BUY

Target Price: 804

CMP (Rs) as of (Apr 23, 2020) 625
Upside /Downside (%) 29
Axis Securities - Equity Research
High/Low (Rs) 870/482

Varun Beverages Ltd

Market cap (Cr) Rs. 18,043
(VBL IN) Avg. daily vol. (6m) Shrs. 1,67,705
No. of shares (Cr) 28.9
Consumer | Initiating Coverage |

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 Shareholding (%)
from the current levels. Looking beyond the lockdown period caused by Mar-20 Dec-19 Sep-20

COVID-19, VBL to witness a relatively faster recovery in earnings growth Promoter 68.0 68.4 68.4

versus other discretionary consumption products given the relatively low FIIs 19.9 19.3 19.2

ticket size of soft drinks versus other discretionary products. VBL is MFs / UTI 5.8 5.9 6.1

expected to register Revenue/Earnings CAGR of 13%/30% over CY19-21E Banks / FIs 0.0 0.0 0.0
driven by 1) consolidation in newly acquired territories; 2) market share Others 6.3 6.2 6.3
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. Financial & Valuations
We value the stock at 13x EV/EBITDA on its CY21E EBITDA to arrive at Y/E Dec (Rs. bn) 2019 2020E 2021E
our Target Price. Net Sales 71.3 74.8 91.1
OUR INVESTMENT THESIS IS BASED ON THE FOLLOWING PREMISES EBITDA 14.5 14.4 18.9
Net Profit 4.7 4.6 8.0
Huge growth opportunity in a highly underpenetrated market EPS (Rs) 16.8 16.1 27.8
Soft drink is one of the fastest growing consumer segments in India with mid- PER (x) 42.1 38.7 22.5
teens growth CAGR over CY10-19. Low per capita consumption at 44 bottles in EV/EBITDA (x) 15.9 14.1 10.3
India in 2016 against 1,496 bottles in USA and 537 bottles in Brazil offer a RoE (%) 17.6 13.1 19.6
huge growth opportunity. Further, grossly untapped rural areas and rising in- Debt/Equity (x) 0.8 0.7 0.5

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

category growth and expansion over medium to long term.
Key Drivers (%)
Advantage of a strong relationship with PepsiCo
Y/E Dec 2019 2020E 2021E
PepsiCo is a leading player in the global food & beverage industry with VBL
Dom. Vols 47.6 3.9 20.1
being associated since 1990s. As of CY19, VBL forms +80% of PepsiCo India’s
EBITDA Margin 20.3 19.4 20.8
volumes share up from 45% in CY15. VBL thus is a critical part of PepsiCo’s PAT Growth 57.5 -1.4 72.6
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
Axis vs Consensus
COVID-19 outbreak has impacted VBLs peak season sales (~40% annual
EPS Estimates CY19 CY20E CY21E
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% Axis 16.8 16.1 27.8

aided by VBL’s execution prowess, consolidation of new territories, Consensus 16.8 19.5 28.0

improvement in capacity utilization leading to potentially higher asset turns. Mean Consensus TP (12M) 812

ROBUST LONG TERM GROWTH OUTLOOK – INITIATE WITH BUY

Initiate coverage with BUY and target price of Rs. 804/share, valuing the Relative performance
company at 13x EV/EBITDA basis CY21E EBITDA. We believe VBL is well 250
positioned to capture the immense growth opportunity given 1) low per capita 200
consumption; 2) product mix change; 3) sustained gains from consolidation of 150

newly acquired territories of South and West; 4) Margin tailwinds driven by cost 100

efficiencies, lower input costs, backward integration and 6) healthy cash flow 50

generation. 0

KEY FINANCIALS (CONSOLIDATED)

