Detailed Rationale

Crisil Ratings has upgraded its rating on the long-term bank facilities of Varun Beverages Ltd (VBL; part of the Varun Beverages group) to ‘Crisil AAA/Stable’ from ‘Crisil AA+/Stable’.

 

Crisil Ratings has withdrawn the proposed bank facilities amounting to Rs.1,517.37 crore on request from the company and on receipt of requisite documentation in line with Crisil Ratings policy on withdrawal of rating on bank loan facilities.

 

The rating upgrade reflects significant improvement in the financial risk profile with issuance of shares (including Share Premium) through qualified institutional placement (QIP) of Rs 7,500 crore and strengthening of the business risk profile backed by sizeable increase in scale of operations, with continued double digit growth momentum maintained in India, ramp-up of operations in existing international territories and expansion into newer territories with acquisition of BevCo (South Africa-based bottling company) and greenfield plant in Democratic Republic of Congo (DRC) territories while sustaining steady operating profitability.

 

VBL’s capital structure strengthened after it raised Rs 7,500 crore in November 2024 via QIP, issuing (4.1% fresh Capital), diluting  existing Shareholders proportionately including Promoters. Post the issuance of shares through QIP, the debt has reduced significantly to Rs 2,634 crore as on December 31, 2024 (net debt being negative Rs 86 crore), compared with Rs 6,288 crore as on June 30, 2024, while the tangible networth increased to Rs 16,609 crore from Rs 6513 crores as on December 31, 2023. The gearing is estimated to have improved to 0.14 time as on December 31, 2024, compared with 0.80 time as on December 31, 2023. Meanwhile, the net cash accrual to adjusted debt ratio (NCAAD) is estimated to have improved to 1.51 times in calendar year 2024, compared with 0.49 times in calendar year 2023. However, any higher-than-estimated, debt-funded acquisition or capital expenditure (capex) would be a key rating sensitivity factor.

 

VBL recorded strong net revenue growth of 24.7% on-year to Rs 20,008 crore in calendar year 2024 from reported revenues Rs 16,043 crore (net of traded goods sold) in calendar year 2023, driven by international volume growth of 72.3% to 303 million cases (27% of total volumes) and 11.4% domestic volume growth to 821million cases (73% of total volumes). The volume growth in International markets was due to the acquisition of BevCo and the commencement of operations in DRC, which together contributed to ~116 million cases in calendar year 2024 from the date of consolidation. Healthy domestic volume growth was driven by strategic expansion in lower penetrated territories. Crisil Ratings expects double digit revenue growth to sustain in calendar year 2025 as well supported by increasing domestic penetration and growing international portfolio.

 

The operating margin increased to 23.5% in calendar year 2024 from 22.5% in calendar year 2023 due to better operating leverage, backward integration and cost optimisation measures implemented by the company. The operating margin is expected to remain at a similar level over the medium term, supported by prudent raw material sourcing strategies and improvement in the scale of operations.

 

The ratings reflect the leadership position of the Varun Beverages group in the franchisee operations of PepsiCo, diversity in geographical reach, strong financial risk profile and robust operating efficiency. These strengths are partially offset by susceptibility of business to changes in regulations, customer preferences, risks of currency fluctuations and adverse geopolitical scenario in Africa as contribution from this region increases.

Analytical Approach

Crisil Ratings has combined the business and financial risk profiles of VBL and all its subsidiaries. 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: Consistent ramp-up in operations via organic and inorganic routes has helped VBL significantly strengthen its market position and enhance geographical diversity. 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 has presence in 26 States and six union territories in India (except Andhra Pradesh, Jammu and Kashmir and Ladakh), accounting for more than 90% of the 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 internationally and has incorporated new subsidiaries in DRC and in South Africa in last two years. Through its acquisition of BevCo in South Africa, VBL gained franchise rights in South Africa, Lesotho and Eswatini and distribution rights in Botswana, Namibia, Mozambique and Madagascar. The company is also in the process of acquiring franchise rights in Tanzania and Ghana. Expansion in Africa will help VBL counter the seasonality of sales and diversify its revenue streams. Additionally, the company has entered into an exclusive snacks franchising agreement with PepsiCo for its territories in Morocco, Zimbabwe, and Zambia. This will help the company in enriching the portfolio and leveraging synergies with its existing infrastructure. However, with the growing share of revenue from Africa, currency fluctuations and geopolitical scenario in Africa will remain monitorable.

