Management Meet Note Rating matrix Rating : Unrated Target : NA Target Period : NA Potential Upside : NA Key financials (consolidated) Crore CY12 CY13 CY14 CY15 CY16 Net sales 1,8. 2,115.1 2,52.4 3,394.1 3,852. EBITDA 228. 291.1 384.5 637.1 795.2 EBITDA Margin (%) 12.7 13.8 15.4 18.8 2.6 Net profit after MI 25.1 (39.5) (2.2) 113. 151.3 EPS ( ) NA NA NA 6.2 8.3 Valuation summary CY12 CY13 CY14 CY15 CY16 P/E NA NA NA 77.7 58. EV/EBITDA 45.8 37. 27.5 16.6 12.7 P/BV 15.2 5.9 5.7 5.7 5.7 RoNW (%) 14.6 (22.5) (5.9) 16.8 8. RoCE (%) (1.4) (3.4) (.5) 5.8 6.3 Shareholding pattern (in %) Dec-16 Mar-17 Promoter 73.6 73.7 FII 17.9 17.9 DII 1.1 1.1 Others 7.5 7.4 Price movement 6 5 4 3 2 1 Nov-16 Jan-17 Mar-17 May-17 Research Analyst VBL (R.H.S) Sanjay Manyal sanjay.manyal@icicisecurities.com Tejashwini Kumari tejashwini.kumari@icicisecurities.com Nifty (L.H.S) 12, 1, 8, 6, 4, 2, May 3, 217 Varun Beverages (VARBEV) 481 Proxy play for Indian soft drink industry We met the management of Varun Beverages (VBL) to understand the business of the company and its growth outlook. VBL is the one of the largest franchisees of PepsiCo globally (ex-us) for production and distribution of carbonated soft drinks (CSDs) and non-carbonated beverages (NCBs) sold under trademarks owned by PepsiCo. The company enjoys more than 25 years of strategic association with PepsiCo (since 199), has expanded its territories to 17 states (mainly North and North East India), two union territories in India; Nepal, Sri Lanka, Morocco, Mozambique and Zambia. It has a capacity of 2, bottles per minute spread across 21 production facilities on a consolidated basis. It is present across the whole supply chain from beverage manufacturing to packaging and distribution, including local level promotion. Strong association with PepsiCo for decades VBL enjoys a strong relationship with PepsiCo since 199. Under this alliance, VBL gets access to strong brands of PepsiCo, new & innovated products and concentrate supply. In CY16, VBL contributed ~45% of total PepsiCo s soft drinks volume sales in India. PepsiCo is the second largest player after The Coca Cola in India with 31.1%, 26.4% and 11.6% volume share in carbonates, juices and bottled water, respectively (as of 215). The carbonates and juice segments are expected to grow at a volume CAGR of 6.8% and 16.9%, respectively, in CY16-21E giving VBL a huge market opportunity to explore. Additionally, the low per capita soft drink consumption at 44 litre against the world average of 391 litre also gives VBL a huge opportunity to penetrate in existing. Capacity addition through acquisitions ahead of time to yield result VBL has expanded its operations in India (mainly North and North east India) through the acquisition of territories from PepsiCo in the last few years. Currently, it has access to 17 states and two union territories. Also, it has acquired rights for Nepal, Sri Lanka and Zambia. The newly acquired territories in India are not fully utilised currently. The capital intensive and seasonal nature of business along with new acquisitions has weighed on return ratios, however, with improving utilisation levels. The return ratios are expected to improve at a steady rate. Any further decline in interest expense to boost profitability The company paid 54 crore of the net proceeds from IPO towards the repayment of its debt. At present, VBL s net debt is at 133.1 crore (including short-term debt). The debt can be further reduced if there are no acquisitions in near future. This will directly boost the bottomline of the company. Exhibit 1: Financial Summary (consolidated) ( crore) CY12 CY13 CY14 CY15 CY16 Net sales ( crore) 1,8. 2,115.1 2,52.4 3,394.1 3,852. EBITDA ( crore) 228. 291.1 384.5 637.1 795.2 Net Profit after MI ( crore) 25.1 (39.5) (2.2) 113. 151.3 EPS ( ) NA NA NA 6.2 8.3 PE (x) NA NA NA 77.7 58. EV/EBITDA (x) 45.8 37. 27.5 16.6 12.7 ROCE (%) (1.4) (3.4) (.5) 5.8 6.3 ROE (%) 14.6 (22.5) (5.9) 16.8 8. D/E (x) 9.9 11.6 6.2 2.7.7 ICICI Securities Ltd Retail Equity Research
