november 28, 2017 varun beverage (varbev) |...

November 28, 2017

Initiating Coverage

ICICI Securities Ltd | Retail Equity Research

Territory consolidation to spur growth…

Varun Beverage (VBL), a part of RJ Corp group, is the second largest

PepsiCo franchisee globally (ex-US). VBL is engaged in the business of

manufacturing and distributing PepsiCo’s CSD and NCB products across

licensed territories in India, Nepal, Sri Lanka, Morocco and Zambia. It

enjoys end-to-end execution capabilities across the value chain and

currently owns 22 production facilities, 74 depots, 2,024 vehicles, 469,500

visi-coolers and 1,378 distributors. In CY16, India business contributed

77% to total revenue while international business contributed the rest.

Due to consolidation of newly acquired territories, new product launches

and higher growth potential in operating regions, we expect VBL to report

revenue CAGR of 12.4% in CY16-19E with EBITDA margin of 21.6% in

CY19E. With huge growth potential in sight on account of a) low per

capita soft drink consumption and b) increasing penetration through

territory acquisition, we initiate coverage on VBL with a BUY

recommendation at a target price of | 590/share.

Leveraging strong brand name of PepsiCo

VBL enjoys over 25 years of strategic association with PepsiCo and today

accounts for ~47% of PepsiCo’s beverage sales volume in India (as on

Q3CY17). In addition to India, it is present in five other countries - Nepal,

Sri Lanka, Morocco, Zambia. With the strategic franchisee partnership

with PepsiCo in licensed areas, VBL takes care of the demand delivery for

PepsiCo while PepsiCo owns the trademark and takes care of demand

creation through R&D and brand development. VBL’s presence in low per

capita soft drink consumption countries (e.g. 9.4 litre for India against

world average of 91.9 litre), supported by strong brand name of PepsiCo

provides VBL huge growth opportunity through a) penetration in existing

markets and b) growth via additional territory acquisition from PepsiCo.

Health consciousness among consumers to aid NCD growth

India is witnessing a shift from carbonated soft drinks (CSD) to non-

carbonated drinks (NCD) on account of increasing health consciousness

among consumers. To tap this opportunity, PepsiCo is focused on

innovation and launch of new drinks in the non-carbonated space. In the

recent past, it has launched Masala Nimbooz, Tropicana Frutz, 7 Up

Revive & Sting. We believe VBL is strongly placed with a extensive

distribution channel to tap the upcoming opportunity in the NCD space.

We expect NCD segment to clock revenue CAGR of 25.8% in CY16-19E

(increase in revenue contribution from 7.4% in CY16 to 10.3% in CY19E).

Strong proxy play for soft drink industry in India; initiate with BUY

We expect the revenue and PAT to grow at a CAGR of 12.3% and 39.2%,

respectively, in CY16-19E with an operating margin of 21.6% in CY19E.

With the comfort of earnings visibility and expected improvement in

return ratios, we initiate coverage on the stock with a BUY rating and a

target price of | 590/share.

Exhibit 1: Varun Beverage – key Financials (Consolidated)

Particulars CY15 FY16 FY17 FY18E FY19E

Net Sales (| Crore) 3,394.1 3,852.0 4,359.8 4,900.0 5,459.6

EBITDA (| Crore) 637.1 795.2 860.8 1,003.1 1,180.7

Net Profit (| Crore) 113.0 151.3 218.5 281.8 408.3

EPS (|) 1.9 8.3 12.0 15.5 22.4

PE (x) 264.4 61.7 42.7 33.1 22.9

EV/EBITDA (x) 17.4 13.4 12.6 10.7 8.8

RoCE (%) 12.6 13.2 12.8 14.9 18.9

RoE (%) 14.8 8.0 10.7 12.7 16.9

Source: Company, ICICIdirect.com Research

Varun Beverage (VARBEV) | 512 Rating Matrix

Rating : Buy

Target : | 590

Target Period : 12 months

Potential Upside : 15%

Key Financials

| Crore CY16 CY17E CY18E CY19E

Revenue 3,852 4,360 4,900 5,460

EBITDA 795 861 1,003 1,181

Net Profit 151.3 218.5 281.8 408.3

EPS(|) 8.3 12.0 15.5 22.4

Valuation Summary

CY16 CY17E CY18E CY19E

P/E 61.7 42.7 33.1 22.9

Target P/E 70.7 49.0 38.0 26.2

Div. Yield - 0.7 1.2 2.2

Mcap/Sales 2.4 2.1 1.9 1.7

RoNW (%) 8.0 10.7 12.7 16.9

RoCE (%) 13.2 12.8 14.9 18.9

Stock Data

Particular Amount

Market Capitalization (| Crore) 9,334.4

Total Debt (CY16) (| Crore) 1,368.8

Cash and Investments (CY16) (| Crore) 65.7

EV (| Crore) 10,637.6

52 week H/L 573 / 340

Equity capital | 182.3 crore

Face value | 10

FII Holding (%) 12.8

DII Holding (%) 1.2

Price movement

250

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600

Nov-16

Dec-16

Jan-17

Feb-17

Mar-17

Apr-17

May-17

Jun-17

Jul-17

Aug-17

Sep-17

Oct-17

Nov-17

5000

6000

7000

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9000

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Share price (|) Nifty 50

Research Analysts

Sanjay Manyal

[email protected]


Company background

Varun Beverage (VBL), a part of the RJ Corp group (a diversified business

conglomerate with interests in beverages, quick-service restaurants, dairy

and healthcare) was promoted by Ravi Kant Jaipuria. The company was

incorporated in 1995 and began commercial operations in 1996. VBL is

the second largest PepsiCo franchisee for carbonated soft drinks (CSDs)

and non-carbonated beverages (NCBs) in the world (ex-US) after Tingyi

Cayman Island Holdings Corp of China. The company has 22 production

facilities and 276 million cases (CY16) of annual sales volume. VBL is

engaged in the business of manufacturing and distributing PepsiCo’s CSD

and NCB products across licensed territories in India, Nepal, Sri Lanka

(including Ole brand), Morocco and Zambia (it exited the Mozambique

business early this year given the small scale of business operation). The

company enjoys end-to-end execution capabilities across the value chain

and currently owns 22 production facilities, 74 depots, 2,024 vehicles,

469,500 visi-coolers and 1,378 distributors (578 in India and 800 in the

international market) reaching ~1 million (mn) retail outlets (India).

In CY16, India business contributed 77% to total revenue with

international business contributing the rest. On account of new territory

acquisition domestically and new region acquisition globally, the India

business of VBL reported 18.4% volume CAGR in CY12-16. The

international business clocked 20.4% volume CAGR in the same period.

On a segmental basis, CSDs dominate revenue with 85.6% share as on

CY16, followed by NCDs and packaged water with 7.4% and 7.0%

contribution, respectively.

Strong proxy play for soft drink industry growth supported by relationship

with PepsiCo

VBL enjoys over 25 years of strategic association with PepsiCo. Today the

company accounts for 47% of PepsiCo’s beverage sales volume in India

(as on Q3CY17) and is present in five countries (Nepal, Sri Lanka,

Morocco, Zambia, India), globally. With the strategic franchisee

partnership with PepsiCo in licensed areas, VBL takes care of demand

delivery for PepsiCo through manufacturing, distributing, in-outlet

management and consumer push (at the sales point). PepsiCo is the

trademark owner liable for demand creation through R&D and brand

development. VBL has a 10-year agreement with PepsiCo with auto

renewal. Further, it procures the key raw material, i.e. concentrate, from

PepsiCo at a mutually agreed price (at start of each year). Also, to access

brands, strong relationship with PepsiCo provides VBL access to best

operational & manufacturing practices and experienced professionals.

