varun beverages buy - sakshi · 2017-08-28 · varun beverages 15 june 2 017 jm financial...

JM Financial Institutional Securities Limited

JM Financial Research is also available on: Bloomberg - JMFR <GO>,

Thomson Publisher & Reuters S&P Capital IQ and FactSet

Please see Appendix I at the end of this Thomson Publisher & Reuters

S&P Capital IQ and FactSet Please see Appendix I at the end of this report for Important Disclosures and

Disclaimers and Research Analyst

Varun Beverages (VBL) is one of PepsiCo’s largest franchisees outside of the USA, and has

ready-access to PepsiCo’s brands and portfolio of products to capitalise on the attractive soft-

drinks opportunity in India and some of the other countries that it has operations in. The key

investment debates on the stock since its Nov’16 listing have revolved around the return-

profile of VBL’s business operations, and whether VBL is a significantly lesser-mortal when

compared to other brand-owning consumer staples companies in India. Our detailed study of

the single-plant economics in VBL’s line of business lends confidence that a 20%+ ROIC is

highly achievable, as long as capacity utilisation gets to a more optimum level – typically a

matter of 4-5 years from commercialisation of the plant, as per our workings; VBL’s reported

ratios are depressed by its recent aggression in capacity building. On brand-ownership, we

view VBL and PepsiCo’s partnership as one of equals where VBL’s contribution (including the

all-important last-mile activities) is as important as that of PepsiCo’s (product-innovations,

branding). We initiate BUY with a DCF-based TP of INR635/share.

Large size of opportunity, attractive growth potential: The Indian soft-drinks market is

pegged at INR524bn and expected to post a healthy 17.5% CAGR over CY15-20E.

Despite the size, the category remains highly under-penetrated - our calculations indicate

that per-capita consumption is merely 35% vs China’s and 25% vs world average, even if

only the LSM4+ households are considered to be the active consumer-base for the

category. Considering the low price-points at which the products are retailed, scope for

increase in consumption-frequencies is still significant, we believe, which would help drive

healthy volume growth for years to come. VBL would be a key beneficiary of this

opportunity with the help of the access that it has to PepsiCo’s brands and portfolio of

products. The strength of its supply-chain and distribution network positions it well to

leverage the innovation capabilities of PepsiCo. VBL has driven healthy organic volume

growth in the past and given the strength of the portfolio and the opportunity, there

remains a good possibility of high single-digit volume growth in future as well, in our

view. VBL is also looking to enhance its share of PepsiCo’s India business through M&A

opportunities - it currently accounts for c.45% of PepsiCo’s volumes in the country.

Plant-economics is impressive, contrary to what the current consolidated picture presents:

VBL’s ROIC profile has been subdued (c.10% post-tax) leading to heightened concerns on

the profitability potential of its business model. Our analysis suggests that the depressed

return-ratio is more a result of sub-optimal utilisation of consolidated capacities at present

– a function of aggressive investments in capacity augmentation in recent times

(acquisitions contributed 31% to volumes in 2015). Our study of the economics of a

representative soft-drinks plant reveals that business ROIC can be in excess of 20% once

capacity utilisation gets closer to c.80% level on a seasonality-adjusted basis – typically a

matter of 4-5 years’ time from inception of a plant, in our view. Moreover, with

aggressive capex already incurred in recent years, we expect future spends to be low in

existing operations, which would drive strong organic FCF generation over the coming

years. Potential M&A could, however, use up some of the cash so generated, given VBL’s

quest to get much more of PepsiCo’s territories within its fold.

Vicky Punjabi [email protected] | Tel: (91 22) 66303065

Richard Liu [email protected] | Tel: (91 22) 66303064

Recommendation and Price Target

Current Reco. BUY

Previous Reco. NR

Current Price Target (12M) 635

Upside/(Downside) 16.5%

Previous Price Target NA

Change NA

Key Data – VBL IN

Current Market Price Rs541

Market cap (bn) Rs99.4/US$1.5

Free Float 21%

Shares in issue (mn) 182.3

Diluted share (mn) 182.3

3-mon avg daily val (mn) Rs77.0/US$0.1

52-week range 548/340

Sensex/Nifty 31,103/9,607

Rs/US$ 64.3

Price Performance % 1M 6M 12M

Absolute 11.7 30.5 0.0

Relative* 8.4 12.0 0.0

* To the BSE Sensex

Varun Beverages | BUY

15 June 2017 India | Consumer | Initiating Coverage

PepsiCo’s go-to partner

Financial Summary (Rs mn) Y/E March CY15A CY16A CY17E CY18E CY19E

Net Sales 33,941 38,520 40,803 46,727 53,341

Sales growth (%) 35.6% 13.5% 5.9% 14.5% 14.2%

EBITDA 6,371 7,952 8,646 9,825 11,173

EBITDA (%) 18.8% 20.6% 21.2% 21.0% 20.9%

Adjusted net profit 1,003 1,510 1,990 2,678 3,573

EPS (Rs) 7.5 8.3 10.9 14.7 19.6

EPS growth (%) NA 10.5% 31.8% 34.6% 33.4%

ROIC (%) 7.3% 9.1% 8.4% 9.5% 11.3%

ROE (%) 19.7% 11.8% 10.0% 12.0% 14.1%

PE (x) 72.2 65.3 49.6 36.8 27.6

Price/Book Value (x) 10.7 5.2 4.7 4.2 3.6

EV/EBITDA (x) 14.5 14.4 13.6 11.7 9.9

Dividend Yield (%) 0.0% 0.0% 0.0% 0.0% 0.0%

Source: Company data, JM Financial. Note: Valuations as of 14/Jun/2017

Varun Beverages 15 June 2017


Indian soft drinks industry has grown at an attractive 18% Exhibit 1.volume CAGR over CY10-15

Source: Company, JM Financial

Indian soft drinks industry was pegged at INR524bn in 2015 Exhibit 2.growing at 19% CAGR in value terms


Indian soft drinks industry is expected to grow at a healthy Exhibit 3.17.5% CAGR in value over CY15-20

Source: Company, Euromonitor, JM Financial

Bottled water and juices are expected to grow at a healthy Exhibit 4.pace

Source: Company,Euromonitor JM Financial

Lime and lemonade based drinks constitute c.45% of VBL’s Exhibit 5.portfolio


VBL has achieved a 7% organic volume CAGR over CY11-Exhibit 6.15; overall volume CAGR stood at 28.3% on acquisitions


5,300

6,363

7,589

8,915

10,366

12,081

0

2,000

4,000

6,000

8,000

10,000

12,000

14,000

2010 2011 2012 2013 2014 2015

Indian Soft Drinks - Volume (mn litres)

