Strong volume growth doubles Varun Beverages Ltd revenues in Q2CY22 results

Varun Beverages Limited is an Indian beverage manufacturer, bottler, and distributor. Outside of the United States, it is the world’s second-largest bottling company for PepsiCo products. Aside from PepsiCo’s carbonated soft drinks such as Pepsi, 7 Up, Mountain Dew, and Mirinda, the firm also distributes Tropicana fruit juice brands, Gatorade sports-themed beverages, Quaker Oats’ milk-based drinks, and Aquafina bottled water.

Varun Beverages is a PepsiCo bottler in 27 Indian states and 7 Union Territories as of 2019. The company’s products are also sold in Nepal, Sri Lanka, Morocco, Mozambique, Zambia, and Zimbabwe.

Let’s see more about the fundamentals of Varun Beverages Limited and analyse their Q2CY22 performance.

Key Highlights of Varun Beverages Q2CY22 Result

• Net revenue from operations increased by 3% year on year in Q2CY22 to Rs. 4,954.8 crores, owing principally to strong volume growth.
• In Q2 CY2022, EBITDA climbed by 119.1 % to Rs. 1,250.6 crores, while EBITDA margin increased by 194 basis points to 2 %.
• Varun Beverages’ revenue from operations in Q2CY22 was Rs 5,017.6 crores, more than double the previous year’s figure of Rs 2,483.04
• PAT increased by 6 % to Rs. 802 crores in Q2 CY2022 from Rs. 318.8 crores in Q2CY21, owing to strong growth in revenue from operations.
• Net debt stood at 2,055 crores as of Jun 30, 2022, against Rs. 3,005 crores as on Dec 31, 2021

Robust Revenue Growth of 102.3 % YoY in C2FY22

VBL’s revenue increased by 102.3 % to Rs 4954.8 crore, driven by 96.9 % volume growth and

2.7 % realisation growth. During the quarter, the company sold 300 million cases, accounting for 73% of the cases of carbonated soft drinks, 18% of the cases of water, and 9% of the cases of juices. Realisations increased by 2.7%, owing to price increases in key SKUs and a reduction in discounts and incentives. Sales and volume growths were 20.8 % and 15 %, respectively, over three years.

Sales volume in India climbed by 106.4 % to 262 million cases, while volumes in outside territories increased by 49.2 % to 38 million cases. Capacity utilisation in India was close to 90%, owing to large sales volumes.

Capacity utilisation in certain categories, such as CSD PET, Tropicana, and value-added drinks, reached 100 %.

Profit after tax increased by 154% YoY to Rs 787 crore

VBL reported a two-fold increase in consolidated profit after tax for the June quarter, to Rs 787 crore, due to increased revenue from operations and improved margins. In April-June 2021, the company reported a PAT of Rs 308.80 crore. The company announced a dividend of Rs 2.5 per share.

In the last six months, net debt fell by Rs 950 crore to Rs 2055.5 crore. Net working capital days have decreased from 24 days in Q2CY21 to 17 days in 2QCY22, as most of the raw material inventory stocked for the season has been used and the business has returned to normalcy.

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Strong demand from underpenetrated markets

During the quarter, all territories expanded. However, underserved markets (with 15-20% market share) such as MP, Orissa, Bihar, Jharkhand, and Chhattisgarh experienced substantial growth throughout the quarter.

VBL recently established a facility in Bihar, and its capacity was fully utilised within the first year due to significant demand in the region. VBL will expand its distribution network in underserved locations with more “visible” coolers and cars, as management anticipates significant growth in these markets. Energy drink ‘Sting’ has witnessed a growth of 185% & it now contributed 7.2% to the volumes.

Expanding capacity by 30% with CAPEX of Rs 1200 crore in CY23

During H1CY22, net Capex amounted to Rs 670 crore due to new greenfield production facilities in Bihar and Jammu, as well as brownfield expansion at the Sandila site. VBL is now establishing two huge greenfield plants in MP and Rajasthan. It is also expanding its brownfield factory in Bihar. VBL will add 30% more capacity in CY23, with an outlay of Rs 1200 crores, resulting in additional revenue of about Rs 2,600 crores.

VBL is tripling its capacity in the dairy industry by the end of CY23, which will increase income in CY24. VBL has added one line in Zimbabwe, which will be operational by the end of the season on August 22.

VBL is trying to double its dairy capacity, and they are doing so from their Pathankot, Punjab facility, which serves the North region. By early CY24E, the new capacity should be contributing to the top line. Kurkure Puffcorn production will begin in Q3CY22.

Q2CY22 Result Con Call Highlights

• Domestic and international retail touch points totalled 3 million, including 0.4 million exclusive Sting locations. These exclusive shops may eventually take care of the other SKUs as They hope to increase touch points by 8-10% year on year.
• The juice category has risen exponentially, currently accounting for a record-breaking 9% of total
• The company would start manufacturing the Kurkure brand in October 2022. VBL would be only manufacturing the brands, and marketing & distribution would be done by PepsiCo
• The new tax regime eliminates various exemptions, yet the lower tax rates benefit the corporation by saving 3%.
• Keeping sustainability as a core principle of its business strategy, VBL continues to invest in PET recycling and energy and water efficiency, with the goal of having a net positive influence on the

Technical Analysis

Varun Beverages’ share price saw a huge upsurge in the market price in the last few trading sessions. On the daily frame chart, it broke the All-Time High resistance and moved upward with strong volume. The stock is moving above both MA 50 and MA 200 which makes it a bullish stock. RSI is 78.5, and RSI above 70 is considered overbought. This implies that the stock may show a pullback.

Additionally, after the Q2CY22 data is released, investors may want to think about buying Varun Beverages with a medium- to long-term outlook due to its sound Fundamentals and strong business operations. The stock is continuing an uptrend.

Our view

Varun beverage experienced a spectacular YoY volume increase throughout the quarter, owing to a low base, an intense summer, and prospective expansion in acquired southern and western areas (acquired 3 years back). With 90 % of its capacity utilised, the company was able to attain a volume of 300 million cases during the quarter.

We expect VBL’s earnings momentum to continue, driven by greater penetration in newly acquired South and West Indian regions, higher adoption of newly launched products and expanding refrigeration in rural and semi-rural areas.

 

About the Author

Ketan Sonalkar (SEBI Rgn No INA000011255)

Ketan Sonalkar is a certified SEBI registered investment advisor and head of research at Univest. He is one of the finest financial trainers, with a track record of having trained more than 2000 people in offline and online models. He serves as a consultant advisor to leading fintech and financial data firms. He has over 15 years of working experience in the finance field. He runs Advisory Services for Direct Equities and Personal Finance Transformation.

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