Rating Rationale
January 13, 2020 | Mumbai
Varun Beverages Limited
Rated amount enhanced ; NCD Withdrawn
 
Rating Action
Total Bank Loan Facilities Rated Rs.3122.8 Crore (Enhanced from Rs.874.1 Crore)
Long Term Rating CRISIL AA/Stable (Reaffirmed)
 
Rs.300 Crore Non Convertible Debentures CRISIL AA/Stable (Withdrawn)
Rs.200 Crore Commercial Paper CRISIL A1+ (Reaffirmed)
1 crore = 10 million
Refer to annexure for Details of Instruments & Bank Facilities
Detailed Rationale

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 CRISIL has also withdrawn its rating on the non-convertible (NCD) debentures of Rs 300 crore (See Annexure 'Details of Rating Withdrawn' for details) since these are completely redeemed.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.
 
On October 14, 2019, CRISIL had upgraded its rating on the long-term bank facilities and NCDs of VBL to 'CRISIL AA/Stable' from 'CRISIL AA-/Positive' and reaffirmed the short-term facilities and commercial paper programme at 'CRISIL A1+'.
 
The upgrade reflects CRISIL's belief that the group's business and financial risk profiles will remain strong over the medium term. VBL's business profile is underpinned by its dominant share in PepsiCo India Holdings Pvt Ltd's (PepsiCo's) beverage portfolio in the country along with healthy growth in international territories. VBL has acquired franchise rights for southern and western India territories from PepsiCo and third party franchisee w.e.f. from May 2019 and February 2019, respectively, leading the overall market share to increase to about 82% from 51% previously. The total cost of acquisition from PepsiCo was Rs 1802.5 crore on slump sale basis, while the total outgo for the acquisition was around Rs 1593.5 crore (net off investment fund received from PepsiCo for capital expenditure (capex) to be incurred). The acquisition was funded in a mix of debt and equity. In September 2019, VBL raised ~Rs 900 crore though qualified institutional placement (QIP) by diluting ~5% equity to retire part of the debt contracted in the interim to fund the acquisition.
 
Further, with healthy accretion from the recently integrated territories, VBL's financial risk profile is expected to remain robust. Consequently, debt to earnings before interest, tax, depreciation and amortisation (EBITDA) is expected to come down to under 2.4 times as on December 31, 2019 (2.7 times as on December 31, 2018).
 
The ratings continue to reflect the group's leadership position in the franchisee operations of PepsiCo, geographical diversity in markets, robust operating efficiencies and strong financial risk profile. These strengths are partially offset by susceptibility to changes in regulations and customer preferences, and moderate expansion plans.

Analytical Approach

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.

Please refer Annexure - Details of Consolidation, 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 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

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

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.
 
Rating Sensitivity factors
Upside factors:

* Significant and sustained improvement in operating performance leading to higher cash accruals
* Debt to EBITDA to sustain under 1.5 times in the absence of any large debt-funded capex
 
Downward factors:
* Lower-than-expected operating performance leading to a significant decline in margins
* Weakening of financial risk profile on account of large, debt-funded capex or acquisition leading to debt to EBITDA of over 3 times on a sustained basis

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 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.

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 a co-packing facility 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, VBL'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 ending September 30, 2019, operating income was Rs 5909 crore and profit after tax Rs 526 crore against Rs 4320 crore and Rs 371 crore, respectively, in the corresponding period of the previous year.