 

VBL has over 15 brands across carbonated soft drinks (CSD), non-carbonated beverages and packaged drinking water segments, with CSD contributing to ~74% of the volume in calendar year 2024. The non-carbonated drink portfolio consisting of juice-based drinks, sports drink and ambient temperature value-added dairy beverages. VBL has expanded the capacity of non-carbonated drink portfolio at two greenfield plants at Supa, Maharashtra and Gorakhpur, UP in CY2024.

 

Benefits from the dominant position of VBL in the franchisee operations of PepsiCo in India, extensive domestic distribution network and overseas geographies will continue to aid the business.

 

• Robust 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, plastic cap closures and plastic shells. Furthermore, presence in contiguous territories helps efficiently manage logistics and other operating costs and maintain the economies of scale. Operating margin increased to 23.5% in 2024 from 22.5% in 2023, supported by better operating leverage, cost optimisation measures and realisation growth in a few product segments. While operating margins in newly acquired international territories is expected to be lower, as operations in these regions are in a ramp up phase, the impact on overall margins is not expected to be material.

 

• Strong financial risk profile: The financial risk profile has strengthened with the issuance shares through QIP of Rs 7,500 crore in November 2024. Debt to operating earnings before interest, taxes, depreciation and amortisation (Ebitda) ratio reduced to ~0.5 time as on December 31, 2024, compared with ~1.4 times as on December 31, 2023, mainly due to debt repayment. Crisil Ratings expects the debt to operating Ebitda ratio to sustain below 0.5 time over the medium term, despite the capex and acquisition, supported by accretive cash flow due to better penetration in existing territories, product diversification and geographical expansion strategies deployed by the group. However, any large, debt-funded capex continues to be monitorable.

 

Weaknesses:

• Susceptibility of business to changes in regulations and customer preferences: The domestic beverage industry remains susceptible to regulatory changes regarding the content in soft drinks and the increasing environmental concerns over ground water depletion and discharge of effluents by bottling plants in India. Evolving environmental concerns like disposal of plastic bottles may have a continuing impact on the industry. The company has expanded from CSD to non-CSD category with presence in juice-based drinks, sports drinks and value-added dairy beverages as it plans to cater to customer preferences across categories. Even catering to a wide variety of taste preferences of the consumers in new geographies may involve higher spending advertising and promotion efforts that may lead to variations in return expectations over the medium term.

 

• Susceptibility to forex fluctuations and adverse geopolitical scenario in African territories as contribution from these regions increases: While VBL's revenue streams are presently dominated by domestic operations, the company's international footprint is anticipated to expand gradually, driven by the ramp-up of its Bevco and DRC facilities, as well as forthcoming acquisitions in Africa. To mitigate potential risks associated with international operations, VBL employs a natural hedging strategy, wherein revenues and most of the expenditures are denominated in local currencies, and debt is typically incurred in the same currency. Any further impact of currency is usually passed on to the consumers through price hikes. Furthermore, the company's international operations are concentrated in regions that are not subject to US sanctions. VBL also has established a proven track record of operating successfully in Africa, having maintained franchise rights in Morocco, Zambia, and Zimbabwe since 2018. Nevertheless, any significant geopolitical developments that could potentially impact the company's business risk profile will remain monitorable.

Outlook: Stable

Crisil Ratings believes VBL will sustain healthy business and financial risk profiles over the medium term, supported by strong accrual due to growth in new territories and integration benefits as well as gradual reduction in debt.

Rating sensitivity factors

Downward factors

• Weakening of the financial risk profile on account of large, debt-funded capex or acquisition leading to debt to Ebitda ratio above 1.25 times on a sustained basis
• Lower-than-expected operating performance leading to a significant decline in cash accrual
• Significant forex fluctuations and adverse geopolitical events in Africa impacting the company’s operating performance

About the Company

VBL was established in 1995 by the promoter, Mr Ravi Kant Jaipuria, to cater to the 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. It has 36 manufacturing units in India and 12 in international geographies.

 

It has franchisee rights in 10 countries - India, Nepal, Sri Lanka, Morocco, Zambia, Zimbabwe, South Africa, Lesotho, Eswatini and DRC and distribution rights in four countries - Namibia, Botswana, Mozambique and Madagascar.

Key Financial Indicators

For the 12 months ended December 31		2024^	2023
Operating income	Rs crore	20007	16301
Profit after tax	Rs crore	2634	2102
PAT margin	%	13.2	12.9
Adjusted debt/adjusted networth	Times	0.14	0.80
Adjusted interest coverage	Times	10.73	12.99

^Basis provisional financials

Above reflects analytical adjustments made by Crisil Ratings and may not be same as company reported financials.

Any other information: Not Applicable