Varun Beverages is the 2nd largest franchisee in the world (outside the United States) for PepsiCo. The company, under the negative impact of lockdown on consumption, is seeing the drop of activities at its plants. The effect is likely to be to be adverse in Q2CY20 as the ongoing summer season has been a complete washout for the company. Though, the situation is expected to improve with gradual easing of lockdown, FY21 is likely to be a tepid one for the company.

In Q1CY20 the company has reported a good set of numbers amidst the ongoing Coronavirus scare which has resulted in a nationwide lockdown. Revenue grew by 23% to Rs 1,699 crore led by robust sales volume growth of 26% at 11.4 crore cases. Carbonated Soft Drinks (CSD) constituted 67%; juice, 7%; and packaged drinking water 26% of the total sales volume in the quarter. The sales volume growth was supported by steady performance in India as well as in the international territories in the months of January and February. However, post lockdown organic sales volume was severely impacted in the last 10 days of March.

On the profitability front, EBITDA increased by 24.2% to the level of Rs 271 crore in Q1CY20 from Rs 218 crore in the previous quarter. EBITDA margins were steady as the major part of savings in raw material cost was offset by higher fixed cost amid negligible sales during the last 10 days of March. Gross margins expanded by 300 basis points on a YoY basis. With this, the Profit After Tax (PAT) stood at Rs 60 crore which was up by 50% as compared to Rs 40 crore in the previous quarter ended in March 2019.


Products of Varun Beverages can be classified into two divisions viz. Carbonated Soft Drinks (CSDs) and Non- Carbonated Beverages (NCBs).

Carbonated Drinks include Pepsi, Pepsi Black, Diet Pepsi, Mountain Dew, Mirinda, 7Up, 7Up Nimbooz Soda, Slice Fizzy Drinks, and Everess. Varun Beverages has manufacturing and distribution rights for all carbonated drinks. (The products are Pepsi owned, but Varun Beverages is a contract manufacturer and distributor)

Non-carbonated beverages include Slice, 7Up Nimbooz, Tropicana, Sting, Gatorade, Aquafina, etc. Varun Beverages has only distribution rights for the Tropicana segment as they don’t make but only distribute it and for the rest, it has manufacturing and distribution rights.

Geographical spread:

At the current juncture, the company is spread across 27 States and 7 Union Territories (except Jammu & Kashmir and Andhra Pradesh) in India and across 5 developing economies – Nepal and Sri Lanka in South Asia, and Morocco, Zambia, and Zimbabwe in Africa. Most of the growth has come in terms of inorganic expansion by acquiring new territories and expanding the distribution network. Varun beverages have more than 80% market share in Pepsi beverages in India.

The company was unable to get a foothold in the South Indian Market for a long time. It has acquired Franchisee rights from SMV group to manufacture in the southern region which will help to gain market share in the region. With this, the company has 30+ manufacturing plants in India and 6 manufacturing plants in international geographies. Most of its manufacturing facilities are located close to target markets, helping to reduce the time to market, enabling optimization of freight and logistics cost, and aiding in margin expansion.

The company has 90+ owned depots with 2,500+ owned vehicles and 1,500+ primary distributors. To incentivise the retail outlets the company has distributed nearly 7,75,000 coolers.

Acquiring New Territories:

The Company acquired franchise rights in the states of Gujarat, Telangana, Kerala, Tamil Nadu and parts of Maharashtra, Karnataka, Andhra Pradesh and in Union Territories of Daman & Diu, Dadra & Nagar Haveli, Andaman & Nicobar Islands, and Lakshadweep and Puducherry which will provide significant sales growth as these are regions which see higher temperatures in summer and have higher demand during the period.

Leveraged balance sheet remains a concern:

All the acquisitions of territories and plants Varun Beverages has done are through debt. This has spiked up the debt levels from Rs1,940 crores in 2012 to Rs 3417 crores in December 2019. Despite this, their cash flows seem strong enough to be able to repay this very fast. The company has a total free cash flow of Rs 552 crore as of December 2019. The company has also maintained its Debt to equity ratio 1.5x in 2017 to 1.03 in 2019.

New Innovative Products With Changing Trends:

PepsiCo has evolved with time. As the generation changes so are their drinking habits. Consumers are going towards lower-calorie drinks. In line with that Pepsi has launched diet Pepsi, Pepsi Black, and Sting. The recently launched products contribute nearly 2-3% of Varun Beverages revenue. More new product offerings are required to drive future growth.

Robust Financial Performance:

If you look at the last 5-year financial performance, the company has reported an increase in revenue by 114% from Rs 3,394 crore in 2015 to Rs 7,248 crore in 2019. The company has also reported robust PAT growth of 323% from Rs 112 crore in 2015 to Rs 472 crore in 2019. In terms of profitability too, Varun Beverages has managed to keep return on equity (RoE) and PAT margins growing above 15% and 5% respectively. The business is seasonal in nature and the peak is usually summer and bottom is winter, when sales dry up. Therefore, the company almost generates 40-45% of its full-year revenue in the month of summer.

Key Strengths:

  • Market leadership and geographical diversity in domestic and global markets
  • Strong operating efficiencies
  • The strong financial risk profile

Key Risks:

  • Change in contractual terms with PepsiCo
  • Economic and consumption slown
  • changes in customer preferences
  • Integration of large acquisitions
  • Lower-than-expected operating performance

Final Thoughts:

The soft drinks industry in India is expected to report a broad-based growth across categories. While soft drinks consumption is on the rise in India, the sector is still notably underpenetrated as compared to global averages as well as other emerging markets. The main segments of the soft drinks market in India are carbonates, juices, and bottled water. In value terms, carbonates are the largest category, while bottled water is the largest in volume terms.

With a population of 1.3 billion and an average age of 29, as well as a rapidly growing middle-class that spends a high proportion of its disposable income on food and beverages, India boasts a large consumer base. The Indian soft drinks industry has huge potential.

Although there could be a near term pressure due to COVID-19 led lockdown, the sales volumes are expected to recover faster than other discretionary items given the lower ticket size of products compared to other discretionary items. Further, there are multiple long term growth potentials like sustained share gains from the consolidation of South and West territories, robust volume growth from organic domestic business; product mix change, and healthy growth momentum in International business.

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