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

Varun Beverages BSE Sensex

(Rs. Cr) CY18 CY19 CY20E CY21E
Net Sales 5,105 7,130 7,479 9,106 Source: Captaline, Axis Securities
EBITDA 1,007 1,448 1,451 1,894
Net Profit 300 472 466 804
Suvarna Joshi
EPS (Rs.) 10.7 16.8 16.1 27.8
Sr. Research Analyst
PER (x) 49.1 42.1 38.7 22.5
EV/EBITDA (x) 11.8 15.9 14.1 10.3 : (022) 4267 1740
P/BV (x) 4.8 6.1 4.8 4.0 : suvarna.joshi@axissecurities.in
ROE (%) 15.9 17.6 13.1 19.6
Source: Company, Axis Research

Axis Securities 24th Apr 2020

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

1800
1616
1600 1489 1496 1490
1400
1221 1203
1200
No. of Bottles

1000
800
566
600 537
400 313
271
200 84
44
0
India China Brazil Germany Mexico USA

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).

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Varun Beverages Ltd

Exhibit 2: VBL a critical partner for PepsiCo India

CY15 45%

CY16 45%

CY17 45%

CY18 51%

CY19 80%+

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

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

Other raw Warehousing Delivery to Marketing &
Concentrate Bottling
Materials distribution Retail Outlets Sales

Pepsico
Procures concentrate from PepsiCo Centralized Advertising done by PepsiCo

Varun VBL procures Other VBL does Bottling of VBL has VBL distributes Delivery to retail
Beverages Raw Material from Pepsico products warehouses and various outlets in visi-coolers
3rd party vendors distributes soft manufactured by VBLs distributors.
approved by drinks through products to Visi-coolers are
PepsiCo logistics managed Distributors who in owned by VBL and
by its own trucks turn supply to retail in few cases delivery
outlets (stored in done by VBL
visi-coolers)

Distributor
VBL undertakes
on the ground marketing

Retailer
Retailer makes final sale
to consumer

Source: Company, Axis Securities

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.

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Varun Beverages Ltd

Exhibit 4: Well defined business roles

 Owner of Trademarks  Invest in production facilities –

Manufacturing Plants; demand
 Invests in R&D – Product,
forecasting, production
Packaging innovation
planning
 Provide formulation
 Sales & Distribution: Vehicles
through Concentrate
 Visi-coolers : in-outlet
 Consumer Pull
execution
management
 Consumer Push management,
 Brand Development
focus on market share gains

Source: Company, Axis Securities

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 Dairy Based Drinks

Carbonated Soft Drinks

Mango
Shake

Carbonated Juice Based Drinks Energy Drink Club Soda Ice Tea

Cold Coffee

Fruits Pulp/Juice Based Drinks

Belgian
Sports Drinks Packaged Water Choco
Shake

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

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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

120%

100%

80%

60%

40%

20%

0%
CY15 CY16 CY17 CY18 CY19 CY20E CY21E

CSD NCB Water

Source: Company, Axis Securities

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.

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Varun Beverages Ltd

Exhibit 7: Market share gains aided by Distributor Network expansion

1,600 1,500

1,400
1,186
No. of Distributors

1,200 1,100
1,049
1,000

800

600

400

200

0
CY16 CY17 CY18 CY19

Source: Company, Axis Securities

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

3,000

2,500
2,500 2,400
2,122
2,024
Owned Vehicles

2,000

1,500

1,000

500

0
CY16 CY17 CY18 CY19

Source: Company, Axis Securities

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

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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

900000
775,000
750000

600000 550,000
No. of Visi-Coolers

458,000 474,500
450000

300000

150000

0
CY16 CY17 CY18 CY19

Source: Company, Axis Securities

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

Punjab Himachal Pradesh

Philliaur Panipat Punjab Himachal Pradesh
Chandigarh Greater Noida I & II Philliaur
Bazpur Panipat
Haryana Uttarakhand Chandigarh Greater Noida I & II
Bazpur Guwahati
NUH Nepal North East
Haryana Uttarakhand
Delhi Sikkim
Rajasthan Kosi NUH North East
Bhiwadi Assam UP (W) UP (E)
Hardoi Guhati Rajasthan Bhiwadi Kosi Hardoi
Bihar Assam
Jodhpur Mandideep
Sathariya West
Gujarat Madhya Jharkhand Bengal Jodhpur
Sathariya
Pradesh
Bharuch Part of MP
Bargarh Kolkata
Daman & Diu Aurangabad Odessa
Dadara & Nagar Haveli Maharashtra Cuttak West Bengal
Mahul, Mumbai Kolkata
Roha Sangareddy

