Investing in Varun Beverages: Key Insights

Let's start today's article with a little game of connecting the dots, shall we? 
There's an interesting common thread among the following beverages: Pepsi, Diet Pepsi, Seven-Up, Mirinda Orange, Mirinda Lemon, Mountain Dew, Seven-Up Nimbooz Masala Soda, Seven-Up Revive, and Evervess. Any guesses?
And for those who prefer to keep it non-carbonated, we've got the Tropicana Slice or the zesty Nimbooz—because bubbles are so passé, right?
Now, if your taste buds are still in hibernation, there's always the ever-so-exotic Aquafina, packaged drinking water. Heard of it? Of course, you have!

But hey, if these names are still hiding in the shadows for you, then

Let's cut to the chase. All these fabulous drinks–they're like puzzle pieces neatly fitting to make up a picture – Varun Beverages! But before we know our company better, there's a bigger picture here, folks.

You see, it's time to take a little sip from the fountain of wisdom. We will be diving into the beverage industry, and why, you ask? Because, well, it's like Investing 101: when an industry is rocking and rolling, the companies within it tend to groove to the music. Let's pop the cap on this industry overview.

About The Beverage Industry

In India, the beverage industry is set to grow big-time thanks to rapid population growth, especially of the middle class. The non-alcoholic beverage industry is expected to increase at a CAGR of 8.85% by the end of 2027, reaching a whopping ₹60,180 crore. 

The Indian soft drinks market is fizzing with excitement, too, with revenue expected to reach a record high of ₹72,250 crore in 2023.

It is a no-brainer that people who make more money will be ready to splurge more on fancier drinks. Plus, soft drinks are going to be even more popular down the road, considering the data.

Click here to read about a legend in the spirits industry.

Let's zoom in and take a closer look at what Varun Beverages Ltd. does.

About Varun Beverages Ltd.

Varun Beverages Ltd. (VBL), with a substantial market capitalisation of ₹1,19,585.51 crore, ranks as one of PepsiCo's largest global franchisees, holding the second position worldwide outside the United States. This partnership has been going on for over three decades and is responsible for driving over 90% of PepsiCo's business in India. 

VBL sources the concentrate from PepsiCo, the brand owner, and manufactures Carbonated Soft Drinks (CSDs) while efficiently managing the distribution network. PepsiCo determines the pricing of the concentrate.

VBL stands head and shoulders above its competitors because they've got something special: scale, reach, and brand power that others can only dream of. When it comes to the Indian beverage market, there's no "Plan B" that even comes close. What makes them even more unstoppable is their deep local knowledge about the market.

Their winning formula? Well, they're all about boosting their market share, beefing up their infrastructure, and expanding their reach, year after year.

And the secret sauce- being PepsiCo's top franchisee. They've got the exclusive rights to make, sell, and market PepsiCo's drinks in specific regions. That's a tall barrier for anyone trying to compete. Plus, VBL has built a rock-solid distribution and supply chain network that's no walk in the park to replicate – it takes big bucks and a ton of know-how even to try.

What sets VBL apart as a leader in the Indian beverage market are three key factors: 

1. A robust brand portfolio, 
2. An expansive distribution network, and 
3. A sound financial position. 

Why these factors are crucial, let's dissect them one by one.

First on our list is the 'Strong brand portfolio' - and hey, you're probably already on a first-name basis with these brands. After all, we kicked off this article with a grand introduction to the whole gang, which you can see in the image below. 👇

The second reason is the huge distribution network. Take a look at the table below to get an idea of the same. 

Particulars	2020	2021	2022
Distribution Vehicles	2500	2500	2500
Depots	90	100	110
Primary Distributors	1500	2000	2400

The distribution vehicles have remained the same for 3 years at 2500, whereas the primary distributors have gone up to 2400. 

And last, our third point is their strong financial position. We'll break this down in a bit more detail.

Financial Performance of Varun Beverages Ltd.

In this section, we're going to switch things up a bit and present information in a question-and-answer format. But before we dive into the financial details, here's a key tidbit: the company follows a calendar year for its reporting. 

