Detailed Rationale

CRISIL Ratings has reaffirmed its ratings on the bank facilities and commercial paper of Varun Beverages Limited (VBL; part of the Varun Beverages group) at 'CRISIL AA/Stable/CRISIL A1+’.

 

The ratings continue to reflect the group’s leadership position in the franchisee operations of PepsiCo, geographical diversity in markets, robust operating efficiency and strong financial risk profile. These strengths are partially offset by susceptibility to changes in regulations and customer preferences, and to risks relating to integration of acquired territories.

Analytical Approach

For arriving at the ratings, 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. That’s because 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 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 through organic and inorganic routes has helped strengthen the market position significantly and increase geographical diversity. With the acquisition of PepsiCo’s southern and western territories in 2019, the group 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). 

 

The volumes in 2020 were impacted because of the Covid-19 pandemic-induced lockdown during the peak season of beverage sales. While revenue in April-June 2020 was lower by 42% than in the corresponding period of the previous year, it recovered thereafter on account of higher in-home consumption. With synergies from contiguous territories and presence in underpenetrated markets, along with full benefit of territories acquired in 2019, healthy growth is expected in 2021.

 

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 efficiency

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, a presence in contiguous territories helps efficiently manage logistics and other operating costs, and provides economies of scale. A favourable sales mix towards aerated beverages along with cost rationalisation and lower expenses during the pandemic period have supported sustenance of the operating margin at 19-20% in 2020. With an evolving product mix and stable raw material prices, the margin is expected to remain healthy over the medium term. Further, a few of the territories remain relatively underpenetrated; volumes and profitability in these are expected to reach similar levels as those for existing territories over the medium term and this will remain a key monitorable.

 

• Strong financial risk profile

Debt protection metrics have strengthened due to increased cash flow 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 (qualified institutional placement) 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 the sanctioned bank limit.

 

Despite the pandemic impacting the peak season in 2020, the debt to Ebidta (earnings before interest, tax, depreciation and amortisation) ratio is expected to remain around 2.5 times (2.3 times as on December 31, 2020). The gearing, as on December 31, 2020, is estimated at under 1 times against 1.37 times as on December 31, 2018. With accretive cash flows from the acquisitions and 2021 expected to be normal, the debt to EBITDA ratio should come down to under 2 times. The group has moderate capital expenditure (capex) plans of Rs 200-250 crore in its organic business. Any further acquisitions are expected to be funded primarily through internal cash accrual; the consequent debt protection metrics would 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. The group has tied up for recycling of 42% of its PET bottles as on June 30, 2020 and is expected to increase this to 100% over the medium term.

 

• Integration of territories acquired

The growth strategy comprises organic and inorganic capacity expansions in both domestic and international markets. The acquisitions of PepsiCo India and third-party bottler territories had been completed in the first half of 2019 and the full benefit of this was expected in 2020. However, the pandemic-induced lockdown had hampered the ramp-up in volumes and further penetration in the territories. Given that 2021 is expected to be normal, the group should benefit from economies of scale in these contiguous territories. Its ability to successfully integrate and increase profitability will be a key monitorable. 

Liquidity: Strong

Cash accrual is healthy and has grown significantly aided by organic and inorganic expansion in the past. Cash accrual for 2020 is estimated at over Rs 750 crore (Rs 866 crore in the previous year) against debt repayment of around Rs 400 crore. While volumes were impacted because of the pandemic in 2020, cash accrual is expected to increase to over Rs 1,000 crore in 2021. Further, as the nature of business is seasonal, working capital requirement is moderate. The cash and bank balance was Rs 212 crore as on June 30, 2020. Utilisation of bank lines (sanctioned limit of Rs 475 crore) averaged 22% in the 12 months through November 2020.

Outlook Stable

The Varun Beverages group should sustain its improved business and financial risk profiles over the medium term, supported by EBITDA accretion from new territories and integration benefits, and absence of any large, debt-funded acquisition plans.

Rating Sensitivity Factors

Upward Factors:

• Significant and sustained improvement in the operating performance, leading to higher cash accrual
• Sustenance of the debt to EBITDA ratio at below 1.5 times in the absence of any large, debt-funded capex

 

Downward factors:

• Weakening of the operating performance, leading to a significant decline in the operating margin
• Weakening of financial risk profile on account of large, debt-funded capex or acquisition, leading to a sustained debt to EBITDA ratio of over 3 times

About the Group

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 31 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, Cuttack in Odisha, Jamshedpur in Jharkhand, Mandideep in Madhya Pradesh, Goa, Kolkata, 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.

 

Varun Beverages (International) Ltd was the group's holding company until March 12, 2013, when it was merged with VBL with effect from January 1, 2012, following equity buyback from PepsiCo. In February 2015, VBL acquired selling and distribution rights for Punjab, Chandigarh, Himachal Pradesh, and the remaining parts of Uttar Pradesh, Uttarakhand, and Haryana; along with four manufacturing units - one each in Panipat, Sathariya, Jainpur and Bazpur—on a slump-sale basis from PepsiCo. In 2016, VBL acquired two co-packing facilities, one each in Sathariya and Phillaur.

 

In 2017 and 2018, it acquired Bihar, Madhya Pradesh, Chhattisgarh, Jharkhand and Odisha territories from third-party bottlers. With the recent acquisitions of territories from PepsiCo India and third-party bottlers, the group’s presence has expanded to 27 states and 7 union territories. VBL also increased its effective shareholding to 55% from 35% in Lunarmech Technologies Pvt Ltd, manufacturer of plastic closures for PET bottles, in September 2019 for Rs 15 crore.