Exhibit 2: Symbiotic relationship with PepsiCo

VBL – Demand Delivery PepsiCo – Demand Creation

Investment in Production Facilities –manufacturing plants Owner of Trademarks

Sales & Distribution – Vehicles Investment in R&D – Product &Packaging innovation

In-outlet Management – Visi-Coolers Concentrate Supply

Market Share Gains – ConsumerPush Management Brand Development – Consumer PullManagement


Capitalising on strong brand name & diverse product portfolio

VBL has successfully leveraged the diverse & strong product portfolio of

PepsiCo over the years. This is reflected in the company’s strong growth

over the years. As per the agreement, VBL is licensed to use PepsiCo’s

brands. However, it has to pay a 5% royalty for using trademark Lehar

comprising Aquafina (bottled water) and Evervess (club soda). Volume

CAGR of CSDs, which includes brands Pepsi, Diet Pepsi, Seven-Up,

Mirinda Orange, Mirinda Lemon, Mountain Dew, Seven-Up Nimbooz

Masala Soda, Seven-Up Revive and Evervess, was 18.4%, followed by

Shareholding pattern (as on Sep 2017) (%)

Shareholding Pattern (%)

Promoters 73.6

Institutional Investors 14.0

Others 12.4

Source: bseindia.com, ICICIdirect.com Research

Institutional Holding Trend (%)

8.2

10.6 10.8

12.8

1.2 1.1 1.3 1.2

0.0

5.0

10.0

15.0

Q4CY16 Q1CY17 Q2CY17 Q3CY17

%

FII DII

Source: bseindia.com, ICICIdirect.com Research


NCDs (Tropicana Slice, Tropicana Frutz & Nimbooz). Packaged water

(Aquafina) clocked highest volume CAGR at 32.1% over the same period.

Exhibit 3: Product portfolio

Fizzy*

Juicy

Packaged Water

Source: RHP, ICICIdirect.com Research

*Available in Glass bottles of 200 ml, 250 ml, 300 ml and 400 ml; PET bottles from 250 ml to 2250 ml; Cans of 250 ml and 330 ml and post-mix bags

Exhibit 4: Licensed products and respective territories

Licenced product Territories

Pepsi India, Nepal, Sri Lanka, Morocco, Zambia

Seven-Up India, Nepal, Sri Lanka, Morocco, Zambia

Mountain Dew India, Nepal, Sri Lanka , Zambia

Mirinda India, Nepal, Sri Lanka, Morocco, Zambia

Evervess India, Nepal, Sri Lanka, Zambia

Tropicana Slice India, Nepal

Nimbooz India

Tropicana Frutz India, Sri Lanka

Aquafina India and Sri Lanka



Investment Rationale

Healthy revenue growth in sight on account of territory consolidation

VBL reported strong revenue CAGR of 22.8% in CY12-16, led by strong

19.4% volume CAGR and 3.3% blended realisation CAGR in the same

period. This strong volume growth was due to various acquisitions done

by the company, both in India and international markets. Segment wise,

carbonates contributed 85.6% of total beverage sales whereas juices and

bottled water contributed 7.4% and 7.0%, respectively, in CY16.

Going forward, considering a) consolidation of newly acquired territories,

b) growth opportunity in the international market (expected growth in per

capita soft drink consumption in operational territories), c) new product

launches from PepsiCo, mainly in the non-carbonated segment, we

expect the revenue to grow at 12.3% CAGR in CY16-19E. We expect the

revenue mix of the company to change in line with changing consumers’

preference towards healthy drinks – CSDs at 81.2%, juices at 10.4% and

packaged water at 8.4%. Also, we expect the revenue CAGR of the CSD

segment in CY16-19E to moderate to 10.5%. However, juices and

packaged water are expected to clock higher revenue CAGR of 25.8% and

19.5%, respectively, over the same period.

Further, EBITDA has grown strongly at a CAGR of 36.7% in CY12-16 on

backward integration, economies of scale and consolidation of new

territories. The EBITDA margin has expanded 8 pps over the same period

to 20.6% in CY16. Going forward, we factor in 14% EBITDA growth in

CY16-19E led by a) some saving in freight cost post GST implementation,

b) profitable international business on account of economies of scale, c)

blended realisation growth (2% CAGR in CY16-19E) and d)

commissioning of new PET bottle plant in Goa (further strengthening the

backward integration of company). Additionally, with increasing share of

NCDs, alone with aforementioned positives, we expect EBITDA per case

to improve to | 31.8 in CY19E from | 28.8 in CY16.

Exhibit 5: Revenue to grow at 12.3% CAGR over CY16-19E

2115.1

2502.4

3394.1

3852.0

4359.8

4900.0

5459.6

0.0

2000.0

4000.0

6000.0

CY13 CY14 CY15 CY16 CY17E CY18E CY19E

0.0

10.0

20.0

30.0

40.0

Revenue (| crore) % growth


Exhibit 6: EBITDA to improve to | 31.8/case*

19.0

22.6

26.6

28.828.0

29.5

31.8

0.0

5.0

10.0

15.0

20.0

25.0

30.0

35.0

CY

13

CY

14

CY

15

CY

16

CY

17

E

CY

18

E

CY

19

E

Source: RHP, ICICIdirect.com Research; *1 case = 5.678 litre

Capitalising on strong presence of PepsiCo brand in Indian market

PepsiCo is the second largest player after Coca Cola in India with 31.1%,

26.4% and 11.6% volume share in carbonates, juices and bottled water,

respectively. In value terms, it has 33.2%, 24.2% and 10.8% market share

in the carbonates, juices and bottled water market, respectively.

The total carbonates industry grew at 10.7% CAGR by volume in 2010-15

and is expected to grow at 6.8% CAGR in 2016-21E. Additionally, North

India is expected to grow faster compared to other regions both in

volume and value terms during the same period, providing the company

Changing product mix in line with consumers’ preference

86.0

85.6

84.7

83.0

81.2

7.7

7.4

7.9

9.0

10.4

6.3

7.0

7.5

8.0

8.4

0% 20% 40% 60% 80% 100%

CY15

CY16

CY17E

CY18E

CY19E

Carbonates NCD Packaged water



strong growth potential as it has a strong presence in the region post

acquisitions in 2015.

With rising health consciousness and changing food habits, the juice

industry has grown at a faster rate than carbonates at a volume CAGR of

21.6% and value CAGR of 26.3% in 2010-15. The industry is further

expected to grow at a volume CAGR of 19.6% in 2016-21E. Additionally,

growing health consciousness has also driven the bottled water segment

strongly at a volume CAGR of 25.4% and value CAGR of 31.2% in 2010-

15. This segment is also likely to witness strong volume growth of 19.8%

during CY16-21E.

The strong foothold of the PepsiCo brand in these segments with a bright

growth outlook and Varun’s increasing contribution to PepsiCo’s total soft

drinks volume sales in India (~47% in Q3CY17 from 26.5% in CY11),

positions the company strongly to increase volumes through increasing

penetration.

