Varun beverages fast growth duopoly business

[Debottlenecking]

**SINESS: Varun Beverages
Stock code BSE 540180
Stock code NSE VBL

ABOUT COMPANY
Varun Beverages Limited (VBL or Company) is a key player in beverage industry and one of the largest franchisees of PepsiCo in the world (outside USA). The Company produces and distributes a wide range of carbonated soft drinks (CSDs), as well as a large selection of non-carbonated beverages (NCBs), including packaged drinking water sold under trademarks owned by PepsiCo. PepsiCo CSD brands produced and sold by VBL include Pepsi, Diet Pepsi, Seven-Up, Mirinda Orange, Mirinda Lemon, Mountain Dew, Mountain Dew Ice, Seven-Up Nimbooz Masala Soda, Evervess, Sting, Gatorade and Slice Fizzy Drinks. PepsiCo NCB brands produced and sold by the Company include Tropicana Slice, Tropicana Juices (100%, Delight, Essentials), Nimbooz, as well as packaged drinking water under the brand Aquafina. VBL has been associated with PepsiCo since the 1990s . As on date, VBL has been granted franchises for various PepsiCo products across 27 States and 7 Union Territories in India. VBL has 31 manufacturing plants in India and 6 manufacturing plants in international geographies (two in Nepal and one each in Sri Lanka, Morocco, Zambia and Zimbabwe).

HISTORY
• 1995- Incorporation of our Company as public limited company.
• 1996-VBL started operation at Jaipur in 1996.
• 1999- Started operations in Alwar, Jodhpur and Kosi.
• 2013- Company acquired the business of manufacturing and marketing of soft drink beverages in Delhi, India.
• 2014- Capital infusion of ` 4,500 million by Promoter Group.
• 2015- Business transfer agreement through which our Company acquired Pepsi India’s business of manufacturing, marketing, selling and distributing soft drink beverages and syrup mix in the Indian states of Uttar Pradesh, Uttarakhand, Himachal Pradesh, Haryana, Punjab and the Union Territory of Chandigarh.
• 2015- Incorporation of Varun Beverages (Zimbabwe) (Private) Limited
• 2016- Acquired entire shareholding of Arctic International Private Limited in Varun Beverages (Zambia) Limited.
• 2016- VBL was successfully listed on Indian Stock Exchanges – NSE & BSE.
• 2017- Acquired Odisha and parts of Madhya Pradesh along with two manufacturing units at Bargarh.
• 2018- Acquired Chhattisgarh, Bihar and Jharkhand along with two manufacturing units at Cuttack (Odisha) and Jamshedpur (Jharkhand).
• 2018- Entered into a strategic partnership for selling and distribution of the larger Tropicana portfolio that includes Tropicana Juices (100%, Delight, Essentials), Gatorade and Quaker Value-Added Dairy in territories across North and East India
• 2018- Established a green field production facility in Zimbabwe, an untapped market with huge potential.
• 2019- Concluded the acquisition of PepsiCo India’s previously franchised sub-territories of the State of Maharashtra (designated parts), Karnataka (designated parts) and Madhya Pradesh (designated parts).
• 2019- Concluded the acquisition of West and South India sub-territories from PepsiCo.

KEY HIGHLIGHTS
• 37state-of-the-art production facilities.
• 90+ depots
• 2,500+ owned vehicles
• 1,500+ primary distributors
• Installed 800,000+ visi-coolers.
• Three division CDS 71%, Water 22% & Juice 7%.
• Auditor M/s. Walker Chandiok & Co. LLP fee is 6.80
PRODUCTS
1.Pepsi
2. Mountain dew
3.Miranda
4. 7 up
5. Nimbooz
6. Sting
7. Lipton ice tea
8. Tropicana
9. Slice
10. Aquafina

PLANT & CAPACITY

REVENUE BREAKUP
• CSD constituted 73%, JBD 9% and Packaged Drinking Water 18% in Q2 CY2022

RAW MATERIAL
• PET CHIPS – 66000 MT for packaging of finished goods. (Crude derivatives)
• SUGAR- one of the key raw materials.
• PETROLEUM- transportation of finished goods.
• PULP

COMPETITORS
• COCA-COLA

CAPEX PLANS
1200 cr for CY 23

SUBSIDIES
• Varun Beverages (Nepal) Pvt Ltd
• Varun Beverages Morocco SA
• Varun Beverages Lanka (Pvt) Ltd
• Varun Beverages (Zambia) Ltd
• Varun Beverages (Zimbabwe) (Pvt) Ltd
• Ole Springs Bottlers (Pvt) Ltd
• Lunarmech Technologies Pvt Ltd
MOAT
• Barrier to Entry as its mainly duopoly market.
• Brand- Pepsi co brand name
• Distribution channel is very strong 90 depots, 1500+ distributors 2500+ owned vehicle.

