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Fundamental Analysis of Varun Beverages

Fundamental Analysis of Varun Beverages: The stock of Varun Beverages has rallied like nothing else in the last five years giving a CAGR return of 48% to its investors. That’s more than 600% cumulative return. And guess what? The growth in share price has been very consistent. So what makes Varun Beverages such an impressive long-term multi-bagger? Can investors expect the same returns in the future? We’ll attempt to answer these and other questions by performing a Fundamental analysis of Varun Beverages in this article.

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Fundamental Analysis of Varun Beverages

We’ll begin our study by learning about the business of the company. Next, we’ll look at the industry landscape. Later, we’ll race through the financials of the stock. A highlight of the future plans and a summary conclude the article at the end.

Company Overview

Varun Beverages Ltd. (VBL) was founded in 1991 by Mr Ravi Jaipuria who presently serves as the Chairman of the company. The company entered into a bottling and trademark licensing agreement with PepsiCo to sell carbonated beverages in India.

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As of the present date, VBL is the second largest franchisee (outside the US) of PepsiCo engaged in the process of manufacturing, distribution, and sale of carbonated soft drinks, fruit juice-based beverages, bottled drinking water, and sports & energy drinks. 

It possesses rights for lots of well-known brands such as Pepsi, Mirinda, Mountain Dew, Tropicana 100%, Slice, Gatorade, Aquafina, Lipton Ice Tea, and Sting.

It has positioned itself as a prominent beverage company with a presence in six nations: India, Sri Lanka, Nepal, Morocco, Zambia, and Zimbabwe. The beverage maker employs over 11,500 people and more than 1.4 billion people consume its products. 


It has a huge distribution network of 110+ depots, 2,400+ distributors, and a large self-owned fleet of 2,500+ vehicles servicing 3 million retail outlets. Varun Beverages owns 32 production facilities in India and 6 overseas.

Product-wise Segments

For the financial year 2022 (the company follows the calendar year January to December as its financial year), carbonated soft drinks (CSDs) accounted for 70% of the revenue of VBL.  Bottled drinking water is the second largest division fetching 23% of the sales. The balance came from the sale of non-carbonated drinks such as milkshakes, juices, etc.

Geography-wise Segments

Talking about the geographical revenue segregation, Varun Beverages earned 78.5% of its total revenues from sales within India. Its international operations brought 21.5% of the total income.

We got a good understanding of the business and the scale of operations of the company. In the next section, we’ll learn about the industry landscape of carbonated and non-carbonated beverages.

Industry Overview

Carbonated soft drinks and non-carbonated soft drinks (fruit-based, milk-based, etc.) make up the non-alcoholic beverages market in India. The sector is projected to grow at a CAGR of 8.10% to hit the $13.7 billion mark by 2027.

Globally as well as in India, the market exhibits near duopoly characteristics with Coca-Cola and Pepsico controlling the majority of the market share. They compete with each other through non-price actions. Along with these two, there are several small and medium-sized brands such as Parle.

The nation’s non-alcoholic beverages industry is also experiencing an unprecedented change towards healthy beverages because shift in consumer preferences. Furthermore, emerging D2C startups and the re-launch of the Campa Cola brand under Reliance Industries are two events that will have a significant bearing on the market in the coming years.

Going forward, a rise in disposable income, higher rural consumption, an increase in discretionary spending, a shift in consumer preferences, and a large young population are expected to bring more sales of carbonated soft drinks and non-carbonated soft drinks in India.

Varun Beverages – Financials

Revenue and Net Profit Growth

The operating revenue of Varun Beverages has grown at a CAGR of 20.7% from Rs 5,228 crore in FY18 to Rs 13,391 crore in FY22. During the same period, the profit after tax accelerated at a much sharper annualized rate of 38.9% to Rs 1,550 crore. 

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What’s noteworthy about VBL’s top-line and bottom-line growth is that it was led by volume increase and operating leverage. The image below highlights the 24% CAGR growth of Varun Beverages in volume terms.

Fundamental Analysis of Varun Beverages - Sales report
Source: Varun Beverages Ltd. FY 2022 Annual Report 

The table below highlights the revenue and net profit growth of Varun Beverages for the last five fiscals.

