Fundamental Analysis of Varun Beverages Ltd
(Sector: Beverages/FMCG)
Listed on BSE and NSE
CMP: 1236.90rs/ share at 15:30
(Note: The company follows the Calendar Year January to December as its Financial Year. Hence, the report analysis is likewise.)
 

Varun Beverages, the multi-bagger stock, gave a handsome return of 425% in the last three years. The company has delivered good profit growth of 49.2% CAGR over the last five years. Analysts believe the stock is a ‘good’ buy from the ‘long-term’ perspective. Let us look into the fundamentals to conclude, Is Varun Beverages a wise decision to buy or there is no fizz left for the stock?

Ravikant Jaipuria, the founder turned billionaire.
 

Ravikant Jaipuria is the founder and chairman of RJ Group. He is an Indian billionaire business magnate with a $14.45 billion net worth. In 2023, Mr Jaipuria surpassed Uday Kotak, the wealthiest banker in the nation, in terms of net worth. Under RJ Group, he manages Varun Beverages and Devyani International. Varun Beverages produces bottles and distributes PepsiCo beverages in India. 

Jaipuria hails from the Marwari family and is a father of two children. He studied business management in the US and returned to India in 1985. He joined the family business as a bottler for Pepsi-Cola. Jaipuria holds a minority stake in Medanta, a healthcare firm and hotel chain Lemon Tree. He also manages Devyani International, which operates KFC, Pizza Hut, and Costa Coffee.

Company Roundup
 

Varun Beverages is a prominent player in the beverage industry and is the second-largest bottling partner for Pepsico in the world (outside the USA). The company produces and distributes a wide range of carbonated soft drinks (CSDs) and a large selection of non-carbonated beverages (NCBs). PepsiCo CSD brands produced and sold by VBL include Pepsi, Diet Pepsi, Seven Up, Mirinda Orange, Mirinda Lemon, Mountain Dew, Evervess, Sting, Gatorade, and Slice Fizzy drinks. The NCB brands produced and sold by the company are Tropicana Juices, Nimbooz, and packaged drinking water, Aquafina.

VBL has been in association with PepsiCo since the 1990s. For two and a half decades, it consolidated its business association with PepsiCo, increasing the number of licensed territories and sub-territories covered by the company production and distributing a wide range of PepsiCo beverages, introducing SKUs in the portfolio, and expanding the distribution network. 

The company has 31 manufacturing plants in India and six in the International geographies. It has a vast distribution network of 110+ depots, 2400+ distributors, and a self-owned fleet of 2500+ vehicles serving 3 million retail outlets.

Product-wise segments
CSDs accounted for 70% of the revenue of VBL. The bottled water division fetches 23% of the sales. The balance came from the sales of NCBs such as juices, milkshakes, etc.

Geography-wise segments
Varun Beverages earned 78.5% of its total revenue from sales within India. International operations brought in 21.5% of the total income. 

Industry Parlance

Indian Beverages, both alcoholic and non-alcoholic, are as diverse as their people, influenced by the country's vast geography and weather. The industry is expected to grow at a CAGR of 8.10% to hit the $13.7 billion mark by 2027.

The majority of the market share is controlled by Coca-Cola and Pepsico, representing a duopoly. They compete with each other through different strategies. The non-alcoholic beverages industry is experiencing an unprecedented change towards healthy beverages because of the transition in consumer preferences. Other factors, such as a rise in disposable income, higher rural consumption, an increase in discretionary spending, change in lifestyle, and population growth, are expected to bring more sales to the beverage industry of India.                                         

Volume Growth
   

Total Sales Volume (MN Unit Cases) (Source: Varun Beverages Ltd . FY 2022 Annual Report)
CAGR(2018-22)            24%  
The above image represents the 24% CAGR growth in volume terms. Considering volume growth, the operating revenue has grown at a CAGR of 20.7% from FY 18 to FY 22. During the same period, the profit after tax accelerated at a sharper annualized rate of 38.9% to Rs 1,550 crores.