MANAGEMENT
I. BOARD OF DIRECTORS

• Ravi Jaipuria (Promoter & Chairman)
• Varun Jaipuria (Whole-time Director)
• Raj Gandhi (Whole-time Director)
• Kapil Agarwal (Whole-time Director and CEO)
• Rajinder Jeet Singh Bagga (Whole-time Director)
• Dr. Naresh Trehan (Independent Director)
• Dr. Ravi Gupta (Independent Director)
• Pradeep Sardana (Independent Director)
• Rashmi Dhariwal (Independent Director)
• Sita Khosla (Independent Director)

WEAKNESS & THREATS
• Duplicate vat bill case in Nepal on company employees.
• Promoters have continuously decreased holdings.
• PET resins is a crude derivatives which effect margins.
• Have acquired almost whole India, so after few years sales growth may be slow.
• Debt of 3000 cr.
• Licensing deal with Pepsi may not materialize in future (very little chance)

STRENTGH & OPPOURTUNITY
• Duopoly sector only two brands in CDS. Juice is also consolidated market.
• Have continuously reduced debt from 1.5 times in CY18 to 0.6 times in CY21.
• Brand of Pepsi.
• Great distribution channel.
• Company can acquire Africa talks going on for Congo.

THESIS.
• Operating leverage – CY22 sales growth will be high due to low base year and acquisitions of south & west territory.
• Deleverage – debt of 3000 cr which will be reduced by 40% in CY22.

Disclosure- Biased invested from lower levels. Not a Sebi registered adviser, views and thesis are mine please contact your financial adviser before taking any action.

[Debottlenecking]

[luckbychance]

Hi - did you check if the company already had an existing thread to it?

[ChaitanyaC]

There was one and it was closed.

Varun Beveregas - PepsiCo Bottler - A consistent compounder?

This is my first topic that I have created on VP and would like to get opinions on Varun Beverages Pvt Ltd, the franchisee bottler for Pepsico in India with a market cap of 17,000 cr Some positives:- Low per capita consumption at 44 bottles in India in 2016-17 against 1,496 bottles in USA and 537 bottles in Brazil offer a huge growth opportunity. Further, grossly untapped rural areas and rising in-home consumption (~40 per cent of total market consumption) offers opportunity for category grow…

[ChaitanyaC]

https://soic.in/blog-description/varunbeverage

Written by @arjunbadola

[Suyog_Patil]

Deep pocket guys are now entering into beverage industry

[Praveen_K_B]

VBL uses PET Resin as a major raw material for bottle production.

Since the Petroleum product prices were very high due to certain conditions across the world and now slowly the crude oil prices are consolidating, will VBL have inventory losses in coming quarters?

[nikhil090]

PepsiCo to set up 4 plants in UP

Looks like a very significant investment commitment. Would be interesting to watch company perspective on this

Regards
Nikhil

[Malhar_Manek]

Plant visit video

Inside The Pepsi Factory With Varun Jaipuria On India Inc 2.0

Disc- no holdings as of now, studying

[Noobinvestor]

Hi @Malhar_Manek I have written a detailed blog long ago this might help you

Varun Beverages: Yeh Dil Maange More!

[rajiv_ag16]

A lot of thanks for such nice analysis. In absence of understanding years ago i booked little profit. But when I understood the business model i repurchased it realizing my mistake. This scrip is only 8 bagger in the portfolio and will retain for 2-3 years ahead.

[pramaan]

Notes on Varun Beverages Conference Call- Q3CY2022

Financial Performance-

• We have delivered a net revenue growth of 32% and a PAT growth of 53%. Our India business has delivered a solid organic volume growth of 22%, led by a favorable demand environment and strong performance of our energy drink – Sting. In addition, healthy double-digit sales volume growth of 31% in our key international markets further assisted performance during the quarter.