Exhibit 7: Market share details in India for CY15 (%)

Volume Value

Carbonates

The Coca Cola Co 56.5 58.7

Sprite 18.0 20.0

Thums Up 16.0 15.7

Coca-Cola 8.4 8.8

Limca 8.3 9.0

Fanta 5.8 5.2

PepsiCo Inc 31.1 33.2

Pepsi 12.4 13.7

7-Up 6.0 5.8

Mountain Dew 5.8 7.1

Mirinda 5.7 5.4

Evervess 1.2 1.2

Others 12.4 8.1

Packaged juices

Maaza (The Coca-Cola Co) 30.1 22.3

PepsiCo Inc 26.4 24.2

Slice 20.9 15.3

Tropicana 5.5 8.9

Frooti (Parle Agro Pvt Ltd) 15.1 12.1

Réal (Dabur India Ltd) 8.4 13.6

Others 20.0 27.8

Bottled water

Bisleri (Parle Bisleri Ltd) 25.3 25.8

Kinley (The Coca-Cola Co) 13.0 17.9

Aquafina (PepsiCo Inc) 11.6 10.8

Others 50.1 45.5


Strategic expansion through franchisee acquisition

VBL has a track record of effectively utilising the retained earnings for

inorganic growth through acquisition of new territories. For the past many

years, acquisitions have been a key component of the company’s growth

strategy that has successfully resulted in accelerated revenue growth and

profitability. The company has expanded its operations in India (mainly

North and North East India) through the acquisition of additional

territories from PepsiCo in the last few years. As on date, VBL accounts

for ~47% of PepsiCo’s sales in India (as on Q3CY17) and is the second

largest PepsiCo franchisee in the world (ex-US). We believe the strong

track record of VBL to grow in the acquired business and PepsiCo’s

intention to exit manufacturing operations from India (strategy to become

asset light) gives VBL a huge opportunity to acquire and expand further in

Indian territory. As per media reports, PepsiCo is planning to sell its

The strong track record of VBL to grow in the acquired

business and PepsiCo’s intention to exit operations from India

(strategy to become asset light) gives VBL a huge

opportunity to acquire and expand further in Indian territory


bottling operations to franchisees in the south and west, thereby divesting

the beverage business nationally.

Till February 2015, licensed sub-territories in India included Delhi,

Rajasthan, West Bengal, Goa, Arunachal Pradesh, Assam, Meghalaya,

Manipur, Mizoram, Nagaland, Tripura and certain designated parts of

Madhya Pradesh (MP), Uttar Pradesh (UP), Uttarakhand, Haryana and

Maharashtra.

With effect from February 28, 2015, the company successfully

acquired franchises for Punjab, Himachal Pradesh, Chandigarh and

remaining parts of Haryana, Uttarakhand and UP. Acquisition of these

franchisees resulted in a significant increase in sales volumes for the

company resulting in an increase in its share from 26.5% in 2011 to

44.12% in 2015 to PepsiCo’s total soft drinks volume sales in India

VBL, in September 2017, acquired PepsiCo India’s previously

franchised territories of Odisha, parts of MP along with two

manufacturing units at Cuttack, Bargarh and Bhopal on a slump sale

basis at a derived EV of | 170 crore

Upon completion of the latest acquisition, VBL enjoyed a presence across

18 states and two union territories, which are highly under-penetrated and

provide a huge opportunity for increasing volumes and gaining market

share. This move is in line with the company’s strategy to expand into

contiguous territories to garner better operating leverage and asset

utilisation through economies of scale.

Earlier this year (February 2017), in the international market, VBL

increased its stake in its subsidiary, Varun Beverages (Zambia) from 60%

to 90% post the first year of encouraging operations. Also, the company

is in the process of setting up a greenfield facility in Zimbabwe in

anticipation of franchise rights being granted by PepsiCo. On the other

side, it divested its 41% equity stake in Varun Beverages Mozambique,

owing to small scale of operations and losses. The PepsiCo International

agreements are automatically renewed for successive five year terms if

neither party provides notice of termination. We are not factoring in any

new territory acquisition in our estimates;

Presence of PepsiCo in fastest growing beverage markets, viz. India,

Nepal, Morocco, Sri Lanka (source: RHP), gives VBL a huge opportunity to

penetrate newer markets that would be a key driver for volume growth.

Source: VBL Analyst Presentation

Acquisition criteria adopted by VBL:

The consideration for the target territory/sub-territory shall be up to 1.0x revenue (net

of GST) ± 20%

The investment will be made such that consolidated debt/EBITDA ratio remains under

3x post acquisition

Acquisition of any territory/sub-territory shall be at an EV of under 6x

o EV = Volume* EBITDA* 6

o Volume = last one year proforma volumes of target territory/sub-territory

o EBITDA = VBL’s last one year EBITDA per unit case

Any M&A related to PepsiCo franchise in target territory/sub-territory shall be through

VBL only


Exhibit 8: Contribution of international franchise (CY16)

India

77%

Nepal

8%

Sri Lanka

5%

Morocco

5%

Zambia

3%

Others

2%


Exhibit 9: Volume CAGR expectation in key franchise market (%)

15.1

20.0

13.1 12.6

7.0

0.0

5.0

10.0

15.0

20.0

25.0

India

Nepal

Sri Lanka

Morocco

Zam

bia

Source: RHP, ICICIdirect.com Research; *

Exhibit 10: Acquisitions

Year Description

CY12 Goa and North-East sub-territories merged with VBL; subsidiaries holding franchisee for Nepal, Sri Lanka

and Morocco territories consolidated with VBL

CY13 Acquires territory of Delhi from PepsiCo

Acquires PepsiCo business of Uttar Pradesh (excluding certain territories), Uttarakhand, Himachal

Pradesh, Haryana (excluding certain territories) and Union territory of Chandigarh, Punjab

Acquires entire shareholding of Arctic International Pvt Ltd in Varun Beverages Mozambique, Ltd

Incorporates Varun Beverages (Zimbabwe) (Pvt) Ltd (VBZPL)

CY16 Acquires 85% of shareholding of VBZPL

New manufacturing unit set up in Hardoi, Lucknow

Increases stake in Zambia subsidiary to 90%

Acquires franchisee of Odisha and MP

CY15

CY17


Strategically located production units, integrated distribution network

The company’s production facilities across India are strategically located

to serve the various target markets at lower transportation and

distribution expenses enabling it to leverage economies of scale. It owns

22 production facilities, 74 depots, 2,024 vehicles, 469,500 visi-coolers

and 1,378 distributors (578 in India and 800 in international market)

reaching ~1 mn retail outlets (India). The company’s estimated annual

production capacity is 343.8 crore litre (~to 60.6 crore unit cases) in India

and 99.2 crore litre (~17.5 crore unit cases) in international production

facilities. Currently, its peak season utilisation is at 70%. It can serve 50%

more volumes with the existing capacity. The capacity along with

proximity to market and well connected distribution network across India

and international territories provide the company the benefits of a)

effective market penetration and b) effectively response to competitive

pressure and consumer demand in a short time. VBL distributes through a

hub-and-spoke model either directly or through distributors. There are no

wholesalers involved in the process. Additionally, to keep logistics costs

under control, VBL prefers to distribute in a radius of 200 km.

VBL owns 21 production facilities, 71 depots, 2,024 vehicles,

458,000 visi-coolers and 1,378 distributors (578 in India, 800

in international market) reaching ~ 1 mn retail outlets (India)


Exhibit 11: VBL’s presence

Source: Analyst Presentation, ICICIdirect.com Research

Changing trend towards NCD consumption to be potential driver in future

With the shift happening from carbonated soft drinks (CSD) to non-

carbonated drinks (NCD) on account of health consciousness, PepsiCo is

also focused on launching new drinks in the non-carbonated space. In the

recent past, it has launched Masala Nimbooz, Tropicana Frutz (fruit juice

in Lychee, Apple, Mango, Mix Fruit and Orange flavours) and 7 Up Revive

(hydrotonic drink). To tap the fastest growing segment of juices (expected

26% value CAGR), PepsiCo is continuously investing in innovation.

In line with the trend, we believe VBL is strongly placed with an extensive

distribution channel to tap the upcoming opportunity. We expect the NCD

segment to clock revenue CAGR of 25.8% supported by 18.3% volume

CAGR and 6.3% realisation CAGR in CY16-19E. Further, the revenue

contribution of NCDs in VBL’s overall revenue, is thus, expected to

increase form 7.4% in CY16 to 10.4% in CY19E.

