| Varun Beverages Limited | ||||
| Rating Reaffirmed; CP Withdrawn | ||||
| Rating Action | ||||
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| 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 Ltd (VBL; part of the Varun Beverages group). CRISIL Ratings has withdrawn its rating on commercial paper of Rs 250 crore at the company’s request, as there is no outstanding against the rated amount. The rating action is in line with CRISIL Ratings withdrawal policy on debt instruments.
On May 20, 2022, CRISIL Ratings upgraded its rating on the long-term bank facilities of VBL to ‘CRISIL AA+’ from ‘CRISIL AA’ and revised the outlook to ‘Stable’ from ‘Positive’. The rating on the commercial paper programme has been reaffirmed at ‘CRISIL A1+’.
The rating reflects expectation of strengthening of the group’s business and financial risk profiles over the medium term. The group’s performance in 2022 (January to December) is likely to benefit from a favourable peak summer season, full potential of the territories acquired in 2019 and enhanced capacities at the plants in Bihar and Sandila in Uttar Pradesh, which became operational in March 2022. Revenue was impacted in the peak summers of 2020 and 2021 amid the Covid-19 pandemic.
Driven by strong cash accrual and accelerated debt repayment during the peak season, the group's debt to earnings before interest, tax, depreciation and amortisation (Ebitda) ratio is expected to reach below 1.2 times by June 2022 and will likely remain below 1.5 times even after factoring in moderate debt-funded capital expenditure (capex) over the medium term. However, any higher-than-estimated debt-funded acquisition or capex would be a key rating sensitivity factor.
Revenue grew by 37% in 2021 over the previous year on account of relatively lower business restrictions amid the second wave of the pandemic during the peak season and low-base impact. Overall revenue growth is expected at above 25% in 2022, as the group is likely to benefit from early onset of an intense summer and waning impact of the pandemic, coinciding with the peak season.
The financial risk profile continues to strengthen further, as indicated by interest coverage ratio increasing to 8.4 times in 2021 from 4.2 times in 2020. Strong financial flexibility is supported by cash surplus of around Rs 330 crore as on December 31, 2021, modest bank limit utilisation and ability to raise debt at attractive rates.
The rating also reflect the leadership position of the group in the franchisee operations of PepsiCo, diversity in geographical reach, robust operating efficiency and strong financial risk profile. These strengths are partially offset by susceptibility to changes in regulations and customer preferences and inherent risk in the integration of large acquired territories. |
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.
CRISIL Ratings has adjusted the networth for intangible assets (from acquisition) and amortised goodwill and intangible assets over 20 years starting from calendar year 2017.
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
The Varun Beverages group is the second largest franchisee for PepsiCo in the world (outside the US) and the largest in India; it also has the sole franchisee operations in Nepal, Sri Lanka, Morocco, Zambia and Zimbabwe. VBL incorporated a new subsidiary, Varun Beverages RDC SAS, in the Democratic Republic of Congo in Africa. Consistent ramp-up of operations via organic and inorganic routes has helped significantly strengthen the market position and enhance geographical diversity. Following the acquisition of the southern and western India territories of PepsiCo in 2019, VBL has presence in 27 states and seven union territories in India (except Andhra Pradesh, Jammu & Kashmir and Ladakh), accounting for more than 85% of the beverage sales of PepsiCo in India.
Benefits from the dominant position of VBL in the franchisee operations of PepsiCo in India and overseas geographies will continue to aid the business.
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 closures and plastic shells. Furthermore, presence in contiguous territories helps with efficient management of logistics and other operating costs and maintenance of economies of scale. Operating margin was healthy at 19.1% in 2021, supported by cost optimisation measures and strong growth in realisations in a few product segments.
As per the management, VBL will be able to sustain the operating margin at historical levels despite inflationary pressure; however, CRISIL Ratings expects the margin to moderate marginally. Any steep reduction in the margin would be offset by stocking of polyethylene terephthalate (PET) for the peak season, benefits of backward integration, continuous cost optimisation (reduced grammage of PET bottles) and operating leverage. Moreover, a few territories remain relatively underpenetrated, and the volume and operating margin in these regions are expected to be at par with those for the other territories over the medium term and will remain a key monitorable.
Owing to strong operating performance in the peak season of 2022, debt to Ebitda ratio is expected to fall to below 1.2 times as on June 30, 2022, from 1.9 times as on December 31, 2021. The company plans to undertake moderate capex of Rs 600-700 crore in its organic business, which the balance sheet can easily absorb. With accretive cash flow from previous acquisitions expected in 2022, debt to Ebitda ratio could sustain at below 1.5 times over the medium term despite continuous capex and moderate acquisition.