• On the product portfolio front, we are pleased to share that Sting continues to perform exceedingly well across geographies. Similarly, our launches in the value-added Dairy segment are seeing healthy consumer response.

• CSD contributed 70%, juices 5% and packaged drinking water 25% of total sales volume in Q3 CY2022.

• Gross margins increased to 52.8% in Q3CY2022

Africa Business:

• Ø We are seeing traction in Democratic Republic of Congo. Pepsico’s penetration in Africa is lower than Coca-Cola. we are going one-by-one country. Once we stabilize in one country, then we look at the second country. There are lot of countries where Pepsi still does not exist, so there are huge opportunities available. There are other 2- 3 bottlers that PepsiCo is engaged with in Africa. They are engaged, but they are not expanding, with other big bottlers, whoever is there, not adding new territories. So, it depends how fast we can grow and what we can do.
• Ø Zimbabwe is doing extremely well for us. Peak season is October to December.
• Ø Agreement to distribute & sell “Lays, Doritos and Cheetos” in Morocco – to come into effect from January 2023- Existing business there is ₹150 crore.
• Ø In Morocco, volume growth is coming from Water which has lower realisations. Capex for water was undertaken in Morocco which led to volume growth.
• Ø As per the co-manufacturing agreement dated 28th February 2022, the manufacturing plant in Kosi, Uttar Pradesh commenced the trial production of Kurkure Puffcorn. - This is still very small revenue segment; it is something we wanted to learn and understand. It’s a small investment from our side, and it will not be large revenues. With proper learning, we will understand the business. And hopefully, like in Morocco where we have got the distribution right, we will try and want to take it in a much bigger business.

Energy Drink: From Jan to September 2022- average mix of Sting is 8.5%. In September quarter, it was more than 12%. In Sting, our realization is more by 65%. Sting is high margin product, which is leading to improvement in the overall margins. Coke has just launched their energy drink, which is very new.

Juice and Dairy based products: Tropicana- one large facility which we opened in Pathankot, because of that our distribution has gone to only about 15% of our total outlet. So, it’s still not going to all the outlets because of a constraint of production. The Tropicana and dairy are both done from the same plant, we are adding one more plant next year by July. So that will double our capacity in dairy as well as Tropicana. In this season we could not supply Dairy because we ran out of capacity and hopefully, as I said, even next year we are going to be constrained because our capacities are only coming after the season. Dairy products are not Pepsico products, they are Varun beverages products.

Capacity: We were reasonably fully utilized this year and also, we are adding new capacity, so we would be having good capacities for next year. Capex- Rs. 1,200 – Rs.1,300 crore for this year. Rajasthan and Madhya Pradesh. Commissioning is targeted before February , i.e. start of season. Overall capacity is based on PET, cans, and glass. New capex is all PET. Capacity addition is approximately 20%.

Sales:

• Ø October to December is seasonally weakest quarter.
• Ø We are not looking for a private label.
• Ø Bihar and MP have been seeing growth of over 50%.

Margins: It is not easy to expand margins when margins are already at 20%- 22%. If we can maintain this, we’ll be happy. We are trying to maintain the EBITDA margin at around 20-21% odd which is highest in the world.

Guidance:

• Ø We took over the rest of territory in the country in 2019 and soon after, where we wanted to expand the distribution, Covid-19 came in for 2 years, all the expansion of the go-to-market we had done, could not get any results. This is the first year we have really got results out of whatever expansion and go-to-market we have done and that is what is giving us the fruits. Going forward also, as long as we keep on growing the market and keep on adding our go-to market, there is enough room for us to grow.
• Ø We are adding many new products. We added the value-added dairy, Tropicana, and energy drinks. So, there is enough in our palette and then we are now looking to start snacks with Pepsi, which they have given us the first opportunity in Morocco. So, there is enough for us to expand and there is enough room for us to expand in the categories which we have. I think that itself is going to take us a long time before we can saturate the market. The Indian market is growing at such a huge pace, the number of outlets which are being added, if we can meet that also itself, we’ll see double-digit growth.

Distribution: We are adding 40,000 to 50,000 chilling equipment each year. In the past two years, we had reached about two million dealers, which now have reached to about three million. Every year, we expect this to go up by ~10% as far as the dealer’s reach is concerned. The carrying size also with these dealers is going up another 5%- 7%. These are some statistics on the distribution side. (Well, as per our information, there’s 11 million outlets in India. Now the question is, we are reaching close to 3 million now and to add more, we are looking to add between 10% to 12% every year.)