223

264

315

375

447

524

0

100

200

300

400

500

600

2010 2011 2012 2013 2014 2015

Indian Soft Drinks - Value (Rs bn)

524

1,176

0

200

400

600

800

1,000

1,200

1,400

2015 2020

Indian Soft Drinks - Rs bn

7%

17%

20%

0%

5%

10%

15%

20%

25%

Carbonates Juice Bottled Water

Indian Soft Drinks - Segment-wise value CAGR - 2016-21

Non-carbonated Beverages, 16

Packaged Drinking

Water , 37Pepsi, 48

7-up, 19

Mountain Dew, 104

Mirinda, 39

Other CSDs, 12

Carbonated Soft Drinks, 223

Volume - mn cases - CY16

77

101

107

-5

40

85

130

175

220

CY11 CY15

Varun Beverages - India Sales volume - mn cases

209

Existing Territories

Newly acquired Territories



Volumes expected to grow at healthy 7.8% CAGR Exhibit 7.


Net sales to grow at 11.5% CAGR Exhibit 8.


Expecting strong 33% net profit CAGR on high leverage Exhibit 9.


Pre-tax ROCE to touch 15% over next 2-3 years Exhibit 10.


136153

170

240

276286

316

346

0

50

100

150

200

250

300

350

400

CY12 CY13 CY14 CY15 CY16 CY17 CY18 CY19

Volumes - mn cases

17,883

21,028

24,745

33,642

38,25140,519

46,401

52,969

0

10,000

20,000

30,000

40,000

50,000

60,000


Net sales - Rs mn

251

-395-202

1,003

1,510

1,990

2,678

3,573

-1,000

-500

0

500

1,000

1,500

2,000

2,500

3,000

3,500

4,000


Adjusted net profit - Rs mn

5%

7% 10%

11%11%

12% 12%

4%

6%

11%

13%

12%

13%

15%

0.9

0.9

1.21.2

1.0

1.1

1.2

0.8

0.9

1.0

1.1

1.2

1.3

2%

7%

12%

17%

CY13 CY14 CY15 CY16 CY17 CY18 CY19

EBIT Margin ROCE (pre-tax) Asset Turns



Attractive opportunity; We expect scepticism on financial metrics to give way as plant-economics suggest an intrinsic 20%+ ROIC on a steady-state basis

Varun Beverages (VBL), in our view, presents an attractive opportunity to leverage the

softdrinks industry’s growth potential in India. With PepsiCo’s strong brand portfolio within

its fold through franchisee rights for 45% of the former’s volumes in India, the investment

argument should have largely centered around the size of the opportunity and perhaps on

the right valuation to pay for the opportunity. However, given the dependence of the

business on PepsiCo and nature of the relationship (details given in later section of the note),

there have been far more questions on the possibility of VBL’s ability to capitalise on this

growth opportunity in a profitable manner. These concerns also stem from subdued financial

performance in some of the recent years (the business reported losses in 2013 and 2014),

and low return-ratios (consolidated ROIC of 10% in 2016), we believe.

We have analysed some of these concerns in detail, and are convinced that VBL is a highly

profitable business that is capable of a 20%+ return on invested capital on a steady-state

basis; current reported ROIC are depressed by aggressive capacity-expansion exercise

(including M&A for the same) in recent years, as per our calculations. To understand the

inherent profitability potential of the business, we have carried out an in-depth analysis of the

levels of ROIC that can possibly be achieved at the company-level for a similar business that

operates with a single plant – ROIC varies substantially at different levels of capacity

utilisation and this exercise strengthens our confidence that VBL’s ROIC can scale-up to

20%+ levels in the coming years (discussed in detail later). Valuation would catch-up with

consumer peers in India (VBL is currently trading at 12.8x EV-EBITDA on an NTM basis, vs 26x

weighted average for consumer staples stocks in India) once reasonable confidence builds up

on VBL’s intrinsic ROIC potential.

The Indian soft-drinks industry is a mid-teens growth opportunity

Soft-drinks remain an under-penetrated category in India, and presents an attractive mid-

teens growth opportunity: As per Euromonitor, the per-capita consumption of soft drinks

in India is abysmally low even when compared to emerging markets. India’s consumption

stood at 9 litres – this is 1/7th of China, 1/14

th of Brazil and 1/10

th of the world average.

The ratio is a little better for carbonated soft drinks with per-capita consumption of

approximately 1/8th of world average.

India’s per-capita csoft-drinks consumption is significantly lower vs world average Exhibit 11.(figures in litres p.a.)


4 918

4665

798392

103122

135152

350 347 345

0

50

100

150

200

250

300

350

400

2010 2015 2020E

India China World Average Brazil USA



Overview of the Indian Soft-drinks Industry; Carbonated drinks constitute 48% of the industry at present Exhibit 12.

Source: Euromonitor, Company, JM Financial. Note percentages in the chart above denotes the value share of the sub-segment

We have tried to take a look at the per-capita consumption of soft drinks in India from

the angle of ability-to-pay. For this purpose, if one assumes that soft-drinks affordability

lies only with LSM 4+ households which makes up c.40% of the total households in the

country – this group would cover c.530mn individuals. LSM stands for Living Standards

Measure which segregates households based on their relative means with LSM-1

representing the poorest households and LSM-10 being the most affluent. One serving of

soft-drinks would be approx. 250ml.

Based on the above assumptions, per-capita consumption for the above sub-set of Indian

households, viz. households that have higher ability to pay for non-essential consumption

items, work out to c.23 litres per annum (vs 9 litres calculated by Euromonitor using the

entire population as the potential consumer-base) – this is still significantly lower vs 65

litres in China and 135 litres in Brazil.

This also implies that frequency of consumption is quite low at just 1.8 servings per week

even within households that can very easily afford the product (note that soft-drinks

include carbonated soft drinks, juices, and packaged water); we believe that apart from

the opportunity to increase penetration (a function of growth in households income in

the coming years), there is also a huge scope for higher frequency of consumption even

amongst the current set of regular consumers of the product.