Strengths and Weakness

5. Strong momentum in Price: Price above short, medium, and long-term moving averages.
5. Consistent highest return stocks over five years - NIFTY 500.
5. Good quarterly growth in the recent results of Sept 23 Qtr with volume growth and higher realisation driving sales and low raw material prices aiding margin expansion.
5. Varun Beverages is benefitting from new products at affordable price points.
6. It increased its market penetration in newly acquired territories in South and West India and grew refrigeration in rural and semi-rural areas.
5. Strong cash-generating ability from its core business. It has improved cash flow over the last two years.
5. FII/FPI increased their shareholding in Sept 23 Qtr from 26.7% to 27.55%
5. The company is investing in recycling and implementing measures to improve energy and water efficiency.
5. Institutional Investors have increased their holding in the Sept 23 Qtr  from 29.87% to 30.91%
    
5. Promoters pledge of 0.04%
5. Mutual Funds have decreased their shareholding in Sept 23 Qtr from 2.37% to 2.22%
5. The company had a net debt of Rs 4000 crores as of March 31, 2023.
5. Promoter holding decreased by 0.52%
5. The number of Mutual Fund Schemes decreased from 30 to 28 in Sept 23 Qtr.

Peer Comparison

Source: Screener
Please note that the above list is for educational purposes only and not a recommendation. Do your research before investing.
 

Developments of the Company through the year

1. In 2019 PepsiCo extended the bottling appointment and trademark license agreement from October 2, 2022, to April 30, 2039.
2. In December 2023, the company laid the foundation stone of its proposed manufacturing plant in Kandrori- Kangra Himachal Pradesh for a capex of Rs 270 crores.
3. The company is planning Greenfield facilities in UP, Maharashtra, and Odisha.
4. In December 2023, the MOU was signed with the Government of Jharkhand for its proposed manufacturing plant in Patratu for a capex of Rs 450 crores.
5. In Q2FY24, the company commissioned a new production facility at Bundi, Rajasthan and Jabalpur, Madhya Pradesh as well as expanded its capacity at six existing locations.
6. In H1FY24, the company acquired a 100% stake in the business conducted by The Beverage Company (Proprietary) Limited, South Africa along with its wholly-owned subsidiaries (“BevCo”) for Rs 13,200 crores.
7. In November 2023, the company incorporated a subsidiary company in Mozambique, South Africa, and in Q2FY24 it incorporated a new subsidiary in Johannesburg, South Africa.
8. The company uses around 66,000 MT of PET resin as packaging material for its finished products annually.
9. It has engaged with GEM Enviro Management Pvt Ltd for 100% recycling of used PET bottles through collection from end users by placing dustbins in reverse vending machines, direct collection from institutions etc.
10. In Q1FY24, the company split the existing equity shares of the Company from 1 equity share having an FV of Rs.10/- into two equity shares having an FV of Rs. 5/-.

Road Ahead

1. The company recently formed an agreement for the manufacturing and sale of Lays, Doritos, and Cheetos for PepsiCo in Morocco. Along with this, it has also started production of Kurkure Puffcorn in Uttar Pradesh.
2. The company is optimistic about the future growth of value-added milk-based beverages such as shakes and cold coffee launched under its in-house brand ‘Cream Bell’.
3. It is enhancing its capacity for juices and value-added dairy beverages to align with evolving consumer needs.
4. The company has acquired Lunarmech Technologies as a backward integration for cap production.
5. VBL’s introduction of 250 ml Sting energy drink priced at Rs 20 has positioned itself at a favourable price point thus attracting the masses. It aided in disrupting the higher-priced market dominated by the likes of Redbull. The management expects it to be a key growth driver in the future.
6. The company has made notable investments in developing Greenfield and Brownfield manufacturing facilities in India and a Greenfield facility in DRC.

To Conclude

Varun Beverages has indeed rewarded its investors in the recent past. Considering the strong fundamentals, major expansion plans, and rewarding business, risks and challenges are inherent to running the business. Challenges such as any rift with PepsiCo in the future can hurt the company. Its expansion efforts in uncharted international territories might have an unfavourable end. The investors should do a thorough analysis before reaching out to any investment decisions.

Source: Screener, Moneycontrol, Forbes, Statista, Trendlyne

Can logistics be a challenge for the company?
What strategies should Varun Beverages think in terms of healthy beverages?
 

Prepared by: Manali S
 

Disclaimer: Do not practice investment recommendations or strategies based on the above study. The information is compiled for study purposes; to give an insight into one of the companies from many. The report is made with due care and information is sourced from the liable websites and mediums.