Varun beverages fast growth duopoly business

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.