Now, let's kick off with the first question.

1. Can we see a track record of steady sales and profit growth from the company over the years?

Over the last decade, the company's revenue has soared, going from ₹1800 crore in 2012 to ₹13,173 crore in 2022. That's a remarkable growth rate of 22% (annually). In the previous year, they even outdid themselves, with revenue surging by a whopping 49.3% and profits skyrocketing by 107.7%. Check the graph below ⬇️

The disruption caused by COVID-19 in 2020 was a temporary setback, but in 2022, revenue bounced back thanks to price adjustments, reduced discounts, and a shift towards selling more of certain products. 

👉 This performance is attributed to a strong business foundation, smart acquisitions, continuously expanding product lineup, their ability to handle every aspect of the beverage process, and a presence throughout the entire beverage journey. 

Profit has also grown significantly over the past ten years, from ₹25 crore in 2012 to ₹1550 crore in 2022. This represents a CAGR of 51%. 

👉 In 2022, the company made more money because its sales grew a lot, managed its costs better, and paid less in taxes.

2. Is the company highly sensitive to changes in its operating costs and revenues as per its business model?

In 2022, the company's Degree of Operating Leverage (DOL) was 1.72. Over the past four years, their DOL has consistently been greater than 1. This means that even a small change in sales can have a significant impact on their operating income.

Having a high DOL can be a double-edged sword. When sales are on the rise, it can result in higher profits. However, when sales are falling, it can lead to losses. So, it's a powerful tool that can work both for and against the company, depending on the sales situation.

3. Is the company able to convert its profits into healthy cash flows?

Absolutely, the company knows how to turn profits into cash like a pro. In 2022, they made ₹1,550 crore in profit, but here's the impressive part: they pulled in ₹1,790 crore from their daily operations. That's 115 times more cash than their profit.

Over the past five years, they've consistently generated over 100% of their net profit in cash from their everyday activities. Plus, they're super quick at converting their inventory into cash – in just 8 days!

They make more cash than they earn in profit, as shown in the graph below. This is a very positive sign for their financial well-being!

4. Does the company use its money efficiently and make good returns on its investments?

In 2022, the company hit a home run with a 33.5% Return on Equity (ROE) and a 27.8% Return on Capital Employed (ROCE). These numbers keep the company way ahead of its competitors like Orient Beverages, Tata Consumer Products, United Breweries, and Hatsun Agro Products.

These returns have soared compared to their average over the past 5 years, which was 20.79% for ROE and 17.32% for ROCE. The graph below paints a clear picture of this remarkable growth.

👉 The company's improved operational efficiency and higher net profit margins are the primary reasons for its increased returns.

5. Can the company generate robust free cash flows, showing it can support growth and reward shareholders?

The company's Free Cash Flow (FCF) has taken a dip in recent years. In December 2019, they generated a healthy FCF of ₹575 crore, but by December 2022, it had shrunk to just ₹40.13 crore. This is noticeably lower compared to competitors like Tata Consumer Products and United Breweries, which boast FCF figures of ₹1,270 crore and ₹727 crore, respectively. 

In 2022, the company's FCF was quite low, representing only 0.30% of its sales revenue. This is well below their average FCF margin of 4.84% over the past 5 years. 

👉 The drop in FCF can be attributed to substantial spending on CAPEX and debt repayments. During this year, the company repaid long-term borrowings amounting to ₹1,137.36 crore and invested ₹1,500 crore in CAPEX.

Despite the lower FCF, the company utilised its available cash by declaring dividends, including an interim dividend of ₹2.5 per equity share and a final dividend of ₹1 per equity share. The total cash outflow for dividend payouts in 2022 was approximately ₹227.3 crore.

6. What is the company's current debt level?

The company's financial ratios show a healthy picture in 2022, with a Debt-to-Equity ratio of 0.65x and a Debt to EBITDA ratio of 1.23x. 
On the balance sheet side, its Net Debt increased from ₹3,005.3 crore as of December 31, 2021, to ₹3,409.6 crore as of December 31, 2022. 