Exhibit 12: Volume and realisation growth

6.4 7.2 8.2 8.910.3

12.314.8

33.3

38.036.0 37.0

38.941.6

44.5

0.0

10.0

20.0

30.0

40.0

50.0


Sales Volume (crore litres) Realization ( per litre)


Exhibit 13: Sales growth of NCDs

213.0

272.1295.5

330.8

399.5

513.0

658.6

0.0

200.0

400.0

600.0

800.0


0.0

5.0

10.0

15.0

20.0

25.0

30.0

Sales Value (| crores) % Increase


Lower per capita consumption of soft drinks to provide huge opportunity

The soft drink market comprises primarily of carbonates, packaged juices

or non-carbonated drinks (NCDs), packaged drinking water and ready-to-

drink (RTD) tea and coffee. The Indian soft drink market is highly under

penetrated with per capita consumption of only 9.4 litre in 2015, much

lower than the world average of 91.9 litre and vis-à-vis 367.5, 347.3 and

291.9 litre for Mexico, US and Germany. In India, there is a huge potential

for the company to tap the under penetrated of soft drinks given the low


per capita consumption. The Indian soft drink industry has grown at 17%

CAGR in volume terms in 2010-16 to 2391 mn cases (| 60,000 crore in

2016) and is estimated to clock 15.1% volume CAGR in 2016-21E to 4839

mn cases.

The bottled water category leads the volume market (47.3%) followed by

CSDs (36.3%) while the rest is contributed by juices (15.6%) and others

(0.8%) for 2016. However, in value terms, the carbonates category is the

leader with 47.9% contribution, followed by juices and water with 25.1%

and 23.1% contribution, respectively (for 2015). Over 2016-21E, bottled

water is expected to grow at 19.8%, followed by juices at 19.6%.

However, due to increasing health consciousness, carbonates are

expected to grow at a lower CAGR of 6.8% over the same period.

However, we believe the under-penetrated market provides a huge

opportunity in the CSD segment as well. Overall, we believe that on

account of the strong brand name of PepsiCo and strong presence in all

the categories provides VBL a huge opportunity to grow.


Soft drink industry

The soft drink market primarily comprises carbonates, packaged juices or

non-carbonated drinks (NCDs), packaged drinking water and ready-to-

drink tea and coffee. The Indian soft drink market is highly under

penetrated with per capita consumption of only 9.4 litre in 2015, much

lower than the world average of 91.9 litre and vis-à-vis 367.5, 347.3 and

291.9 litre for Mexico, US and Germany.

The global soft drink industry has grown at a volume & value CAGR of

3.4% & 3.1%, respectively, over 2010-15, with per capita consumption of

91.9 litre, led by developed countries. However, the per capita

consumption of soft drinks in Asian and African countries is much lower

than mature markets. Further, as per industry reports, the per capita soft

drink consumption of mature markets is expected to decline. In contrast,

countries where VBL is present i.e. India, Sri Lanka, Zambia, Morocco and

Nepal are forecast to grow at a much faster rate than the world average of

2.3% in 2015-20E.

Exhibit 14: Per capita consumption of soft drinks (in litre)

368

347

292

135

65 61

15 14 10 9 9 6

0

100

200

300

400

Mexic

o

US

A

Germ

any

Brazil

Chin

a

Morocco

Zim

babw

e

Mozam

biq

ue

Nepal

India

Zam

bia

Sri Lanka


Exhibit 15: Volume CAGR estimate over 2016-21E (%)

15.1

20.0

13.1 12.6

7.0

0.0

5.0

10.0

15.0

20.0

25.0

India Nepal Sri Lanka Morocco Zambia


Indian soft drink Industry – estimated to clock 15% volume CAGR

The Indian soft drink industry has grown at 17.0% CAGR in volume terms

in 2010-16 to 2391 mn cases (| 60,000 crore) and is estimated to clock

15.1% volume CAGR in 2016-21E to 4839 mn cases. The three major

constituent of the soft drink market i.e. CSD, NCD and bottled water

together form over 99% of the market volume.

Exhibit 16: Soft drink volumes to grow at 15.1% CAGR over 2016-21E (mn cases*)

9331121

1337

1570

1826

2128

2391

4839

0

1000

2000

3000

4000

5000

2010 2011 2012 2013 2014 2015 2016E 2021E

Source: RHP, ICICIdirect.com Research; 1 case = 5.678 litre


In volume terms, the bottled water category leads the market (47.3%,

1132 mn cases) followed by CSDs (36.3%, 868 mn cases) while the rest is

contributed by juices (15.6%, 373 mn cases) and others (0.8%, 18 mn

cases) for 2016. However, in value terms, the carbonates category is the

leader with 47.9% contribution, followed by juices and water with 25.1%

and 23.1% contribution, respectively (for 2015). Over 2016-21E, bottled

water is expected to grow at 19.8%, followed by juices at 19.6%.

However, due to increasing health consciousness, carbonates are

expected to grow at a lower CAGR of 6.8% over the same period. Others

(concentrates, ready-to-drink tea/coffee & sports and energy drinks) are in

a nascent stage with negligible share of overall volumes in 2016.

Exhibit 17: Segmental contribution – bottled water leads volume (%)

36.3

24.9

15.6

16.9

47.357.8

0.8 0.5

0.0

20.0

40.0

60.0

80.0

100.0

2016 2021P

Carbonates Juice Bottled water Others*

Source: RHP, ICICIdirect.com Research; *Concentrate, RTD tea/coffee, energy drinks

Exhibit 18: Volume CAGR estimate over 2016-21E (%)

6.8

16.9

19.8

5.0

15.1

0.0

5.0

10.0

15.0

20.0

25.0

Carbonates Juice Bottled water Others* Total


In terms of distribution, channels, the soft drinks market is divided into

off-trade (sales at retail outlets like grocery stores, hypermarkets, super

markets, etc) and on-trade (sales at food service outlets, restaurants, bars,

clubs, etc). The on-trade channels generally have a price advantage as

they charge higher prices for the same product. However, as per industry

reports, over the next five years, off-trade is estimated to grow at a faster

rate due to their easy accessibility and penetration.

Further, North & West India contribute the most to soft drink sales with

34% contribution each in volume terms supported by increasing

disposable income among the middle class, coupled with rapid

urbanisation and changing lifestyles. South India contributes 23%. This

region witnessed more sale of juices and energy drinks due to health

conscious customers. However, on account of lower disposable income

and less priority by leading soft drink players (due to less favourable

income group and difficulty in transportation), East & North East

contributed only 9% to total soft drink sales volumes.

Exhibit 19: On-trade & off-trade contribution in volume & value (%)

69

54

31

46

0

20

40

60

80

100

Volume Value

Off trade On trade


Exhibit 20: Region-wise sales volume contribution

East and North-

east

9%

North

34%

South

23%

West

34%


Urban India contributed 75.7% of total soft drink volume sales

while rural contributed the remaining 24.3%. With increasing

awareness and brand loyalty in rural areas, companies are

focusing on penetrating the rural markets


Exhibit 21: Demand drivers and concerns for growth for various segments

Segment Volume CAGR* Demand drivers Concerns

Carbonates 6.8 Widespread availability of carbonates in all retail channels Low advertisement reach and a lack of cold storage facilities in rural

regions

Sustainability to be used as mixers with alcoholic drinks drive

lemonade/lime based carbonates

Awareness of ill effects of sugar-based carbonates among

consumers

Juices 16.9 Rising health consciousness and changing food habits of consumers Availability of affordable fresh juice in local kiosks may restrict

conumers to move to packaged branded juices, which contain

preservatives

Bottled water 19.8 Lack of access to safe drinking water in many regions

Increasing health consciousness among consumers

Source: RHP, ICICIdirect.com Research; * CAGR over 2016-21E


Competitive landscape of Indian soft drink industry

The Indian soft drink industry is dominated by two MNCs – PepsiCo and

Coca Cola in both carbonates and juice categories. However, bottled

water is dominated by home grown Parle Bisleri.

