625 upside /downside (%) 29 high/low (rs) 870/482 varun

Varun Beverages Ltd (VBL IN)

Axis Securities 24th Apr 2020

Consumer | Initiating Coverage |

CMP (Rs) as of (Apr 23, 2020) 625

Upside /Downside (%) 29

High/Low (Rs) 870/482

Market cap (Cr) Rs. 18,043

Avg. daily vol. (6m) Shrs. 1,67,705

No. of shares (Cr) 28.9

BUY

Axis Securities - Equity Research

Target Price: 804

VALUATION ATTRACTIVE, BUY FOR THE LONG HAUL

We are initiating coverage on Varun Beverages Limited (VBL) with a BUY

recommendation and a Target Price of Rs. 804, which implies 29% upside

from the current levels. Looking beyond the lockdown period caused by

COVID-19, VBL to witness a relatively faster recovery in earnings growth

versus other discretionary consumption products given the relatively low

ticket size of soft drinks versus other discretionary products. VBL is

expected to register Revenue/Earnings CAGR of 13%/30% over CY19-21E

driven by 1) consolidation in newly acquired territories; 2) market share

gains; 3) favorable product mix; 4) cost efficiencies and 5) improving

asset turn. At CMP, the stock trades at 10x CY21E EBITDA, which we

believe is attractive given the strong growth visibility over CY19-CY21E.

We value the stock at 13x EV/EBITDA on its CY21E EBITDA to arrive at

our Target Price.

OUR INVESTMENT THESIS IS BASED ON THE FOLLOWING PREMISES

Huge growth opportunity in a highly underpenetrated market

Soft drink is one of the fastest growing consumer segments in India with mid-

teens growth CAGR over CY10-19. Low per capita consumption at 44 bottles in

India in 2016 against 1,496 bottles in USA and 537 bottles in Brazil offer a

huge growth opportunity. Further, grossly untapped rural areas and rising in-

home consumption (~40% of total market consumption) offers opportunity for

category growth and expansion over medium to long term.

Advantage of a strong relationship with PepsiCo

PepsiCo is a leading player in the global food & beverage industry with VBL

being associated since 1990s. As of CY19, VBL forms +80% of PepsiCo India’s

volumes share up from 45% in CY15. VBL thus is a critical part of PepsiCo’s

aspirations of growing in India. VBL also is a key franchisee for PepsiCo in

countries like Nepal, Sri Lanka, Morocco, Zambia and Zimbabwe.

COVID-19 to impact CY20E Return Ratios, improvement seen in CY21E

COVID-19 outbreak has impacted VBLs peak season sales (~40% annual

sales volumes) and profitability. RoE/RoCE in CY20E is expected at

13.1%/13.5% while, in CY21E we see sharp improvement to 19.6%/19.0%

aided by VBL’s execution prowess, consolidation of new territories,

improvement in capacity utilization leading to potentially higher asset turns.

ROBUST LONG TERM GROWTH OUTLOOK – INITIATE WITH BUY

Initiate coverage with BUY and target price of Rs. 804/share, valuing the

company at 13x EV/EBITDA basis CY21E EBITDA. We believe VBL is well

positioned to capture the immense growth opportunity given 1) low per capita

consumption; 2) product mix change; 3) sustained gains from consolidation of

newly acquired territories of South and West; 4) Margin tailwinds driven by cost

efficiencies, lower input costs, backward integration and 6) healthy cash flow

generation.

KEY FINANCIALS (CONSOLIDATED)

(Rs. Cr) CY18 CY19 CY20E CY21E

Net Sales 5,105 7,130 7,479 9,106

EBITDA 1,007 1,448 1,451 1,894

Net Profit 300 472 466 804

EPS (Rs.) 10.7 16.8 16.1 27.8

PER (x) 49.1 42.1 38.7 22.5

EV/EBITDA (x) 11.8 15.9 14.1 10.3

P/BV (x) 4.8 6.1 4.8 4.0

ROE (%) 15.9 17.6 13.1 19.6

Source: Company, Axis Research

Shareholding (%)

Mar-20 Dec-19 Sep-20

Promoter 68.0 68.4 68.4

FIIs 19.9 19.3 19.2

MFs / UTI 5.8 5.9 6.1

Banks / FIs 0.0 0.0 0.0

Others 6.3 6.2 6.3

Financial & Valuations

Y/E Dec (Rs. bn) 2019 2020E 2021E

Net Sales 71.3 74.8 91.1

EBITDA 14.5 14.4 18.9

Net Profit 4.7 4.6 8.0

EPS (Rs) 16.8 16.1 27.8

PER (x) 42.1 38.7 22.5

EV/EBITDA (x) 15.9 14.1 10.3

RoE (%) 17.6 13.1 19.6

Debt/Equity (x) 0.8 0.7 0.5

Key Drivers (%)

Y/E Dec 2019 2020E 2021E

Dom. Vols 47.6 3.9 20.1

EBITDA Margin 20.3 19.4 20.8

PAT Growth 57.5 -1.4 72.6

Axis vs Consensus

EPS Estimates CY19 CY20E CY21E

Axis 16.8 16.1 27.8

Consensus 16.8 19.5 28.0

Mean Consensus TP (12M) 812

Relative performance

0

50

100

150

200

250

Jan-18 Jun-18 Nov-18 May-19 Oct-19 Apr-20

Varun Beverages BSE Sensex

Source: Captaline, Axis Securities

Suvarna Joshi

Sr. Research Analyst

: (022) 4267 1740

: [email protected]

Axis Securities 2

Varun Beverages Ltd

KEY INVESTMENT ARGUMENTS

Strong growth potential in the Indian Beverages market

The Indian Soft Beverages (drink) industry comprises of Carbonates, Bottled Water, Packaged

Juices and Other Drinks like Ready-To-Drink tea, coffee, energy drinks etc. Over CY10-19, the

industry witnessed high growth rates and is expected to maintain its healthy double digit growth

momentum over the medium to long term. As per Global Data Report, Indian Soft Drinks industry is

expected to record highest volume growth among all commercial beverages with 7.3% CAGR over

CY19-24E with incremental volume of 11,890 million litres. PepsiCo is the 2nd largest player in the

Carbonated Soft Drinks (CSD) category in India, with a volume share (in million litres) of 28.1% in

2018 with scope to grow further driven by various factors like consolidation of its operations under a

handful of bottlers, driving product, sizing and packaging innovation, focusing on e-commerce a fast

growing channel, local & regional branding of its beverages in India to grow in the Indian hinterland.

