top of page

Varun Beverages Ltd – Yeh Dil Maange More... Aha!

Updated: Jun 9, 2022

Company Name – Varun Beverages Limited (VBL)

Current Share PriceINR 1,110 (May 17, 2022)

Market CapINR 48,062 cr


1. What is interesting about the stock?

India's soft drink consumption is significantly lower than that of developed nations due to lower per capita income and inadequate home electricity (44 bottles per capita vs. 1,496 bottles per capita in the US). Packed drinking water (PDW) accounts for the majority of volume share, with 48%, followed by bulk/HOD water (23%) and Carbonated Soft Drink (CSD) (19%). However, CSDs lead the market in value, accounting for 44%, followed by PDW at 30%. The JNSD category, which comprises juices, nectar, and still drinks, accounts for 19% of the soft drink industry's revenue. Bulk water, energy drinks, sports drinks, flavored water, and other forms contribute the remaining 7%. As disposable income grows and the country gets more electrified as a consequence of several government initiatives, consumption is expected to go up.

Varun Beverages Limited is a large-cap beverage firm with an INR 48,062 crore market capitalization. RJ Corp, a multinational corporate conglomerate specializing in drinks, quick-service restaurants, dairy, and healthcare, owns VBL. The Company produces and markets a variety of carbonated soft drinks (CSDs) and non-carbonated beverages (NCBs), including packaged drinking water, under PepsiCo trademarks. It is the world's second-largest PepsiCo licensee (outside the USA). The increasing consolidation of VBL's presence across adjacent regions demonstrates that the partnership has been successfully fostered. It has franchise rights for PepsiCo's beverage products in 27 Indian states and union territories (~81% of revenues) and Nepal, Sri Lanka, Morocco, Zambia, and Zimbabwe (~19% of revenues) covering ~135 cr people, or roughly a sixth of the world's population. VBL's share of PepsiCo beverage volume sales has risen from 26% in FY11 to over 85% presently in these regions. VBL sets aside 20% of net sales, with 14% going to PepsiCo (8% going to concentrate expenses acquired from Pepsi, and 6% going to 'above the line' (ATL) advertising expenditures), according to the agreement with PepsiCo. The remaining 6% is on below-the-line (BTL) marketing by VBL. For goods that do not involve concentrate, VBL pays a royalty of 1.3% for Aquafina and 1% for Evervess Soda.

VBL is in charge of production, distribution, warehousing, customer management, and in-market execution, as well as managing cash flows and future growth, thanks to its end-to-end execution capabilities. PepsiCo’s various brands manufactured and distributed by the Company include Pepsi, Pepsi Black, Mirinda Orange, Mountain Dew, Mountain Dew Ice, Diet Pepsi, Slice Fizzy, Seven-Up, Seven-Up Nimbooz Masala Soda, Sting, Evervess, Duke, Tropicana Slice, Tropicana Juices, Seven-Up Nimbooz, Gatorade, as well as packaged drinking water under the brands Aquafina and Aquavess.

VBL saw healthy demand across regions, driven by out-of-home consumption and the early start of summer.

VBL spent INR 550 crore to set up an in-house facility in Pathankot, Punjab, to gain a larger share of the fast-growing JNSD market. It only recently began producing juices through this facility. VBL may boost its margins by using this completely backward integrated manufacturing unit.

The Company is building a new plastic preforms and seals facility in Kathua, Jammu & Kashmir, and a new juice, carbonated beverages, and bottled drinking water factory in Baruni, Begusarai, Bihar. VBL plans to take advantage of growing demand in Bihar, one of India's most populous states.

VBL has also delved into non-beverage product creation for the first time. The Company inked a deal with PepsiCo India to make Kurkure Puffcorn, investing INR 23 crore in the production unit.

Refrigeration is required, and coolers are crucial to a company's success. VBL pays for the equipment (INR 20,000 per Visi Cooler) to properly showcase a diverse assortment of items. The installation of Visi Coolers is the most essential mechanism for boosting distribution. VBL intends to launch 80,000 retail shops and 40,000 Visi Coolers per year, focusing on semi-urban and rural locations.

By June 2019, VBL's net debt had risen to INR 3,500 crore, owing to massive acquisitions of PepsiCo's South and West India regions. VBL raised INR 900 crore through the qualified institutional placement method (QIP) in September 2019, diluting 5% of its stock and using the funds to settle the debt. It has repaid INR 2,200 crore in debt in the last two years despite the epidemic. In H1CY21, the company paid down a debt of INR 466 crore.

Key Strengths

  • VBL has maintained a strategic, robust, and long-standing partnership with PepsiCo since it entered India 29 years ago. Therefore, the Company enjoys a near-monopoly (accounting for 85% or more of its sales volumes in India).

  • The Company has built a comprehensive sales force that works closely with PepsiCo on local marketing and advertising. It has a large distribution footprint with nearly 2 million retail locations.

  • The Company’s profitability has grown at a CAGR of 72% over the last 5 years.