Per-capita consumption merely 23 litres even in penetrated households Exhibit 13.Total Indian population - in mn households 247

% of population in LSM 4+ category 40%

Target Indian population - mn households 100

Average no. of people per household 5.3

Target Indian population - mn people 529

1 serving of soft-drinks – ml 250

Avg no. of servings per week 1.8

Total consumption per week – ml 440

No. of weeks 52

Total annual per-capita consumption – litres 23

India soft-drinks market size (as per Euromonitor) - mn litres 12,081


Indian Sof t Drink s Indust ry

INR 524bn

(12.1bn litres)

Carbonates (48%)

INR 251bn

(4.6bn litres)

Non Carbonates (29%)

INR 153bn

(1.9bn litres)

Bot t led Water (23%)

INR 121bn

5.6bn litres

Cola Carbonates

INR103bn

(1.9bn litres)

J uices

INR 132bn

1.8bn litres

Non-Cola Carbonates

INR 148bn

2.7bn litres

Others

INR 21bn

0.1bn litres



The Indian Soft-drinks industry presents attractive mid-teens volume growth opportunity:

Indian soft-drinks industry volumes stood at c.12bn litres in 2015 – this works out to

INR524bn in value-terms and has grown at 17.9%/18.7% CAGR in volume/value terms

over 2010-15, as per Euromonitor data. Growth is projected to remain high over the next

five years (15.8%/17.5% CAGR in volume/value), as per Euromonitor. Given lower per-

capita consumption and penetration at present, these growth rates, in our view, are

achievable also aided by the low unit selling-price of the products involved. This would

peg the industry size at c.25bn litres in 2020 and a per-capita consumption of 18 litres

(35 litres if one considers just the LSM 4+ households as the active consumer-base). Even

at 35 litres, per capita consumption would still be 44% that of China and nearly one-fifth

of Brazil.

Indian soft drinks industry has grown at an attractive 18% Exhibit 14.volume CAGR


Indian soft drinks industry was pegged at INR524bn in Exhibit 15.2015 growing at 19% CAGR


Juices and bottled water have gorwn at a much faster rate Exhibit 16.relative to carbonates


All segments have grown in double-digits in value over Exhibit 17.past 5 years


5,300

6,363

7,589

8,915

10,366

12,081

0

2,000

4,000

6,000

8,000

10,000

12,000

14,000

2010 2011 2012 2013 2014 2015

Indian Soft Drinks - Volume (mn litres)

223

264

315

375

447

524

0

100

200

300

400

500

600

2010 2011 2012 2013 2014 2015

Indian Soft Drinks - Value (Rs bn)

9%

22%

25%

0%

5%

10%

15%

20%

25%

30%

Carbonated Soft Drinks Juices Bottled Water

Indian Soft Drinks - Segment-wise volume CAGR - 2010-15

12%

26%

31%

0%

5%

10%

15%

20%

25%

30%

35%

Carbonated Soft Drinks Juices Bottled Water




Indian soft drinks industry is expected to grow at a healthy 17.5% CAGR in value Exhibit 18.over next 5 years


Bottled water and Juices are expected to be the fastest growing segments within the soft-

drinks market with value-growth potential of 20% and 17% respectively, while

carbonated soft-drinks is expected to grow at 7% CAGR. Growth would be fuelled by:

- Increasing income levels.

- Higher demand for packaged products.

- Increased expenditure on leisure.

- Preference for convenience.

- Higher penetration (rural areas constituted just 24% of off-trade soft-drinks sales in

2015 vs 40-50% for most FMCG companies).

* Off-trade sales refer to sales at retail outlets like grocery stores, hypermarkets etc. On-trade refers

to sales at foodservice outlets, restaurants, bars, clubs etc.

Euromonitor category-wise volume-growth forecasts: Bottled water and juices are Exhibit 19.

expected to grow at a healthy pace


524

1,176

0

200

400

600

800

1,000

1,200

1,400

2015 2020

Indian Soft Drinks - Rs bn

7%

17%

20%

0%

5%

10%

15%

20%

25%

Carbonates Juice Bottled Water




Being a partner-of-choice for PepsiCo, other favourable attributes

positions Varun Beverages well to leverage this opportunity

One of the largest franchisees of PepsiCo outside the USA: VBL is one of PepsiCo’s largest

franchisees in the world (outside the USA) of carbonated soft drinks and non-carbonated

beverages. The company sells a wide range of Carbonated soft-drinks (CSDs) as well as a

wide selection of Non-carbonated beverages (NCBs) including packaged drinking water,

juice-drinks (product portfolio given in the chart below). It has been associated with

PepsiCo since early 1990s and over the past 2.5 decades, has increased the number of its

licensed territories and sub-territories. While India remains its largest territory (c.76% of

revenues in CY15) and it accounts for c.45% of PepsiCo’s overall Indian sales (in volume

terms), the company has also been granted territories of Nepal, SriLanka, Morocco and

Zambia.

VBL’s product portfolio Exhibit 20.Product Description

Pepsi

Cola. Also available in variants like Pepsi Max and Diet Pepsi

7-UP

Lemon-lime flavor. Available in variants like Seven-Up Revive, Nimbooz

and Masala Soda

Mountain Dew

Citrus Flavor. Available in variants like Mountain Dew Game Fuel

Mirinda

Fruit Flavor. Available in variants like Mirinda Orange, Mirinda Pineapple,

Mirinda Apple and Mirinda Lemon

Evervess

Soda. Available in variants like Teem Soda and Duke's Soda

Tropicana Slice

Mango-based drink variant

Nimbooz

Lemon based drink variant

Tropicana Frutz

Lychee, Apple, Mango, Mix Fruit and Orange Flavours

Aquafina

Packaged drinking water


Though the rights for Tropicana fruit juices (covering 100% juices, nectars) have not been

licenced to VBL as yet, we believe the same could well be included shortly, given how well

the relationship has worked for both PepsiCo and VBL.

Ability to drive high growth has made it the franchisee-of-choice for PepsiCo: PepsiCo’s

confidence on VBL appears to have strengthened over time which is evident from the

latter’s increased share of PepsiCo’s India volumes over past four years - from 26.5% in

CY11 to c.45% in CY15. The increased share has been driven by: 1) Healthy growth in

existing territories – grown at 7% CAGR in volumes over CY11-15. 2) Acquisition of new

territories within India which constituted c.56% of VBL’s total volumes in 2015. These

factors have helped VBL drive c.28% domestic volume CAGR over CY11 to CY15.



VBL accounted for 45% of PepsiCo’s India volumes in CY15 Exhibit 21.


VBL has grown domestic volumes at 7.1% CAGR historically on an organic basis Exhibit 22.

Source: Company, JM Financial. Note:

Lower-share of Cola Carbonates (the “black-drink”) and focus on NCBs should help

sustain growth in early-teens level: As per Euromonitor, while overall soft-drinks market is

expected to grow at an attractive rate of 17.5% over 2015-20, CSD’s growth opportunity

remains lower at 10.2% (in value-terms) while Juices and bottled water are expected to

report growth in excess of 20%.