👉 This uptick was primarily driven by expansions in Rajasthan and Madhya Pradesh and the expansion of 6 plants across India planned for 2023.

The company's debt is indeed on the rise, but it's worth noting that its equity is increasing even more, thanks to the issuance of bonus equity shares. This dynamic is leading to a decrease in the debt-to-equity ratio, as seen in the graph below.

For additional information like peer comparisons, you can find it by clicking here. Now that we've examined the financials let's proceed with a SWOT analysis.

SWOT Analysis of Varun Beverages Ltd.

Let's break down the strengths, weaknesses, opportunities, and threats (SWOT) for a more detailed analysis:

Strengths:

• Robust Manufacturing and Supply Chain: The company boasts 37 state-of-the-art manufacturing facilities, a strong supply chain with 110+ depots, and a large fleet of 2,500+ vehicles.
• Backward Integration: Efficiently manufacturing essential components like crown corks, PET pre-forms, and more in-house.
• Market Dominance with PepsiCo: Holding a significant market share in the Indian beverage industry due to its association with PepsiCo.
• Production Versatility: Using the same machines for producing various products, allowing quick shifts based on demand.

Weaknesses:

• Foreign Exchange Vulnerability: Exposed to forex risks, with a significant forex loss of ₹380 crore, accounting for 25% of annual PAT.
• Production Capacity Limitation: Inability to meet the strong demand for energy drinks, hindering portfolio expansion.

Opportunities:

• Untapped Carbonated Drinks Market: Expanding the distribution network to capitalise on the low penetration of carbonated drinks in India.

Threats:

• Reliance on PepsiCo Agreements: The company's profitability depends on strategic agreements with PepsiCo. With potential risks if these agreements are terminated or renewed on unfavourable terms.
• Consumer Health Trends: Failing to adapt to changing consumer health trends may impact demand negatively.
• Weather and External Factors: Vulnerable to unfavourable weather conditions and other external factors affecting peak summer sales volume.

Moving on to the company’s capital structure next.

Shareholding Pattern of Varun Beverages Ltd.

The promoters' holding saw a slight decrease, going from 63.90% in March 2023 to 63.62% in June 2023. Importantly, the company hasn't taken any loans by pledging securities held in its subsidiary firms. Moreover, the total promoter pledging for the company is minimal, standing at only 0.04%.

Now, let's jump into my absolute favourite section of this article, where I get to sprinkle my thoughts.

My Vishesh Tippani on Varun Beverages Ltd.

I believe the Indian soft drinks market is on a roll. With factors like growing middle class and increasing per capita income, it's a good option for investors and businesses.
Now, let's talk about why Varun Beverages Limited (VBL) rocks:

1. They've got the exclusive rights to distribute big names like Pepsi and Mountain Dew in a huge chunk of India.
2. Their network of 2 million retail outlets is massive, giving them an edge over others using third-party distributors.
3. Being India's biggest beverage company means they save big bucks on manufacturing, buying stuff, and marketing because of their scale.
4. Plus, they're not just making drinks; they're also in on the syrup action, which keeps their costs and quality in check.

Overall, Varun Beverages is a robust player with a strong market position and a few challenges to keep an eye on.

The Bottom Line

With a strong performance history and a promising future outlook, Varun Beverages Limited is well-positioned to capitalise on the growth potential within the beverage industry.

It has a strong brand presence, an expansive distribution network, successful strategic acquisitions, and an impressive 31+ year partnership with Pepsi. Allowing it to dominate around 90% of India's total sales volume as PepsiCo's exclusive franchisee.

Backed by solid financial foundations and a positive outlook, Varun Beverages emerges as an enticing option for investors seeking quality stocks. 

So, to wrap it up, before diving into any investment, always do your own research – because even the best stocks can't beat the power of informed decisions! 🤓💼📈

*Disclaimer: The stocks and companies discussed above aren't a recommendation from Finology Insider and shall not be construed as a replacement for professional advice. Consult a professional or conduct the necessary research before making investment decisions.