Water lies at the heart of VBL’s business. But surprisingly, the question of water availability has not been discussed adequately in any of the analyst concalls since the company listed in November 2016. The DRHP lists concentrate, sugar and packing material as VBL’s principal raw materials. Of course, the Annual Report devotes lot of pages exclusively to Water, but all of it in the context of ESG. In general, the importance of water in the overall scheme of things appears to be grossly underplayed. Perhaps, water constitutes only a small portion of VBL’s overall costs, and hence lack of attention to it by the overall investor community. But my concern is more with the availability of water itself, than the cost of it.
VBL gets its water from two main sources – supply arrangements with local authorities like municipalities where the plants are located (about 30 %), and groundwater from own borewells (about 70 %). Recycled water is not used. The company has long-term agreements with local authorities for supply of water for its plants. These supplies are given subject to the company meeting the certain conditions including for the recharge of water. VBL claims its water recharge is best in class across the world, and its recharge numbers are well above the statutory obligations at each of its manufacturing location. Despite this, water supply is not a right and nothing stops the local authorities from denying water in a year of scarcity.
The bigger source of water is through borewells. The Central Ground Water Authority (CGWA) - constituted under Ministry of Jal Shakti, Govt of India regulates this. Their main job is to monitor and maintain the groundwater resources and prevent over-exploitation of the ground water. CGWA & the respective State Ground Water Authority (SGWA) regulate extraction of water from borewells, check adherence to guidelines, levy charges and grant permissions. The CGWA classifies geographies in different categories such as Safe / Semi critical / Critical and Over-exploited - with regulations becoming progressively stringent for each higher level. VBL’s 2023 Annual Report says 26 of the company’s 33 plants are in Safe / Semi-Critical zones. The remaining 7 contributed 16 % of the total production in CY2023. Thus, there is a regulatory limitation on how much water the company can draw from its own borewells. In the past, some of the company’s greenfield expansion has actually been driven by inability to draw more water at existing locations.
The permissions to extract water are granted for 3 years at a time and then renewed. This is largely a routine cyclical activity, though nothing can be taken for granted. The DRHP – filed in 2016 - says permissions for groundwater extraction at 8-odd plants were pending with the authorities.
In response to a questionnaire sent to the company, the management declined to provide an updated status of the same. A request to share the overall cost of water was also declined, but it said the pricing varies significantly from State to State, with charges ranging from Rs. 0.026 to 0.26 per liter.
It should be noted that the company has not faced any material disruption in water supply historically. Additionally, with over 34 beverage manufacturing plants in India, it can make water available from other nearby locations to safeguard operational continuity, says the company. The DRHP said at least 21 of its manufacturing plants were in “Safe” zones. It is also heartening to see the company’s water usage has improved consistently, from 1.94 liters of water consumed per liter of beverage produced in 2019, to 1.70 in 2022 and 1.54 in 2023. The added focus on dairy based products and juices as compared to pure carbonated soft drinks will reduce water intensity of the business in the long run. Geographical dispersion – both within India and overseas – also reduces the long-term water availability risk for the business.
In the current year, the IMD has predicted normal to excess rainfall for the country. The IMD, as well as other international weather bodies are predicting an enhanced possibility of La Nina and a positive IOD (Indian Ocean Dipole) event developing later this year, both of which will be good for Indian monsoon. If this materializes, the depleted water table levels due to last year’s El Nino will get replenished alleviating water risk for the country in the immediate future. Nevertheless, water is going to be a more and more precious resource in the years to come. This will be a factor to watch for Varun Beverages.
(Disc.: Invested)
Excess rainfall = colder days = less sales for VBL? What do you think?
Yes it’s true, but they have diversified into various geographies, that provides some cushion.
Excess heat events is definitely a boon to the company.
RJ Corp successsion plan
As Bevco became subsidy on 26th March , 2024 , will its earning will be part of March quarter consolidated earning ?
Yes, but only six days earnings (26-31 March, both days inclusive) will be consolidated in the March quarter results, so the effect will be minimal. Full quarter earnings will come in from 1st April.
Pabrai has adovocated for CCI in multiple forum in last few months. One thing , business with so many emerging economy including its main market in Turkkiye is vulnerable of significant forex risk. Infact both S&P and Fitch current rating for CCI highlights this risk.Interested to know Mohnish’s view on this risk. Infact Varun Bevrages also encountered it in its Africa business or for that matter Airtel is facing with Nigeria market.
Q1 2024 results: Good YOY growth
- Consolidated sales volume grew by 7.2% to 240.2 million cases in Q1 CY2024 from 224.1 million cases in Q1 CY2023.
- PAT increased by 24.9% to Rs. 5,479.8 million in Q1 CY2024 from Rs. 4,385.7 million in Q1 CY2023 driven by volume growth, increase in net realization and improved profit margins.
- Gross margins improved by 385 bps to 56.3% from 52.4% during Q1 CY2024 primarily due to reduced PET prices as well as the focus on reducing sugar content and light-weighting of packaging. Approx. 46% of our consolidated sales volumes come from Low sugar / No sugar products.
- EBITDA increased by 23.9% to Rs. 9,887.6 million YoY and EBITDA margin improved by 240 bps to 22.9% in Q1 CY2024, led by higher gross margins and increased realization.
Next two summer quarters to follow 