VBL has successfully enhanced the share of NCBs and packaged water from 16.5% in

CY12 to 19% in CY16. Even within carbonates, share of Cola Carbonates (the “black

drink”) within CSD has fallen from c.32% in CY12 to c.22% in CY16 which is responsible

for the lower overall growth expected in the CSD segment (Cola carbonates expected to

grow at only 8.9% CAGR). VBL’s portfolio has a higher skew towards lime-based

carbonates (55.4% in CY16) within its CSD portfolio which is expected to grow at a

healthier rate of 12.5%CAGR

26.5%

45.0%

0%

10%

20%

30%

40%

50%

CY12 CY15

Varun Beverages - Pepsi India Volume share

77

101

107

-5

40

85

130

175

220

CY11 CY15

Varun Beverages - India Sales volume - mn cases

209

Existing Territories

Newly acquired Territories



VBL’s product-portfolio: Lime and lemonade based drinks constitute c.45% of Exhibit 23.total portfolio and c.55% of CSD.

Source: JM Financial, Company

It is also important to note that PepsiCo has gained market share in two major brands viz.

Aquafina and Tropicana Slice and these categories are expected to have better growth

rates in future which bodes well for VBL.

PepsiCo has gained share in the fast growing lime/citrus category through 7-Up Exhibit 24.and Mountain Dew

Market Shares (volume %) 2010 2011 2012 2013 2014 2015

PepsiCo 34.2 34.1 33.4 32.5 31.1 31.1

Pepsi 14.5 14.4 13.8 13.3 12.5 12.4

7-Up 5.2 5.5 5.6 5.6 5.6 6.0

Mountain Dew 4.8 5.2 5.6 5.6 5.7 5.8

Mirinda 8.0 7.4 6.9 6.6 6.0 5.7

Evervess 1.7 1.6 1.5 1.4 1.3 1.2

Coca Cola 55.0 55.4 56.3 57.2 57.1 56.5

Sprite 14.1 15.3 16.3 17.1 17.7 18.0

Thums Up 16.0 16.0 16.4 16.7 16.5 16.0

Coca-Cola 9.2 9.1 8.9 8.9 8.6 8.4

Limca 7.8 7.7 8.0 8.0 8.2 8.3

Fanta 7.9 7.3 6.7 6.5 6.1 5.8


Aquafina (PepsiCo brand) is the only brand in amongst the top 3 to have gained Exhibit 25.market share over 2010-15

Packaged Water - Market Shares (volume %) 2010 2011 2012 2013 2014 2015

Bisleri 29.1 26.8 25.1 25.4 25.6 25.3

Kinley 19.0 18.7 18.2 16.3 14.4 13.0

Aquafina 10.4 11.2 11.4 11.6 11.8 11.6

Others 41.5 43.3 45.3 46.7 48.2 50.1


Non-carbonated Beverages, 16

Packaged Drinking

Water , 37Pepsi, 48

7-up, 19

Mountain Dew, 104

Mirinda, 39

Other CSDs, 12

Carbonated Soft Drinks, 223

Volume - mn cases - CY16



Slice (PepsiCo brand) has achieved 4.1ppt gain in market share over 2010-15 Exhibit 26.

Juices - Market Shares (volume %) 2010 2011 2012 2013 2014 2015

Maaza 29.2 28.1 27.3 28.1 29.9 30.1

Slice 16.8 18.0 18.5 20.3 22.3 20.9

Frooti 22.1 20.3 18.5 16.4 16.4 15.1

Real 7.7 8.1 8.7 9.2 8.8 8.4

Tropicana 6.0 6.2 6.0 6.2 5.9 5.5

Others 18.2 19.3 21.0 19.8 16.7 20.0


Geographical expansion could enhance growth potential: In addition to India, VBL also

has franchisee rights for various PepsiCo’s products for territories of Nepal, Sri Lanka,

Morocco and Zambia. The company is also setting up a plant in Zimbabwe in anticipation

of franchisee rights being granted by PepsiCo. Of these territories, inherent growth

potential remains a double-digit one in Sri Lanka, Morocco and Nepal while other

territories are expected to witness mid-single digit growth. Overall international growth is

expected to be in double-digits.

Domestic volumes are >4x International volumes; India Exhibit 27.expected to remain at c.80% of VBL’s overall volumes


International revenue share increased in CY16 on Zambia Exhibit 28.acquisition


VBL’s business operation has an inherent capability to drive a healthy 20%+ ROIC

Commendable increase in EBITDA margin over past 4 years: VBL’s EBITDA margin has

improved from 12.8% in CY12 to 20.8% in CY16 which has been largely driven by gross

margin improvement – increased by 12.1ppt over the same period. Improved margin is

attributable to three major reasons:

- Increased scale of operations which aided in improving sourcing capabilities and

driving other operational efficiencies.

- Backward integration through inhouse manufacturing of pet chips (as per our

calculations, cost of pet chips per case has declined 39% over CY12 to CY16 as a

result of this shift), and conversion from cardboard packaging to shrink wrap

packaging (a cost-savings initiative that was in fact designed and driven by PepsiCo).

- Benign RM pricing environment (cost of concentrate per case has declined 26% over

CY12-16 in absolute terms) and focus on lower sugar-content. In reality, though,

concentrate pricing could get discounted by PepsiCo to help fund activities that may

be needed at VBL’s end to counter competitive or other pressure in the marketplace.

While a part of the expansion seen in recent years could reverse once RM pricing turns

inflationary, a significant part of these benefits are sustainable, in our view, as a lot of

these were driven by internal efficiencies. Further, given the low selling-price change in

114

132144

209

224

22 21 26 31

52

0

50

100

150

200

250

CY12 CY13 CY14 CY15 CY16

India - mn cases International - mn cases

20.1%18.6% 19.9%

16.4%

24.2%

0%

5%

10%

15%

20%

25%

30%


International Revenue Share



the recent past (realization per case for VBL has increased by a mere 0.9% CAGR in the

Indian territories over CY12-16), it should be easier to pass-on RM led costs inflation to

consumers in the near future unless competitive pressures turn intense.

Investors have also raised concerns on VBL being a mere bottler and hence could be

squeezed by PepsiCo on margin. It is important to note here that PepsiCo negotiates

terms on concentrate purchases while pricing is generally arrived through a mutual

agreement. VBL is the obvious bottler-of-choice for PepsiCo in India given that it has over

time been granted rights to nearly c.45% of PepsiCo’s Indian volumes. This implies, terms

of trade on concentrates that is negotiated with VBL would be at par relative to other

bottlers in India. PepsiCo also adjusts concentrate pricing to account for any enhanced

promotions to counter increased competitive intensity, thus ensuring a somewhat stable

profitability level for VBL.

