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Equity Research Report FMCG Date: Apr 16, 2022

Varun Beverages Ltd Analyst Recommendation: BUY

BSE Code: 540180 NSE: VBL Bloomberg Code: VBL:IN

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Investor’s Rationale
CMP: Rs 1011
2 Year Target: Rs 1200  Marketing push/product innovation to boost growth:

Despite Covid-led challenges, VBL placed ~25,000/40,000 visi-coolers in

Face Value 10.0 CY20/CY21. Alongside, VBL has refreshed Pepsi with more fizz, expanded its
portfolio in the large lemon-based carbonate segment (~40% of carbonate
Market Cap (Rs cr) 43,782 industry) through Mountain Dew Ice and entered the dairy segment through
Creambell shakes. New innovations are well supported by a strong marketing
push ahead of the CY22 season, which we believe should lead to strong 26%
52 week high/low 1,051/582
revenue growth in CY22.
Beta
0.74
 Prepared to combat inflation with PET light-weighting/stocking:
Shares O/S (Cr) 43.30
By reducing plastic usage, VBL has achieved light-weighting of pre-forms and
Book Value per Share (Rs) 94.2
closures of PET bottles by 6-15% across SKUs, compared to CY15-19 period
Sensex 58,339 (exhibit 2). PET resins/others form 25-30% of overall RM costs, while concentrate
and sugar make up the rest, in our view. In addition, prebuying of PET chips in
Nifty 17,475.65 Q4CY21 (inventory days at 60 vs. 45-50 historically) and price hikes in select SKUs,
place VBL in a better position to combat crude price inflation.

1 yr. Price Chart of Stock and Nifty

 Expects 40% reduction in debt; RPTs in line with past trends:

An increase in CWIP due to new facilities in Bihar/J&K and stocking of PET helped
esees es VBL keep net debt flat at Rs30bn in CY21. However, VBL expects to pare down
debt by ~40% in CY22. Organic capex stood at Rs3.5bn, primarily toward
brownfield expansion in India, Morocco and Zimbabwe.

 Valuation
We initiate coverage on VBL with a BUY rating and price target of Rs 1200 (37.2x
CY23E EPS)
CY20 CY21 CY22E CY23E
Revenue (Rs.Cr) 6,450.0 8,823.2 11,125.1 12,603.9
EBITDA (Rs. cr) 1,201.9 1,654.6 2,234.5 2,642.8
Shareholding pattern as on 31st Mar
2022. Adj. profit (Rs.Cr) 322.3 694.1 1,074.8 1,394.8
Adj. EPS (Rs.) 7.4 16.0 24.8 32.2
P/E (x) 127.5 59.2 38.2 29.5
Dividend Yield 0.20% 0.30% 0.50% 0.60%
EV/EBITDA (x) 36.9 26.8 19.2 15.9
ROE (%) 9.4% 18.3% 23.8% 25.2%
ROCE 9.8% 15.6% 21.4% 25.9%
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Constant Generation of Free Cash Flow
 The company had been on an acquisition spree for last few years, which impacted its Free Cash Flow (FCF). However, with
already 90% volumes of the PepsiCo's India beverage under VBL, the growth for VBL in the future would be largely led by organic
route in India. Improvement in capacity utilisation, margin expansion and consolidation of operations will lead to improvement
in FCF going forward.
 It has repaid debt to the extent of Rs. ~2200 Cr over past 2 years and with strong FCF generation, we expect a sharp reduction in
debt over next 2-3 years. Reduced capex intensity and focus on debt reduction, better margins and improved asset turnover
would lead to steady improvement of ratios

. VBL: One of the largest PepsiCo franchisee

 VBL has been associated with PepsiCo since the 1991 and has over three decades consolidated its business association with
PepsiCo, increasing the number of licensed territories and sub-territories covered by the company, producing and distributing a
wider range of PepsiCo beverages, introducing various SKUs in the portfolio and expanding the distribution network. The fact
that the relationship has been well nurtured is evident from gradual consolidation of VBL’s presence across contiguous
geographies.
 VBL has increased its share of PepsiCo’s India beverages volume sales (based on its sales to end customers) from 26.5% in CY11
to 44.1% in CY15 and to 85%+ now. Being granted franchises for various PepsiCo products across 27 States and 7 Union
Territories, it covers 90% of India now. Although, India is VBL’s largest market, it has also been granted the franchise for various
PepsiCo products for the high-growth potential territories of Nepal, Sri Lanka, Morocco, Zambia and Zimbabwe.
VBL is a much more than mere bottler…

 A bottler merely manufactures the product and supplies it back to the brand owner for a small conversion fee. VBL is much more
than a pure bottler – in fact, the company is present almost across the entire value chain. VBL straddles across the entire value
chain… VBL’s presence across the entire value chain more than signifies that it is not just a bottler but makes significant
contribution across the value chain.
 As per its agreement with PepsiCo, responsibilities of both players are clearly spelt out. VBL with its end-to-end execution
capabilities, is responsible for manufacturing, distribution and warehousing, customer management and in-market execution, to
managing cash flows and future growth.
 PepsiCo offers brands, concentrates and marketing support to VBL, which then takes complete control over the manufacturing
and supply chain processes, driving market share gains, enhancing cost efficiencies and managing capital allocation strategies.
Robust infrastructure in place