Low per capita consumption of soft drinks in India

We note the per capita consumption of packaged beverages in India is extremely low compared to

global consumption average. In India the per capita soft drink consumption was 44 bottles in 2016

which is expected to rise to 84 bottles by 2021. We observe that soft drink per capita consumption

in USA was 1,496 bottles, Mexico 1,489 bottles, Germany 1,221 bottles and Brazil a developing

market has 537 bottles per capita consumption in 2016. Government thrust on 100% electrification

of villages would drive per capita consumption of Soft Drinks in India owing to rising penetration of

cooling infrastructure in these regions.

Exhibit 1: Soft Drinks per capita consumption a comparative

44

271

537

1221

1489 1496

84

313

566

1203

1616

1490

0

200

400

600

800

1000

1200

1400

1600

1800

India China Brazil Germany Mexico USA

No

. o

f B

ott

les

Source: Company, Axis Securities; 1 bottle = 237ml

Backed by PepsiCo, a leading player in the global F&B market

PepsiCo and Coca-Cola are the two largest soft drink companies globally. PepisCo has been at a

leading position in some of its key markets over the years led by customer stickiness for its brands.

VBLs association with PepsiCo has been for over 28 years (since 1991) and it has only

consolidated and strengthened its position with PepsiCo.

PepsiCo’s confidence in VBL has been due to its strong in-market execution track record

and capabilities alongside its long term strategy of consolidating PepsiCo operated

territories under long term bottling partners. Testimony to this is VBLs consistently rising

share of PepsiCo India’s volume share with rise in number of franchisee territories and sub-

territories granted/acquired by VBL over the years from both PepsiCo owned units as well

as from third party units over the past few years. As of CY19, VBL has 80%+ share in

PepsiCo India’s sales volumes from 45% in CY15 (27% in CY11).

Axis Securities 3

Varun Beverages Ltd

Exhibit 2: VBL a critical partner for PepsiCo India

80%+

51%

45%

45%

45%

0% 10% 20% 30% 40% 50% 60% 70% 80% 90%

CY19

CY18

CY17

CY16

CY15

VBLs share of Pepsico India sales volumes

Source: Company, Axis Securities

The symbiotic partnership has allowed VBL access to top class brands of PepsiCo, modern

technology & operational know-how, access to equipment at competitive prices and support from

PepsiCo’s experienced personnel. Further, with PepsiCo’s international stature in the food &

beverage industry it has been able to quickly adapt to changing market trends and thus launched

innovative products in the marketplace. VBL thus has been given the opportunity over its

partnership period to manufacture, sell and distribute its wide and innovative product portfolio in

VBLs markets across product segments like Carbonated Soft Drinks (CSD) and Non-Carbonated

Beverages (NCB) products and Bottled Water. Exemplifying this is the success of lemon based

drinks in India which PepsiCo was quick to respond by launching multiple brands like Mountain

Dew, Nimbooz, Reviev to grab a higher share of this fast growing market. Mountain Dew has been

one of the biggest brand successes in the soft drinks category (Sales grown by ~13-15%) over the

past few years.

Exhibit 3: VBL a critical partner in PepsiCo India value chain

ConcentrateOther raw

MaterialsBottling

Warehousing

distribution

Delivery to

Retail Outlets

Marketing &

Sales

Pepsico

Varun

Beverages

Distributor

Retailer

Procures concentrate from PepsiCo Centralized Advertising done by PepsiCo

VBL procures Other Raw Material from 3rd party vendors

approved by PepsiCo

VBL does Bottling of Pepsico products

VBL has warehouses and distributes soft

drinks through logistics managed

by its own trucks

Delivery to retail outlets in visi-coolers by VBLs distributors.

Visi-coolers are owned by VBL and

in few cases delivery done by VBL

VBL distributes various manufactured

products to Distributors who in

turn supply to retail outlets (stored in visi-coolers)

VBL undertakes on the ground marketing

Retailer makes final sale to consumer


Consolidation of bottling operations by MNCs – positive for bottlers

In an attempt to move towards an asset light model MNC Cola giants, Coca-Cola and PepsiCo

initiated with consolidating their bottling operations to franchisees. Doing so allows them to focus on

product branding, new product development and innovation. We study that reported numbers of the

global Cola giants have reported sharp dip over the past couple years thus necessitating them to

go asset light. We believe this presents strategic inorganic growth opportunities for integrated

bottlers like VBL.

Axis Securities 4

Varun Beverages Ltd

Exhibit 4: Well defined business roles

Owner of Trademarks

Invests in R&D – Product,

Packaging innovation

Provide formulation

through Concentrate

Consumer Pull

management

Brand Development

Invest in production facilities –

Manufacturing Plants; demand

forecasting, production

planning

Sales & Distribution: Vehicles

Visi-coolers : in-outlet

execution

Consumer Push management,

focus on market share gains


Shift towards NCB consumption a potential future growth driver

With rising health awareness, consumers are seeking healthier variants of beverages there is a

higher salience of non-cola based drinks over the past few years. To capture this growing non-cola

carbonates segment, PepsiCo launched Masala Nimbooz, Tropicana Frutz, 7Up Revive in CY16.