It is quite evident from the above that VBL is a not a mere cost-plus model and there are

avenues and incentives for driving cost savings. Clearly, a fall in costs of inputs like e.g.

sugar and efficiencies achieved through internalization of pet-chips manufacturing

process have driven gross margin expansion over the past two to three years apart from

the fall in prices of concentrates purchased from PepsiCo.

VBL receives 53% share of retail selling price; its profits account for 11% of retail Exhibit 29.

selling price while PepsiCo receives 6% through sale of concentrate

Source: Company, JM Financial. *% of retail selling price. Note: Taxes under GST are expected to remain similar to current levels.

Pet chips cost had nearly halved from peak levels Exhibit 30.


Concentrates costs have also declined sharply Exhibit 31.


Trade Margin23%

Taxes24%

Concentrate Cost6%*

Other RM costs18%*

Overheads18%*

VBL's Profit11% *

VBL's Net Realisation

53%

Split of Retail Selling Price - Carbonated Soft-Drinks Split of VBL's realisation

9.3 10.0 9.2

5.4 5.7

0

2

4

6

8

10

12


Pet Chips - Rs per case

22.7 25.4

28.6

21.2

16.7

0

5

10

15

20

25

30

35


Concentrates - Rs per case



Pet-chips contributed nearly 1/3rd to absolute savings per case over CY12-16 (Rs) Exhibit 32.

COGS Break-up - per case CY12 CY13 CY14 CY15 CY16 CAGR

Volume - mn cases 136 153 170 240 276 19.4%

Realization - Rs per case 132 138 147 141 139 1.3%

Pet Chips - Rs per case 9.3 10.0 9.2 5.4 5.7 -11.5%

Concentrates - Rs per case 22.7 25.4 28.6 21.2 16.7 -7.3%

Sugar - Rs per case 20.2 21.0 20.9 15.8 21.3 1.3%

Others - Rs per case 21.4 21.2 21.3 19.7 19.3 -2.6%

COGS - Rs per case 75.6 78.4 80.9 71.5 62.9 -4.5%

% of sales 57.1% 56.7% 55.0% 50.6% 45.1%

Source: Company, JM Financial. Note: Concentrate costs are also adjusted by PepsiCo to account for enhanced competitive intensity or

brand investments in the market place.

Return ratios impacted by acquisitions; inherent potential to clock 20%+ as capacity

utilisation exceeds 80%: Depressed return-ratio has been a cause of concern in the minds

of many investors despite margin expansion and has raised questions on the potential of

the VBL business model to generate healthy profitability metrics. There seems to be some

attribution of low ROIC potential to the fact that VBL is dependent on PepsiCo for its

entire innovation and product-portfolio pipeline. The important aspect to understand here

is that VBL’s business model allows it to extract efficiencies out of each of its operations

to enhance returns for itself and the progress towards this objective remains a key

monitorable, in our view. VBL has the right to retain all the savings arising out of higher

efficiencies in the parts of the supply-chain which it is responsible for.

The “transfer” of profit to PepsiCo is mainly through the pricing of concentrates that VBL

purchases from the former. In this regard, one must note that since the same

concentrates are also sold to other bottlers in India who are smaller in scale compared to

VBL and therefore enjoys lower economies of scale (note that all the other bottlers

together account for less than 25% of PepsiCo’s India volumes while VBL itself sells

c.45% thereof), a higher concentrate pricing would be severely detrimental to these

bottlers’ operations / financials. With VBL by itself accounting for nearly 2x the volumes of

all the other PepsiCo bottlers put together, we believe it is unlikely that the terms of trade

to a more strategic partner in PepsiCo’s eco-system would be unfavourable compared to

that applicable to others.

To analyse the reasons for current depressed ROIC, we bifurcate it into two parts viz.

reasons for the depressed net profit at present and low asset turns:

- VBL’s net profit is presently impacted by high depreciation charge and net financial

expense. Depreciation accounted for 9.7% of net sales in CY16 while net financial

expense took away 43% of the year’s EBIT.

- Secondly, at the consolidated level, asset-turn stood at merely 1.2x – due to higher

fixed assets (gross fixed assets turnover stood at merely 0.8x, almost the entire capital

employed of VBL is accounted for by fixed assets, as VBL’s working capital

requirement is low at merely c.8% of revenue).

The key reasons for both depressed profitability and lower asset-turns, are the M&A

executed over the recent years which have resulted in a very low capacity utilization at the

consolidated level for VBL – adjusted for seasonality, this is merely 66% in the Indian

operations and works out to be sub-40% in 2/3rds of the overseas operations. Capacity

utilization levels quoted here is adjusted for seasonality, i.e. peak monthly capacity divided

by share of volumes in the peak month. Actual capacity utilisation would be much lower

relative to figures stated since extra capacity would need to be built to cater to peak-

season demand. Given the nature of business, lower capacity utilisation is an impediment

towards scaling-up return ratios and realising the inherent profitability potential of this

business. VBL has incurred INR18.5bn (c.49% of Dec’16 total capital employed) on

acquisitions over the past two years which has adversely impacted asset-turns.



Enhancing capacity utilisation remains the single-most important lever for driving

improved return ratios. Increased sales on negligible incremental capex would lead to fall

in depreciation as a percentage of sales which would help improve EBIT margin and in

turn profitability. Higher scale of operations on similar capital employed would also lead

to a sharp improvement in asset turns.

To analyse the potential for scaling-up ROIC, we have also tried to work out ROIC that

could be achieved as capacity utilisation levels scale up over a period of time. Our

workings are for a single-plant that scales up its operations to reach 100% utilisation

(seasonality-adjusted) in 7 years’ time. Note that given the seasonal nature of the

business, this would still mean a capacity-utilisation of only c.60% on a full-capacity two-

shift working basis.

Our workings take into account the following:

- The plant operates with a throughput of 600 bottles a minute. Adjusting for

seasonality, the overall capacity would stand at 11.8mn cases per annum (theoretical

capacity is 25.5mn cases. Seasonally-adjusted capacity is derived by dividing the peak

monthly production by the share of volumes of the peak month. To illustrate, volumes

in the peak month of May account for c.18% of VBL’s annual volumes, and at peak

capacity, a typical plant can produce 2.1mn cases in a month. 11.8mn cases stated

above is arrived at by dividing 2.1mn cases by 18%.

- Capital expenditure required for building the plant is approx. INR88 per case. This

includes the costs of visi-coolers that need to be provided to the retail outlets to store

the products.

