- Varun Beverages Ltd is an Indian beverage company and sole franchise of PepsiCo products in several countries. - In 2017, the company divested its stake in a loss-making Mozambique subsidiary and increased its stake in a profitable Zambia subsidiary. It also established new production facilities in Zimbabwe and India. - The company received rights to produce and distribute additional PepsiCo brands and acquired new territories in India through the purchase of PepsiCo's franchised territories in several states. - Financial highlights show increased assets but decreased profits compared to the previous year. The company expects future profitability to rise through consolidation efforts and expanded product portfolio and territories.

1. Varun Beverages Ltd.
Year End Highlights
Reco. Price: Rs. 569 CMP (as on 08/03/2018): Rs. 633.05
Reco. Date: 21/12/2017 Return: ~11.26% in approx. 2.5 months
Company Updates
 In 2017, the company divested
41% of its stake in subsidiary
Varun Beverage Mozambique
Ltda. as the subsidiary was posting
losses and affecting the overall net
operations of the firm.
 Increased stake in the Zambia
subsidiary from 60% to 90%.
 Established a greenfield
production facility at Zimbabwe to
capture an untapped market. VBL
is the sole Pepsi Franchisee and
distributor of Pepsico products.
Commercial production has
already begun at this facility.
 VBL got a credit rating upgrade
from CRISIL. Ratings shifted
from CRISIL AA-/Stable to
CRISIL A+/Positive. Short term
debt rating remained constant at
CRISIL A1+.
 The company set up a new manufacturing unit of Pepsi products at Hardoi
district, UP. Operations started from May 3, 2017.
 The company’s operations span across 6 countries: India, Nepal, Sri Lanka
which contribute ~90% to revenues and 3 countries in Africa (Morocco,
Zambia and Zimbabwe) which contribute ~10% to revenues.
 VBL accounts for ~51% of Pepsico’s beverage sales volume in India. It has a
presence in 21 states and 2 union territories.
 Increase in infrastructure: 23 state-of-the-art production facilities.
 Supply Chain: 72 owned depots, 2122 owned vehicles, 1049 primary
distributors.

2. NEW BRAND LICENSE BY PEPSICO
 Company has received manufacturing and distribution rights for Pepsi Black
and Diet Pepsi (CSD segment), Nimbooz masala soda (carbonated juices
segments), Sting (energy drink)
 Company gained distribution rights for: Tropicana, Tropicana Essentials,
Tropicana Delight, Sports Drink Gatorade and Dairy product Quaker Oats
Milk.
ACQUISITION OF TERRITORIES
 The company concluded the
acquisition of Pepsico India’s
previously franchised territories of
state of Odisha and parts of Madhya
Pradesh along with 2 manufacturing
units at Bargarh (Odisha) and
Bhopal(MP) w.e.f from 27th
September, 2017.
 The company concluded the
acquisition of Pepsico India’s
previously franchised territories of state of Jharkhand along with a
manufacturing unit at Jamshedpur on 20th
Dec 2017 (due-diligence is till in
progress).
 Completed acquisition of Pepsico India’s previously franchised territory of
state of Chhattisgarh (w.e.f. 11th
Jan 2018), Bihar (w.e.f. 17th
Jan 2018).
 Acquired manufacturing unit at Cuttack (Odisha) w.e.f. 19th
Jan 2018.
 For above acquisition, total acquisition was ~Rs. 2550 million. The company
plans to further spend ~Rs. 350 million in upgrading plant & machinery.
 Because of above acquisition, the company saw a 6% growth in Pepsico India
volumes and addition in the existing consumer base of India’s population by
~21%.
NEW PRODUCT LAUNCHES
 PEPSI BLACK: A zero calorie cola flavour CSD product.
 STING: An energy drink which contains 50% less sugar than CSD products.
It has a highly competitive price as compared with other brands.
 TROPICANA: VBL has entered into a strategic agreement for selling and
distribution of Tropicana portfolio in territories across North and East India.
 GATORADE/QUAKER OATS: Partnership for selling and distribution of
Gatorade and Quaker Value-Added Dairy in territories across North and East
India.

3. Financial Highlights Year End
Consolidated
 Property, Plant & equipment grew by ~5.5% on YoY basis and stood at
Rs.35411.66 million.
 Capital Work-in-Progress has increased substantially this year by ~52% YoY
basis for setting up a greenfield plant in Nepal and Zimbabwe to tap into
previously un-chartered potential territories.
 Intangible assets have increased by ~21% on YoY basis.
 Total non-current assets increased by ~8.45% on YoY basis.
 Inventories have marginally decreased and cash and cash equivalents
increased by ~99% YoY basis.
 Long-term borrowings increased by ~38% on YoY basis and stood at
Rs.16869.95 million. Short-term borrowings and trade payables have reduced
this year.
 D/E at 1.3x due to incremental debt for acquisition of new sub-territories in
India and adjustment in equity due to Ind-AS implementation.
 Net profit grew by 346%.
 Sales Volume grew by 1.1% YoY at ~278 million unit cases.
 Net working capital steady at 30 days in CY 2017.
 Net capex in CY 2017 was Rs. 6615 million, out of which, organic capex was
Rs. 3915 million and inorganic capex was Rs. 2700 million.
Performance Highlights Quarter End
Consolidated
 Revenue from operations grew by 21.4% YoY basis.
 EBITDA margins reduced by ~38% in Q4 CY2017 as compared to Q4
CY2016.
 Loss recorded in Q4 CY2017 is Rs. 721 million as compared to loss of Rs.
1117 million in Q4 Cy2016.
(Note:Since the business is seasonal, the December quarter generally doesn’t
post attractive figures and hence the company must be viewed on annual basis.)

4. Conference Call Highlights
 The company is going through a consolidation phase; they have
consolidated their Goa operations into 1 unit from 2.
 The company expects a lot of free cash flow in the coming years.
 Capex for existing territories is done for now but additional Rs. 350
million is needed to upgrade the plants in the recently acquired 5
states.
 Nepal market share is constant the reason for this is the company
has 1 plant in Nepal while the competition has 2 plants. The
company’s plant is functioning at 100-110% capacity but is not able
to reach all the territories there as the freight costs are too high.
 Since Nepal is one of the most profitable territories, the company
plans to set up a greenfield plant in Nepal to get full benefits of
unexplored territories.
 Juices and water are being added to Nepal territory.
 The company expects to gain ~50% market share this year as
compared to existing 42%.
 The Juice and water category are much fast growing segments then
CSD category.
 The company hopes to gain manufacturing rights of Quaker and
Tropicana. The profitability is expected to rise in the last quarters of
this year.
 To start manufacturing of Quaker and Tropicana, the company will
set up a greenfield facility. The company is still in talks with
Pepsico and will come up with exact figures for capex soon. The
capex will happen by the end of 2018 and might flow into 2019.
 Further capex will be done for Zimbabwe (~Rs. 165 Cr.), Nepal
(~Rs. 150 Cr.) and India (~Rs. 150 Cr. for existing business -
doesn’t include capex needed for Tropicana and Quaker product
manufacturing facility).

5. Final View!
The management of the company is very clear about their future
prospects and actions taken by the company are complementary
towards their future goals. Year End results are favourable and we at
Jainam Wealth recommend our investors to “accumulate at every dip”.
Sources:
 Web-based software ace-analyser.
 Company press release, quarter update release, annual update
release, investor presentation and conference call.

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