 

Operations outside India comprise bottling operations in Nepal under Varun Beverages (Nepal) Pvt Ltd; in Sri Lanka under Varun Beverages Lanka (Pvt) Ltd; in Morocco under Varun Beverages Morocco SA; in Zambia under Varun Beverages (Zambia) Ltd; and in Zimbabwe under Varun Beverages (Zimbabwe) Pvt Ltd. During 2017, VBL had divested 41% stake in Varun Beverages Mozambique Limitada and increased stake in its Zambia subsidiary to 90% from 60%.

 

VBL raised funds through an IPO in November 2016 with an issue size of 2.5 crore shares, including 1 crore shares on offer for sale by the promoters. As a result, promoter shareholding reduced to around 74% as on November 30, 2016, from 100%. The dilution also includes equity shares allotted to Standard Chartered Pvt Equity and AION Investments upon conversion of compulsorily convertible debentures prior to the IPO. Further, in September 2019, VBL has raised Rs 900 crore through QIP to fund the recent acquisitions.

 

For the nine months ended September 30, 2020, operating income was Rs 5,119 crore and profit after tax (PAT) Rs 365 crore, against Rs 5,909 crore and Rs 526 crore, respectively, in the corresponding period of the previous year.

Any other information: Not applicable

Annexure - Details of Instrument(s)

ISIN	Name of instrument	Date of allotment	Coupon rate (%)	Maturity date	Issue size (Rs.Crore)	Complexity level	Rating assigned with outlook
NA	Commercial paper	NA	NA	7-365 days	250	Simple	CRISIL A1+
NA	Cash credit	NA	NA	NA	395	NA	CRISIL AA/Stable
NA	Overdraft Facility	NA	NA	NA	130	NA	CRISIL AA/Stable
NA	External commercial borrowings*	NA	NA	31-May-2022	171.57	NA	CRISIL AA/Stable
NA	Term Loan	NA	NA	30-Jun-2022	37.5	NA	CRISIL AA/Stable
NA	Term Loan	NA	NA	30-Jun-2022	52.5	NA	CRISIL AA/Stable
NA	Term Loan	NA	NA	30-Jun-2022	53.62	NA	CRISIL AA/Stable
NA	Term Loan	NA	NA	30-Jun-2025	175	NA	CRISIL AA/Stable
NA	Term Loan	NA	NA	30-Jun-2025	80	NA	CRISIL AA/Stable
NA	Term Loan	NA	NA	30-Jun-2022	30	NA	CRISIL AA/Stable
NA	Term Loan	NA	NA	30-Jun-2023	25	NA	CRISIL AA/Stable
NA	Term Loan	NA	NA	30-Jun-2022	100	NA	CRISIL AA/Stable
NA	Term Loan	NA	NA	30-Jun-2023	67	NA	CRISIL AA/Stable
NA	Term Loan	NA	NA	30-Jun-2022	32.11	NA	CRISIL AA/Stable
NA	Term Loan	NA	NA	30-Jun-2023	150	NA	CRISIL AA/Stable
NA	Term Loan	NA	NA	30-Jun-2025	70	NA	CRISIL AA/Stable
NA	Term Loan	NA	NA	30-Jun-2022	60	NA	CRISIL AA/Stable
NA	Term Loan	NA	NA	30-Apr-2023	180	NA	CRISIL AA/Stable
NA	Term Loan	NA	NA	30-Jun-2023	150	NA	CRISIL AA/Stable
NA	Term Loan	NA	NA	31-May-2021	15	NA	CRISIL AA/Stable
NA	Term Loan	NA	NA	30-Jun-2023	39.5	NA	CRISIL AA/Stable
NA	Term Loan	NA	NA	31-Jul-2025	131.26	NA	CRISIL AA/Stable
NA	Term Loan	NA	NA	30-Jun-2022	44.46	NA	CRISIL AA/Stable
NA	Term Loan	NA	NA	30-Jun-2022	10.16	NA	CRISIL AA/Stable
NA	Term Loan	NA	NA	30-Jun-2022	100	NA	CRISIL AA/Stable
NA	Term Loan	NA	NA	30-Jun-2023	140	NA	CRISIL AA/Stable
NA	Term Loan	NA	NA	31-May-2023	125	NA	CRISIL AA/Stable
NA	Term Loan	NA	NA	30-Jun-2022	88.39	NA	CRISIL AA/Stable
NA	Term Loan	NA	NA	30-Jun-2021	15	NA	CRISIL AA/Stable
NA	Term Loan	NA	NA	31-May-2023	43.49	NA	CRISIL AA/Stable
NA	Term Loan	NA	NA	30-Jun-2023	125	NA	CRISIL AA/Stable
NA	Proposed Long Term Bank Loan Facility	NA	NA	NA	286.24	NA	CRISIL AA/Stable

*Equivalent to USD 25000000 /SGD equivalent to USD 25000000

Annexure – List of entities consolidated

Names of Entities Consolidated	Extent of Consolidation	Rationale for Consolidation
Varun Beverages (Nepal) Pvt Ltd	Full	Strong operational and financial linkages
Varun Beverages Morocco SA	Full	Strong operational and financial linkages
Varun Beverages Lanka (Pvt) Ltd	Full	Strong operational and financial linkages
Ole Springs Bottlers (Pvt) Ltd	Full	Strong operational and financial linkages
Varun Beverages (Zambia) Ltd	Equity Method	Proportionate consolidation
Varun Beverages (Zimbabwe) (Pvt) Ltd	Equity Method	Proportionate consolidation
Angelica Technologies Pvt Ltd	Equity Method	Proportionate consolidation
Lunarmech Technologies Pvt. Ltd.	Equity Method	Proportionate consolidation