Competition: Reliance acquired this Campa Cola business- There’s enough room for everybody to complete and the business is growing, and I am sure they will do a good job.

Disc- Invested.

[Sparsh_Jain425]

KPIs¹ to track in the business of Varun Beverages (NSE:- VBL):—>

1. 2Vs:- It’s one of the two most important KPIs to track in FMCG companies.
1.1) Value (Realisation)
1.2) Volume² Growth
2. Distribution Reach & Scale:- This is the second of the two most significant KPIs to look for in FMCG businesses.
3. Product Mix:- Basically, look out for updates in the increase of High Value & High Volume Growth Beverages.
4. CapEx Numbers:- Track the Capacity Expansion & Key Developments in VBL.

¹ KPIs:- Key Performance Indicators
² Volume:- It’s generally measured in Million Cases by VBL. A unit case = 5.678 litres of beverage/in 24 bottles of 237 ml each.

Disclosure:- Just INVESTED Today. It’s not a Buy/Sell/Hold Recommendation.

[Sparsh_Jain425]

It’s a Good COMPILATION of VBL’s Q3CY2022 Earnings ConCall
Thanks @pramaan for the Notes

[Vishal_Vindoorty]

What i have observed, is that packaged drinking water segment has grown more than 20 percent cagr over a period of 4 to 5 years?

Is the growth sustainable for many years?

However, i have read that packaged drinking water is a low margin business, any idea on profitability margins of beverage and energy drink category?

What can be the growth trajectories in roe and roce ?

[sivaram]

@Vishal_Vindoorty

Is the growth sustainable for many years?

If you see JJM Dashboard (ejalshakti.gov.in)
my personal view is that it should flatten out quickly once water connections are done and then water quality is also addressed. you might say, the market is completely different but once water availability is the norm, the need for packaged water moderates a bit

[ChaitanyaC]

@sivaram

the need for packaged water moderates a bit

I don’t think so. This is anecdotal but I have seen people from lesser income groups too buying water and not carrying water, when venues to buy water are available. These are unbranded in some cases and sometimes local brands, but people are buying. And I for one, cannot say one brand is superior to others - Bisleri, Aquafina, Oxyrich etc, when all such brands go through the same stages of purification, and as such, put the information on their respective bottles, so I guess even educated people may not find one brand more better than the other and choose whichever is more available, so distribution may be the key here. And when all the brands are well known, I guess all will grow, except for some regional market share here and there.

@Vishal_Vindoorty

So if something has become a part of life, something where people are not in 2 minds to take a decision, something which people buy quickly in seconds, despite the low margins, the segment becomes a permanent vertical, along with the regular increase of price, unless there is some regulatory change that poses a challenge.

Have a position in VBL, bedazzled by the rise.

[phreakv6]

I’ve spent most of the week reading old concalls of VBL and updating my thesis. This post is my understanding of the business as a whole, the nuts and bolts of it (especially the “Unstructured notes” section). What follows is a copy/paste from my Notion page so may have certain unfinished bits/errors etc. Wasn’t sure if I should share or not since its perhaps a bit too long.

Varun Beverages (VBL) is a bottler for PepsiCo in India and abroad. The relationship with PepsiCo is now 30+ years old and as a company, VBL has been in the bottling business with PepsiCo for 30+ years and in the beverage industry for 55+ years. The company went public in late 2016.

Geography

During the last 6 years post listing, the company has continued to maintain its stellar growth pre-listing, unlike most businesses that listed in ‘16/’17 period (Parag Milk, Thyrocare etc.). VBL had distribution rights in 17 states and 2 Union Territories and 5 countries in 2016 when it got listed, whereas today, it has presence in 27 states and 7 UTs and 6 countries.

Most of East, West and South India rights were taken from PepsiCo in the last few years. PepsiCo and Coke have a combined market share of ~90% in India in CSD+Juices. PepsiCo has ~38% in that.

PepsiCo Partnership

As partners, VBL and PepsiCo handle different responsibilities in the symbiotic relationship. PepsiCo owns the Branding, Trademarks, Formulation and supply of concentrate, Product & Packaging innovation and Customer Pull Management (ATL) via Brand development. VBL handles the production, distribution, logistics, outlet management and Customer Push Management (BTL)

Products

The company sells products under broad categories of carbonated soft drinks (CSD), Juices and Packaged Water. They sell energy drinks under Sting brand. sports drinks under Gatorade and dairy products under Creambell which is owned by the promoter and not PepsiCo.