VBL is also licensed to manufacture and distribute PepsiCo brands Tropicana under Juices

category and Aquafina in Packaged drinking water space. Recently, VBL started to manufacture

ambient temperature value added dairy based beverage under Cremebell brand. Varun Beverages

pays royalty to PepsiCo for NCB brands and Water at ~1.1% and 1.3% as of CY19. While for Cola

based soft drinks it procures concentrate from PepsiCo for a price.

Exhibit 5: PepsiCo brands licensed to Varun Beverages

Brands licensed by PepsiCo

Carbonated Soft Drinks

Fruits Pulp/Juice Based Drinks

Energy Drink Club Soda

Sports Drinks Packaged Water

Carbonated Juice Based Drinks

Dairy Based Drinks

BelgianChoco

Shake

Cold Coffee

Mango Shake

Ice Tea

Source: Company, Axis Securities; Note: “Creambell” brand, has been licensed to be used by VBL for ambient temperature value added dairy based beverages

As per GlobalData Report, Juice (NCB) category is expected to grow at an 8.8% volume CAGR

over CY19-24E. PepsiCo is the 2nd largest company in the juice and nectar categories in India,

through its brand Tropicana, with a volume/value share of 20.2%/ 19.7% in 2018. Juices

Axis Securities 5

Varun Beverages Ltd

contributed to 6.7% to total volume share of VBL in CY19 reporting a robust 23% volume CAGR

over CY15-19. With Pathankot facility up and running the contribution from higher margin juices can

be expected to rise going ahead.

Packaged water category is yet another fast growing space. It is expected to record a 9% CAGR in

volume terms over CY19-24E as consumers preference towards packaged water increased when

compared to tap water given rising health awareness. For VBL, Packaged water formed ~23% of

CY19 volumes reporting a 39% volume CAGR over CY15-19.

VBL is well positioned to capitalize on the market growth in such categories owing to PepsiCo’s

presence in several categories of variety of beverages. Adding further to the healthier variants, VBL

in consultation with PepsiCo launched ambient temperature value added dairy based beverages

under Cremebell brand. VBL to pay PepsiCo 1% non-compete fee for Cremebell brand to PepsiCo.

Exhibit 6: Rising share of Juices and Water to de-risk revenue profile

0%

20%

40%

60%

80%

100%

120%

CY15 CY16 CY17 CY18 CY19 CY20E CY21E

CSD NCB Water


Market share gains driven by extensive distribution network

VBL has a wide spread and integrated sales and distribution network that enables it to reach a wide

range of consumers and ensure effective market penetration. As of CY19, the company has

reached to 1.35bn consumers through 2mn retail touch points. The company typically reaches its

consumers through various points of sale that include traditional retail channels like grocery / kirana

stores (75% of revenues), Modern Retail outlets including e-commerce, supermarkets,

hypermarkets, convenience stores (5% revenue contribution), hotels, cafes, bars and restaurants

(HoReCa) forms 20% of VBLs revenues. Out-of-home consumption for VBL’s products effectively

stands at +50%. With COVID-19 outbreak there has been serious restriction on movement of

people and shut down of HoReCa channel (30% of 50% OOH consumption per management) it

could have a significant impact on overall sales volumes in the peak season.

We note Varun’s distribution network is strategically located to maximize market penetration across

its licensed territories and sub-territories in India, with an increased focus on higher growth markets

across urban, semi-urban and rural sub-territories. This has supported market share gains for the

company over the years that’s has led to further strengthening of its partnership with PepsiCo over

the last 28 years. Going forward, the company intends to further expand its distribution network by

setting up additional distribution centres, consolidating existing distributors in newly acquired 2019

territories of South and West and increase number of distributors in under penetrated markets.

Axis Securities 6

Varun Beverages Ltd

Exhibit 7: Market share gains aided by Distributor Network expansion

1,186

1,049 1,100

1,500

0

200

400

600

800

1,000

1,200

1,400

1,600

CY16 CY17 CY18 CY19

No

. o

f D

istr

ibu

tors


Pan-India manufacturing presence an entry barrier

VBL post acquisition of South and West territories now has 38 manufacturing plants across the

country and complements strategy of expanding distribution network. This we believe is a

significant entry barrier for new entrants in the Indian markets. A combination of location proximity

of manufacturing plants with owned (customized) vehicles, allows VBL greater control on costs and

its response time to the market as compared to leased vehicles during peak business months.

Exhibit 8: Rise in number of vehicles

2,024 2,122

2,400 2,500

0

500

1,000

1,500

2,000

2,500

3,000

CY16 CY17 CY18 CY19

Ow

ned

Veh

icle

s


Visi-coolers to further drive volume growth

As one of the pillars to sustaining robust volume growth momentum and market share gains, VBL

develops long term relationship with its distributors by supporting the growth of their business and

providing for support services like visi-coolers, marketing material and in-store promotion. To

ensure deepening of its distributor’s network and support their existing distributors in

underpenetrated territories / sub-territories, VBL consistently has invested in owning visi-coolers.

VBL, as of CY19 has 7.75 lakh visi-coolers that have grown at 19% CAGR over CY15-19. Of these,

65% of the visi-coolers have been placed in markets of North and East that have lower per capita

consumption of soft drinks. VBL ear marked investments to the tune of Rs. 100cr to add 40,000

visi-coolers during CY20E in its efforts to deepen distribution of its products and thereby gain

market share.

We understand that share of rural markets in India’s soft drink industry has risen to ~25% in CY18

from 21% in CY10 and this is expected to grow ahead of urban markets that are growing at high

Axis Securities 7

Varun Beverages Ltd

single digit rate. Typically, share of rural markets have been lower compared to urban due to 1)

poor infrastructure, 2) limited availability of visi-coolers and 3) unavailability of electricity 24x7.