The company has had a strong track record of improvement in its capital structure in the past. Debt protection metrics have strengthened because of increased cash flow following integration of previously acquired territories and initial public offering proceeds (infusion of Rs 667.50 crore) received in 2016. Financial flexibility is adequate, as demonstrated by the ability to raise funds from debt as well as equity investors. In September 2019, VBL raised about Rs 900 crore through a qualified institutional placement to reduce the debt availed for funding acquisitions. Liquidity should be comfortable given the strong cash flow and drop in utilisation of the sanctioned bank limit.
Weaknesses
The domestic beverage industry remains susceptible to regulatory changes regarding the content in soft drinks and increasing environmental concerns over ground water depletion and discharge of effluents by bottling plants in India. VBL restored water to the ground equivalent of 2.28 times total annual water usage in 2021 through various water conservation programmes. Furthermore, 20 VBL facilities, accounting for 69% of the total production in 2021, are classified as "Safe" by the Central Ground Water Authority of India. Evolving issues related to disposal of plastic bottles and single-use plastic straws in ready-to-drink beverages may also impact the industry. VBL recycled ~73% of its PET sold during the three months ended March 31, 2022, and has a target to scale this to 100% by 2023.
VBL follows a growth strategy comprising organic and inorganic capacity expansions in the domestic and international markets. Acquisitions of PepsiCo India and third-party bottler territories was completed in the first half of 2019, and the full benefit was expected to flow in 2020. However, the pandemic hampered ramp-up in volume and market penetration in 2020 and 2021. As things normalise in 2022, VBL should benefit from economies of scale in these contiguous territories. Ability to successfully integrate and increase profitability will be a key monitorable for the group. |
Liquidity: Strong Cash accrual is healthy, significantly aided by organic and inorganic expansion in the past. Cash accrual of Rs 1,231 crore in 2021 (Rs 1,012 crore in 2020) sufficiently covered debt obligation of around Rs 500 crore. With early onset of summer and a normalised peak season, cash accrual is expected to remain above Rs 1,400 crore in 2022. Furthermore, given the seasonality of the beverage business, the working capital requirement is moderate. Cash and bank balance was around Rs 330 crore as on December 31, 2021. Utilisation of bank lines (sanctioned limit of Rs 475 crore) averaged 19% over the 12 months through March 2022.
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 its products on the health and wellbeing of its customers.
Key ESG 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 The Varun Beverages group will sustain its improved business and financial risk profiles over the medium term, supported by Ebitda accretion from new territories and integration benefits as well as reduction in debt in the absence of any large, debt-funded acquisition plans. |
Rating Sensitivity factors Upward factors
Downward factors
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About the Group 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 carbonated soft drinks, juice-based drinks and packaged drinking water. 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, Assam; Jodhpur and Bhiwadi, Rajasthan; Nuh and Panipat, Haryana; Kosi Kalan, Hardoi, and Jainpur, Uttar Pradesh; Bazpur, Uttarakhand; Phillaur and Pathankot, Punjab; Cuttack, Odisha; Jamshedpur, Jharkhand; Mandideep, Madhya Pradesh; Goa; Kolkata, West Bengal; Bharuch, Gujarat; Mahul and Paithan, Maharashtra; Sangareddy, Telangana; Sri City, Andhra Pradesh; Mamandur and Tirunelveli, Tamil Nadu; Nelamangala and Dharwad, Karnataka; Palakkad, Kerala; and Begusarai, Bihar.
Initially, the group had exclusive franchise rights to manufacture, sell and distribute PepsiCo products in seven sub-territories in India. Over time, the promoters expanded franchisee operations in India through consolidation of group companies as well as acquisition of territories from third parties. In February 2015, VBL acquired the franchise 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—from PepsiCo.
In 2017 and 2018, VBL acquired Bihar and parts of the Madhya Pradesh, Chhattisgarh, Jharkhand and Odisha territories from third-party bottlers. With the acquisitions of franchise rights for southern and western sub-territories from PepsiCo India and third-party bottlers in 2019, VBL has expanded its presence to 27 states and seven 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.
Operations outside India include franchise 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. In 2017, VBL divested its 41% stake in Varun Beverages Mozambique Limitada and increased its stake in Varun Beverages (Zambia) Ltd to 90% from 60%.
For the three months ended March 31, 2022, revenue from operations stood at Rs 2,827 crore and profit after tax (PAT) at Rs 271 crore against Rs 2,241 crore and Rs 137 crore, respectively, in the corresponding period of the previous year. |
Key Financial Indicators (CRISIL Ratings-adjusted)
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Any other information: Not applicable |
| Note on complexity levels of the rated instrument: CRISIL Ratings' complexity levels are assigned to various types of financial instruments. The CRISIL Ratings' complexity levels are available on www.crisil.com/complexity-levels. Users are advised to refer to the CRISIL Ratings' 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)
*Long-term bank guarantee |
| Annexure - Rating History for last 3 Years | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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| Annexure - Details of Bank Lenders & Facilities | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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This Annexure has been updated on 01-Jul-2022 in line with the lender-wise facility details as on 02-Aug-2021 received from the rated entity.
Criteria Details
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