Fiscal Year Operating Revenue Net Proft
2022 13,391 1,550
2021 8,958 746
2020 6,556 357
2019 7,248 472
2018 5,228 300
5-Yr CAGR 20.7% 38.9%
(figures in Rs Cr)

EBITDA and Net Profit Margin

Along with volume growth and operating leverage, margin improvement played its role in the bottom-line expansion of the beverage maker. 

From the table below on EBITDA margins and net profit margins, we can note that the net profit margin widened much more than the EBITDA margin. This happened as the company changed its tax regime to follow a more favorable one.

Fiscal Year EBITDA Margin Net Profit Margin
2022 21.2 11.8
2021 18.8 8.5
2020 18.6 5.5
2019 20.3 6.6
2018 19.7 5.9
(figures in %)

Net Worth and Return on Equity / Net Worth

Following the earnings growth, the net worth of the cold drink manufacturer increased at a fast pace translating into a huge increase in stock value for the shareholders. But that’s not it! 

The return on equity (RoE) or net worth (RoNW) also grew from only 14.9% in FY18 to the high of 29.7% in FY22 transforming Varun Beverages into a highly profitable business.

The table below presents the net worth and return on equity (RoE) of VBL for the last few years.

Fiscal Year Net Worth RoE / RoNW 
2022 5,216 29.7
2021 4,197 17.8
2020 3,589 10.0
2019 3,359 14.1
2018 2,006 14.9
(net worth in Rs Cr and RoE/RoNW in %)

Debt/Equity and Interest Coverage

We’ll now do a leverage study as part of our fundamental analysis of Varun Beverages. The debt-to-equity ratio of VBL has improved from 1.3 in FY18 to 0.7 in FY22. Furthermore, the interest coverage ratio rose to 15.19 times strengthening the leverage position of the company.

The table below highlights the improvement in the debt/equity ratio and interest converge ratio of Varun Beverages for the last few fiscals.

Fiscal Year Debt/Equity Interest Coverage
2022 0.7 15.19
2021 0.7 9.33
2020 0.8 2.53
2019 1.0 3.23
2018 1.3 3.03

Future Plans Of Varun Beverages

So far we looked at the previous fiscals’ data for our fundamental analysis of Varun Beverages. In this section, we’ll try to make sense of what lies ahead for the company and its investors.

  1. The company recently formed an agreement for the manufacturing and sale of Lays, Doritos, and Cheetos for PepsiCo in  Morocco. Along with this, it has also started production of Kurkure Puffcorn in Uttar Pradesh.
  2. Varun Beverages is optimistic about the future growth of value-added milk-based beverages such as shakes and cold coffee launched under its in-house brand Cream Bell.
  3. VBL’s foray into the 250 ml Sting energy drink priced at Rs 20 has been very profitable as it has a higher net realization. It aided in disrupting the higher-priced market dominated by the likes of Redbull. Furthermore, it has grown at a fast pace to contribute between 10-15% of the total beverage sales and the management expects it to be a key growth driver in the future as well.
  4. The beverage maker is currently executing a greenfield and brownfield expansion at various sites at a cost of Rs 606.6 crore. In addition to this, the management is eying a long-term investment of Rs 370 crore towards land acquisitions for capacity expansion in 2024-25 years. Along these lines, it has estimated a net CAPEX of Rs 1,500 crore for 2023. 

Key Metrics Of Varun Beverages

We are almost at the end of our fundamental analysis of Varun Beverages. Let us take a quick look at the key metrics of the stock.

CMP ₹1,452 Market Cap (Cr.) ₹94,500
EPS ₹25.80 P/E Ratio 56
Book Value ₹79 P/B Ratio 18.5
EBITDA Margin 21.2% Net Profit Margin 11.8%
Debt to Equity 0.7 Interest Coverage 15.19
Promoter Holding 63.9% RoE 29.7%

In Conclusion

As we conclude our fundamental analysis of Varun Beverages, we can definitely say that operating leverage, capacity expansion, and strong volume growth have helped the stock to become a multibagger. The present valuation at a high P/E of 56 and P/B of 18.5 tells us that VBL thrives on the Pepsico brand in India and investors still see it as a growth stock.

Therefore, investors should closely track future quarter results to make sure the company is consistent with results and executing due CAPEX to support volume growth. What are your views on the stock of VBL? How about we continue this conversation in the comments below?

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