However, with Government’s thrust on 100% electrification of Indian villages, easy availability of

visi-coolers and rise in infrastructure investments will aid increase in rural market shares over the

long term and thereby volume growth for VBL.

Exhibit 9: Growth in visi-coolers

458,000 474,500

550,000

775,000

0

150000

300000

450000

600000

750000

900000

CY16 CY17 CY18 CY19

No

. o

f V

isi-

Co

ole

rs


Inorganic growth VBLs niche; 20% Sales CAGR over CY15-19

Over CY15-19, VBL posted consolidated sales volume CAGR of 19.7% (to 493mn cases), with Net

Sales CAGR at 20.4% (to Rs. 7,130cr in CY19). With strong focus on growing its geographical

reach, inorganic acquisitions (acquiring contiguous territories to its existing territories) aided VBLs

India business sales volume/value CAGR of 17.9%/18.3% during CY15-19. VBL has successfully

expanded its presence in acquired territories in the past and thus we expect strong gains from

consolidation of South and West territories to notably add to volume growth momentum. Consistent

focus on inorganic growth and turning it around is a niche carved out by VBL to drive growth.

Exhibit 10: Quest for inorganic growth reflected in territory acquisitions

Territories in 2019 Territories in 2016

2019 Existing VBL India Sub Territories

VBL Manufacturing Plants

Himachal PradeshPunjab

Chandigarh

Haryana

Rajasthan

Madhya

Pradesh

Uttarakhand

PhilliaurPanipat

Mahul, Mumbai

NUH

Bhiwadi Kosi

Hardoi

Sathariya

Kolkata

Greater Noida I & IIBazpur

North East

Assam

Gujarat

Bharuch

Daman & Diu

Dadara & Nagar Haveli

Goa

Karnataka

Nelamangala

Morocco

Zimbabwe

Zombie

LakshadweepSri Lanka

Kerala Tamil Nadu

Triune vet

Palakkad

Sangareddy

Telangana

Roha

Aurangabad

Maharashtra

Odessa

Cuttak

Bargarh

WestBengalJharkhand

BiharGuhati

SikkimNepal

MandideepJodhpur

Delhi

Puducherry

Mamandur

Sri city

2019 New VBL India Sub Territories

2019 Other Franchisee Sub Territories

2019 Existing VBL International Territories

Dharwad

*Map not to scale

Varun’s Territories

Manufacturing Plants as of March 31, 2017

Himachal PradeshPunjab

Chandigarh

Haryana

Rajasthan

Part of MP

West Bengal

Uttarakhand

UP (E)

PhilliaurPanipat

Jodhpur

NUH UP (W)

Bhiwadi Kosi Hardoi

Sathariya

Kolkata

Greater Noida I & IIBazpur Guwahati

North East

Assam

Goa


Axis Securities 8

Varun Beverages Ltd

Healthy growth in International territories

VBL’s International operations include franchise rights for underpenetrated countries Sri Lanka,

Nepal, Morocco, Zambia and Zimbabwe. However, VBL has been a strong player in the beverage

market across its international territories driven by its strong in-market execution. Nepal has been a

high growth country for VBL and over CY15-19 Nepal reported 14% volume CAGR. In Zimbabwe

too, VBL reported a stellar 89% YoY growth in CY19 over CY18 the year in which it acquired the

territory. Overall across its international geographies, VBL reported robust volume CAGR of 30%

over CY15-19. The key reasons for this growth are: rising market shares owing to

underpenetrated markets, operating efficiency and addition of new territory (Zimbabwe

acquired in CY18). As of June 30, 2019, VBL has 345 primary distributors across its

International geographies.

International Presence

Acquisition Year

CY19 (%) share in group volume

Market Share (%)

Nepal 1997 4% ~45%

Sri Lanka 2010 2% ~18%

Morocco 2011 4% ~10-15%

Zambia 2016 2% ~40%

Zimbabwe 2018 6% ~43%


Over the past five years, VBL has been able to double its market share in most of its international

geographies owing to its aggressive investments in trade and distribution. However, there remains

enough scope to grow in these underpenetrated geographies. International operations revenue

share increased to 21% in CY19 vs 15.6% in CY15.

Exhibit 11: VBL Markets – Per Capita Soft Drink Consumption (Per Capita Bottles)

44

16 19

275

4484

30 23

471

105

0

100

200

300

400

500

India Sri Lanka Zambia Morroco Nepal

No

. o

f B

ott

les

2016 2021E


himashwetha.j

Highlight

himashwetha.j

Highlight

Axis Securities 9

Varun Beverages Ltd

FINANCIAL COMMENTARY

Volumes/Revenues expected to grow at 12.4%/13.1% CAGR over CY19-21E

Over CY15-19, VBL’s overall business reported a 19.7% volume growth. In CY19, India business

volumes stood at 404 million cases (India organic volume CAGR of 23% over CY15-19) and

International organic volumes stood at 89 million cases (International volume CAGR of 30% over

CY15-19). In terms of geographic contribution, 82%/79% volume/value share comes from India

business that posted 17.9%/18.3% volume/value CAGR over CY15-19. While, International

operations for VBL forms 18%/21% volumes/value share that reported robust 30.4%/30% CAGR in

volume/value terms over CY15-19. With acquisition of South and West territories which are

significantly underpenetrated, we believe India operations revenue share to increase as company

looks to consolidate its share in these territories.

