| Varun Beverages Limited | ||||
| Rated amount enhanced for Bank Debt | ||||
| Rating Action | ||||
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| Note: None of the Directors on CRISIL Ratings Limited’s Board are members of rating committee and thus do not participate in discussion or assignment of any ratings. The Board of Directors also does not discuss any ratings at its meetings. | ||||
| 1 crore = 10 million | ||||
| Refer to Annexure for Details of Instruments & Bank Facilities |
Detailed Rationale CRISIL Ratings has reaffirmed its ‘CRISIL AA+/Stable’ rating on the long-term bank facilities of Varun Beverages Limited (VBL; part of the Varun Beverages group).
CRISIL Ratings has taken note of the corporate announcement by VBL on December 19, 2023, regarding acquisition of 100% stake in the business conducted by The Beverage Company Ltd, South Africa, and its wholly owned subsidiaries, collectively known as Bevco, with an option to accept minority co-investment from a large equity fund. Bevco is engaged in manufacturing and distribution of licensed (PepsiCo Inc) and own-branded non-alcoholic beverages. It holds franchise rights from PepsiCo Inc for South Africa, Lesotho and Eswatini, along with distribution rights for Namibia and Botswana. The proposed transaction is valued at Enterprise Value of Rs 1,320 crore and will be in the form of cash consideration. VBL is in process of finalising the means of funding the proposed acquisition. This acquisition will bolster the geographic reach of the company in Africa. Despite the acquisition and moderate capital expenditure (capex) plans, financial risk profile should remain strong with debt to EBITDA expected to remain below 1.2 times. CRISIL Ratings will continue to monitor the developments on the acquisition, which is subject to approvals from Competition Commission South Africa and PepsiCo Inc.
The reaffirmation factors in healthy revenue growth of 22% year-on-year for the nine months ended September 30, 2023 (9M CY2023), driven by strategic expansion in lower penetrated territories, scaling up of the non-carbonated drinks portfolio and growing international presence. CRISIL Ratings expects revenue growth to remain strong in CY2023 despite unfavourable weather conditions in the second quarter, supported by healthy growth in demand in the carbonated soft drink (CSD) segment and scaling up of the non-CSD portfolio.
Operating margin rose to 23.9% in 9M CY2023, driven by operating leverage and focus on backward integration and cost optimisation. CRISIL Ratings expects the margin to remain around 21.5% over the medium term, as the company will benefit from moderation in raw material prices, especially packaging cost, with correction in prices of Pet chips.
The financial risk profile remains strong, marked by a comfortable capital structure and gearing of less than one time as on December 31, 2022. Debt to operating earnings before interest, depreciation, taxes and amortisation (EBIDTA) ratio improved to around 1.3 time in CY2022, from around 1.9 times in the previous year supported by higher profitability. The company has net capitalisation of Rs 2,000 crore in CY2023, of which cash outflow wasRs 800 crore. The balance Rs 1,200 crore was incurred in the previous year. The company has also invested Rs 1,600 crore towards domestic and international greenfield expansion during the first nine months of CY2023. While the financial risk profile is expected to remain strong, any further debt-funded capex and its impact on the financial risk profile remains a monitorable. Financial flexibility is aided by sufficient cushion in the bank limit and expected healthy cash accrual in CY2023.
The ratings also reflect the leadership position of the group in managing franchisee operations of PepsiCo, its diversified geographic reach and robust operating efficiency. These strengths are partially offset by the debt-funded expansion plans and susceptibility of business to changes in customer preferences and regulations. |
Analytical Approach CRISIL Ratings has combined the business and financial risk profiles of VBL and all its subsidiaries, including Varun Beverages Lanka (Pvt) Ltd, Varun Beverages Morocco SA, Varun Beverages (Nepal) Pvt Ltd, Varun Beverages (Zambia) Ltd, Varun Beverages (Zimbabwe) (Pvt) Ltd and Lunarmech Technologies Pvt Ltd. All these entities, collectively referred to as the Varun Beverages group, have business and financial linkages.
Please refer Annexure - List of entities consolidated, which captures the list of entities considered and their analytical treatment of consolidation. |
Key Rating Drivers & Detailed Description Strengths: Market leadership and geographical diversity in domestic and global markets The Varun Beverages group is the second largest franchisee for PepsiCo outside the US, and the largest in India. Following the acquisition of the southern and western territories of PepsiCo in 2019, VBL is present in 27 states and 7 union territories (except Andhra Pradesh, Jammu and Kashmir, and Ladakh), and accounts for over 90% of beverage sales of PepsiCo in India. It also has sole franchisee operations in Nepal, Sri Lanka, Morocco, Zambia and Zimbabwe. Furthermore, VBL continues to expand its overseas presence, having set up subsidiaries in the Democratic Republic of Congo (DRC), Mozambique and in South Africa over last two years. Consistent ramp-up in operations via organic and inorganic routes, has helped strengthen the overall market position and geographical reach. VBL has over 15 brands across CSD, non-carbonated beverages and packaged drinking water segments, with CSD accounting for nearly 72.6% of sale volume during the first nine months of CY2023. The non-carbonated drink portfolio, comprising juice-based drinks and ambient temperature, value-added dairy beverages, primarily caters to north India. VBL is also focused on expanding its manufacturing facilities for value-added dairy beverages and juice-based drinks across India.
