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:
- Climate: Increased temperatures boost demand for beverages.
- Demographics: A youthful population drives consumption.
- Urbanization/Rising Income/Household Spending: Higher disposable incomes and increased urbanization fuel beverage consumption.
- Rural Advancement/Rural Electrification: Improved infrastructure and access in rural areas enhance market reach.
Varun Beverages Limited (VBL) Overview:
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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.
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Revenue Contribution: The Indian subcontinent (India, Sri Lanka, Nepal) contributes 83% to VBL’s revenue.
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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. -
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 -
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. -
Profitability:
EBITDA Margin (H1 2024): 25.9%
PAT Margin (H1 2024):15.7%
- 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:
- Branding/Marketing/Pricing: Limited control over branding and pricing due to reliance on PepsiCo.
- Health Concerns: Growing consumer shift towards low-sugar/no-sugar beverages, with 46% of VBL’s sales volume in these categories.
- Seasonality: Demand fluctuations due to seasonal variations.
- Raw Material Pricing: Volatility in costs for PET chips, sugar, and packaging materials.
- Supply Chain Disruptions: Potential disruptions affecting production and distribution.
- Foreign Currency Risk: Exposure to currency fluctuations in international markets.
- International Exposure: Risks associated with operations in Africa and other international markets.
- Taxation: Potential impacts from changes in tax policies and regulations.
- 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.
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