Exhibit 12: Volume growth momentum to sustain


COVID-19 impacts 2020 peak season: CY2020E started on a strong note with management

indicating volume growth of +20% in the months of January and February. However, owing to

COVID-19 outbreak in March and thereafter a complete lockdown by states and the nation impacted

volumes significantly. We note June quarter is a seasonally strong quarter for Varun Beverages

contributing ~40% to annual domestic volumes. Moreover a large part of the same happens from out

of-home consumption (OOH) with relatively higher discretionary spending. Although the company

has partially resumption both production and distribution operations following Government order to

permit packaged F&B players to commence operations, we believe any further extension of the

lockdown or rise in number of COVID-19 cases in its key markets could affect both on-trade and off-

trade sales. Given the considerable impact of COVID-19 on peak season sales we assume CY20E

to see muted volume growth largely driven by inorganic volumes (consolidation in acquired

territories of South and West). International geographies, although have seen limited impact of

COVID-19 outbreak we will continue to monitor the outbreak of coronavirus in these markets

alongside currency fluctuations that could dent its sales performance. However, looking beyond

the lockdown we expect a faster recovery in its sales volumes given the relatively low ticket

size of soft drinks vs other discretionary consumption items and expect Varun Beverages to

report a 13.1% Sales CAGR over CY19-21E.

Axis Securities 10

Varun Beverages Ltd

Exhibit 13: Sales growth to sharply recover in CY21E


Margin profile to sustain over CY19-21E

Despite the impact on business due to coronavirus affecting VBL’s sales during peak months, we

believe the company will be able to sustain its industry leading margin profile over CY19-21E in an

industry that is characterized by high volumes-low margins. However, in CY20E, margins could be

lower than CY19 owing to negative operating leverage. We expect VBL to report Gross Margins

and EBITDA Margin of 54.6%/19.4% in CY20E while in CY21E it would improve to 55.2%/20.8% in

our view. Key drivers for margin improvement are 1) commercialization of fully integrated Pathankot

facility (majorly manufacturing Tropicana juices having relatively higher realizations), 2) lower

packaging & freight costs driven by decline in crude prices, 3) operational efficiencies aided by

improved utilization, 4) mix change (higher NCB and Dairy products contribution) and 5) backward

integration.

Exhibit 14: VBL has amongst the best margins in bottling industry


Axis Securities 11

Varun Beverages Ltd

PAT to grow at a robust 30% CAGR over CY19-21E after de-growing in CY20E

Sustained operating performance despite slowdown in consumption and challenging macro-

economic conditions caused by COVID-19 in the near term, we need to look beyond COVID-19 and

the potential with VBL to consistently deliver on earnings. With no major capex in the near term and

steady cash flow generation VBL will look to pare its debt causing a decline in interest costs by

CY21E. We expect bottomline to grow at a strong 30% CAGR over CY19-21E.

Exhibit 15: Earnings growth to recover


Balance sheet to improve in CY21 with lower debt profile

VBL has total outstanding debt of Rs. 2,822cr as of December 31, 2019, of which Rs. 2,355cr is

with respect to long term borrowings which were taken to acquire new territories of South and West

in 2019. With no major territory acquisition in sight and focus on improving cash flows going ahead

we believe, debt will reduce over CY19-21E. Debt:Equity ratio is expected to reduce to 0.5x in

CY21E from 0.8x in CY19.

Exhibit 16: Debt to reduce over CY19-21E


Return ratios to improve going ahead

As highlighted earlier, seasonality plays an important role for VBL since sales are highly skewed

towards April-June quarter (Q2) in any particular year. While significant profits get accounted for in

Q2. This leads to a necessity of investing in capacity ahead of demand so as to cater to peak

Axis Securities 12

Varun Beverages Ltd

season. However, this leads to lower capacity utilizations during rest of the year. For VBL, May is

the busiest month and all its capacity planning and monitoring of utilization rates are typically

planned around this month. For example, today, the company is operating its plants at <70%

utilization basis May capacity and further organic expansion would be largely based on utilization

trend in this month.

In addition to seasonality, growth has also induced VBL to spend on capex both domestic as well

as international markets on both existing and new products. Major territory acquisitions by Varun

Beverages since CY15-CY19 are as below.

Exhibit 17: Key value accretive acquisition by VBL

Year CY15 CY17-18 CY19

Territories acquired

Aquired PepsiCo business of

- Uttarakhand

- Himachal Pradesh

- Punjab

- Union Territory of Chandigarh

- UP (excl certain territories)

- Haryana (excluding certain

territories)

Acquired

- Odisha

- MP

- Chhatisgarh

- Bihar

- Jharkhand

Acquired

- Maharashtra

- Gujarat

- South Indian states

except Andhra

Pradesh

Acquisition Price (Rs. cr) 1,268.5 255 1,817.5

Sales Volumes (mn cases) 75 25 135

EBITDA (Rs. cr) 198 75 399

EBITDA / Acquisition Price (x) 0.15 0.29 0.22

Exhibit 18: ROE / RoCE to bounce back in CY21E


While in CY20E, Return Ratios are likely to get impacted led by COVID-19 pandemic and

acquisition of South and West territories in CY19 the same is estimated to sharply improve in

CY21E. Key drivers are 1) increase in capacity utilization, as market share in newly acquired

territories rises; 2) lower seasonality in South and West territories and growing contribution aids

improvement in asset turnover, 3) growing contribution from Juices segment that has higher

realization and better asset turns compared to CSD; 4) no major acquisitions in the near term to

strengthen cash flow generation; 5) debt reduction to support an overall improvement in Return

Ratios in CY21E given that CY20E will see impact of COVID-19 pandemic on its overall business.

