Varun beverages fast growth duopoly business

Can we also put below these topics as corporate governance risk?


VARUN Beverages Q3FY23 Concall or Q4CY22 concall

-Improved product mix led to 49% Revenue growth and PAT growth of 100%+.

-Sting contributed to realisation and revenue growth. Expect category to keep growing.

-Launched products in value added dairy segment recently.

-Sting is 9.6% of sales volume. Gross margins were minimally impacted inspite of higher cost of RM. Gm’s declined this year, yet EBITDA Margins increased due to realisations and operating leverage.
-Ebitda Margins at 22.2% for the full Year.

-Debt/ebitda at 1.23 times and D/E at 0.65 times.

-CWIP at 600+ crores for Greenfield and brownfield capex. Entire Capex for CY23 or FY24 at 1500 crores.

-Snacks Business: at the moment in India Pepsi isn’t looking for distribution. Only working on co packing and giving it to Pepsi. This is what they are looking for. Varun has started distribution and packaging for them in Morocco. Varun will start talks of manufacturing for them soon in Morocco. Currently importing from Portugal and Egypt.

-Production for Snacks business for Pepsi in India: production started in November and December. Pepsi has asked to expand the same.

-South and Western territories are growing faster. Seasonality in the business is structurally coming down.

-Looking at 10-15% expansion in distribution. Targeting to reach 3.5million outlets from 3million currently. Expanding trucks, visi coolers etc.

-National roll out for dairy business will happen in FY24. Tripling capacity by the end of this year. Sourcing for dairy also in place in all the regions.
-Don’t find much competition in dairy competition and Sting (energy drink) vs our key competitor.

-Rajasthan, Mp, and 6 brownfield: This is where we are doing our capex.

-Vision of the company is to reach 1 billion volume. Want 50% growth in volumes over 3 years in India. At 652 million today. Implies a 15%+ Volume growth in Indian Business.

-1500 crore capex+Cream bell capex will be capitalised.

-Analyst asked this Q: Gross margins if they revert back to mean and operating leverage kicks in. Margins might actually go to 22.5 to 23%. Management replied by saying- no guidance on margins, it might be possible.

-Snacks business for Pepsi- currently it is foot in the door. 1 line at the moment and talking about 1 more line.

-Volume growth for the Full year was 41%.

-Expect energy drink to become 15% of overall beverages business. As even in other geographies like Pakistan, Thailand etc. Energy drinks are at 15%. Energy drinks used to be very expensive, due to value and pricing. Energy drinks have really taken off in last 5-7 years.

-% Wise growth is faster in East, West and Souther India vs North.

-Juice and Dairy capex will be ready by the end of this year. Which will contribute to growth by next year.

-Difference between us vs Other FMCG in rural markets:

Only now power and electrification of villages has started. Due to this we are getting much more traction vs the likes of HUL, Dabur etc etc. As they were already present in villages since long. Thus, our category volume growth is much faster.

-Sting was 16% of total volumes in Q3FY23, Q4CY22.

-Sting volume has grown 175% vs the last year when looked at Q4CY22 or Q3FY23.

Disc: Invested and trades in last 30 days.


A few critical observations from the Varun Beverages Annual Report for FY22 that caught my eye. Note that this is not the formal analysis of the AR, I am not commenting on the usual stuff like growth rate / margins / volume & segment information etc. which is readily available elsewhere - and all of which looks very good!

  1. The company is a net foreign exchange consumer. Last year, forex consumed was Rs.956 crore and forex gained was Rs.230 crore. Rupee depreciation affects the company adversely.

  2. In FY22, there was a forex gain in India operations (Standalone P&L) of Rs. 46 crores but a forex loss of Rs.6 crore at consolidated level, implying forex loss in international operations. More importantly, a huge forex loss of Rs.380 crore is accounted under OCI. This is almost 25 % of the annual PAT.

My understanding is that unless the rates move back in the opposite direction, this loss will hit P&L in the coming year.

  1. Franchisee Rights & Trademarks worth Rs.604 crore is capitalised as Intangible Assets. The current license agreement for India with PepsiCo India is till April 30, 2039. Company says this can be renewed at nominal cost and with no specific conditions attached, and therefore Franchisee Rights & Trademarks are no longer amortised. If these are amortized over a 20-year period, there will be a hit of Rs.3 crore per annum to the P&L.

  2. Addition to Franchisee Rights was Nil during the year, despite company starting new operations in Morocco to distribute and sell Lays, Doritos and Cheetos. Not sure if this agreement is somehow different from other agreements elsewhere which created the Intangible Asset in the first place.

  3. The large number of visi-coolers installed by the company at retail outlets is another fixed asset in the Balance Sheet. The number of visi-coolers installed have gone up from 840,000+ in FY21 to 925,000+ in FY22 i.e. 85,000 new visi-coolers installed during the year. At a cost of around Rs.15,000 per visi-cooler, there should have been an addition of Rs.125 crore to the asset base (gross block). However, addition to visi-coolers in Fixed Assets Schedule is just Rs.1.4 crore in Standalone.

Even if one assumes most of the new visi-coolers were installed outside India (unlikely), the addition in Consolidated is just Rs.43 crore. The numbers don’t match, not sure what I am missing here.

  1. Rs. 185 crore of operating revenue is Government Grants under different industrial promotion tax exemption schemes. Outstanding government grants went up from Rs.185 crore in FY21 to Rs.301 crore in FY22. State governments are notorious for delaying on their obligations.

  2. Company has operations in Zimbabwe, which is a hyperinflationary economy. Zimbabwe does not have a proper stable currency of its own, and hence conversion / translation of the transactions into INR are prone to inherent subjectivity.

  3. A large part of the Annual Report is devoted to ESG, especially the company’s efforts at water conservation and management. Clearly, the company understands that cost and availability of water is the main risk to the long-term viability of the business. And for that, they are dependent on agreements with local municipal authorities. I went back to more than 5 years of analyst concalls but there is not a single question on this. What is the cost of water in the overall cost structure is not clear, and can the authorities deny committed quantities of water in a drought year? Interestingly, even the DRHP is silent on what I think is the most crucial aspect of this business (or maybe I am being unnecessarily paranoid).

  4. Mr. Ravi Jaipuria made a Rs.56 lac settlement with SEBI with respect to a case during the year.

Just nit-picking, perhaps!

(Disc.: Invested)

Update on 27-Mar-2023:

I had written to the company on point no.5 above i.e., addition to the Visi Coolers Gross Block. After some follow up, the company has replied as follows:

Please note, the 85,000+ visi coolers added during CY2022 is at the consolidated level. Total cost of Visi Coolers (refrigerators / post-mix vending machines) procured during CY2022 is Rs. 430.47 Mn (as per Pg 208 of Annual Report) at Consolidated level and Rs. 14.05 Mn (as per Pg 310 of Annual Report) at Standalone level.

At Standalone level, the cost of purchase of Visi Coolers during CY22 is almost negligible as the same was reimbursed by PepsiCo as a one-off brand infra support to enhance the distribution reach. As a prudent accounting practice and good corporate governance, we have only capitalized the cost of such Visi Coolers which was paid by VBL.


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