Varun Beverages Ltd Q4 FY24 Earnings Conference Call Insights

Key highlights from Varun Beverages Ltd (VBL) Q4 FY24 Earnings Concall

• Financial Performance
  • Consolidated sales revenue growth of 10.9% (volume growth of 7.2%, net realization per case growth of 3.5%).
  • EBITDA increased by 23.9% year-on-year.
  • PAT increased by 24.9% to INR 5,479.8 million.
  • Volume growth of 7.2% to 240.2 million cases (India 4.4%, International 21.9%).
  • Gross margins improved 385 bps to 56.3% due to reduced sugar, light-weighting, and lower PET prices.
  • EBITDA up 23.9% to INR 9,887.6 million, margin up 240 bps to 22.9%.
• Growth Outlook
  • Positive outlook for peak season, supported by strong investments in capacity and new acquisitions.
  • Established solid platform for sustained future growth.
• Debt Repayment
  • The company paid INR 1,260 crore for the BevCo acquisition and spent around INR 950-1,000 crore on capex during the current quarter.
  • Aims to amortize the additional debt within a couple of months, striving to reach the targeted debt position by December 31.
  • Company borrowed locally in South Africa to manage exchange rate risks, as the cost differential between Indian and South African borrowing rates was around 150 basis points.
• Capacity Expansion
  • Commissioned 3 new greenfield facilities in Supa (INR 10,000 million), Gorakhpur (INR 11,000 million), and Khordha (INR 7,000 million).
  • Set up backward integration facilities at all 3 plants, taking total to 13.
  • Upcoming INR 4,000 million capex for DRC unit.
  • The plants were operating at approximately 100% utilization in April, indicating high demand during the summer season.
  • The company is increasing capacity by adding lines or plants, particularly for Gatorade and CreamBell products.
  • PepsiCo has allowed the company to produce Gatorade from multiple plants, and a zero-calorie variant has been launched.
  • CreamBell’s capacity expansion was initially delayed but is now contributing to growth, with demand outpacing the enhanced capacity.
  • All plants were operating at around 100% utilization as the peak season approached in April.
• South Africa Acquisition
  • The company has acquired five operational plants in South Africa through the BevCo acquisition.
  • Plans to enhance capacity and improve profitability by increasing the share of PepsiCo products, which contribute better to top and bottom lines.
  • The company sees a huge upside potential and aims to significantly increase PepsiCo’s share, drawing from its successful track record in other markets like Zimbabwe, 71% share, Zambia, and Morocco.
  • While the volume may be lower than India, the realizations and profitability are expected to be higher in South Africa.
• Portfolio Mix Improvement
  • Currently, 46% of the consolidated sales volume comes from zero or low-sugar products.
  • In South Africa and Morocco, the low/no-sugar portfolio accounts for around 90% of sales.
  • The company is continuously launching new low-sugar variants like Gatorade Zero and exploring ways to reduce sugar content further.
  • Improving the portfolio mix towards low/no-sugar products is expected to help gross margins going forward.
• Capital Structure
  • The company aims to maintain its debt-to-EBITDA ratio around 1-1.25 and a healthy debt-equity ratio, in line with its past track record.
  • Expects to amortize the debt taken for the current year’s expansions and the South Africa acquisition within a couple of months after the peak season.
  • Future expansions from 2025 onward are expected to be funded primarily through internal accruals, with potential short-term borrowings to bridge the gap until operations commence and generate cash flows.
• Acquisition Synergy
  • The company does not have immediate plans to launch brands like Rockstar, an energy drink brand present in South Africa, in the Indian market.
  • Introducing premium and niche categories in India hinges on aligning with PepsiCo’s strategy and assessing market readiness.
  • The company plans to offer insights on synergies from the South Africa acquisition after a few quarters, once it better understands market dynamics.
• Operating Leverage Prospects
  • The company expects 2025 to mark the beginning of a favorable operating and financial leverage period.
  • The company can leverage the increased scale and operating leverage after integrating current acquisitions and capacity expansions.
  • Assuming no significant acquisitions in 2025, debt levels are expected to remain stable from the end of 2023, while EBITDA contributions from new plants and acquisitions should substantially increase.
• DRC Market Opportunity
  • Democratic Republic of the Congo market has a population of over 100 million and a warm climate, presenting a sizable opportunity.
  • The company has installed two large production lines with a capacity of 35-40 million cases.
  • As the plant commences operations by the end of the current quarter, the company expects to gain better insights into the market’s potential and growth prospects.