Key Financial Indicators
For the 12 months ended December 31   2018 2017
Revenue Rs crore 5,105 4,003
Profit after tax Rs crore 300 214
PAT margin % 5.9 5.3
Adjusted debt*/adjusted networth Times 1.37 1.46
Interest coverage Times 4.70 4.02
* Not adjusted for cash and bank balance

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)
ISIN Name of instrument Date of allotment Coupon rate (%) Maturity date Issue size (Rs crore) Rating assigned with outlook
NA Commercial paper NA NA 7-365 days 250.0 CRISIL A1+
NA Cash credit NA NA NA 381.0 CRISIL AA/Stable
NA Overdraft NA NA NA 45.0 CRISIL AA/Stable
NA Term loan NA NA July 2025 2525.23 CRISIL AA/Stable
NA External commercial borrowings* NA NA May 2023 171.57 CRISIL AA/Stable
*Equivalent to USD 25000000 /SGD equivalent to USD 25000000
 
Annexure - Details of Rating Withdrawn
ISIN Name of instrument Date of allotment Coupon rate (%) Maturity
date
Issue size
(Rs crore)
INE200M07044 Debentures 27-Feb-2017 7.7% 29-Jun-2018 300.0

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
Annexure - Rating History for last 3 Years
  Current 2020 (History) 2019  2018  2017  Start of 2017
Instrument Type Outstanding Amount Rating Date Rating Date Rating Date Rating Date Rating Rating
Commercial Paper  ST  250.00  CRISIL A1+      14-10-19  CRISIL A1+  29-06-18  CRISIL A1+  17-08-17  CRISIL A1+  CRISIL A1+ 
            27-02-19  CRISIL A1+  15-03-18  CRISIL A1+  10-05-17  CRISIL A1+   
                    06-04-17  CRISIL A1+   
                    21-02-17  CRISIL A1+   
Non Convertible Debentures  LT  0.00
29-06-18 
Withdrawal      14-10-19  CRISIL AA/Stable  29-06-18  CRISIL AA-/Positive  17-08-17  CRISIL AA-/Stable  -- 
            27-02-19  CRISIL AA-/Positive  15-03-18  CRISIL AA-/Stable  10-05-17  CRISIL AA-/Stable   
                    06-04-17  CRISIL A+/Positive   
                    21-02-17  CRISIL A+/Positive   
Fund-based Bank Facilities  LT/ST  3122.80  CRISIL AA/Stable      14-10-19  CRISIL AA/Stable/ CRISIL A1+  29-06-18  CRISIL AA-/Positive  17-08-17  CRISIL AA-/Stable  CRISIL A+/Positive 
            27-02-19  CRISIL AA-/Positive  15-03-18  CRISIL AA-/Stable  10-05-17  CRISIL AA-/Stable   
                    06-04-17  CRISIL A+/Positive   
                    21-02-17  CRISIL A+/Positive   
Non Fund-based Bank Facilities  LT/ST          14-10-19  CRISIL A1+  29-06-18  CRISIL A1+  17-08-17  CRISIL A1+  CRISIL A1+ 
            27-02-19  CRISIL A1+  15-03-18  CRISIL A1+  10-05-17  CRISIL A1+   
                    06-04-17  CRISIL A1+   
                    21-02-17  CRISIL A1+   
All amounts are in Rs.Cr.
Annexure - Details of various bank facilities
Current facilities Previous facilities
Facility Amount (Rs.Crore) Rating Facility Amount (Rs.Crore) Rating
Cash Credit 381 CRISIL AA/Stable Cash Credit 273.5 CRISIL AA/Stable
External Commercial Borrowings* 171.57 CRISIL AA/Stable Letter of Credit 90 CRISIL A1+
Overdraft 45 CRISIL AA/Stable Proposed Long Term Bank Loan Facility 249.75 CRISIL AA/Stable
Term Loan 2525.23 CRISIL AA/Stable Proposed Short Term Bank Loan Facility 5 CRISIL A1+
-- 0 -- Proposed Term Loan 34.15 CRISIL AA/Stable
-- 0 -- Term Loan 221.7 CRISIL AA/Stable
Total 3122.8 -- Total 874.1 --
*Equivalent to USD 25000000 /SGD equivalent to USD 25000000
Links to related criteria
CRISILs Approach to Financial Ratios
CRISILs Bank Loan Ratings - process, scale and default recognition
Rating criteria for manufaturing and service sector companies
Rating Criteria for Fast Moving Consumer Goods Industry
CRISILs Criteria for Consolidation
CRISILs Criteria for rating short term debt

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