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Varun Beverages – Multibagger Stock For the Month of July 2018

Price – Rs. 754.65

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About the Company

Varun Beverages Limited (“Varun Beverages” or the “Company”) is the second largest franchisee in the world (outside US) of carbonated soft drinks (“CSDs”) and non-carbonated beverages (“NCBs”) sold under trademarks owned by PepsiCo.

  • PepsiCo CSD Brands sold by the Company include Pepsi, Diet Pepsi, Seven-Up, Mirinda Orange, Mirinda Lemon, Mountain Dew, Seven-Up Nimbooz Masala Soda, Evervess Soda, Sting and Gatorade.
  • PepsiCo NCB Brands sold by us include Tropicana (100%, Essentials & Delight), Tropicana Slice, Tropicana Frutz, Seven-Up Nimbooz and Quaker Oat Milk.
  • Packaged Drinking Water under the brand Aquafina.

Varun Beverages Revenue

Varun Beverages Brands

Manufacturing – As of March 2018, VBL has 20 manufacturing plants in India and 5 manufacturing plants in international geographies.

Distribution And Warehousing – Robust supply chain management

  • 72 depots
  • 2,100+ owned vehicles
  • 1,000+ primary distributors

INVESTMENT RATIONALE

Leveraging Strong Brand Name of PepsiCo

Varun Beverages enjoys over 25 years of strategic association with PepsiCo and accounts for ~51% of PepsiCo’s beverage sales volume in India. In addition to India, the Company is present in five other countries – Nepal, Sri Lanka, Morocco, Zambia and Zimbabwe.  With 279 million cases of beverages sold in 2017 across 6 countries. VBL is its second largest CSDs and NCBs franchisee in the world (outside the USA).

VBL’s presence in low per capita soft drinks consumption countries (44 bottles for India compared to matured markets like U.S. (1,496 bottles), Mexico (1,489 bottles), Germany (1,221 bottles) and Brazil (537 bottles).), 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.

Diversified and Solid Portfolio of PepsiCo Licensed Brands

CARBONATED SOFT DRINKS

Pepsi-Cola

Pepsi, Diet Pepsi, Pepsi Max, Pepsi Black

Seven-Up

Seven-Up – Lemon-lime flavor soft drink

Mountain Dew

Citrus flavored drink

Mirinda

Available in orange, pineapple, apple and lemon flavor

Evervess

Evervess, Teem Soda, Duke’s Soda

FRUIT PULP / JUICE-BASED Drinks

Tropicana Slice

Mango-based drink

Seven-Up Nimbooz

Real lemon juice, juice-based drink

Tropicana Frutz

Fruit juice in lychee, apple, mango, mix-fruit and orange flavors

CARBONATED JUICE BASED DRINK

Seven-up NMS

Seven-Up Nimbooz Masala Soda

PACKAGED DRINKING WATER

Aquafina

Packaged drinking water

New Product Launches

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. With its extensive distribution channel, VBL is strongly placed to tap the upcoming opportunity in the NCD space.

Pepsi Black

·     Zero Calorie Drink

·     Available in 250 ml cans and 250 ml non-returnable glass bottles

Sting

·     Energy Drink

·     Available in 250 ml cans and 250 ml PET bottles

Tropicana

·     Tropicana Juices (100%, Delight, Essentials) available in 1 litre and 200 ml tetra packs

Gatorade

·     Sports Drink

·     Available in 3 flavors (Orange, Lemon and Blue Bolt) in 500 ml PET bottles

Quaker Milk

·     Oats Milk based Drink

·     Available in two flavors (Almond and Mango) in 180 ml tetra Packs

Slice Fizzy Drinks

·     Carbonated Juice based Drinks

·     Available in 7 flavors (Lemon & Lime, Orange, Clear Lemon, Jeera, Apple, Guava Chilli, Cream Soda)

·     All flavors are available in 250 ml PET bottles at a MRP of Rs. 12

Capacity Expansion

In CY 2017, the Company has done the following capacity expansion initiatives:

  • Set up a new unit for manufacturing PepsiCo range of products at District Hardoi, Uttar Pradesh; commercial production / operation started with effect from May 3, 2017
  • Goa operations got consolidated into a single larger facility to bring in operational efficiencies
  • One CSD glass line each from Sathariya-1 and Bazpur plant were shifted to Nepal and Zimbabwe respectively
  • Expanded presence in Africa:
    • Increased stake in Zambia subsidiary, Varun Beverages (Zambia) Limited, to 90% from 60%.
    • Established a green-field production facility in Zimbabwe, an untapped market with huge potential where it will sell and distribute PepsiCo’s products as sole franchisee

 For CY 2018

  • Set up a new unit for manufacturing of Pepsi range of products at Harare, Zimbabwe; commercial production / operation has started with effect from February 19, 2018.
  • The Company has set up a new unit for manufacturing of Pepsi range of products at Nepal; commercial production / operation has started with effect from May 02, 2018

Strategic Expansion through Franchisee Acquisition

VBL 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 ~51% of PepsiCo’s sales in India and is the second largest PepsiCo franchisee in the world (ex-US). 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 the Company a huge opportunity to acquire and expand further in Indian Territory.

INVESTMENT CONCERNS

Seasonality Plays an Important Role

Seasonality plays an important role for Varun Beverages as it typically derives 45+% of volumes and 60% of EBITDA during Mar-May.

Competition Faced by Pepsi | Falling Market Share | Change in consumption pattern

Changing consumer preferences and rising competition has led to a fall in the market share of PepsiCo. Pepsi lost share to touch 13.4% (retail value) in calendar year 2016 from 14.9% in 2013, according to Euromonitor data. Its carbonated drinks brands Mountain Dew and 7UP gained market share, while Mirinda’s declined.

The story is no different for its fruit juice brands Tropicana and Slice. Tropicana’s market share dropped from 10.2% in 2013 (retail value) to 8.8% in 2016 and Slice slipped marginally from 15.6% in 2013 to 15.4% in 2016.

In fruit-based beverages, Pepsi competes with Dabur India Ltd’s Real, and other brands like ITC Ltd’s B Natural and Patanjali’s juices.

About the Author

Rajat Sharma pictureRajat Sharma is a well known stock market analyst and commentator. He has covered Indian markets for over a decade and is regarded for consistently identifying early stage investment opportunities. Attorney by qualification, Rajat has done extensive work for improving corporate governance and disclosure standards.