VARUN BEVERAGES Stock Research Report

VBL is the key player in the global beverage industry and the second largest franchisee of PepsiCo in the world (outside US) with operations spanning across 10 countries with franchise rights and additional 4 countries with distribution rights. The company accounts for ~90% of PepsiCo’s beverage sales volume in India. India is the largest market and contributed ~79% of revenues from operations (net) in Fiscal 2023. VBL has also been granted the franchise for various PepsiCo products for the territories of Nepal, Sri Lanka, Morocco, Zambia, Zimbabwe, South Africa, Lesotho, Eswatini, DRC, Tanzania & Ghana and distribution rights for Namibia, Botswana, Mozambique and Madagascar.

Key Rational

◼ Consistent top /bottom line performance despite challenging environment –

VBL revenue/PAT grew 22%/45% CAGR over CY19-23 on account of scaling of new territories of west and south India which was acquired pre-covid and strong growth in international geographies. Moreover, expansion of its distribution reach to 4 Mn outlets as on Sep-24 from 3 Mn in CY22, expanding high margin Sting energy drink across outlets coupled with increased focus on expansion of value-added Dairy, Sports drink (Gatorade), and Juice segment are some of the key growth drivers of the company

◼ The commissioning of multiple greenfield and brown field manufacturing facilities will lead to strong foundation for future growth.

In last several years – CY23 company commissioned new production facilities at Bundi (Rajasthan) and at Jabalpur (Madhya Pradesh), as well as expanded capacity at six existing locations in Pathankot, Kosi, Bharuch, Tirunelveli, Begusarai and Guwahati. Moreover, in CY24 it commissioned new facilities in Gorakhpur (Uttar Pradesh), Khordha (Odisha) and additionally, it proposed to acquire remaining 39.93 (taking its total shareholding to 100%) stake in Lunarmech Technologies which is engaged in manufacturing plastic closures for PET bottles used by VBL inhouse. In Africa, it has commissioned CSD and packaged drinking water at production facility in Kinshasa, Democratic Republic of Congo. All these expansions have led to strong foundation for VBL for multiyear growth opportunities in India and Africa market.

◼  Expanding South Africa territory –

VBL announced a proposed acquisition of a 100% stake in SBC Beverages Tanzania Ltd and SBC Beverages Ghana, both PepsiCo bottlers operating in the territories of Tanzania and Ghana, further reinforcing its position in the high-growth African market following the acquisition of BevCo in Dec-23. Further, the company successfully concluded the strategic acquisition of the Beverage Company (BevCo) in South Africa. Now it will expand its footprint across several dynamic markets in the African region Lesotho, Eswatini, Namibia, Botswana, Mozambique, and Madagascar. The company is engaged in the business of manufacturing and distribution of licensed (Pepsico) and own-branded non-alcoholic beverages in South Africa.

◼  Outlook:

VBL is poised to sustain its strong growth momentum, driven by several strategic factors: 1) The successful acquisition of BevCo, which strengthens its market presence in South Africa and DRC; 2) Expansion of its snacks portfolio beyond India, with a focus on markets such as Zimbabwe and Zambia; 3) A continued push to expand its distribution network, particularly in rural areas; 4) The commissioning of various greenfield and brownfield facilities, boosting manufacturing capacity and market coverage while optimizing transportation costs; and 5) The expansion of its high-margin Sting energy drink and a greater focus on value-added dairy products, sports drinks (Gatorade), and juice offerings. These initiatives are anticipated to underpin the company’s long-term growth trajectory and enhance profitability. We expect the revenue/EBITDA/ PAT to grow at 23%/27%/30% CAGR over CY23-26E.

Key Financials (Consolidated)