Varun Beverages IPO: All you need to know

After a long time, investors are likely to see a company related to consumables hit the Indian stock markets. Although Varun Beverages Ltd, a bottler for Pepsi, is not exactly a consumer play, it’s the closest proxy for Pepsi that Indian markets can hope for.

So, should you invest in the Varun Beverages IPO? Let’s find out. We bring to you 10 key points about the company and what it does..

  1. Varun Beverages is one of the largest franchisees in the world (outside USA) of carbonated soft drinks (CSDs) and non-carbonated beverages (NCBs) for PepsiCo. CSD brands produced and sold by the company include Pepsi, Diet Pepsi, Seven-Up, Mirinda Orange, Mirinda Lemon, Mountain Dew, Seven-Up Nimbooz Masala Soda, Seven-Up Revive and Evervess. The NCB brands produced and sold are Tropicana Slice, Tropicana Frutz (Lychee, Apple and Mango), Nimbooz as well as packaged drinking water under the brand, Aquafina.

2.The company has been associated with PepsiCo since the 1990s and has consolidated it business over the years. As of March 31, 2016, the company has franchises to sell PepsiCo’s products across 17 states and two union territories in India.

3.It also has presence in Nepal, Sri Lanka, Morocco, Mozambique and Zambia. However, India is its largest market contributing about 84.4% in FY15.

4.Varun Beverages accounted for 44.12% of PepsiCo’s sales in the country in FY15, up from 26.5% in FY11.

5.As of April 30, 2016, the company operates 16 production facilities across India and five production facilities at their international licensed territories. Also, it produces preforms, crowns, corrugated boxes and pads, plastic crates and shrink-wrap films. Its production facilities across India are strategically located in geographical proximity to various target markets, resulting in lower transportation and distribution expenses.

6.Varun Beverages has a strong distribution network covering urban, semi-urban and rural markets. Its 578 primary distributors in India accounted for 76.79% of sales in volume terms in India in FY2015.

7.According to broking firm Ambit, carbonated drinks accounts for 82% of the revenue, water is 12% while non-carbonated drinks account for 6%. However, according to Ambit, over-reliance on the carbonated segment, which is a slow growing segment, is structurally negative for the company.

8.Being a bottler, Varun Beverages does not have any pricing power, says the Ambit report. Varun Beverages does not have any of the key operational and financial characteristics of a consumer business; operationally, it has no pricing power, brand ownership, new product development or control over raw material. These are the reasons which separate the company from being compared to any other in the consumer sector.

9.Further, the business is capital intensive points out Ambit. Bulk of the cash generated by the business has gone towards funding its capital expenditure and interest payment. In search for growth, the company’s return ratios and balance sheet has taken a hit with constant dilution of existing shareholders and rising debt levels. Ambit points out that despite a reasonably healthy EBITDA margin of 18%, Varun Beverages is struggling to achieve a double-digit ROCE mainly on account of high level of capacity building that the company has undergone to generate sales growth. Over the past five years, nearly 25% of sales has gone is for capacity expansion.

10.As per media reports, the company intends to tap the market at a price of Rs 440-445 valuing the business at around $1.2 billion or around Rs 7,900 crore. In FY15, the company posted a consolidated net profit of Rs 87 crore, which prices the current issue at a price to earnings ratio of nearly 90 times, almost twice the industry average. These valuation numbers are based on December 2015 numbers provided by the company in its prospectus. A sharp improvement in profits can bring the valuation lower.

-Shishir Asthana

This article was published in Business Standard. Click here

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