Axis Securities 13

Varun Beverages Ltd

VALUATIONS AND OUTLOOK

We initiate coverage on Varun Beverages with BUY and Target Price of Rs. 804/share implies

upside of 29% as we value the stock at 13x EV/EBITDA basis its CY21E EBITDA. The stock has

seen a sharp correction of ~28% since lockdown announcement, making it attractive to enter, as

valuations are supportive given the immense long term structural growth potential. Although, near

term earnings could be under pressure due to COVID-19 led lockdown, we believe, sales volumes

to recovery faster than other discretionary items given the lower ticket size of its products compared

to other discretionary items. Further, we believe there are multiple long term growth catalysts like 1)

sustained share gains from consolidation of South and West territories, 2) robust volume growth

from organic domestic business; 3) product mix change (higher Juice/Water contribution); 4)

healthy growth momentum in International business and 5) Margin tailwinds over CY19-21E from

operating leverage effected from Pathankot plant and lower crude prices driving lower packaging

costs and 6) healthy cash flow generation over CY21E.

FWD PE (x) FWD PE BAND (x)

20

25

30

35

40

45

50

Dec-1

6

May-1

7

No

v-1

7

May-1

8

No

v-1

8

Ap

r-19

Oct-

19

Ap

r-20

Mean Mean+1Stdev Mean-1Stdev PE

0

200

400

600

800

1000

Dec-1

6

May-1

7

No

v-1

7

May-1

8

No

v-1

8

Ap

r-19

Oct-

19

Ap

r-20

Price 20x 25x 30x 35x


EV/EBITDA (x) FWD EV/EBITDA BAND (x)

0

5

10

15

20

25

No

v-1

6

Mar-

17

Ju

l-17

No

v-1

7

Mar-

18

Ju

l-18

No

v-1

8

Ap

r-19

Au

g-1

9

Dec-1

9

Ap

r-20

Enterprise Value To EBITDA (Daily Time Series Ratio)

5

7

9

11

13

15

17

19

21

23

No

v-1

6

Feb

-17

May

-17

Au

g-1

7

No

v-1

7

Feb

-18

May

-18

Jul-

18

Oct

-18

Jan

-19

Ap

r-1

9

Jul-

19

Oct

-19

Jan

-20

Ap

r-2

0

EV/EBITDA Mean EV/EBIDTA Mean +1Stdev Mean -1Stdev


Axis Securities 14

Varun Beverages Ltd

KEY RISKS

Change in contractual terms with PepsiCo

VBLs financial performance could be at a risk if there are any changes in contractual terms and

conditions with PepsiCo for its India or International agreements. Further, to undertake growth and

expansion of business VBL needs to take approval from PepsiCo to execute such plans. Inability to

secure such approvals may adversely affect its business prospects and future financial

performance.

Concentrate pricing rests with PepsiCo Fixing concentrate prices unilaterally rests with PepsiCo which is purchased by VBL also, any incremental levy of Royalty on PepsiCo products could see a significant impact on its earnings.

Seasonality

VBLs product sales are significantly higher in summer months of Apr-June (Q2 of calendar year)

due to heat and warm weather. Also during winter months of Dec-Feb period volumes are

considerably lower. Thus bad weather, untimely rains and late onset of summer may adversely

affect its sales performance as ~40% of annual sales volumes are clocked in April-June quarter by

VBL. Also, any extension of COVID-19 lockdown could sharply impact its peak season sales.

Economic and consumption slowdown

As VBLs aggression is on growing in the rural regions where penetration remains low any

slowdown in rural economy caused by reduced disposable income may affect operational

performance for VBL. Further extension of nationwide lockdown due to coronavirus could hamper

consumption spends particularly in rural areas affecting Varun’s operating performance.

Shift in consumer preference

Demand for products may be adversely affected by changes in consumer preferences led by

growing health awareness and nutritional benefits of soft drinks (CSD forms 70% of revenues). Any

significant reduction in demand thus could materially affect business, prospects and financial

performance.

Competition and Product pricing

The maximum retail price (MRP) or consumer price for PepsiCo products is fixed in consultation

with PepsiCo. The pricing decisions are materially influenced by competition, market dynamics and

raw material prices. Should there be no increase in product prices in the wake of surge in

competition or raw material prices the operating profitability of Varun Beverages could see a

material impact.

ABOUT THE COMPANY

Varun Beverages (VBL) part of RJ Corp group was incorporated in 1995. VBL is the 2

nd largest

franchisee in the world (outside USA) for PepsiCo. It currently has operations across 27 states and 2 Union Territories in India. It is also the exclusive bottler for PepsiCo in Nepal, Sri Lanka, Morocco, Zambia and Zimbabwe. Manufacturing footprint is well spread out and includes overall 38 units. In India, VBL has 32 manufacturing plants and 6 production facilities in its International markets. Products manufactured by VBL include Carbonated Soft Drinks - Pepsi, Mountain Dew, Seven Up, Mirinda; Non Carbonated Beverages - Tropicana Slice, Tropicana Frutz; and Bottled water - Aquafina.

Axis Securities 15

Varun Beverages Ltd

FINANCIALS (CONSOLIDATED)

Profit & Loss (Rs Cr)

Y/E Dec CY18 CY19 CY20E CY21E

Total Net Sales 5,105 7,130 7,479 9,106

% Change 27.5% 39.7% 4.9% 21.8%

Total Raw material Consumption 2,244 3,219 3,403 4,079

Staff costs 583 811 882 1,029

Other Expenditure 1,272 1,652 1,750 2,103

Total Expenditure 4,099 5,682 6,035 7,212

EBITDA 1,007 1,448 1,443 1,894

% Change 20.4% 43.8% -0.3% 31.2%

EBITDA Margin % 19.7% 20.3% 19.3% 20.8%

Depreciation 385 488 546 574

EBIT 622 959 897 1,320

% Change 27.0% 54.3% -6.4% 47.1%

EBIT Margin % 12.2% 13.5% 12.0% 14.5%

Interest 213 310 277 244

Other Income 22 43 22 36

PBT 434 696 647 1,116

Tax 134 224 181 313

Tax Rate % 30.9% 32.2% 28.0% 28.0%

APAT 300 472 466 804

% Change 39.9% 57.5% -1.4% 72.6%


Balance Sheet (Rs Cr)


