| 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 |
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CRISIL has revised its outlook on the long-term facilities and debt programme of Varun Beverages Ltd (VBL; part of Varun Beverages Group) to 'Positive' from 'Stable', while reaffirming the ratings at 'CRISIL AA-/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 has 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. Continuous acquisition of territories has helped the group increase its share of PepsiCo's beverage sales, to ~51%. At present, it is handling all of PepsiCo's north, central and eastern India regions except J&K with presence in 21 states and 2 union territories. Further, the group has PepsiCo's franchisee operations in Nepal, Sri Lanka, Morocco, Zambia and Zimbabwe. Consistent ramp up in scale of operations, via organic and inorganic routes, has helped strengthen the group's market position significantly and increased geographical diversity. Operating income grew 17% on compound annual basis, over the five years ended December 31, 2017. EBIDTA has increased to a healthy Rs 854 crore in 2017 from Rs 273 crore in 2012. Benefits from the company's leadership position in PepsiCo's franchisee operations in India, geographical diversity and support from PepsiCo should aid the business. * Integrated manufacturing operations Economies of scale are derived 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. EBIDTA margin improved to 21.1% in 2017 from 14.9% in 2012 because of integration of operations with newly acquired contiguous territories from PepsiCo, resultant economies of scale and product / packaging innovations introduced by PepsiCo. The group will continue to draw synergies from presence in contiguous territories and backward integration, especially as volume increases, thus sustaining margins. * Strong financial profile The group has benefitted from increased revenue and integration of the contiguous territories acquired from PepsiCo in recent past leading to improved profitability. Debt protection metrics were strengthened by the cash accrual generated from these acquired territories, and further supported by the initial public offering (IPO) proceeds (infusion of Rs 667.50 crore) received in 2016. As on December 31, 2017, debt levels were elevated on account of loans availed for undertaking acquisitions. However, revenue and accretion of EBIDTA from these territories have commenced from the first quarter of 2018. 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 the strong cash flow and reduction in the utilisation of the sanctioned bank limit. While organic capex is expected to be moderate over the medium term, any larger-than-expected debt-funded acquisition will remain a key monitorable. Weakness * Susceptibility to changes in regulations and in customer preferences 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. * Moderate expansion plans The growth strategy has comprised organic and inorganic capacity expansions in both domestic as well as international markets. Debt protection metrics had strengthened significantly in 2016 with prepayment of debt and a stronger capital structure driven by funds raised through the IPO. While in 2017 debt contracted for part of recent acquisition of territories elevated the debt to EBIDTA to 3.1 times, the same is expected to improve with cash flows from these territories in 2018. Gearing as on December 31, 2017 was also 1.46 times against 1.3 times the previous year. Any further debt-funded capex and acquisition will remain a key monitorable. |
| Outlook: Positive |
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CRISIL believes that increase in operating profit over the medium term, coupled with absence of large 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), and packaged drinking water and juices. 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. |
| Key Financial Indicators | ||||||||||||||||||||||||
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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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| Annexure - Rating History for last 3 Years | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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| Annexure - Details of various bank facilities | ||||||||||||||||||||||||||||||||||||||||||
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