Volume Growth

20% CAGR over last 10 years. (Company has grown at 20% CAGR over 25 years) Interesting how international volumes have kept up with the domestic volume driven by territory acquisitions.

In million cases

Year	Domestic Volume	International	Total	International %
2012	114	22	136	19%
2013	132	21	153	16%
2014	144	26	170	18%
2015	209	31	240	15%
2016	224	52	276	23%
2017	224	55	279	25%
2018	274	66	340	24%
2019	404	89	493	22%
2020	337	88	425	26%
2021	454	115	569	25%
2022

Key Milestones

• 2016

  • Got listed
  • Launched Pepsi Black
  • 45% of PepsiCo’s volumes. Presence in 17 states and 2 UTs

• 2017

  • Acquired Odisha, MP, Chattisgarh, Jharkhand territories (21 states, 2 UTs)
  • 51% of PepsiCo’s volumes

• 2018

  • 51% of PepsiCo’s volumes. Acquired Bihar (22 states, 2 UTs).
  • Launched Sting
  • Acquired dist. rights to Tropicana, Gatorade and Quaker dairy

• 2019

  • Acquired Gujarat, parts of Maharashtra and Karnataka
  • Acquired parts of AP & Telangana, Kerala and TN
  • Acquired 5 more UTs (Total cost 1850 Cr for 7 states and 5 UTs)
  • 83% of PepsiCo’s volumes (27 states, 7 UTs)
  • Exports to Botswana and Malawi from Zimbabwe
  • Acquired water distribution rights in Morocco (led to great vol. growth)
  • 50% stake in Lunarmech for recycling PET
  • Tropicana plant commissioned in Pathankot end of 2019
  • QIP to raise money for acquiring territories

• 2020

  • Adapted to large packs for in-home consumption (introduced the 1.25L pack instead of 2L since 1.25L fits in a fridge easily)
  • Cost-cutting, rationalisation across the supply chain and innovation with light-weight PET pre-forms

• 2021

  • Re-introduced Cream Bell branded dairy products
  • Launched Mountain Dew Ice
  • Tropicana in PET form and in small packs
  • Enhanced GTM strategy for territories acquired in 2019 (more vehicles, visi-coolers, people)

• 2022

  • Commissioned Bihar & Jammu plants
  • Entered Congo (supplied from Zambia and Morocco as off-season of Morocco is peak in DRC)
  • Lays, Doritos, Cheetos distribution rights in Morocco
  • Kurkure Puffcorn co-packing rights in India to test the waters

Unstructured Notes

• Concentrate, sugar, logistics (6%), pre-form, crown, corks, labels, cartons, pulp used for juices form the cost structure

• Fully integrated company that produces everything from shrink films, crates, corks, pre-forms, blows their own bottles and owns the trucks and visi-coolers used for distribution

• This is a seasonal business where bulk of the sales used to be in H1. However, there are early signs that seasonality might be changing a bit

• For Coke, different territories are run by different people. PepsiCo appears to be taking a different turn going with a single bottler contributing to 81% of India volumes. Its an incredible amount of trust between VBL and PepsiCo

• The trust can also seen by the keenness PepsiCo has had to hand over territories in Africa as well whenever VBL is ready. And also with handing over distribution of snacks (Lays, Doritos, Cheetos) business in Morocco and Tropicana in India, which they have not done anywhere else in the world. VBL is the only franchisee in the world that manufactures Tropicana and Lays

• 65% of volume used to be in H1 and 35% in H2 (2/3rd in Q3 and 1/3rd in Q4) in 2017 when they had mostly North territories

• Capacity utilisation is calculated only based on peak month utilisation. Peak month, the plant is run on 3 shift basis. So 9 month production happens in 90 days (concept of 24/90)

• PepsiCo’s territories acquired by VBL have been very underpenetrated (10-15% market share vs 40% in VBL’s northern strongholds). PepsiCo due to its reputation as a IP and brands player and other franchisees being small and fragmented, haven’t been able to execute as well as VBL (VBL has 4+% higher margins than other bottlers in the world)

• Acquisitions that VBL does are always at around 1x current revenues in the territory and most territories VBL has acquired so far have been underpenetrated, so these have been fantastic capital allocations so far

• MP, Odisha, Bihar, Chattisgarh, Jharkhand - 5 states had revenues of 420 Cr when acquired (30 million cases) - How much now?

