| Varun Beverages Limited | ||||||
| Ratings Reaffirmed | ||||||
| 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 ratings on the bank facilities and debt programme of Varun Beverages Ltd (VBL; part of Varun Beverages Group) at 'CRISIL AA-/Positive/CRISIL A1+'. |
| 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. The deferred payment to PepsiCo for the territories acquired in 2015 has been treated as debt (the final payment of Rs 300 crore had been made in February 2018). |
| 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 to strengthen market position significantly and increase geographical diversity. Operating income grew 19% on compound annual basis over the five years ended December 31, 2018. The EBIDTA increased to a healthy Rs 1,007 crore in 2017 from Rs 309 crore in 2013. With the recently announced acquisition of PepsiCo's southern and western territories, VBL will be present in 27 states (except Andhra Pradesh and Jammu & Kashmir) and 7 union territories, accounting for over 80% of beverage sales of PepsiCo in India (51% for calendar year 2018). Benefits from the company's dominant position in PepsiCo's franchisee operations in India, and overseas geographies will continue to aid business. * Strong operating efficiencies The group continues to derive efficiencies from backward integration of operations'with facilities to manufacture crown corks, polyethylene terephthalate pre-forms, corrugated boxes, shrink wrap sheets, plastic cap closures, and plastic shells. Furthermore, presence in contiguous territories helps efficiently manage logistic and other operating costs, economies of scale. Consequently, EBIDTA margin remained healthy at 19.7% in calendar year 2018 (21.1% in calendar year 2017). The recent proposed acquisitions are in Southern and Western India, which are relatively underpenetrated markets. Volumes and profitability of these territories 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. Liquidity is also likely to remain comfortable given strong cash flow and reduction in utilisation of sanctioned bank limit. Debt to EBIDTA improved in line with expectations, to 2.7 times for calendar year 2018 from 3.1 times in the previous year. Gearing, as on December 31, 2018, was 1.37 times against 1.46 times in the previous year. The company has capex and acquisition plans of about Rs 2,100 crore in the near term. These include pending capex for Tropicana greenfield project in Punjab (around Rs 100 crore), acquisition cost of around Rs 1,838 crore for PepsiCo territories, and Rs 125 crore for acquisition of 30 districts from third-party bottlers. Since, the acquisitions will be initially funded through debt, debt to EBIDTA may temporarily be above 3 times during 2019. However, it is expected to subsequently improve with fund infusion from QIP proceeds. With accretive cash flows from the acquisitions and timely fund infusion through QIP, debt to EBIDTA for calendar year 2019 is expected to remain below 2.5 times 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 content of soft drinks, and to increasing environmental concerns in India about ground water depletion and discharge of effluents by bottling plants. * Integration of recently announced large acquisitions VBL's growth strategy comprises organic and inorganic capacity expansions in both domestic and international markets. The recently announced acquisitions of PepsiCo India and third-party bottler territories will be completed by April 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 to existing margin will be a key monitorable. Furthermore, timely infusion of funds through QIP will be an important event to sustain capital structure. |
| Liquidity |
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VBL generates healthy cash accrual, which has shown significant growth aided by organic and inorganic expansion in the past. Accrual for the calendar year ending December 31, 2018, was Rs 685 crore (Rs 565 crore in the previous year) against debt repayment of around Rs 400 crore. Furthermore, 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 376 crore as on December 31, 2018) averaged 43% in the 12 months ended December 31, 2018. |
| Outlook: Positive |
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CRISIL believes improving synergies from the proposed acquisition of PepsiCo's territories, coupled with absence of any other debt-funded capex/ acquisition, could further improve VBL's financial risk profile. |
| 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 20 manufacturing units: 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 in Punjab, Bargarh and Cuttack in Odisha, Jamshedpur in Jharkhand, Mandideep in MP, Goa, and Kolkata in West Bengal. |
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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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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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| Annexure - Details of various bank facilities | ||||||||||||||||||||||||||||||||||||||||||||||||
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