  • In the past couple of years, the Company has launched several new products that are doing well in the Indian market. The energy drink 'Sting,' milk-based beverages, and Tropicana juices are becoming increasingly popular, and the production line is virtually full. Sting (6-7%), Value Added Dairy (0.5%), and Tropicana (2%) make up the volume mix of new items in 1QCY22. The Company's Tropicana facility in Pathankot is nearly filled, and it hopes to establish a second Tropicana plant by next season.

Key Weakness

  • Over the last three years, promoter holding in VBL has reduced by ~9%.

  • Even though VBL has 31 production facilities in India and 6 in other countries, freight costs are higher in regions where the Company does not have a manufacturing presence since things need to be transported from the nearest plant. Increased public knowledge of Carbonated Soft Drinks (CSD) high sugar content is progressively decreasing use, lowering volume. Changing preferences for healthier choices might influence CSD sales in the long run. As a result, increased competition from a variety of peers on the healthy beverage platform may impact carbonated beverage sales.

  • The Company generates 70% of sales from carbonated drinks, 23% from water, and ~7% from non-carbonated drinks. Overdependence on the slow-growing carbonated sector can be harmful to the Company's growth prospects.

Key Competitors

  • Parle Agro – is an Indian beverage company. It is based in Mumbai and employs over 4000 people. It has been creating distinctive products and well-known brands since 1985.

  • Coca-Cola India - is India's most successful and well-known brand. It is the largest beverage company in the world and has had 2 successful stints in India.

  • Red Bull India - was founded in 2009 and has been successful in the country ever since. Red Bull introduced the customer to the notion of energy drinks in 1987.

Ravi Jaipuria is the promoter and founder of the Company. He has over 30 years of experience in the food, beverage, and dairy industry designing, implementation, establishment, and expansion.

2. Key Historical Financials

VBL saw a significant increase in sales in the 1QCY22. Revenue increased 26% y-o-y to INR 2,827 crore, driven by noticeable growth and a 6% boost in realization per unit case. Due to improved realization and management efficiency, driven by significant volume growth, EBITDA increased by 39% year on year to INR 531 crore. Margin improvement, better profitability in overseas business, lower taxes, and lower finance costs drove adjusted PAT to INR 254 crore vs. INR 129 crore in the first quarter of 2022. Out-of-home consumption, driven by the restart of offices and increased traveling activities, has led to CSD volumes climbing by 19% y-o-y to 126 million unit cases. Based on healthy growth and the rising popularity of recently released Sting and Tropicana, NCB volumes increased 18% YoY to 13 million unit cases. Water volumes climbed 21% y-o-y to 41 million unit cases, owing to stronger development in the international market.

As of Mar 2022, the Company's net debt was INR 3,350 crore, which included borrowing for inventory replenishment. The Company also announced the issuance of bonus shares in the ratio of 1:2 with June 7, 2022 as the record date. Since CY20, VBL has significantly increased its return ratios (ROE/ROCE) from 11% to 17%.

3. What is my view on company valuation?

The stock price of VBL rose ~70% in the last year and ~20% year-to-date (2022). Company is trading at a P/E (TTM) of ~60x, which is high compared to the industry P/E ratio of ~40x.

Over the previous ten years, the Company's PAT CAGR has been 36%. Due to the launch and early success of new products alongside a stable product line and large distribution footprint, we expect the growth to continue for the next few years. The debt to equity ratio of the Company is presently 0.6x; if cash flow improves, the D/E ratio can improve to 0.3x by CY2023.

For the past few years, the Company had been on an acquisition binge, which hurt its Free Cash Flow (FCF). However, FCF is improving as capacity utilization, margin growth, and consolidation of operations are happening. Over the previous two years, it has serviced debt to the tune of INR 2,200 crore, and with high FCF, we expect a rapid reduction in debt over the next 2-3 years. The Company had a CFO of INR 1,231 crore and working capital of ~30 days in CY21. Reduced capital expenditure and an emphasis on debt reduction, as well as higher margins and asset turnover, would result in a sustained improvement in ratios.

Share price looks expensive vs industry average. Also, we need to factor in the risk of reduction in growth due to lower consumption of carbonated drinks.

4. What are the risks to the investment analysis?

  • VBL’s whole business revolves around its partnership with PepsiCo. While the franchise agreement was recently extended until 2039, any modifications to the contractual arrangement in the future will significantly impact the metrics of the business

  • Because a large portion of its production and sales occur throughout the summer months, weather conditions or external constraints like lockdowns during these peak sales seasons might substantially and adversely affect its sales, results of operations, and financial condition


About the Author

I write about the stock market, cryptocurrency, blockchain. I have Bachelor of Arts degree with more than 10 years of experience in finance and cryptocurrencies.


I have no stock, option or similar derivative position in any of the companies mentioned since last 30 days, and shall not initiate any such positions within the next 5 days. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from SocInvest). I have no business relationship with any company whose stock is mentioned in this article.

I am not a SEBI registered advisor. This article is purely for educational purpose and not to be construed as an investment advice. Please consult your financial advisor before acting on it.

I have used publicly available information while writing this article.



bottom of page