A blowout quarter for Varun Beverages, with strong sales growth and margin expansion both at gross margin and operating margin level. More importantly, the concall revealed a large number of upside triggers lined up. No wonder the markets are celebrating. And even though the stock has doubled in the last one year, valuation is still around the Oct 2021 level.
Some highlights from the concall:
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Consolidated revenues have grown 22 % and sales volume showcased a healthy resurgence, growing at 15.4 %
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The net realization per case rose by 5.6 % to reach Rs.176.3 per case, an upturn primarily driven by the improvement witnessed in the international markets.
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Gross margins during the quarter improved by 163 basis points to the level of 55.3 % from 53.7 %, mainly due to the softening of PET chip prices. Operating margins have also moved up to 23 %.
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The company has invested about Rs.1600 crores during nine months of CY 2023 for the next year primarily for the three greenfield plants in India at Gorakhpur – UP, Supa Partner – Maharashtra and Khorda – Odisha and one in DRC – Africa. Once commissioned, the combined capex for 2023 and 2024 taken together will increase the peak month capacity in India at a level of about 45 % over 2022 capacity. This will be up and commissioned before the summer of CY24. Once the plants reach full maturity and operate at full capacity, they will achieve a turnover of 1.8 – 1.9 times to fully utilize their capacity
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The raw materials are pet chips and sugar. The company is getting into manufacturing recycled PET. So by the time it will be using the reasonable portion of recycled PET, it will be manufacturing it on its own. It has JV signed with Indorama, which is going to be in production by 2025
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Why Varun Beverages is doing better than other FMCG players – Management said it is expanding its go-to market very aggressively, which maybe everybody is not doing as fast. Secondly, with the power situation improving in the country, it has been able to penetrate much deeper into the rural. This is not very relevant to others. There are about 12 million FMCG outlets in the country today and roughly it is going to about 3.5 million outlets. So others are already at a higher level of distribution. Varun’s reach is increasing by 200,000 – 300,000 stores year after year which is helping in increasing market share. It has about 925,000 visi-coolers at present and is increasing efforts to put more visi-coolers in coming years. It has also played aggresively with price pack architecture, said the management.
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In January when the other two plants are ready, the value added dairy’s real growth will start coming. From next year you will see a major change coming in the value added dairy business
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Majority of juice sales occur between March and June
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The seasonality curve has started changing. Q2 is no longer the only important quarter, Q1 and Q4 are also becoming important. The percentage of every quarter is going to keep changing as South and West become more-and-more important. The other three quarters continue to grow sequentially much faster than the second quarter. (Note: Here they are talking about India but an important thing about seasonality that did not come up for discussion is that as the company expands in DRC, and further in Zimbabwe, Mozambique, South Africa etc. seasonality will come down even further as all these countries are in the Southern Hemisphere with summer in December)
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There is a lot of innovation in the pipeline, especially in the no sugar portfolio. That has done extremely well. As Pepsi is moving towards a healthier portfolio, VBL is also promoting a lot of products in mid-calorie and no sugar segments.
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The value added dairy and juice margins are similar to our CSD margins. So with growth in these segments, the total portfolio will also expand. The margins are not going to materially change and are not expected to come down either. Sting is a little more profitable
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Energy drinks is going to be a big play going forward. Next year it may launch another energy drink. Management said not sure it will be Rockstar or what, but they are looking to launch one more energy drink next year.
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Greenfield facility in DRC is progressing well and is slated to be commissioned in the upcoming months. It can do about between 35 to 40 million cases (capacity). It’s a large market and with one plant, it can serve around 55%-60% of Congo. To serve the other part of Congo, it will have to set up another plant. Congo is a large market with more than 100 million population as compared to Zimbabwe with a population of 16 million people. Congo is near the equator and has much warmer climate. So the market is large, much larger than Zimbabwe
For the first time, Varun Jaipuria spoke in the call, and quite a lot. The next generation is getting ready for the transition.
(Disc.: Invested)
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