- Net sales realisation has been taken at the current company level average of INR139

per case. Though the realisation is higher for carbonated soft drinks, costs would also

be higher and hence a company level average would be more representative for this

exercise.

- The plant starts with a capacity utilisation of as low as 30% in the first year and scales

up to 45% in year 2, 80% in year 4 and 100% by the 7th year. Given the overall

capacity has been adjusted for seasonality, a utilisation of 100% (or perhaps even

more) can be achieved. On an unadjusted basis, capacity utilisation would remain at

46% for the life of the plant (assuming three-shift working; this figure stands at

c.60% on a double-shift basis).

- Gross margin is taken based on VBL’s company-level average margin and overheads

and other expenses have been attributed based on capacities (total capacity for VBL

stood at 28,000 bottles of 600ml each, this plant in our illustration would account for

2.1% of the same).

- Net working capital requirement taken at 8% of sales.

Based on the above, in the first year, the plant would be manufacturing 3.6mn cases at a

30% utilisation which would be gradually scaled-up to a level of 100% by the 7th year. As

per our workings, the plant would achieve breakeven in the second year itself at a

capacity utilisation of 45%. Double-digit ROIC (on gross capital invested) would require a

capacity-utilisation of 60%+.

As per our analysis, the plant would achieve a 20% ROIC once it gets to a 80%+

capacity-utilisation level - EBIT margin would then be in excess of 20% while driving asset

turns of 1.2x (presently, VBL’s EBIT margin is at 11% while asset turns stood at 1.2x for

CY16). Given the nature of business, this appears quite logical and emphasises on the

need for driving scale-led efficiencies. The other key highlight is that at 100% capacity

utilisation (adjusted for seasonality; capacity utilisation on total basis would be 60% on a

two-shift working basis), ROIC could be c.30% for this business. Scope for growth within

domestic operations and the company’s objective of enhancing its presence in India

implies that scale-up in ROIC would be more gradual, though, in our view. Given the

current capacity utilisation in India of 66%, we believe, Indian operations could be

generating an ROIC of c.12% while International operations in Morocco and Sri Lanka



with much lower utilisation (sub-40%) could be loss-making – this combination is what

leads to a consolidated ROIC of c.10%, we believe.

20%+ ROIC potential exists if capacity utilisation crosses 80% mark; break-even is achieved at 45%. Exhibit 33.


Healthy operating cash flow generation; Free cash flow distorted by acquisitions

Proven strong operating cash flow generation capability: Given high debt levels, it

becomes easier to question the cash generation capability of the company especially in

light of the fact that it has reported losses in two out of the past five years and the debt

levels have remained high despite equity funding. However, VBL has reported strong

operational cash flows historically which has reported a CAGR of 31% to reach INR8.3bn

in CY16. The growth has been aided by 8% expansion in EBITDA margin (12.8% in CY12

to 20.8% in CY16). Working capital efficiency also remains high – in the range of 7-10%

over past four years excluding capital creditors. Hence, the company appears to be quite

efficient on operational basis which should help cash generation in the future.

Year 0 1 2 3 4 5 6 7 8 9 10

Utilisation % (based on seasonality-adjusted capacity) 30% 45% 65% 80% 90% 95% 100% 100% 100% 100%

Utilisation % (unadjusted - total capacity basis) 14% 21% 30% 37% 42% 44% 46% 46% 46% 46%

No. of cases manufactured - mn 3.6 5.3 7.7 9.5 10.7 11.2 11.8 11.8 11.8 11.8

NSR - Rs per case 139 142 145 148 151 154 157 160 163 167

% growth 2.0% 2.0% 2.0% 2.0% 2.0% 2.0% 2.0% 2.0% 2.0%

Net Sales - Rs mn 495 758 1,116 1,401 1,608 1,731 1,859 1,896 1,934 1,973

Gross Margin - % 55.0% 55.0% 55.0% 55.0% 55.0% 55.0% 55.0% 55.0% 55.0% 55.0%

Gross Profit- Rs per case 77 78 80 81 83 85 86 88 90 92

Gross Profit - Rs mn 272 417 614 771 884 952 1,022 1,043 1,064 1,085

Staff costs - Rs mn 55 78 105 112 120 128 136 144 153 162

% of sales 11% 10% 9% 8% 7% 7% 7% 8% 8% 8%

% growth 7.0% 7.0% 7.0% 7.0% 7.0% 6.0% 6.0% 6.0% 6.0%

A&P Spends - Rs mn 9 14 20 25 29 31 33 34 35 36

% of sales 1.8% 1.8% 1.8% 1.8% 1.8% 1.8% 1.8% 1.8% 1.8% 1.8%

Other Overheads - Rs mn 177 186 195 203 211 220 229 235 242 250

% of sales 35.8% 24.6% 17.5% 14.5% 13.1% 12.7% 12.3% 12.4% 12.5% 12.7%

% growth 5.0% 5.0% 4.0% 4.0% 4.0% 4.0% 3.0% 3.0% 3.0%

EBITDA - Rs mn 31 139 294 430 524 573 625 629 634 638

EBITDA margin 6.3% 18.3% 26.3% 30.7% 32.6% 33.1% 33.6% 33.2% 32.8% 32.3%

Depreciation 104 104 104 104 104 104 104 104 104 104

% of sales 21.0% 13.7% 9.3% 7.4% 6.5% 6.0% 5.6% 5.5% 5.4% 5.3%

EBIT - Rs mn -73 35 190 326 420 469 520 525 530 534

EBIT margin -14.7% 4.6% 17.0% 23.3% 26.1% 27.1% 28.0% 27.7% 27.4% 27.1%

Tax Rate 33% 33% 33% 33% 33% 33% 33% 33% 33% 33%

NOPAT - Rs mn -49 23 127 219 282 314 349 352 355 358

NOPAT margin -9.8% 3.1% 11.4% 15.6% 17.5% 18.1% 18.8% 18.6% 18.3% 18.1%

Capital Expenditure 1,041 1,041 1,041 1,041 1,041 1,041 1,041 1,041 1,041 1,041

Net Working Capital 45 68 100 126 145 156 167 171 174 178

Net Working Capital - % of net sales 9.0% 9.0% 9.0% 9.0% 9.0% 9.0% 9.0% 9.0% 9.0% 9.0%

Gross Capital Employed 1,086 1,110 1,142 1,168 1,186 1,197 1,209 1,212 1,216 1,219

Asset-turn 0.5 0.7 1.0 1.2 1.4 1.4 1.5 1.6 1.6 1.6

Post-tax ROIC (on gross capital invested) -4.5% 2.1% 11.3% 18.9% 23.9% 26.4% 29.0% 29.1% 29.2% 29.4%



Reported profits have been low but operating cash flow generation has been high Exhibit 34.


