| Varun Beverages Limited | ||||
| Rated amount enhanced ; NCD Withdrawn | ||||
| Rating Action | ||||
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| 1 crore = 10 million | ||||
| Refer to annexure for Details of Instruments & Bank Facilities |
| Detailed Rationale |
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CRISIL has reaffirmed its rating on the long-term bank facilities and debt programme of Varun Beverages Limited (VBL; part of the Varun Beverages group) at 'CRISIL AA/Stable' and commercial paper programme at 'CRISIL A1+'. CRISIL has also withdrawn its rating on the non-convertible (NCD) debentures of Rs 300 crore (See Annexure 'Details of Rating Withdrawn' for details) since these are completely redeemed. This is in-line with CRISIL's policy on withdrawal of ratings. |
| Analytical Approach |
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For arriving at the ratings, CRISIL 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, and Varun Beverages (Zimbabwe) (Pvt) Ltd. All these entities, collectively referred to as the Varun Beverages group, have business and financial linkages. |
| Key Rating Drivers & Detailed Description |
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Strengths * Market leadership and geographical diversity in domestic and global markets The group is the largest franchisee for PepsiCo in India and also has sole franchisee operations in Nepal, Sri Lanka, Morocco, Zambia, and Zimbabwe. Consistent ramp-up in operations via organic and inorganic routes has helped strengthen the market position significantly and increase geographical diversity. With the recent integration of PepsiCo's southern and western territories, VBL is present in 27 States and 7 Union Territories in India (except Andhra Pradesh, Jammu & Kashmir and Ladakh), accounting for about 82% of beverage sales of PepsiCo in India (51% for calendar year 2018). Operating income grew 19% on a compound annual basis over the five years ended December 31, 2018. EBIDTA increased to a healthy Rs 1,046 crore in 2018 from Rs 309 crore in 2013. With the integration of recently acquired territories, operating income and EBITDA are expected to show a strong growth of over 30% in calendar year 2019. With synergies from contiguous territories and presence in underpenetrated markets along with full year operations of the integrated territories, the company is expected to show healthy growth in 2020 as well. Benefits from the company's dominant position in PepsiCo's franchisee operations in India, and overseas geographies will continue to aid the business. * Strong operating efficiencies The group continues to derive efficiencies from backward integration of operations'with facilities to manufacture crown corks, polyethylene terephthalate (PET) pre-forms, corrugated boxes, shrink wrap sheets, plastic cap closures, and plastic shells. Further, presence in contiguous territories helps efficiently manage logistic and other operating costs, and economies of scale. Consequently, EBIDTA margin remained healthy at 20.1% in calendar year 2018 (21.1% in 2017). With evolving product mix and increase in raw material prices, margins are expected to sustain at more than 18% over the medium term. Further, the recently acquired territories are relatively underpenetrated; volumes and profitability of these are expected to reach similar levels as those for existing territories over the medium term and will remain key monitorables. * Strong financial risk profile Debt protection metrics have strengthened from increased cash flows post-integration of previously acquired territories, and by initial public offering (IPO) proceeds (infusion of Rs 667.50 crore) received in 2016. The group also has healthy financial flexibility, as demonstrated by its ability to raise funds from both debt and equity investors. In September 2019, VBL raised about Rs 900 crore through a QIP to reduce the debt availed for funding the acquisitions. Liquidity is also likely to remain comfortable given the strong cash flow and reduction in utilisation of sanctioned bank limit. Debt to EBIDTA improved along expected lines, to 2.7 times for calendar year 2018 from 3.1 times the previous year. Gearing, as on December 31, 2018, was 1.37 times against 1.46 times a year ago. With accretive cash flows from the acquisitions and fund infusion through QIP, debt to EBITDA is expected to come down to under 2.4 times as on December 31, 2019. The company has moderate capex plans of about Rs 250-300 crore in its organic business. Any further acquisitions are expected to be funded primarily through internal accruals and debt is not expected to exceed Rs 3000-3200 crore and will remain a key monitorable. Weaknesses * Susceptibility to changes in regulations and customer preferences The beverage industry remains susceptible to changes in government regulations regarding the content of soft drinks, and to increasing environmental concerns in India about ground water depletion and discharge of effluents by bottling plants. Further, evolving concerns related to disposal of plastic may impact the beverages industry. VBL at present has tied up for recycling of 35% of its PET bottles and is expected to increase this to 100% over the medium term. * Integration of recent acquisitions of large territories VBL's growth strategy comprises organic and inorganic capacity expansions in both domestic and international markets. The recent acquisitions of PepsiCo India and third-party bottler territories has been completed in the first half of 2019, resulting in nearly 50% increase in domestic volumes. While VBL is expected to benefit from economies of scale in these contiguous territories, ability to successfully integrate and increase profitability will be a key monitorable. |
| Liquidity Strong |
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VBL generates healthy cash accrual, which has grown significantly aided by organic and inorganic expansion in the past. Accrual for calendar year 2018 was Rs 634 crore (Rs 506 crore in previous year) against debt repayment of around Rs 400 crore. Accruals are expected to increase to over Rs 850 crore in 2019 driven by integration of acquired territories and organic growth in existing ones. Further, as the nature of business is seasonal, working capital requirement is also moderate. Cash and bank balance have been Rs 90-100 crore over the past two years. Utilisation of bank lines (sanctioned limit of Rs 476 crore as on September 30, 2019) averaged 42% in the 12 months through September 2019. |
| Outlook: Stable |
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CRISIL believes the Varun Beverages group will sustain its improved business and financial profiles over the medium term, supported by EBITDA accretion from new territories and integration benefits, and absence of any large, debt-funded acquisition plans. |
| About the Group |
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VBL, incorporated in 1995, was established by Mr Ravi Kant Jaipuria to cater to PepsiCo's beverages operations 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 32 manufacturing units in India: two each at Greater Noida and Sathariya in Uttar Pradesh; and one each at Guwahati in Assam, Jodhpur and Bhiwadi in Rajasthan, Nuh and Panipat in Haryana, Kosi Kalan, Hardoi, and Jainpur in Uttar Pradesh, Bazpur in Uttarakhand, Phillaur and Pathankot in Punjab, Bargarh and Cuttack in Odisha, Jamshedpur in Jharkhand, Mandideep in Madhya Pradesh, Goa, Kolkata in West Bengal, Bharuch in Gujarat, Mahul, Roha and Paithan in Maharashtra, Sangareddy in Telangana, Sri City in Andhra Pradesh, Mamandur and Tirunelveli in Tamil Nadu, Neelamangala and Dharwad in Karnataka and Palakkad in Kerala. |
| Key Financial Indicators | ||||||||||||||||||||||||
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Any other information: Not applicable |
| Note on complexity levels of the rated instrument: CRISIL complexity levels are assigned to various types of financial instruments. The CRISIL complexity levels are available on www.crisil.com/complexity-levels. Users are advised to refer to the CRISIL complexity levels for instruments that they consider for investment. Users may also call the Customer Service Helpdesk with queries on specific instruments. |
| Annexure - Details of Instrument(s) | ||||||||||||||||||||||||||||||||||||||||||
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| Annexure - Details of Rating Withdrawn | ||||||||||||||||||||||||||||||||||||||||||
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Annexure - List of entities consolidated | ||||||||||||||||||||||||||||||||||||||||||
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| Annexure - Rating History for last 3 Years | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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| All amounts are in Rs.Cr. | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Annexure - Details of various bank facilities | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
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