VARUN BEVERAGES LIMITED Oct 20, 2016 SMC Ranking (2.5/5) Issue Highlights Industry FMCG Total Issue(Shares)-Offer for sale 10,000,000 Total Issue (Shares)-Fresh Issue 15,000,000 Net O? er to the Public 25,000,000 Issue Size (Rs. Cr.) 1100.00 Price Band (Rs.) 440-445 Offer Date 26-Oct-16 Close Date 28-Oct-16 Face Value 10 Per Equity Share Lot Size 33 Equity Share About the company Incorporated in 1995, Varun Beverages Ltd is franchisee of carbonated soft drinks (CSDs) and non-carbonated beverages (NCBs) sold under trademarks owned by PepsiCo in India and internationally. The company produces and distributes a range of CSDs under the brands of Pepsi, Diet Pepsi, Seven-Up, Mirinda Orange, Mirinda Lemon, Mountain Dew, Seven-Up Nimbooz Masala Soda, Seven-Up Revive, and Evervess. The company also produces and distributes NCBs under the brands of Tropicana Slice; Tropicana Frutz (Lychee, Apple and Mango); and Nimbooz, as well as packaged drinking water under the brand Aquafina. In addition, the company has the franchise for Ole brand of PepsiCo products in Sri Lanka. It sells its products to retail outlets, including e-commerce, supermarkets, hypermarkets, convenience stores, bars, and restaurants, as well as to grocery stores through distributors. As of April 30, 2016, they operated 16 production facilities across India and five production facilities in their international licensed territories. Issue Composition In shares Competitive Strengths Total Issue (Shares) 25,000,000 QIB 12,500,000 NIB 3,750,000 Retail 8,750,000 Book Running Lead Manager Kotak Mahindra Capital Company Limited Axis Capital Limited CLSA India Private Limited Yes Securities (India) Limited Name of the registrar Karvy Computershare Private Limited Shareholding Pattern (%) Particulars Pre-issue Post issue Promotors and promoters group 86.35% 73.73% QIB 0.00% 6.87% NIB 0.00% 2.06% Retail 13.65% 17.34% Total 100 100 *calculated on the upper price band Demonstrated ability to grow Sales Volumes: The Company has been associated with PepsiCo since the 1990s and has over two and half decades consolidated its business association with PepsiCo, increasing the number of licensed territories and sub-territories covered by it, producing and distributing a wider range of PepsiCo beverages, introducing various SKUs in its portfolio, and expanding its distribution network. Its demonstrated ability to grow PepsiCo product sales has led to PepsiCo India / PepsiCo Inc. and / or the PepsiCo International Entities licensing additional territories to the company, including those that were earlier directly operated by PepsiCo or by third-party bottlers. Strategically located large and technologically advanced production capabilities:its production facilities across India are strategically located in geographical proximity to various target markets. Its large and technologically advanced production capabilities provide cost and operational efficiencies, and it complies with quality standards consistent with PepsiCo's global production standards and regulatory compliance policies. Wide spread and integrated sales and distribution network that ensures effective market penetration: It's wide spread and integrated sales and distribution network enables it to reach a wide range of consumers and ensure effective market penetration. The company has also developed an extensive distribution network in its international markets which as of June 30, 2016 included 20 depots and 518 delivery vehicles. Its production capabilities and distribution network enables it to effectively respond to competitive pressures, market demand and evolving consumer preferences in its territories. Significant markets with high growth potential: The soft drinks market in India is underdeveloped in terms of per capita consumption of 9.4 litres in 2015, especially when compared to the world average of 91.9 litres and the more mature U.S. market, with a per capita consumption of 347.3 litres in such period. In 2015, the consumption growth of soft drinks in rural areas grew at a faster pace compared to that in urban locations. The company expects demand for the soft drink will continue as rural and semiurban consumers become aware of PepsiCo brands. This is expected to result in increased consumption of PepsiCo's beverages and it believes that it is well positioned to capitalize on such market growth. Creating value through alignment with PepsiCo: The Company has been associated with PepsiCo since the 1990s and believes that its strong relationship with PepsiCo is one of the key strengths. The company has developed strong sales teams that work closely with PepsiCo to develop and implement local advertising and marketing strategies and special sales schemes. The company believes that its wide consumer base and strong distribution chain relationships enable its to contribute effectively to PepsiCo's marketing strategy and implement these initiatives at the local distribution and consumer level.