Payments for acquisitions have adversely impacted free cash flows: VBL has reported

negative FCFF in two of the past five years while CY16 FCFF has been negligible at

INR304mn which, on the face of it, implies that business has a high requirement of

capital expenditures. However, a part of the payments for acquisitions has been included

in capital expenditure which has distorted the free cash flow picture. The company has

spent INR18.5bn on acquisitions over the past five years (CY11-16) excluding which, it

has generated INR13.5bn in FCFF over the same period. Even considering interest cost (a

part of it being attributable to acquisitions done during the period) of INR8.2bn, FCFF still

remains positive at INR5.3bn. Hence, in our view, cash generation capability of the

company remains quite healthy and not a real cause of concern.

77% of operating cashflow generated over CY11-16 were spent on acquisitions Exhibit 35.


Summary of acquisitions over CY12-16 (INR mn) Exhibit 36.

Noida - CY13 3,000

New India territories - CY15* 12,685

Phillaur & Jaunpur - CY16 1,074

Zambia and Zimbabwe - CY16 1,755

Total Acquisition costs 18,514

Source: Company, JM Financial. *New India territories include Punjab, Himachal Pradesh, Chandigarh, UT and remaining parts of sub-territories of Haryana, Uttarakhand and Uttar Pradesh.

11.2

5.5

2.6

0

2

4

6

8

10

12

CY12 CY16 CY19

OCF / adjusted net profit

18,514

23,010 924 10,443

-5,023

-10,000

-3,000

4,000

11,000

18,000

25,000

Operating Cash

flow (pre NWCchanges)

Release of Working

Capital

Capex Acquisitions FCFF (post-

acquisition)

Cash flow generation over CY12-16

FCFF generation adverselyimpacted by acquisitions over past 4 years



Sharp reduction in net-debt to equity post IPO to substantially reduce interest cost

burden; appetite for acquisitions remains though: Net debt to equity has declined from

11x in CY12 to 0.8x in CY16 largely on funding through equity (cash generation has

been applied towards acquisition as stated earlier). We expect deleveraging to continue

which is going to help reduce net-interest expense sharply (from 42.6% of EBIT in CY16

to 14.8% in CY19). This should help enhance profitability while lower need for capital

expenditures henceforth should keep capital employed in check leading to better return

ratios. However, high cost acquisitions remains a risk to our continued deleveraging

thesis.

Net debt to equity down to 0.8x in CY16 post IPO; strong cash generation to help Exhibit 37.reduce net-debt-to-equity further


We value the opportunity on DCF basis to capture efficiencies across the value-chain; Our one-year price target is at INR615

Consumer business model with an attractive growth opportunity: While there is an

argument against the company being treated as a consumer company given that it is

PepsiCo bottler, we believe it remains the best way to play the soft drinks growth story in

India. In more ways than one, we believe PepsiCo-VBL partnership is that of equals where

the respective partners have their roles well-defined – and importantly, roles played by

both the partners are equally important.

Moreover, VBL has proven its ability to benefit from lower input costs as well as mix-

improvement implying that its business model is not that of a third-party converter.

Secondly, operating margin stood at 20.8% in CY16 which is quite healthy and better

than packaged food companies like Britannia, Agro Tech Foods.

The street is worried about absence of brand-ownership in Varun Beverages’ case – while

this is a valid argument, the concerns appear to be less in the case of Page Industries

(Jockey franchisee), Jubilant Foodworks (Dominos Pizza franchisee), Westlife (McDonalds

franchisee for West and South India). We see a potential for Varun Beverages to narrow

its valuations-discount with other consumer staples stocks in India (on EV/EBITDA basis,

VBL is quoting at 12.8x which is half the trading multiple that our consumer-coverage

group is currently trading at (c.26x); With blended capacity utilisation being low at

present, depreciation charge is quite high when seen as a percentage of sales and hence

PER is not the best metrics for comparison here, in our view) in the future once return-

metrics move up and cash-generation capability is more visible.

11.1 10.6

6.1

3.0

0.8 0.9 0.7 0.4

0

2

4

6

8

10

12


Net Debt to Equity



Comparison with licensed franchisee companies like Jubilant Foodworks, Westlife Exhibit 38.Development and Page Industries suggest quite a few similarities in the business model

Similarities Differences

None of these companies own the brands that they are selling.

Jubilant and Page Industries have royalty payments while Varun Beverages purchases concentrates from PepsiCo. The prices of concentrates are determined by PepsiCo and includes the “royalty” component therein. There are no incremental royalty payments.

Manufacturing activities relating to the products are completely controlled by these entities.

Brand investment expenses are incurred by brand owner PepsiCo while in the case of Jubilant Foodworks, Westlife and Page Industries, the franchisees bear the brand investment expenditure.

Entire responsibility of GTM execution lies in their hands. Last mile distribution, a key factor, is also controlled by them.

Product innovation responsibilities are with PepsiCo unlike Jubilant Foodworks and Page Industries.

Responsible for point-of-sale activities and in-store publicity.

Business has a much higher level of seasonality vs that of Page Industries, Jubilant Foodworks and Westlife.


Current profitability is depressed on low capacity-utilisation and high leverage; expecting

gradual improvement in return ratios: VBL has managed to scale-up EBITDA margin quite

well and while possibility of sharp margin expansion appears low, prima facie, we would

still argue that current level of profitability does not completely represent the actual profit

generation capability of the business as: 1) Capacity utilization remains quite low c.50%

(adjusted for seasonality; actual capacity utilisation is just c.23% on a 3-shift working

basis) which increases the depreciation charge as a percentage of sales - 9.7% of net

sales in CY16, and 2) High leverage (interest cost at c.50% of EBIT; on acquisitions of

INR18.5bn) has further constricted flowthrough to bottomline. We expect profitability

and return ratios to gradually improve and reach mid-teens level by CY19/CY20 -

expecting 14-15% ROE by CY19.

We value VBL on DCF basis to arrive at a price target of INR635/share: Given depressed

profitability at present and the ability to generate stronger cashflows would be aided by

progressive economies of scale, DCF remains the best way to value this company, in our

view. Also, lack of trading history and a proper comparable set drives our preference

more towards a DCF-based valuation model for this stock.

Using our DCF-based model, we arrive at a price target of INR635 per share which implies

17.4% upside from current levels. Our DCF is based on following assumptions:

- WACC of 11%.