Share Capital 183 289 289 289

Reserves & Surplus 1,816 3,040 3,445 4,136

Net Worth 2,006 3,359 3,764 4,455

Total Borrowings 2,358 2,823 2,523 2,223

Deferred Tax Liability 192 283 283 283

Long Term Provisions 105 170 180 216

Other Long Term Liability 7 1 1 1

Capital Employed 4,668 6,635 6,750 7,177

Gross Block 5,558 8,079 8,569 9,049

Less: Depreciation 1,698 2,187 2,733 3,307

Net Block 3,860 5,893 5,837 5,742

Investments 32 45 48 58

Sundry Debtors 128 173 266 274

Cash & Bank Bal 93 171 280 844

Loans & Advances 142 7 7 7

Inventory 578 882 746 894

Other Current Assets 199 440 461 562

Total Current Assets 1,141 1,672 1,760 2,581

Curr Liab & Prov 1,363 1,753 1,766 2,111

Net Current Assets (222) (81) (6) 470

Total Assets 4,668 6,635 6,750 7,177


Axis Securities 16

Varun Beverages Ltd

Cash Flow (Rs Cr)

Y/E Dec CY18 FY19 CY20E CY21E

PBT 434 696 647 1,116

Depreciation & Amortization 385 489 546 574

Provision for Taxes 199 295 277 244

Chg in Deferred tax 109 35 0 0

Chg in Working cap -50 -85 41 114

Direct tax paid -73 -120 -181 -313

Cash flow from operations 1,003 1,310 1,330 1,736

Chg in Gross Block -859 -754 -583 -515

Chg in Investments -49 -1,625 0 0

Chg in WIP 34 68 0 0

Cash flow from investing -873 -2,311 -583 -515

Proceeds / (Repayment) of ST Borrowings (Net) 1,400 560 0 0

Repayment of LT Borrowings -1,246 46 0 0

Loans Repayment 0 0 -300 -300

Finance Cost paid -189 -301 -277 -244

Dividends paid -46 -69 -61 -113

Dividend Distribution Tax paid -5 -9 0 0

Cash flow from financing -84 1,110 -638 -657

Chg in cash 45 100 109 564

Cash at start 1 42 171 280

Cash at end 46 142 280 844


Ratio Analysis (%)


Growth (%)

Net Sales 27.5% 39.7% 4.9% 21.8%

EBITDA 20.4% 43.8% -0.3% 31.2%

APAT 39.9% 57.5% -1.4% 72.6%

Per Share Data (Rs.)

Adj. EPS 10.7 16.8 16.1 27.8

BVPS 109.8 116.4 130.4 154.3

Profitability (%)

EBITDA Margin 19.7% 20.3% 19.3% 20.8%

Adj. PAT Margin 5.9% 6.6% 6.2% 8.8%

ROCE 14.3% 17.0% 13.4% 19.0%

ROE 15.9% 17.6% 13.1% 19.6%

Valuations (X)

PER 49.1 42.1 38.7 22.5

P/BV 4.8 6.1 4.8 4.0

EV / EBITDA 11.8 15.9 14.1 10.3

EV / Net Sales 2.3 3.2 2.7 2.1

Turnover Days

Asset Turnover 0.9 1.0 0.9 1.0

Inventory days 82.7 82.8 87.3 73.4

Debtors days 9.9 7.7 10.7 10.8

Creditors days 41.3 45.0 48.1 41.3

Working Capital Days 51.4 45.4 49.9 42.9

Gearing Ratio

Debt: Equity (x) 1.2 0.8 0.7 0.5

Net Debt to Equity 1.1 0.8 0.6 0.3


Axis Securities 17

Varun Beverages Ltd

Disclosures:

The following Disclosures are being made in compliance with the SEBI Research Analyst Regulations 2014 (herein after referred to as the

Regulations).

1. Axis Securities Ltd. (ASL) is a SEBI Registered Research Analyst having registration no. INH000000297. ASL, the Research Entity (RE) as defined in the Regulations, is engaged in the business of providing Stock broking services, Depository participant services & distribution of various financial products. ASL is a subsidiary company of Axis Bank Ltd. Axis Bank Ltd. is a listed public company and one of India’s largest private sector bank and has its various subsidiaries engaged in businesses of Asset management, NBFC, Merchant Banking, Trusteeship, Venture Capital, Stock Broking, the details in respect of which are available on www.axisbank.com.

2. ASL is registered with the Securities & Exchange Board of India (SEBI) for its stock broking & Depository participant business activities and with the Association of Mutual Funds of India (AMFI) for distribution of financial products and also registered with IRDA as a corporate agent for insurance business activity.

3. ASL has no material adverse disciplinary history as on the date of publication of this report. 4. I/We, Suvarna Joshi, PGDM-Finance, author/s and the name/s subscribed to this report, hereby certify that all of the views expressed in this research report accurately reflect my/our views about the subject issuer(s) or securities. I/We (Research Analyst) also certify that no part of my/our compensation was, is, or will be directly or indirectly related to the specific recommendation(s) or view(s) in this report. I/we or my/our relative or ASL does not have any financial interest in the subject company. Also I/we or my/our relative or ASL or its Associates may have beneficial ownership of 1% or more in the subject company at the end of the month immediately preceding the date of publication of the Research Report. Since associates of ASL are engaged in various financial service businesses, they might have financial interests or beneficial ownership in various companies including the subject company/companies mentioned in this report. I/we or my/our relative or ASL or its associate does not have any material conflict of interest. I/we have not served as director / officer, etc. in the subject company in the last 12-month period.

Any holding in stock – No 5. ASL has not received any compensation from the subject company in the past twelve months. ASL has not been engaged in market making activity for the subject company.