Strategy Objects of the Issue 1. Prepayment or scheduled repayment of a portion of outstanding indebtedness availed by the Company; and 2. General corporate purposes. Grow its business by capitalizing on brand strength and diversifying its product portfolio: The Company will continue to leverage PepsiCo's brand portfolio to increase market penetration in its licensed territories. Also would leverage its ability to implement new brand and product launches for PepsiCo, particularly in the fast growing NCB space, to further grow its business. The company also continues to focus on growing Aquafina sales as the packaged drinking water segment in India is highly fragmented and provides significant growth opportunities. Moreover, the company continues to evaluate, in alignment with PepsiCo's product development strategy, growth opportunities in fruit juice based carbonated beverages. It believes that its increased focus on semi-urban and rural markets, and ability to understand consumer preferences in such markets, will enable it to further increase market penetration in these markets and segments, resulting in organic growth. Continue to acquire and integrate additional franchisee rights: The Company continues to play a significant role in the consolidation of PepsiCo's production and distribution operations in South Asia and Africa. The company evaluates strategic acquisition opportunities for production facilities and licensing of franchisee rights for additional territories and sub-territories in India, including for territories that were franchised to other bottlers of PepsiCo or operated by PepsiCo directly. The company has entered into a business transfer agreement with PepsiCo India in November 2014 pursuant to which it was granted the franchise for the 2015 New India Sub- Territories. The company continues to work closely with PepsiCo to identify such strategic consolidation opportunities. The company also continues to explore expansion opportunities into new geographical markets, licensed territories and jurisdictions, where it can leverage its operational experience or where low per capita consumption levels for beverages present opportunities for volume. Expand its distribution network and optimise distribution operations: The Company continues to focus on increasing Sales Volumes in its licensed territories and sub-territories by expanding its distribution network, optimizing its distribution operations and increasing product supply to under-penetrated markets, particularly to semi-urban and rural areas. The company focuses on optimal utilization of its existing distribution infrastructure by implementing effective brand and product promotion strategies through intensive interaction with distributors, effective involvement of its sales team at points of sale, and expanding the range of product offerings in certain markets and areas to specifically cater to regional and local consumer preferences. Continue to focus on cost efficiencies and invest in technology to improve operational efficiency: As an integral part of its continuing efforts targeted at ensuring cost efficiencies, it has undertaken a number of initiatives aimed at reduction of cost of goods sold, effective management of operating expenses and improvement in cash flows. These initiatives include backward integration of production facilities and having a centralized procurement team. The company continues to focus on consolidation of its production activities to ensure all components of its products are supplied internally. The company continues to plan its capital expenditure carefully by focusing its investments on more profitable areas of its business, such as chilled equipment for use in immediate-consumption channels. Risk factor Growth plans and expansion strategies are subject to prior approval of PepsiCo: The Company intends to obtain franchises for other existing or newly introduced beverage products of PepsiCo. Under the PepsiCo India Agreements and the PepsiCo International Agreements, any such acquisition will require prior approval from PepsiCo India / PepsiCo Inc. and the PepsiCo International Entities. If PepsiCo were to deny such approval for any reason, it could adversely affect its business, prospects, results of operations and financial condition. An inability to integrate the operations of, or leverage potential operating and cost efficiencies from: An inability to integrate the operations of, or leverage potential operating and cost efficiencies from, the recently acquired 2015 New India Sub-Territories or additional acquired territories or sub-territories in the future may adversely affect its business and future financial performance. If fails to manage its growth effectively: The company has experienced significant growth over the last few years as it has expanded its operations in India and internationally. Its revenue from operations (net) increased at a CAGR of 31.15% from Rs. 11,47.25 Cr in Fiscal 2011 to Rs. 33,94.14 Cr in Fiscal 2015. To maintain its competitive position in India: The carbonated and non-carbonated beverage markets are highly competitive in India and the international markets it operates in. If the number of competitors or level of marketing or investments undertaken by such competitors were to increase, it may result in a reduction in the consumption of its products and may reduce its market share, or it may be required to incur increased marketing and distribution related expenses in order to remain competitive. 2
Dependent on PepsiCo for brand promotion and the protection of the PepsiCo trademarks and brands: The Company is dependent on PepsiCo for brand promotion and the protection of the PepsiCo trademarks and brands. An inability by PepsiCo to adequately promote its brands and/ or adequately protect its trademarks and brands may result in loss of goodwill and business and adversely affect its business prospects, results of operations and financial condition. Valuation: Considering the P/BVx valuation on the upper end of the price band of Rs. 445, the stock is priced at P/B ratio of 8.15x on the pre issue book value of Rs. 54.60 and on the post issue book value of Rs. 110.55, the P/B comes out to 4.03x. On the lower end of the price band of Rs.440 the stock is priced at P/B ratio of 8.06x on the pre issue book value of Rs. 54.60 and on the post issue book value of Rs. 110.55, the P/B comes out to 3.98x. Industry Outlook The beverage market in India is underdeveloped in terms of per capita consumption of 9.4 litres in 2015, compared to the more mature markets such as U.S. and UK, with per capita consumption of 347.3 litres and 162.9 litres, respectively, in such period. It is expected to almost double and reaches 18.4 litres in 2020. In 2015, the total off-trade and on-trade sales of soft drinks in India was 12,08.10 Cr litres. The Indian soft drinks market has been driven by innovation, particularly due to increasing preferences of consumers towards product variety, as well as towards healthier beverages. As a result, there have been a number of new product launches by leading players in the industry over the past few years. Outlook The company has been associated with PepsiCo since the 1990s and has over two and half decades consolidated its business association with PepsiCo. Its production facilities across India are strategically located in geographical proximity to various target markets. The main season for the company s products is first half of calendar year, and it is expected that it may not be able to maintain the pace shown for the first half of the year. An investor with high risk appetite may opt the issue for the long term. 3
Annexure Pro?t & Loss Rs. in Cr. Particulars 30-Jun-16 (6M ended) 31-Dec-15 Total Operating Income Total expenditure Operating Profit OPM% Other Income PBDIT Depreciation PBIT Interest PBT Tax Profit after tax Add : Share of profit PAT 2,529.66 1925.479 604.18 23.88 9.69 613.87 189.49 424.38 111.23 313.15 99.73 213.42-3.68 209.75 3,394.15 2760.088 634.06 18.68 14.28 648.34 317.41 330.93 168.79 162.14 76.62 85.52 1.52 87.04 CHECK NEXT PAGE FOR BALANCE SHEET 6
Annexure Balance Sheet Particulars As on 30-Jun-16 31-Dec-15 Good Will Fixed assets Tangible assets Intangible Assets Capital Work In Progress Deferred Tax Assets Non Current Investment Long-term loans and advances Other non current assets Current assets Current Investment Inventories Trade Receivables Cash and Bank balances Short-term loans and advances Other current assets Total current assets Total Assets Minorities interest Non-current liabilities Long-term borrowings Deferred tax liabilities (net) Other Long Term Liabilities Long-term provisions Total non-current liabilities Current liabilities Short-term borrowings Other current liabilities Short-term provisions Trade payables Total current liabilities Total NET Worth 236.67 0 3440.51 360.85 19.19 4057.22 2.84 4.811 184.58 5.26 4254.71 0.02 559.16 147.88 115.53 202.37 15.87 1040.83 5295.54 0.01 1837.52 229.17 315.116 53.26 2435.07 300.42 1240.71 78.13 329.72 1948.98 4384.06 911.48 9.54 0 3105.67 383.93 37.91 3537.06 2.71 3.273 118.96 5.01 3667.01 0.00 424.66 97.91 58.07 180.38 9.42 770.44 4437.45 1579.52 151.15 636.284 44.00 2410.96 252.41 879.79 37.44 184.56 1354.20 3765.15 672.30 Net worth represented by: Share capital Reserves and surplus Share issue expenses Net Worth 585.67 325.81 911.48 583.77 88.53 672.30 7
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