The dominant position of VBL in PepsiCo’s franchisee operations in India, and its vast distribution network in the domestic and overseas markets will continue to aid the business risk profile.
Strong operating efficiency The group continues to derive efficiency from backward integration of operations, with facilities to manufacture crown corks, PET pre-forms, corrugated boxes, shrink wrap sheets, and plastic cap closures and shells. Furthermore, presence in contiguous territories helps manage logistic cost and other operating costs efficiently and maintain economies of scale. Operating margin improved to 20.9% in 2022, supported by better operating leverage, cost optimisation measures and higher realisations in few products. Operating margin is likely to remain healthy around 21.5% in the medium term, with decrease in cost of raw materials such as PET chips. Moreover, few territories remain relatively underpenetrated, but their contribution to sales volume and profitability should improve over the medium term. This remains a key monitorable.
Strong financial profile Financial risk profile remains healthy, aided by an improvement in debt coverage metrics. Debt to operating EBIDTA ratio reduced to around 1.3 times as on December 31, 2022, from around 1.9 times as on December 31, 2021, mainly due to higher profitability. CRISIL Ratings expects the debt to operating EBITDA ratio to sustain below 1.2 times over the medium term, despite the capex and acquisition. The ratio will be supported by accretive cash flow, owing to better penetration in existing territories, product diversification and expansion in geographic reach. However, any large debt-funded capex remains a key monitorable.
Weaknesses: Susceptibility of business to changes in regulations and customer preferences The domestic beverage industry remains susceptible to changes in regulations related to content in soft drinks, and environmental issues such as ground water depletion and discharge of effluents by bottling plants in India. Further, concerns over disposal of plastic bottles and use of single-use plastic straws in ready-to-drink beverages may continue to impact the industry. The company has expanded from the CSD to non-CSD category, through juice-based drinks and value-added dairy beverages, so as to cater to customers across categories. This too may involve expenditure towards market research, advertising and promotions and cause variations in return expectations over medium term.
Debt-funded expansion plans VBL plans to incur a large capex towards scaling up its operations and improving its reach in existing markets. The company is likely to undertake capex of Rs 2,500 crore in CY2023, towards expansions in the CSD segment as well as juice-based drinks and value-added dairy beverages, and further to support the strong demand and widen its reach in the domestic as well as international markets. It has a strong track record of improving its capital structure and coverage metrics. However, any large debt-funded capex plans remains a key monitorable. |
Liquidity: Strong Cash accrual was healthy at Rs 1,957 crore for CY2022 (Rs 1,169 crore in the previous year). With ramp up of capacities and scaling up of non-carbonated beverages, CRISIL Ratings expects cash accrual to remain healthy in CY2023, however against sizeable repayments. Furthermore, given the seasonal nature of the beverage business, working capital requirement is moderate. Cash and bank balance was around Rs 228 crore as on December 31, 2022. Utilisation of bank lines (sanctioned limit of Rs 570 crore) averaged 36% over the 12 months through May 2023.
Environment, social and governance (ESG) profile The ESG profile of VBL supports its strong credit risk profile. The fast-moving consumer goods sector has a moderate environmental and social impact, primarily driven by plastic waste generation, intensive water usage and direct impact of the products on health and well-being of consumers.
Key highlights
There is growing importance of ESG among investors and lenders. The commitment of VBL to the ESG principle will play a key role in enhancing stakeholder confidence given shareholding by foreign portfolio investors and access to both domestic and foreign capital markets. |
Outlook: Stable CRISIL Ratings believes VBL will sustain its healthy business risk profile, supported by strong cash accrual, with growth in new territories and integration benefits. Financial risk profile should also be aided by gradual reduction in debt. |
Rating Sensitivity Factors Upward Factors
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About the Company VBL was established in 1995, by the promoter, Mr Ravi Kant Jaipuria, to cater to beverage operations of PepsiCo in India. The company manufactures and distributes sweetened aerated water (soft drinks), non-sweetened aerated water (soda), packaged drinking water and juice-based drinks. It is the largest franchisee for PepsiCo in India, with 33 manufacturing units. In 2019, VBL acquired the franchise rights for the southern and western sub-territories from PepsiCo India and third-party bottlers, and expanded its presence to 27 states and seven union territories.
Operations outside India includes franchise operations in Nepal, Sri Lanka, Morocco, Zambia and Zimbabwe. VBL has incorporated new subsidiaries in the Democratic Republic of Congo (DRC), Mozambique and in South Africa over the last two years but is yet to commence operations in these regions. |
Key Financial Indicators
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Any other information: Not Applicable |
Note on complexity levels of the rated instrument: |
Annexure - Details of Instrument(s)
*Long-term bank guarantee |
Annexure - List of Entities Consolidated
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