Varun Beverages' growth strategy could prove beneficial for investors

The VBL board approved the acquisition of SBC Tanzania for Rs 1,304 crore and SBC Beverages Ghana for Rs 127 crore

Varun Beverages (VBL) has increased its Africa presence with acquisition of two major beverage companies, and completed acquisition of remaining stake in a third entity.

 

The VBL board approved the purchase of SBC Tanzania for Rs 1,304 crore and SBC Beverages Ghana for Rs 127 crore. These own manufacturing/distribution rights for NARTD (PepsiCo branded) beverages in Tanzania and Ghana.

 

The acquisitions will help VBL gain ground in East and West Africa. It already had rights for much of southern Africa. The Tanzanian acquisition comes at a trailing multiple of 1.2x (Enterprise Value (EV)/sales), given dominant share (RMS) of Pepsico (56 per cent) and growth profile (15 per cent CAGR in FY21-23). In Ghana, per-capita CSD consumption is lower (at 3 litre vs 6-7 litre for Tanzania and India). In all, VBL now has 6 facilities in Africa with a total capacity of 100 million cases.

 

Africa is a large, long-term growth opportunity with an estimated $20-25 billion size. VBL’s proven capability in Zimbabwe/Nepal and PepsiCo’s focus on franchise-owned bottling operations should help VBL increase Africa penetration with a presence across 15 countries. PepsiCo’s wider product portfolio offers key advantages.

 

VBL delivered strong numbers in the second quarter of financial year 2025 (Q3CY24) with consolidated volume growth of 22 per cent year-on-year (Y-o-Y) to 267.5 million cases (including 34 million cases from Bevco).

 

Domestic volume growth was moderate at 5.7 per cent Y-o-Y, impacted by heavy rains. Realisation per case in Q3CY24 increased by 1.9 per cent to Rs 179.6. Volume from international markets grew by 8 per cent.

 

EBITDA margins improved by 117 bps Y-o-Y to 24 per cent, driven by operating leverage and cost efficiency measures. VBL will raise Rs 7,500 crore via a Qualified Institutional Placement (QIP), to be utilised for acquisitions, and the repayment of debt. As of Sep’24, the net debt is at Rs 6,000 crore.

 

Revenue increased by 24.1 per cent Y-o-Y. Gross margins improved by 22 bps Y-o-Y to 55.5 per cent, supported by softening raw material prices (specifically PET), reduced sugar content, and lightweight packaging initiatives.

 

EBITDA reached Rs 1,151 crore, up 30.5 per cent Y-o-Y.

 

Depreciation increased by 50.2 per cent Y-o-Y, due to the acquisition of BevCo and the establishment of new facilities in India and the DRC. Finance costs rose by 89.7 per cent, due to capex, and higher borrowing costs. PAT grew by 22.3 per cent Y-o-Y to Rs 629 crore.

 

VBL completed the acquisition of BevCo, which consolidates its presence in South Africa and DRC. The expansion of its snacks portfolio in Zimbabwe, Morocco and Zambia will be revenue accretive. There is a focus on better distribution reach, and the commissioning of many greenfield and brownfield facilities.

 

There’s an expansion of the high-margin Sting energy drink, along with focus on value-added dairy, sports drinks (Gatorade), and juices. Sting contributed 15 per cent of sales in 9MCY24. Juice, value-added dairy and sports in India grew 23.9 per cent.

 

The greenfield DRC plant commissioned in Q3CY24, has ramped up to 100 per cent utilisation and a second facility is expected to be operational ahead of CY25 season.

 

VBL sees competition from Campa but is confident of its strategy. VBL aims to add 300,000 – 400,000 outlets each year. Inventory levels are healthy and lean enough to liquidate within one month. VBL will re-launch Nimbu Masala Soda and is in talks with PepsiCo to launch a Jeera-based drink.

 

Capex for CY25 is likely to be Rs 2,400 crore with new plants in Kangra, Gorakhpur, Buxar, and Meghalaya. Dividend was received from Sri Lanka for the first time.

 

The company must watch out for increased competition, raw material inflation, weakening demand, forex fluctuations, etc. But its ambitious growth strategy could pay off.

 

The stock, which was seen lagging the FMCG indices since mid of 2024, has again started outperforming with the gap widening in the last two months.