• Tropicana was acquired at 7.5 million case volume from PepsiCo. PepsiCo was using a co-packer so VBL traded Tropicana in the first year until they put up the plant. They spent a lot of time and effort in optimizing the process for margins as juices were the future. Volumes grew to 10 million cases (Rs.300 realisation, so 300 Cr) by 2019

• Tropicana plant is Pathankot is the only plant that manufactures it. Its at 100% util. New plant will come up towards end of ‘23.

• VBL’s distribution for Tropicana is lot stronger than “Real”, its main competitor and market leader. VBL has 750k visi-coolers and great reach for its products

• Dairy and Tropicana are fungible in the same line. Water and CSD are fungible as well. Large packs and some packs are fungible as well (Covid time VBL shifted to large packs for in-home consumption)

• Lemon and Lime category is estimated to have 600 million cases volume in India (another ultra-large category)

• Nimbooz and Mountain Dew Ice, though both lemon based are not same. Nimbooz is perceived as summer drink

• Sting is consumed by truck drivers, youngsters alike and has universal appeal. Price rationalisation in ‘20 led to 1000% growth in the year

• Sting competes with Red Bull but is really in a category of its own since the price differential is huge

• Sting is now present in more outlets than any other VBL product including water. Sting has 400k dedicated outlets (outlets that offer promise for pushing other VBL products in the future). VBL has 3 million total outlets, 250k international incl. (India has total 11 million outlets in all)

• Sting has grown from 0 to 12% of volume in just 4 years

• It takes 1-2 years for acquired territories to reach the 20-21% EBIDTA margin

• After acquiring water rights in Morocco, the company had phenomenal volume growth. 80% growth in 6-7 yrs vs 80% growth in a single year in 2019. Water penetration helped increase CSD volumes as well. (One product helping other product’s reach seems to be a theme in VBL with Sting penetration helping CSD volumes)

• Single-serve packs are more profitable than larger packs (out-of-home vs in-home consumption)

• Capex required for the business will be 50% of depreciation on steady-state

• Asset turns at 2x for greenfield and 2.5x for brownfield. Mature plants do 2.5x

• Where seasonality is low (South/West), capex is lower (capacity is for peak season)

• Margins will be stable around 20-21% most years and there’s hardly any scope for improving it. However ROCE growth will come primarily from improvement in asset turns (Has played out very well in ‘22)

• Price per case varies a lot between water, CSD, Sting and Tropicana but margins are more or less in line. Realisation improved from Rs.145/case to Rs.167/case in ‘22 (Sting alone contributed Rs.8 to this as it has 65% higher realisation. Reduction in water mix, inc. in juices and dairy)

• Depreciation - 20 years useful life for P&M, bottles etc. 5 yrs, visi-coolers is 8 years. Weighted avg. dep is 8%

• VBL wants to do 100% PET recycling and produce their own resin and as a first step have a partnership (55% stake) with Lunarmech for 30,000 ton starting capacity

• Company will mostly do brownfield as much as possible unless acquiring new territory. GST makes it easier to do business. Also larger plants have a distinct scale advantage over several small ones

• 83% of PepsiCo’s volumes in India. 17% left are parts of AP, J&K, PepsiCo’s JV with Tata called NourishCo and some bulk water sales. So not much headroom left in India to grow via acquisitions in beverages from PepsiCo

• Two peak months now with Q2 and Q3 after acquisition of South and West. Morocco has peak in Aug and Zimbabwe/Zambia in December

• Seasonality will reduce going forward with South and West regions (1/3rd of volume) and also with Tropicana portfolio, as well as Zambia/Zimbabwe which have peak season in Q4

• Even in ‘19 when FMCG companies were struggling with growth, VBL had great growth due to under-penetration in Bihar, Chattisgarh etc.