6. In the last 12-month period ending on the last day of the month immediately preceding the date of publication of this research report, ASL

or any of its associates may have:

i. Received compensation for investment banking, merchant banking or stock broking services or for any other services from the

subject company of this research report and / or;

ii. Managed or co-managed public offering of the securities from the subject company of this research report and / or;

iii. Received compensation for products or services other than investment banking, merchant banking or stock broking services from

the subject company of this research report;

ASL or any of its associates have not received compensation or other benefits from the subject company of this research report or any other

third-party in connection with this report. Term& Conditions: This report has been prepared by ASL and is meant for sole use by the recipient and not for circulation. The report and information contained herein is strictly confidential and may not be altered in any way, transmitted to, copied or distributed, in part or in whole, to any other person or to the media or reproduced in any form, without prior written consent of ASL. The report is based on the facts, figures and information that are considered true, correct, reliable and accurate. The intent of this report is not recommendatory in nature. The information is obtained from publicly available media or other sources believed to be reliable. Such information has not been independently verified and no guaranty, representation of warranty, express or implied, is made as to its accuracy, completeness or correctness. All such information and opinions are subject to change without notice. The report is prepared solely for informational purpose and does not constitute an offer document or solicitation of offer to buy or sell or subscribe for securities or other financial instruments for the clients. Though disseminated to all the customers simultaneously, not all customers may receive this report at the same time. ASL will not treat recipients as customers by virtue of their receiving this report.

Axis Securities 18

Varun Beverages Ltd

DEFINITION OF RATINGS

Ratings Expected absolute returns over 12-18 months

BUY More than 10%

HOLD Between 10% and -10%

SELL Less than -10%

NOT RATED We have forward looking estimates for the stock but we refrain from assigning valuation and recommendation

UNDER REVIEW We will revisit our recommendation, valuation and estimates on the stock following recent events

NO STANCE We do not have any forward looking estimates, valuation or recommendation for the stock

Disclaimer: Nothing in this report constitutes investment, legal, accounting and tax advice or a representation that any investment or strategy is suitable or appropriate to the recipient’s specific circumstances. The securities and strategies discussed and opinions expressed, if any, in this report may not be suitable for all investors, who must make their own investment decisions, based on their own investment objectives, financial positions and needs of specific recipient. This report may not be taken in substitution for the exercise of independent judgment by any recipient. Each recipient of this report should make such investigations as it deems necessary to arrive at an independent evaluation of an investment in the securities of companies referred to in this report (including the merits and risks involved), and should consult its own advisors to determine the merits and risks of such an investment. Certain transactions, including those involving futures, options and other derivatives as well as non-investment grade securities involve substantial risk and are not suitable for all investors. ASL, its directors, analysts or employees do not take any responsibility, financial or otherwise, of the losses or the damages sustained due to the investments made or any action taken on basis of this report, including but not restricted to, fluctuation in the prices of shares and bonds, changes in the currency rates, diminution in the NAVs, reduction in the dividend or income, etc. Past performance is not necessarily a guide to future performance. Investors are advice necessarily a guide to future performance. Investors are advised to see Risk Disclosure Document to understand the risks associated before investing in the securities markets. Actual results may differ materially from those set forth in projections. Forward-looking statements are not predictions and may be subject to change without notice. ASL and its affiliated companies, their directors and employees may; (a) from time to time, have long or short position(s) in, and buy or sell the securities of the company(ies) mentioned herein or (b) be engaged in any other transaction involving such securities or earn brokerage or other compensation or act as a market maker in the financial instruments of the company(ies) discussed herein or act as an advisor or investment banker, lender/borrower to such company(ies) or may have any other potential conflict of interests with respect to any recommendation and other related information and opinions. Each of these entities functions as a separate, distinct and independent of each other. The recipient should take this into account before interpreting this document.

ASL and / or its affiliates do and seek to do business including investment banking with companies covered in its research reports. As a result, the recipients of this report should be aware that ASL may have a potential conflict of interest that may affect the objectivity of this report. Compensation of Research Analysts is not based on any specific merchant banking, investment banking or brokerage service transactions. ASL may have issued other reports that are inconsistent with and reach different conclusion from the information presented in this report. The Research reports are also available & published on AxisDirect website. Neither this report nor any copy of it may be taken or transmitted into the United State (to U.S. Persons), Canada, or Japan or distributed, directly or indirectly, in the United States or Canada or distributed or redistributed in Japan or to any resident thereof. If this report is inadvertently sent or has reached any individual in such country, especially, USA, the same may be ignored and brought to the attention of the sender. This report is not directed or intended for distribution to, or use by, any person or entity who is a citizen or resident of or located in any locality, state, country or other jurisdiction, where such distribution, publication, availability or use would be contrary to law, regulation or which would subject ASL to any registration or licensing requirement within such jurisdiction. The securities described herein may or may not be eligible for sale in all jurisdictions or to certain category of investors. The Disclosures of Interest Statement incorporated in this document is provided solely to enhance the transparency and should not be treated as endorsement of the views expressed in the report. The Company reserves the right to make modifications and alternations to this document as may be required from time to time without any prior notice. The views expressed are those of the analyst(s) and the Company may or may not subscribe to all the views expressed therein.

Copyright in this document vests with Axis Securities Limited.

Axis Securities Limited, Corporate office: Unit No. 2, Phoenix Market City, 15, LBS Road, Near Kamani Junction, Kurla (west), Mumbai-400070, Tel No. – 022-40508080/ 022-61480808, Regd. off.- Axis House, 8th Floor, Wadia International Centre, PandurangBudhkar Marg, Worli, Mumbai – 400 025. Compliance Officer: AnandShaha, Email: [email protected], Tel No: 022-42671582.SEBI-Portfolio Manager Reg. No. INP000000654

625 upside /downside (%) 29 high/low (rs) 870/482 varun

Documents