Management meet highlights The Indian soft drinks market is estimated at 33,6 crore industry with volume at 239.1 crore cases (one case is equal to 5.678 litre) GST tax rate for carbonated drinks at 28% plus cess of 12% was neutral for the company as current excise duty is 21% while VAT is 16.7% VBL s volume CAGR in CY12-16 was at 19%. CSDs have grown at a volume CAGR of 18% followed by non-csd at 12%. It is interesting to note that with increasing health consciousness among people, bottled water is the fastest growing segment with volume CAGR of 32% CSD segment dominate the VBL product portfolio with ~81% contribution in volume terms. Among carbonated beverages, Mountain Dew tops the list with 46.7% share in the total CSD segment, followed by Pepsi at ~22% and Mirinda at ~18% for CY16 The company has a capacity of 22, bottles per minute. Capacity utilisation of the company reaches up to 15% in the peak quarter i.e. March-June quarter On a blended basis, total volume CAGR of VBL was at 19.4% in CY12-16. However, owing to intense competition, the blended realisation CAGR over the same period was a mere 1.3% Revenue for the company has grown at 2.9% CAGR largely led by acquisitions, both within and outside India In CY16, India contributed 76% to total revenues of the company followed by Nepal and Sri Lanka, which together contributed 13%. Africa contributed the rest 11% Major raw materials for the company are concentrate, sugar, PET chips and others (including fruit pulp, labels, CO2, filter paper, washing, cleaning materials, etc) The company sources the concentrate, the major ingredient of the beverages, from PepsiCo s Punjab plant. Its cost is at ~2-21% of total sales. At any point, this ratio does not fluctuate drastically despite the rights of price increase with PepsiCo. This, in turn, supports gross margins. For sugar, VBL follows PepsiCo s quality standards but does not get into any long term arrangements Over CY12-16, the company has expanded its EBITDA margin by ~8 bps from 12.7% in CY12 to 2.6% in CY16 The average capex for setting up a plant is at 15 crore. For visicoolers, it is at 3, per unit. VBL invests ~ 4-5 crore every year on visi-coolers Recent acquisitions of VBL in India in CY15 are currently operating at only 7% and dragging down return ratios. Once capacity utilisation improves, the RoCE of the company is set to improve. Additionally, RoCE for Nepal business is 1% and for Zambia it is 22% Considering the lack of profitability opportunity, the company has divested 41% stake of Mozambique subsidiary (loss of 9.9 crore at PAT level in 216). It had acquired 51% equity in 216. In contrast, looking at the good performance of the Zambia subsidiary (EBITDA 46.7 crore PAT 3.4 crore in 216), it has raised its stake from 6% in 216 to 9% in Q1CY17 VBL had a higher tax outgo in earlier years on account of losses of subsidiaries. However, going forward, considering the exit from one ICICI Securities Ltd Retail Equity Research Page 2
loss making subsidiary (Mozambique), breakeven of other (Sri Lanka), and tax exemptions in Zambia (for five years) and Guwahati plant (for 1 years) the tax rate for the company would decline to 28% in CY17 The company expects organic volume growth to be in the tune of 1-12% in CY17 VBL has direct retail touch points of 1 million outlets with 578 major distributors in India (worldwide count is 8) The company enjoys better margins in rural regions on account of lower distribution cost. Currently, 25% of the company s sales come from the rural region and the rest from the urban region Exhibit 2: Volume mix of brands in CSD segment over years (mn litres) 7 6 5 4 3 2 1 591 522 34 277 222 221 246 242 222 185 151 157 74 87 14 121 Pepsi Seven-Up Mountain Dew Mirinda CY13 CY14 CY15 CY16 ICICI Securities Ltd Retail Equity Research Page 3
Exhibit 3: Revenue trend Exhibit 4: Volume and realisation growth trend 5 4 3394 3852 5. 4. 41.2 3 2 1 18 2115 252 3. 2. 1. 12.9 4. 1.6 6.9 15.1 CY12 CY13 CY14 CY15 CY16 Net Sales ( crore). -1. CY13 CY14 CY15* CY16-1.4-3.9 Volume growth (%) Realisation growth (%) ; * volume growth led by acquisitions Exhibit 5: Segmental break-up in volume terms (CY16) Exhibit 6: Geographical break-up of revenue (CY16) Non-carbonated 6% Packaged water 13% Nepal + Sri Lanka 13% Africa 11% Carbonated 81% India 76% Exhibit 7: Improving EBITDA and EBITDA margin Exhibit 8: Raw material break-up (CY16) 1. 25. 8. 6. 4. 12.7 13.8 15.4 18.8 2.6 2. 15. 1. Others 32% Concentrate 24% 2.. 228. 291.1 384.5 637.1 795.2 CY12 CY13 CY14 CY15 CY16 EBITDA ( crore) EBITDA Margin (%) 5.. Pet chips 9% Sugar 35% ICICI Securities Ltd Retail Equity Research Page 4
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