In the carbonates segment, Coca Cola dominates the market with

57% market share with five brands (Sprite, Thums Up, Coca Cola,

Limca and Fanta). Pepsi is the second largest player with 31% market

share (Pepsi, 7 Up, Mountain Dew, Mirinda and Evervess)

Exhibit 22: Market share of various brands in carbonates segment

Sprite

19%

Thums Up

16%

Pepsi*

12%Coca Cola

8%

Limca

8%

7 Up*

6%

Mountain Dew*

6%

Fanta

6%

Mirinda*

6%

Evervess*

1%

Others

12%

Source: RHP, ICICIdirect.com Research; * Pepsi Brands

Juice segment is dominated by Coca Cola’s Maaza (31% market

share), followed by Pepsi’s Slice & Tropicana (26%). Parle’s Frooti &

Dabur’s Real enjoy market share of 15.1% and 8.4% (2015)

Exhibit 23: Juice segment – Coca Cola leads market

Pepsi

(Tropicana &

Slice)

26%

Coca Cola

31%

Parle Agro

15%

Dabur

8%

Others

20%


Exhibit 24: Bottled water segment – Parle Bisleri dominates market

Parle Bisleri

25%

Coca cola

13%

PepsiCo

12%

Others

50%



PepsiCo’s stature in Indian soft drink market

PepsiCo is the second largest brand in the Indian soft drink market

with 31.1% volume market share in carbonated drinks and 26.4%

volume market share in the juice segment. In the bottled water

segment, it is No. 3 player with 11.6% market share. It operates in

India with nine company-owned manufacturing facilities in the south &

west

PepsiCo enjoys 31.1% market share in the carbonated drinks segment

at | 8336 crore (2015). In terms of volume sales, it has grown at 8.6%

CAGR over 2010-15 at 1424 mn litre

Exhibit 25: Market share trend for PepsiCo in carbonated segment (%)

34.2 34.1

33.4

32.5

31.1 31.1

29

30

31

32

33

34

35

2010 2011 2012 2013 2014 2015

Pepsi


Exhibit 26: Market share of key for 2015 (%)

PepsiCo

31%

Coca Cola

57%

Others

12%


In the juice category, PepsiCo has two brands, Slice and Tropicana.

Collectively, they have 26.4% volume market share, only next to Coca

Cola’s Maaza (30.1% volume market share). Slice (the mango based

drink enjoyed a market share of 20.9% while Tropicana had a market

share of 5.5% in 2015

In the bottled water category, PepsiCo’s Aquafina is the No. 3 player

in volume terms with 11.6% market share. Parle Bisleri dominated this

category with 25.3% market share (as on 2015), followed by Coca

Cola’s Kinley that has 13% market share

Exhibit 27: Market share trend for PepsiCo in juice segment (%)

22.824.2 24.5

26.528.2

26.4

0

5

10

15

20

25

30

2010 2011 2012 2013 2014 2015

Pepsi (Tropicana & Slice)


Exhibit 28: Market share trend for PepsiCo in bottled water (%)

10.411.2 11.4 11.6 11.8 11.6

0

3

6

9

12

15

2010 2011 2012 2013 2014 2015

Aquafina (PepsiCo Inc)


With the shift happening from carbonated drinks to non-carbonated

drinks on account of health consciousness, PepsiCo is also focused

on launching new drinks in the non-carbonated space. In the recent

past, it has launched Masala Nimbooz, Tropicana Frutz (fruit juice in

Lychee, Apple, Mango, Mix Fruit and Orange flavours) and 7 Up

Revive (Hydrotonic Drink). In order to tap the fastest growing segment

of juices (expected value CAGR of 26%), PepsiCo is continuously

investing in innovation


Financials

Territory acquisition to continue accelerating company’s revenue

VBL reported a strong revenue CAGR of 22.8% in CY12-16, led by strong

19.4% volume CAGR and 3.3% blended realisation CAGR over the same

period. This strong volume growth was on account of various acquisitions

done by the company, both in India as well as international markets. It

acquired part of the Delhi sub-territory in CY13 and large size of

neighbouring sub-territories in CY15 from PepsiCo and also acquired

Mozambique and Zambia in CY16. Segment wise, carbonates contributed

85.6% of total beverage sales whereas juices and bottled water

contributed 7.4% and 7.0%, respectively, in CY16.

Exhibit 29: Revenue contribution (%)

80.4 82.0 80.1 83.877.0

19.6 18.0 19.9 16.223.0

0.0

20.0

40.0

60.0

80.0

100.0

CY12 CY13 CY14 CY15 CY16

India International


Exhibit 30: Geographical mix for CY16 (%)

India

77%

Nepal

8%

Sri Lanka

5%

Morocco

5%

Zambia

3%

Others

2%


Going forward, considering a) consolidation of newly acquired territories,

b) growth opportunity in the international market (expected growth in per

capita soft drink consumption in the operational territories) and c) new

product launches from PepsiCo, mainly in the non-carbonated segment,

we expect revenues to grow at a CAGR of 12.3% over CY16-19E.

Exhibit 31: Revenue

2115.1

2502.4

3394.1

3852.0

4359.8

4900.0

5459.6

0.0

2000.0

4000.0

6000.0


0.0

10.0

20.0

30.0

40.0

Revenue (| crore) % growth


Exhibit 32: Volume & realisation growth (%)

12.910.6

41.2

15.0

11.6 10.49.1

4.86.8

1.6 2.0 2.4

-0.5-4.0

-10.0

0.0

10.0

20.0

30.0

40.0

50.0


Volume growth(%) Realisation growth(%)


Carbonates to dominate revenues but share of NCDs & water to increase

On a segmental basis, the carbonates segment has been dominating

revenues of VBL at ~86%. Mountain Dew is the star of the segment

clocking fastest volume CAGR of 33.4% in CY12-16, largely driven by the

consumption trend of non-cola carbonates. PepsiCo has been leveraging

the trend and recently launched Masala Nimbooz in the non-cola

carbonate segment, which has been received well by customers. VBL

along with PepsiCo is involved in developing more such products.


Overall, the carbonate segment has clocked revenue CAGR of 23.4% in

CY12-16 led by 18.4% volume growth.

Exhibit 33: Break-up of CSD segment in volume terms (CY16)

Pepsi

22%

Seven-Up

10%

Mountain Dew

46%

Mirinda

18%

Other CSDs

4%


Exhibit 34: Mountain Dew – fastest growing brand (% CAGR - CY12-16)

7.8

12.7

33.4

11.413.1

0.0

10.0

20.0

30.0

40.0

Pepsi Seven-Up Mountain

Dew

Mirinda Other CSDs


Going forward, we expect the segment to continue its domination in the

revenue contribution. However, we expect the non-cola carbonates

contribution to increase. We estimate 10.5% revenue growth from the

CSD segment in CY16-19E with a volume CAGR of 8.3%.

With increasing health consciousness among consumers for healthy

drinks and companies adapting the same in their offerings, we expect

NCDs and drinking water segments to clock higher volume growth rate.

The NCD segment is expected to clock revenue CAGR of 25.8%

supported by 18.3% volume CAGR and 6.3% realisation CAGR in CY16-

19E. Similarly, the packaged water segment is expected to report 19.5%

revenue CAGR in CY16-19E supported mainly by 18.3% volume growth.