 VBL has also made significant investments towards establishing a robust back-end infrastructure, be it manufacturing of
preforms, crowns, caps, shrink-wrap films, corrugated boxes and plastic crates. This ensures that VBL’s reliance on third party
vendors is limited. It also helps the company harness operating leverage benefits, thereby lending fillip to margins.
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Return ratios to show strong growth in future

Revenue will experience Strong growth

Net profit will experience a growth trajectory

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Outlook and Valuation
We initiate coverage on VBL with a BUY rating and price target of Rs 1200 (37.2x CY23E EPS)

Varun Beverages Ltd- Company Overview

Varun Beverages Ltd has been associated with PepsiCo since the 1990s and is a key player in beverage industry and one of the
largest franchisee of PepsiCo in the world. The company produces and distributes a wide range of carbonated soft drinks, non-
carbonated drinks and packaged water sold under trademarks owned by PepsiCo.
PepsiCo brands produced and sold by the company include Pepsi, Seven-up, Mirinda Orange, Mountain Dew, Tropicana Juices
and many more

Varun beverages is a part of the RJ group, which is the largest franchisee for Pizza Hut, KFC, Cream Bell and Costa Coffee in
India. With this distinguished track record and expertise in the QSR
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Balance sheet (Consolidated) Profit & Loss Account (Consolidated)

(Rs crore) (Rs crore)

CY20 CY21 CY22E CY23E CY20 CY21 CY22E CY23E

Liabilities
Total operating
Paid up capital 289 433 433 433 6,450 8,823 11,125 12,604
Income
Reserves and Surplus 3235 3647 4527 5862 Raw Material Exp 2763.9 4034.7 4327.9 4682.8

Net worth 3524 4080 4960 6295 Employee Exp 890 1,008 1,283 1,411

Total Loans 3,422 3,551 2,616 1,618 Other Exp 1,595 2,126 3,280 3,868

Deffered Tax Liability 226 311 342 377 EBITDA 1,202 1,655 2,235 2,643

Minority Interest 65 117 117 117 Depreciation 529 531 584 626

Total Liabilities 7,236 8,059 8,035 8,406 EBIT 673 1,123 1,650 2,017

Assets Interest cost 281 185 199 129

Other Income &
Net Tangible Assets 6,409 6,311 6,427 6,501 37 68 75 85
Extraordinary Items
- - - - Profit before tax 429 1,007 1,527 1,973

Investments - - - - Tax 78 261 389 503

Current Assets 1,982.90 2,774.50 3,395.60 3,723.80 Profit after tax 351 746 1,137 1,470

Current Liabilities 1,222 1,523 1,787 2,018 Minority Interests

Net Current Assets 761 1252 1609 1706 P/L from Associates

Other 28 52 63 75

Total Assets 7236 8059 8035 8406 Adjusted PAT 322 694 1,075 1,395
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Key Ratios & Valuations (Consolidated) Key Ratios & Valuations (Consolidated)

Y.E March (Rs crore)

CY20 CY21 CY22E CY23E Y.E March (Rs crore) CY20 CY21 CY22E CY23E

Per share data (Rs.)

PBT (Excluding Other Inc) 436 1007 1526 1973

Other Non Cash Item 0 0 0 0 EPS 7.40 16.00 24.80 32.20

Change in Working Capital -39 -344 57 -89 DPS 1.70 2.50 4.50 6.00

Other Items 675 541 425 286 Margin (%)

Cash flow from operating
1071 1203 2008 2170 EBITDA 18.6% 18.8% 20.1% 21.0%
activities
NPM 5.0% 7.9% 9.7% 11.1%

Capital Expenditure -461 -863 -203 -700 Return Ratios (%)

Other 0 0 0 0 RoE 9.4% 18.3% 23.8% 25.2%

Cash flow from investing
-461 -863 -203 -700 ROCE 9.8% 15.6% 21.4% 25.9%
activities
Issue of Equity -27 22 Valuation(x)

Loan Fund -216 125 -1000 -1000 P/E 127.5 59.2 38.2 29.5

Others -348 -340 -391 -462 EV/EBITDA 36.9 26.8 19.2 15.9
Cash flow from financing
-591 -193 -1391 -1462 Dividend Yield 0.20% 0.30% 0.50% 0.60%
activities
Net chg in cash 19 147 414 8 Per share data (Rs.)

Opening Cash 171 190 455 615 EPS 7.4 16.0 24.8 32.2

Closing Cash 190 455 615 961

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Large Cap. Return Mid/Small Cap. Return
Buy More than equal to 10% Buy More than equal to 15%
Hold Between 10% & -5% Accumulate* Upside between 10% & 15%
Reduce Less than -5% Hold Between 0% & 10%
Reduce/sell Less than 0%
* To satisfy regulatory requirements, we attribute ‘Accumulate’ as Buy and ‘Reduce’ as Sell.

Member: BSE, NSE, MCX, MCX-SX, CDSL

Reg. office: PG-4, Rotunda Bldg, Bombay Samachar Marg, Fort, Mumbai -
400001, Maharashtra, India
Corp Office: 24/26 Cama Bldg, 3rd Floor, Dalal Street, Fort Mumbai -
400001, Maharashtra India
Tel: 91-22-67378001 Fax: 91-22-22646410
Dealing: 91-22-67378011 Institutional Dealing: 91-22-6737833
Email: [email protected] Website: www.mjpdirect.com
Registration Number: SEBI- INZ000218338

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