Case Studies

Varun Beverages

23 Jan 2023 India: To Decouple or Not to, That is the Question

Company Overview:

Varun Beverages is the 2nd largest PepsiCo beverage franchisee in the world. The company produces and distributes a wide range of carbonated soft drinks in addition to non-carbonated beverages including juice, packaged drinking water, and sports drinks sold under trademarks owned by PepsiCo. Beyond India, PepsiCo has granted Varun the franchise to produce, bottle, and distribute PepsiCo products in Nepal, Sri Lanka, Morocco, Zambia, and Zimbabwe. The company operates 34 manufacturing plants in India, and a nationwide distribution network of over 3 million outlets and 840,000 installed visi-coolers. Varun distributes its products through 2,000 primary distributors and 2,500 owned trucks.

Investment Thesis:

Varun Beverages stands to benefit from the decline of COVID and any accompanying economic normalization. We expect increased consumption of Varun's products as the HoReCa (hotel, restaurants, catering) channel and on-the-go sales recover. Moreover, we expect the consumer trend of increased in-home consumption to sustain post-COVID due to change in consumer preferences. We believe management will aggressively pursue expansion of the in-home sales channel.

The rapid electrification initiatives undertaken by the Modi government from CY14 have added significant electrical infrastructure and transmission capacity to Tier 2-5 towns. These initiatives will allow Varun to install refrigerators across India, thereby boosting consumption of its beverages.

Between CY17 and CY21, revenue/EBITDA/net profit grew at a CAGR of 21.8%/18.6%/36.6%. Over the same period, net worth grew at a CAGR of 20.7% and net debt/equity reduced from 1.3x to 0.7x. During CY22, the company exceeded its pre-COVID EBITDA margin of 20%.

Varun's portfolio includes marquee PepsiCo brands such as Pepsi, Mountain Dew, 7Up, Mirinda, Aquafina, Tropicana, Duke's, and Lipton. Management has shown a desire to expand into new categories such as carbonated juice-based drinks (Mountain Dew Ice), and energy drinks (Sting). In March 2022, Varun started to manufacture a non-beverage product for PepsiCo, Kurkure Puffcorn. Kurkure Puffcorn is a brand of crunchy puffs made up of rice, lentil, and corn. This is a new vertical for the company and successful execution could potentially lead to more non-beverage business from PepsiCo.

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