We do not estimate any substantial increase in realisation for the

category. However, with increasing share of packaged water in the mix,

there would be marginal saving on the raw material cost and increase in

royalty.

Exhibit 35: Volume contribution of NCD & water to increase (%)

83.1 83.5 81.7 80.9 79.7 77.9 76.4

7.3 7.46.0 5.7 5.9 6.4 7.0

16.515.714.413.412.39.0

9.6

0.0

20.0

40.0

60.0

80.0

100.0


Carbonated Products NCD Drinking Water


Exhibit 36: Value contribution of NCD & water to increase (%)

85.9 85.4 86.0 85.6 84.7 83.0 81.2

9.3 10.0 7.7 7.4 7.9 9.0 10.4

8.48.07.57.06.34.64.9

0.0

20.0

40.0

60.0

80.0

100.0


Carbonates NCD Drinking Water


GST impact: The impact of GST implementation on the company is

neutral as it is similar to what VBL was paying under the excise regime.

Exhibit 37: Market share of various brands in carbonates segment

Segment Excise GST

Carbonates 38-39% 28% + 12% cess

Juice 12% 12%

Water 24% 18%



EBITDA margin to remain range bound, going forward

VBL’s EBITDA has grown strongly at 36.7% CAGR in CY12-16 on the back

of backward integration, economies of scale and consolidation of new

territories. Its EBITDA margin has expanded 8 pps over the same period

to 20.6% in CY16. Going forward, we factor in EBITDA growth of 14.1% in

CY16-19E led by a) some saving in freight cost post GST implementation,

b) profitable international business on account of economies of scale, c)

softness in sugar prices due to expected all time high sugar production of

28-30 million tonnes in 2018-19 and d) commissioning of new PET bottle

plant in Goa (further strengthening the backward integration of company).

Additionally, VBL has divested its stake in the loss making small scale

business in Mozambique. We believe that would aid to profitability. For

CY17E, we estimate some decline in the EBITDA margin to 19.7% on

account of higher sugar prices in first half on CY17. However, with cooling

down of the same and benefit realisation of GST in freight cost, we expect

the margin to be at 20.5% and 21.6% in CY18E and CY19E, respectively.

Additionally, with increasing share of NCDs, along with aforementioned

positives, we expect EBITDA per case to improve to | 31.8 in CY19E from

| 28.8 in CY16.

Exhibit 38: EBITDA to grow stronger

291.1

384.5

637.1

795.2860.8

1,003.1

1,180.7

0.0

300.0

600.0

900.0

1,200.0

1,500.0


0.0

15.0

30.0

45.0

60.0

75.0

EBITDA (| crore) % growth


Exhibit 39: EBITDA margin to expand going forward

57.155.0

51.4

45.9 46.1 45.0 44.0

13.815.4

18.820.6 19.7 20.5 21.6

-5.0

5.0

15.0

25.0

35.0

45.0

55.0

65.0


Raw material as % of sales EBITDA margin (%)


Key costs for VBL

a. Concentrate – It formed ~24% of total raw material for the

company for CY16. VBL buys concentrate form PepsiCo India at a

mutually decided price (at the beginning of every year) taking into

account the net realisation for the company. Additionally, at times,

PepsiCo provides discount on the concentrate price, which is

effectively neutral. The discount to VBL on concentrate price is

more in the competitive market scenario. VBL needs to pass it on in

promotions and discounts in the supply chain

b. Sugar – Sugar was the largest component of total raw material for

VBL at ~35%. VBL procures it directly from the local suppliers who

meet the quality standards of PepsiCo. VBL keeps a sugar inventory

of about six months

c. Advertisement – VBL takes care of the local area and store level

marketing. It was 1.7% of sales for CY16. All other bulk brand

building advertisement is done by PepsiCo

d. Royalty – VBL pays PepsiCo royalty on the use of brand ‘Lehar’ and

sells two products under it – Aquafina (packaged water) and

Everess (soda)

e. Freight cost – VBL has strategically placed manufacturing units,

which aid it to serve the neighbouring areas. As a strategy for cost

effectiveness, the company prefers to supply products over a

radius of 200 km. For CY16, VBL’s freight cost was at 5.3% of sales.

With GST coming in, and acquisition of new territory, VBL would be

able to rationalise the freight cost

Raw material (%)

Concentrate

24%

Sugar

35%

Pet chips

9%

Others*

32%

Source: Company, ICICIdirect.com Research;

* includes filter paper, CO2, Pulp, Label, bottle cleaner etc.


Exhibit 40: Sugar cost hovering at higher cost (|/quintal)

1500

2000

2500

3000

3500

4000

4500

Nov-15

Feb-16

May-16

Aug-16

Nov-16

Feb-17

May-17

Aug-17

Nov-17

With the expected all time high sugar production in

2018-19, sugar prices have started falling from oct-

2017 onwards. Any substaintial dip in future could

benefit VBL as sugar remains biggest RM cost


Exhibit 41: PET chips price pegged at crude cost ($/barrel)

0

15

30

45

60

75

Nov-15

Mar-16

Jul-16

Nov-16

Mar-17

Jul-17

Nov-17


Interest cost reduction to directly flow to company’s profitability

The company’s debt peaked when it acquired new territories in India and

globally in H1CY16. The company had a significant debt of | 2,138 crore

on its books (H1CY16) (| 600 crore interest free debt from PepsiCo). Post

a successful IPO, VBL’s debt came down to | 1368.8 crore (including

short-term and long term). Debt/equity for the company successfully

came down to 0.7x in CY16. We expect it to further decline to 0.5x by

CY19E. Led by healthy EBITDA growth and decline in interest outgo, we

expect VBL to report PAT CAGR of 39.2% in CY16-19E. Additionally, with

an improvement in profitability, debt reduction and improving working

capital management, return ratios of the company are expected to

improve significantly. We expect the RoE and RoCE to increase to 16.9%

and 18.9% in CY19E from 8.0% and 13.2% in CY16, respectively.

Exhibit 42: Interest cost

169.7

185.4

168.8

214.8

181.1172.6

146.9

0.0

50.0

100.0

150.0

200.0

250.0


Interest (| crore)


Exhibit 43: Declining debt/equity

9.4

6.2

2.7

0.7 0.8 0.7 0.5

0.0

2.0

4.0

6.0

8.0

10.0


0.0

1.0

2.0

3.0

4.0

5.0

6.0

Debt/Equity (x) Interest coverage (x)

Source: RHP, ICICIdirect.com Research; *

Lower interest cost to drive profitability

The company’s debt peaked when it acquired new territories in India and

globally. The company had a significant debt of | 2,138 crore on its books

(H1CY16) (| 600 crore interest free debt from PepsiCo). Post a successful

IPO, VBL’s debt came down to | 1368.8 crore (including short-term and

long term). Debt/equity for the company successfully came down to 0.7x

in CY16. We expect it to further decline to 0.5x by CY19E. Led by healthy

EBITDA growth and decline in the interest outgo, we expect VBL to report

PAT CAGR of 39.2% in CY16-19E.


Exhibit 44: Supported by lower interest outgo, profit to grow at 34.7% CAGR over CY16-19E

24.6

-39.5-20.2

113.0

151.3

218.5

281.8

408.3

-100.0

-50.0

0.0

50.0

100.0

150.0

200.0

250.0

300.0

350.0

400.0

450.0

CY12 CY13 CY14 CY15 CY16 CY17E CY18E CY19E

PAT (| crore)

Source: RHP, ICICIdirect.com Research; * Pepsi Brands

With investment slowing down, FCF to increase substantially

VBL has incurred a total capex of ~| 2500 crore in CY13-16 to

purchase new territories in India and globally. It has acquired two new

territories in India (parts of MP, Odisha) for an amount of | 170 crore.

