| Varun Beverages Limited | ||||
| Rating outlook revised to 'Positive'; Ratings reaffirmed | ||||
| Rating Action | ||||
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| 1 crore = 10 million | ||||
| Refer to Annexure for Details of Instruments & Bank Facilities |
Detailed Rationale CRISIL Ratings has revised its outlook on the long-term facilities and debt programme of Varun Beverages Limited (VBL; part of the Varun Beverages group) to ‘Positive’ from ‘Stable’, while reaffirming the ratings at ‘CRISIL AA/CRISIL A1+’.
The outlook revision reflects CRISIL's belief that the financial risk profile of the Varun Beverages group is likely to improve over the medium term. The group is likely to benefit from full-year revenue going forward from the territories acquired in 2019, which were impacted in the peak summers of 2020 and 2021 amid the pandemic. Driven by strong cash accrual and absence of any large, debt-funded acquisitions or capital expenditure (capex), the group's debt to earnings before depreciation, interest and tax (EBITDA) ratio could fall below 1.5 times by the next year from about 2.6 times in 2020. Any large, debt-funded acquisition or capex will, therefore, remain a monitorable.
The ratings continue to 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 modest expansion plans and susceptibility to changes in regulations and customer preferences. |
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.
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 largest franchisee for PepsiCo in India and has the sole franchisee operations in Nepal, Sri Lanka, Morocco, Zambia and Zimbabwe. Consistent ramp-up in operations via organic and inorganic routes has helped significantly strengthen the market position and enhance the geographical diversity. Following the acquisition of the southern and western territories of PepsiCo in 2019, VBL has presence in 27 states and seven union territories in India (except Andhra Pradesh, Jammu and Kashmir and Ladakh), accounting for more than 85% of the beverage sales of PepsiCo in India.
Sales volume in 2021 was impacted by the pandemic-induced lockdown, that too in the peak summer, though the impact was lesser in comparison with 2020. While revenue in the April-June 2021 period grew by 49% compared with the corresponding period of the previous fiscal, it still lagged pre-pandemic levels. However, the company has witnessed organic volume growth in most months year-to-date vis-à-vis pre-pandemic levels, and the trend is expected to continue in the second half of 2021. Furthermore, owing to synergies from contiguous territories and growing presence in underpenetrated markets along with the full benefit of the territories acquired in 2019, the company is expected to show healthy growth in 2022.
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, polyethylene terephthalate (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 economies of scale. Operating margin was slightly muted at 18.6% in 2020 compared with 20% in 2019 amid the Covid-19 pandemic. However, cost optimisation measures and strong growth in realisations in a few product segments have helped the margin stay above 20% in the first half of 2021 compared with 19.6% in the first half of 2020. With an evolving product mix and 2022 expected to be a normal year, the margin should sustain at around 20% over the medium term. Moreover, few territories remain relatively underpenetrated, and the volume and margin in these regions are expected to be at par with those for the current territories over the medium term; however, this is a key monitorable.
Despite the pandemic impacting the peak summer seasons in 2020 and 2021, debt reduced to nearly Rs 2,700 crore as on June 30, 2021, from around Rs 3,400 crore as on December 31, 2019. With operating performance expected to recover in the second half of 2021, debt to EBIDTA may reduce to 1.5-1.6 times as on December 31, 2021, compared with 2.6 times in 2020. The company plans to undertake moderate capex of Rs 500-600 crore in its organic business, which will be comfortably met via internal accrual. With accretive cash flow from previous acquisitions expected in 2022, debt to EBITDA could sustain below 1.5 times over the medium term in the absence of any large, debt-funded acquisition, which remains a monitorable.
The company has had a fair 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 the 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. Evolving issues related to disposal of plastic may also impact the industry. VBL had tied up for recycling of ~66% of its PET bottles as on December 31, 2020, and may increase this to 100% over the medium term.
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 2021. However, the second wave of the Covid-19 pandemic hampered the ramp-up in volume and further penetration in the current year. As things normalise in 2023, 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. Accrual for calendar year 2021 is estimated over Rs 1,000 crore (Rs 814 crore in the previous year) against debt obligation of around Rs 500 crore. While volume was impacted because of the pandemic in 2021, cash accrual of over Rs 1,200 crore is expected in 2022. Furthermore, given the seasonal nature of the beverage business, the working capital requirement is moderate. Cash and bank balance was around Rs 150 crore as on June 30, 2021. Utilisation of bank lines (sanctioned limit of Rs 475 crore) averaged 24% over the 12 months through July 2021. |
Outlook: Positive The Varun Beverages group could improve its financial risk profile 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 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 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.
Initially, it 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 its associate company, Varun Beverages International Ltd (VBIL; formerly Goa Bottling Co Ltd), and added the sub-territories of Goa, three districts of Maharashtra and all seven states in north-east India (following merger of North East Pure Drinks Pvt Ltd). The merger of VBIL with VBL was carried with effect from January 1, 2012. 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—on a slump-sale basis from PepsiCo. In 2016, VBL acquired a co-packing facility each at Sathariya in Uttar Pradesh and Phillaur in Punjab.
In 2017 and 2018, VBL acquired Bihar and parts of 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 comprise 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 six months ended June 30, 2021, revenue from operations was Rs 4,753 crore and profit after tax (PAT) was Rs 456 crore against Rs 3,365 crore and Rs 203 crore, respectively, in the corresponding period of the previous year. |
Key Financial Indicators
* Not adjusted for cash and bank balance |
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)
*Equivalent to USD 12,500,000 /SGD equivalent to USD 12,500,000 |
Annexure – List of entities consolidated
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| 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 14-Oct-2021 in line with the lender-wise facility details as on 02-Aug-2021 received from the rated entity.
Criteria Details
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