Morocco Dharwad Telangana

Goa

Karnataka Sri city 2019 Existing VBL India Sub Territories

Goa
2019 New VBL India Sub Territories
Zombie Nelamangala Puducherry
2019 Other Franchisee Sub Territories
Palakkad Mamandur Varun’s Territories
Kerala Tamil Nadu 2019 Existing VBL International Territories
Triune vet
VBL Manuf acturing Plants
Manuf acturing Plants as of March 31, 2017
Lakshadweep
Zimbabwe Sri Lanka

*Map not to scale

Source: Company, Axis Securities

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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 Acquisition CY19 (%) share Market

Presence Year in group volume Share (%)
Nepal 1997 4% ~45%
Sri Lanka 2010 2% ~18%
Morocco 2011 4% ~10-15%
Zambia 2016 2% ~40%
Zimbabwe 2018 6% ~43%
Source: Company, Axis Securities

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)
500 471

400
No. of Bottles

300 275

200
105
100 84
44 44
30 23
16 19
0
India Sri Lanka Zambia Morroco Nepal

2016 2021E

Source: Company, Axis Securities

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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

Source: Company, Axis Securities

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.

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Varun Beverages Ltd

Exhibit 13: Sales growth to sharply recover in CY21E

Source: Company, Axis Securities

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

Source: Company, Axis Securities

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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

Source: Company, Axis Securities

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

Source: Company, Axis Securities

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

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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

Aquired PepsiCo business of Acquired Acquired

- Uttarakhand - Odisha - Maharashtra
- Himachal Pradesh - MP - Gujarat
Territories acquired - Punjab - Chhatisgarh - South Indian states
- Union Territory of Chandigarh - Bihar except Andhra
- UP (excl certain territories) - Jharkhand Pradesh
- Haryana (excluding certain
territories)
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

Source: Company, Axis Securities

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.

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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)

50 1000

45 800
40 600
35
400
30
200
25
20 0

Apr-19

Apr-20
Nov-17

Nov-18
May-17

May-18

Oct-19
Dec-16
Apr-19

Apr-20
Nov-17

Nov-18
May-17

May-18

Oct-19
Dec-16

Mean Mean+1Stdev Mean-1Stdev PE Price 20x 25x 30x 35x

Source: Company, Axis Securities

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

25 23
21
20 19
17
15 15
13
10
11
5 9
7
0 5
Jul-17

Jul-18
Mar-17

Mar-18

Aug-19

Dec-19
Apr-19

Apr-20
Nov-16

Nov-17

Nov-18

Oct-18

Oct-19
Aug-17
Feb-17

Feb-18

Apr-19

Apr-20
Jan-19

Jan-20
Nov-16

Nov-17
May-17

May-18

Jul-18

Jul-19

Enterprise Value To EBITDA (Daily Time Series Ratio)

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

Source: Company, Axis Securities

Axis Securities 13
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 2nd 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.

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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%
Source: Company, Axis Securities

Balance Sheet (Rs Cr)

Y/E Dec CY18 CY19 CY20E CY21E
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
Source: Company, Axis Securities

Axis Securities 15
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
Source: Company, Axis Securities

Ratio Analysis (%)

Y/E Dec CY18 CY19 CY20E CY21E
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
Source: Company, Axis Securities

Axis Securities 16
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).

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Any holding in stock – No

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Axis Securities 17
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

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The Disclosures of Interest Statement incorporated in this document is provided solely to enhance the transparency and should not be treated
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Axis Securities 18