Going forward, we expect the company to consolidate the operations.

Hence, we do not factor in any new acquisition. Thus, we estimate a

nominal capex of | 200 crore each for CY18E and CY19E. On account

of improving operating profitability and lower capex, we expect the

FCF of the company to grow significantly for the same period

Exhibit 45: Capex (| crore)

510.2

151.7

1133.1

664.3

600.0

200.0 200.0

0.0

200.0

400.0

600.0

800.0

1000.0

1200.0



Exhibit 46: FCF (| crore)

-146

-296

211

-59-88

-15

422

570

-400

-200

0

200

400

600

800

CY12 CY13 CY14 CY15 CY16 CY17E CY18E CY19E


With a) improvement in profitability, b) debt reduction, c) improving

working capital management and d) improvement in asset turnover,

the return ratios for the company would improve significantly. We

expect the RoE and RoCE to increase to 16.9% and 18.9% in CY19E

from 8.0% and 13.2% in CY16, respectively


Exhibit 47: Asset turnover

0.91.0

1.3

1.1 1.1

1.2

1.4

0.0

0.2

0.4

0.6

0.8

1.0

1.2

1.4

1.6


Asset turnover (x)


Exhibit 48: Return ratios to improve, going forward

-18.4

-5.9

14.8

8.010.7

12.7

16.9

5.47.4

12.6 13.2 12.814.9

18.9

-30.0

-20.0

-10.0

0.0

10.0

20.0

30.0


ROE ROCE



Risk & concerns

Relationship with PepsiCo: Termination of agreements, or less

favourable renewal terms, if any, could adversely affect profitability of

the company

Inability to integrate newly acquired operations: VBL has constantly

grown its revenues by acquiring new territories and excelling in

integrating the businesses. Any inability to do so in future with new

acquisitions would be a deterrent to the company’s revenue

Price of concentrate: Concentrate, the key raw material, forms ~24%

of total raw material requirement of the company. As per the

agreement, PepsiCo has the right to unilaterally determine the price.

However, so far, it is being mutually decided at the beginning of each

year. If PepsiCo decides to exercise the right in an adverse manner, it

could affect the future financial performance of the company

Change in consumer’s preferences: In CY16, the carbonate category

contributed ~86% to VBL’s revenue. However, a shift was visible in

the consumer’s preference towards healthy drinks. Any failure to

adapt to changing consumer’s preferences may impact the financials.

PepsiCo is continuously doing R&D to come up with new launches,

especially in the NCD segment

Seasonality of business: April-June is the most important quarter for

VBL’s businesses as ~47% of sales come in that quarter, followed by

July-September contributing ~23% of the business. Any

unfavourable weather change i.e. short summer season or heavy

rainy season, would impact the company’s performance

Exhibit 49: Seasonality plays important role – quarterly contribution (%)

18

47

23

1215

60

22

3

0

20

40

60

80

Q1 Q2 Q3 Q4

Volume EBITDA

Source: Company, ICICIdirect.com Research;

Inability to come up with new launches to keep up with competition,

especially in NCD segment: In the carbonate segment, PepsiCo’s

major competitor is Coca Cola. However, in the NCD, VBL competes

with regional players as well as big FMCG companies dealing in

juices. To keep up with the competition, PepsiCo needs to come up

with new launches at regular intervals to keep consumers interested

Increase in royalty: At present, VBL only pays royalty for usage of the

Lehar brand while PepsiCo is entitled to revise it from time to time.

Currently, it is 0.6% of total sales. In case PepsiCo revises it

significantly or amends the clauses and puts royalty charges on other

brands as well, then it would be negative for VBL


Valuation

We believe that with consolidation of acquired territories, both in India as

well as globally, VBL would be able to increase its footprint. Hence, the

company would be able to improve the penetration. Supported by a)

consolidation of newly acquired territories, b) growth opportunity in the

international market, c) new product launches from PepsiCo, mainly in the

non-carbonated segment, we expect revenues to grow at 12.3% CAGR in

CY16-19E with an operating margin of 21.6% in CY19E.

Exhibit 50: One year forward Price to Earnings band

250

350

450

550

650

750

850

Nov-16

Jan-17

Mar-17

May-17

Jul-17

Sep-17

Nov-17

Jan-18

Mar-18

May-18

Jul-18

Sep-18

Nov-18

Share Price (|) 25x 30x 35x 40x

Source: Company, ICICIdirect.com, Research

Exhibit 51: One year forward EV / EBITDA band

5000

7000

9000

11000

13000

15000

Nov-16

Jan-17

Mar-17

May-17

Jul-17

Sep-17

Nov-17

Jan-18

Mar-18

May-18

Jul-18

Sep-18

Nov-18

8x 10x 11x 13x EV

Source: Company, ICICIdirect.com, Research

Though there is no direct competitor to Varun Beverage in the Indian

listed space, globally, there are some listed bottling plants exclusively

manufacturing for Coca Cola or Pepsi. These bottling companies with

return ratios between 5% and 12% are trading at 8-10x CY19E

EV/EBITDA. We believe VBL with improving operating margins, limited

capex requirement and robust free cash flow would witness an

improvement in RoCE & RoNW to 18.9% & 16.9%, respectively, in CY19.

Considering the higher return ratios compared to its peers, we believe

VBL should command a premium to its global competitors. With the

comfort of earnings visibility and expected improvement in return ratios,

we value the stock at 10x CY19 enterprise value to EBITDA to arrive at a

target price of | 590 per share. We initiate coverage on VBL with a BUY

recommendation.

Exhibit 52: Global Peer Comparison

Market Cap

(US $ m) CY17 CY18 CY19 CY17 CY18 CY19 CY17 CY18 CY19 CY17 CY18 CY19 CY17 CY18 CY19

Coca-Cola Femsa 14579 19.3 19.5 19.9 18.2 18.3 16.1 8.5 7.9 7.4 12.5 12.2 13.1 5.5 5.1 5.2

Arca Continetal 11949 19.0 19.1 19.3 21.7 18.9 17.0 11.1 9.4 8.7 -16.8 5.6 1.7 -24.4 2.6 6.9

Coca-Cola Embonor 1187 18.4 18.9 19.0 16.1 16.3 15.2 9.0 8.6 8.3 12.0 10.7 10.7 7.3 7.5 7.4

Coca-Cola Icecek 2435 15.4 15.7 16.3 25.3 19.1 15.8 9.4 8.2 7.0 8.2 10.2 11.3 4.3 4.4 5.2

Varun Beverage 1436 19.7 20.5 21.6 42.7 33.1 22.9 12.6 10.7 8.8 10.7 12.7 16.9 12.8 14.9 18.9

Operating margins (%) RoCE (%)RoNW(%)EV / EBITDA (x)PE (x)



Financial Summary

Exhibit 53: Income statement (Consolidated) (| crore)

CY16 CY17E CY18E CY19E

Total operating Income 3852.0 4359.8 4900.0 5459.6

Growth (%) 13.5 13.2 12.4 11.4

Raw Material Expenses 1736.3 2008.9 2206.6 2401.9

Employee Expenses 426.4 479.6 539.0 606.0

Marketing Expenses 67.2 76.2 86.5 96.3

Other expenses 827.0 934.3 1064.9 1174.6

Total Operating Expenditure 3056.8 3499.0 3896.9 4279.0

EBITDA 795.2 860.8 1,003.1 1,180.7

Growth (%) 24.8 8.2 16.5 17.7

Depreciation 372.4 394.0 414.2 429.0

Interest 214.8 181.1 172.6 146.9

Other Income 34.8 36.5 0.0 0.0

PBT 242.9 322.2 416.3 604.8

Exceptional item 0 1 2 3

Total Tax 82.9 106.3 137.4 199.6

Minority interest 11.1 0.0 0.0 0.0

Profit from Associates 2.3 2.6 2.8 3.1

PAT 151.3 218.5 281.8 408.3

Growth (%) 33.9 44.4 29.0 44.9

EPS (|) 8.3 12.0 15.5 22.4


Exhibit 54: Balance sheet (Consolidated) (| crore)