• Most of VBL’s rural growth has come from rural electrification. There is now a cooling infrastructure possible in a lot of places which wasn’t so few years back or didn’t have power for 16-18 hours making it difficult to justify chilling infra (mainly in UP)

• VBL’s GTM (Go to market) - More people, routes, visi-coolers, outlets

• Glass bottles have reduced to < 10% of volumes now (Company has depreciated/written-off glass production lines accordingly). PET bottles have higher realisation

• Distributors generally carry 5-7 days inventory. VBL doesn’t carry more than 30 days inventory - this is the worst case and its at the beginning of season. Otherwise its 15 days inventory

• Rural is 30%, semi-urban is 40% and urban is 30%

• Covid behavior change of in-home consumption has continued post Covid as well since Customers now consume out-of-home small packs alongside in-home large packs which have remained stable in volume in ‘22

• Bihar has low per capita consumption of beverages at 8-9 bottles compared to 24 for the country. VBL put up a large plant (285 Cr) which it felt could serve it for 2-3 years but was maxed out in the first year itself

• Bihar, Orissa, Chattisgarh, Jharkhand and MP are so underpenetrated they can grow at 35% volumes

• Summer ‘22 saw 97% volume growth and 90% capacity utilisation. VBL has set out to expand capacities by 30% in time for Summer ‘23 (they missed out on a lot of business in ‘’22 due to capacity constraints and stock-outs)

• GST has really helped VBL. They shutdown extra warehouses and supply to distributors from their plants. Reduced time at borders and not having to have plants in every state have also helped (and during Covid to shift supplies based on state-level lockdowns)

• Beverage consumption in India is about 2 bottles a month, whereas in US/Mexico it is about 2-3 bottles a day (30x higher). China is about 12x higher than India. Even Nepal, Sri Lanka and Pakistan are 2x ours. So as per capita income increases our beverage consumption will keep growing

• PepsiCo is behind Coke in North America, South America and China but ahead in Middle-east, Pakistan, Vietnam. PepsiCo leads in juices with Tropicana (could be a crucial differentiator in the tussle with the future shift in preference towards juices)

Growth

Where will further growth come from is the question I set out to answer with this big exercise. It could come from

• New territories abroad. Looks like Africa and maybe South-east Asia is ripe for the picking once VBL has stabilised their India acquisitions. This has been mentioned 2-3 times in the concalls across the years. Lot of countries in which Pepsi doesn’t even exist in Africa

• New product lines - After Pepsi Black, Mountain Dew Ice, Sting and Tropicana, it looks likely that the company may venture into acquiring Frito-Lay portfolio and enter PepsiCo’s snacks business

• Dairy as a category is very promising. Currently there’s capacity constraint for both Tropicana and Dairy and this should get resolved when they add an additional plant by end of ‘23

• Volume growth as per-capita consumption increases with per-capita GDP improvements. We may see surprising growth here as the bottom of the pyramid is mis-represented in per-capita GDP numbers. Once they are pulled up, a Rs.20-Rs.30 beverage becomes affordable luxury

Risks

• Contract renewal is done once every 10 years. Unless VBL messes up big in terms of infractions to contract, this shouldn’t be a concern. They have a 30+ years relationship now. Also VBL has proven across time and regions that it has higher efficiency of ops and with 83% volume in India and 6 countries in Africa, VBL is an equal partner with PepsiCo

• Sugary carbonated beverages might go out of fashion with health-conscious population. VBL however appears set to capture the juice and dairy market which might replace the CSD slowly over time. Ours is a hot country and some form of packaged hydration is perhaps inevitable

• Coke has introduced “Charged” to compete with Sting. A lot of the growth has come from Sting for VBL in the last 5 years. Have to see if Sting loses market share to “Charged”. Initial impressions however indicate Sting has better taste and is holding its own being a first-mover

• Valuation is pricing in good growth for the foreseeable future. Management appears confident of the same and having read 6 years of concalls back-to-back, it is fascinating how clear the management vision has been so far. (Hindsight and survivorship bias of course)

Conclusion

I think we sometime underestimate the scale-invariance of growth. We assume a large player cannot grow for long. It always feels obvious though in retrospect. VBL has grown at 20% for 25 years without growth being too lumpy, very much like a HDFC Bank. There are decent signs that they might be able to do it for sometime to come as India’s per capita GDP rises and Africa rises in dominance over the next few decades. This might be a business which might survive disruptions as well. However, be wary of the price you pay.

Disc: Invested from lower levels in personal and family accounts. This is not advice to buy/sell. I am not SEBI registered and could have several errors in this post. Please do your own due diligence.