Advancement/Rural Electrification: Improved infrastructure and access in rural areas enhance market reach.

Varun Beverages Limited (VBL) Overview:

1. Relationship with PepsiCo: VBL has a symbiotic relationship with PepsiCo, accounting for 90% of its sales volume from PepsiCo India. The bottling and trademark license agreement extends until April 30, 2039, covering manufacturing, supply chain, and end-user distribution. VBL operates across 27 states and 7 Union Territories in India.

2. Revenue Contribution: The Indian subcontinent (India, Sri Lanka, Nepal) contributes 83% to VBL’s revenue.

3. Financial Performance:
   Revenue Growth: 25% CAGR over the last 5 years.
   Profit After Tax (PAT) Growth: 47% CAGR over the last 5 years.
   Sales Volume Growth: 17% CAGR over the last 4 years.

4. Debt Metrics:
   Net Debt (as of June 30, 2024): Rs. 5,808 crore
   Debt-to-Equity Ratio (as of June 30, 2024): 0.67x
   Debt-to-EBITDA Ratio (TTM, as of June 30, 2024): 1.37x

5. Cost Structure:
   Raw Materials: Concentrate, sugar, PET chips, packaging.
   Franchise Fee: Payment to PepsiCo.
   Logistics: Distribution and supply chain costs.
   Advertising: Shared and company-specific marketing expenses.

6. Profitability:

EBITDA Margin (H1 2024): 25.9%
PAT Margin (H1 2024):15.7%

7. Free Cash Flow (FCF): Given significant capital investments and acquisitions (both debt-funded and cash-based), FCF is not currently a primary focus. Conversion of net profit to operating cash flow is more relevant at this time.

Risks:

1. Branding/Marketing/Pricing: Limited control over branding and pricing due to reliance on PepsiCo.
2. Health Concerns: Growing consumer shift towards low-sugar/no-sugar beverages, with 46% of VBL’s sales volume in these categories.
3. Seasonality: Demand fluctuations due to seasonal variations.
4. Raw Material Pricing: Volatility in costs for PET chips, sugar, and packaging materials.
5. Supply Chain Disruptions: Potential disruptions affecting production and distribution.
6. Foreign Currency Risk: Exposure to currency fluctuations in international markets.
7. International Exposure: Risks associated with operations in Africa and other international markets.
8. Taxation: Potential impacts from changes in tax policies and regulations.
9. New Entrants & Competition from CoCo Cola – PepsiCo will take care

Valuation: The stock is currently trading at a PE ratio above 80. Given this high valuation, the market appears to be pricing in most of the known factors and long-term double-digit growth.

Thoughts are welcome.

Thank you, Murali, for pointing that out . I missed the recent notifications regarding the PLI. With revenue recognition starting in the next financial year, I’m optimistic about seeing strong numbers in the company’s bottom line next year.