(Year-end March) CY16 CY17E CY18E CY19E

Liabilities

Equity Capital 182.3 182.3 182.3 182.3

Reserve and Surplus 1711.6 1864.5 2033.5 2237.7

Total Shareholders funds 1893.9 2046.8 2215.8 2420.0

LT Borrowings & Provisions 963.3 1163.3 963.3 763.3

Deferred Tax Liability 222.6 233.7 245.4 257.7

Others Non-current Liabilities

Total Liabilities 3487.6 3872.0 3874.2 3913.1

Assets

Gross Block 4,752.1 5,397.7 5,597.7 5,797.7

Less: Acc Depreciation 1,339.0 1,733.0 2,147.2 2,576.3

Net Block 3,413.1 3,664.7 3,450.5 3,221.4

Capital WIP 95.6 50.0 50.0 50.0

Net Intangible Assets 337.0 353.9 371.5 390.1

Non-current Investments 5.6 100.0 150.0 200.0

Goodwill 213.2 213.2 213.2 213.2

Current Assets

Inventory 489.9 545.0 598.9 652.1

Debtors 130.3 133.2 136.1 151.7

Loans and Advances 178.6 242.2 245.0 303.3

Other Current Assets 9.9 12.1 12.3 12.1

Cash 65.7 115.1 124.8 198.2

Deferred Tax Assests 6.8 6.8 6.8 6.8

Current Liabilities

Creditors 274.6 302.8 326.7 364.0

Provisions 43.0 48.4 50.4 45.5

Short term debt & other CL 1,423.9 1,454.4 1,342.2 1,303.9

Application of Funds 3,487.6 3,872.0 3,874.2 3,913.1



Exhibit 55: Cash flow statement (Consolidated) (| crore)


Profit After Tax 375.9 396.9 451.5 552.1

Add: Depreciation 372.4 394.0 414.2 429.0

(Inc)/dec in Current Assets -12.9 -81.9 -52.6 -120.1

Inc/(dec) in CL and Provisions 98.8 -13.3 -123.5 -22.8

CF from operating activities 830.3 695.8 689.6 838.2

(Inc)/dec in Investments 35.0 0.0 0.0 0.0

(Inc)/dec in LT loans & advances 0.0 0.0 0.0 0.0

(Inc)/dec in Fixed Assets -952.8 -711.2 -267.7 -268.6

Others -162.3 0.0 0.0 0.0

CF from investing activities -1,068.0 -711.2 -267.7 -268.6

Issue/(Buy back) of Equity 701.4 0.0 0.0 0.0

Inc/(dec) in loan funds 102.5 280.0 -160.0 -180.0

Dividend paid & dividend tax 0.0 -65.5 -112.7 -204.2

Others -557.9 -181.1 -172.6 -146.9

CF from financing activities 245.9 64.9 -412.2 -496.3

Net Cash flow 8.2 49.4 9.7 73.4

Opening Cash 24.3 32.5 81.9 91.6

Other Bank balance 33.2 33.2 33.2 33.2

Closing Cash 65.7 115.1 124.8 198.2

Source: ICICIdirect.com Research

Exhibit 56: Ratio analysis


Per share data (|)

EPS 8.3 12.0 15.5 22.4

Cash EPS 28.7 33.6 38.2 45.9

BV 103.9 112.3 121.5 132.7

DPS 0.0 3.6 6.2 11.2

Cash Per Share 73.4 95.1 117.8 141.3

Operating Ratios (%)

EBITDA Margin 20.6 19.7 20.5 21.6

PBT / Total Operating income 6.3 7.4 8.5 11.1

PAT Margin 3.9 5.0 5.8 7.5

Inventory days 46.4 45.6 44.6 43.6

Debtor days 12.3 11.2 10.1 10.1

Creditor days 26.0 25.3 24.3 24.3

Return Ratios (%)

RoE 8.0 10.7 12.7 16.9

RoCE 13.2 12.8 14.9 18.9

Valuation Ratios (x)

P/E 61.7 42.7 33.1 22.9

EV / EBITDA 13.4 12.6 10.7 8.8

EV / Net Sales 2.8 2.5 2.2 1.9

Market Cap / Sales 2.4 2.1 1.9 1.7

Price to Book Value 4.9 4.6 4.2 3.9

Solvency Ratios

Debt/EBITDA 1.7 1.9 1.5 1.1

Debt / Equity 0.7 0.8 0.7 0.5

Current Ratio 0.6 0.7 0.8 0.9

Quick Ratio 0.2 0.3 0.3 0.4



Annexure I – Business Model

Exhibit 57: VBL’s business model – end-to-end execution capabilities


Exhibit 58: Manufacturing process



Annexure II – Company’s milestones

Exhibit 59: VBL’s key milestones


1991-99

- Bottling & Trademark

License Agreement with

PepsiCo through a group

Company in 1991

- Varun Beverages Ltd (VBL)

incorporated as Public Ltd

company in 1995

- Commenced operations in

Noida in 1995 & Jaipur in 1996

- Acquired existing operations at

Nepal in 1998

- Commenced operations in

Alwar, Jodhpur and Kosi in 1999.

2000-13

- Expanded into international

territories – Sri Lanka and

Morocco

- Investment by Standard

Chartered PE (2011 & 2012)

- Consolidated territories

held by various companies

into VBL (Goa, North East, Sri

Lanka, Nepal & Morocco)

- Acquired the business of

manufacturing and marketing

of soft drink beverages in

Delhi, India in 2013

- Presence in 15 states and a

union territory sales volume

increased to 153.5 million cases

2014-15

- Investment of | 4,500 mn by

promoter group in 2014-15

- Acquired PepsiCo’s India

sub-territories in Uttar Pradesh,

Uttarakhand,

Himachal Pradesh, Haryana,

Punjab and Chandigarh in 2015

- Investment by AION

Capital in 2015

- Incorporated Varun

Beverages (Zimbabwe) Pvt. Ltd

- Sales volume increased

to 239.7 million cases

2016-17

- Acquired shareholding from

Arctic International Pvt Ltd. in

Varun Beverages (Zambia) (60%)

& Varun Beverages Mozambique

(51%)

- VBL's shares got listed in NSE

and BSE

- Acquired two co-packing

facilities located at Phillaur

(Punjab) and Satharia (Uttar

Pradesh) for operational

efficiencies

- Established new production

facility in Goa

- Acquired franchisee rights in the

state of Madhya Pradesh and

Odhisa (Sep 2017)


RATING RATIONALE

ICICIdirect.com endeavours to provide objective opinions and recommendations. ICICIdirect.com assigns

ratings to its stocks according to their notional target price vs. current market price and then categorises them

as Strong Buy, Buy, Hold and Sell. The performance horizon is two years unless specified and the notional

target price is defined as the analysts' valuation for a stock.

Strong Buy: >15%/20% for large caps/midcaps, respectively, with high conviction;

Buy: >10%/15% for large caps/midcaps, respectively;

Hold: Up to +/-10%;

Sell: -10% or more;

Pankaj Pandey Head – Research [email protected]

ICICIdirect.com Research Desk,

ICICI Securities Limited,

1st Floor, Akruti Trade Centre,

Road No 7, MIDC,

Andheri (East)

Mumbai – 400 093

[email protected]


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november 28, 2017 varun beverage (varbev) |...

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