- Terminal growth rate of 5%.

- FCFF CAGR of 12.7% over CY18-30 (explicit forecasts made till CY30).

At our price target, VBL would be trading at c.13x EV/EBITDA, and c.37x on PER (NTM

basis). However, it is pertinent to note that VBL’s net earnings are currently depressed by

higher interest costs and depreciation charge. As utilisation scales-up, we expect a larger

share of operating profit to flowthrough to the bottomline. 13x EV-EBITDA still represents

a 50% discount to our consumer-coverage group’s average.



With estimates of c.13% free cash flow CAGR over CY18-CY30, we arrive at a DCF based price target of INR635 Exhibit 39.


Valuations comparison: International beverage bottlers and brand companies Exhibit 40.

Source: Company, JM Financial, Bloomberg

CY16 CY17E CY18E CY19E CY20E CY21E CY22E CY23E CY24E CY25E CY26E CY27E CY28E CY29E CY30E CAGR

Explic it Forecas t

EBIT 4,228 4,600 5,531 6,551 7,534 8,426 9,517 10,720 12,021 13,572 15,099 16,765 18,593 20,398 22,364

Tax Rate 34.1% 32.0% 32.0% 32.0% 32.0% 32.0% 32.0% 32.0% 32.0% 32.0% 32.0% 32.0% 32.0% 32.0% 32.0%

NOPAT 2,786 3,129 3,762 4,456 5,124 5,731 6,473 7,292 8,176 9,231 10,271 11,404 12,647 13,874 15,212 12.3%

Depreciation 3,724 4,046 4,295 4,622 4,972 5,339 5,722 6,118 6,526 6,963 7,445 7,976 8,560 9,199 9,897

Change in net working capital 3,664 -6,947 -449 -504 -498 -484 -555 -607 -658 -745 -751 -822 -902 -913 -995

Capex -55,525 -2,431 -4,176 -4,502 -4,771 -4,977 -5,170 -5,342 -5,488 -6,093 -6,701 -7,370 -8,107 -8,853 -9,667

Free Cas h Flow -45,352 -2,203 3,432 4,072 4,827 5,609 6,470 7,460 8,557 9,357 10,264 11,187 12,198 13,308 14,448 12.7%

Discount Factor 0.95 0.86 0.77 0.69 0.63 0.56 0.51 0.46 0.41 0.37 0.33 0.30 0.27

Dis counted FCFF 3,257 3,482 3,718 3,893 4,045 4,202 4,342 4,277 4,227 4,150 4,077 4,007 3,919

Fade Period CY31 CY32 CY33 CY34 CY35 CY36 CY37 CY38 CY39 CY40

FCFF 15,717 17,050 18,443 19,893 21,394 22,943 24,533 26,157 27,808 29,476

% growth 8.8% 8.5% 8.2% 7.9% 7.5% 7.2% 6.9% 6.6% 6.3% 6.0%

Discount factor 0.2 0.2 0.2 0.2 0.2 0.1 0.1 0.1 0.1 0.1

Dis counted FCFF 3,841 3,753 3,657 3,554 3,443 3,327 3,205 3,078 2,948 2,815

Va luation

PV of explicit forecast 51,594

PV of Fade period 33,621

PV of terminal value 49,244

Enterpris e Va lue 1,34,460

Les s :

Net Debt 18,678

Minority interest 1

Va lue attributable to equity s hareholders 1,15,781

No. of shares - mn 182

Share price - Rs 635

WACC 11.0%

Termina l growth rate 5.0%

Companies Curr CMP Mkt Cap

(US$) CY17 CY18 CY17 CY18 CY17 CY18 CY17 CY18 CY17 CY18 CY17 CY18

GLOBA L BOTTLERS

V A RUN BEV ERA GES INR 537 1,523 40,519 46,401 8,646 9,825 10.9 14.7 49.2 36.6 13.5 11.6 9.5% 11.3%

COCA-COLA FEMSA SAB-SER L MXN 150 17,300 2,11,707 2,28,412 40,415 44,610 6.8 7.4 22.0 20.3 9.5 8.3 9.1% 9.4%

COCA-COLA EUROPEAN PARTNERS EUR 36 19,467 10,920 11,102 1,960 2,121 2.1 2.4 17.0 15.2 11.7 10.7 14.7% 15.2%

ARCA CONTINENTAL SAB DE CV MXN 135 13,229 1,30,811 1,54,354 26,064 30,726 6.0 7.1 22.5 18.9 10.1 8.3 12.3% 13.2%

COCA-COLA HBC AG-DI GBp 2,315 10,790 6,489 6,714 909 981 1.1 1.3 20.8 18.4 10.2 9.2 12.9% 13.6%

COCA-COLA AMATIL LTD AUD 9 5,287 5,247 5,383 960 991 0.6 0.6 16.4 15.9 8.6 8.4 20.7% 20.1%

EMBOTELLADORA ANDINA-PREF B CLP 2,735 3,803 19,55,743 20,83,169 3,41,663 3,70,465 117.3 131.6 23.3 20.8 9.0 8.2 12.6% 13.4%

COCA-COLA ICECEK AS TRY 37 2,727 8,309 9,431 1,283 1,504 1.4 1.9 26.7 19.6 9.1 7.8 8.2% 10.3%

GLOBA L BEV ERA GE BRA ND COS

NATIONAL BEVERAGE CORP USD 88 4,091 827 942 173 204 2.3 2.7 38.9 32.5 22.9 19.1 43.3% 40.3%

COCA-COLA CO/THE USD 45 1,92,393 35,202 30,986 11,414 11,796 1.9 2.0 23.8 22.7 19.0 18.5 38.0% 41.3%

PEPSICO INC USD 116 1,66,163 63,670 66,048 13,155 13,951 5.1 5.5 22.6 21.0 14.6 13.6 58.3% 57.7%

MONSTER BEVERAGE CORP USD 51 28,703 3,367 3,720 1,345 1,507 1.5 1.7 33.9 29.6 20.8 18.3 23.0% 23.2%

BRITVIC PLC GBp 705 2,378 1,579 1,569 233 247 0.5 0.5 14.6 13.8 10.3 9.8 52.7% 47.2%

CARABAO GROUP PCL THB 73 2,148 14,036 17,577 1,910 2,682 1.6 2.0 46.8 36.9 36.6 26.3 20.5% 22.9%

MANPASAND BEVERAGES LTD INR 772 689 10,234 13,788 1,969 2,471 20.7 26.6 37.3 29.1 20.1 15.7 9.4% 10.8%

Sales EBITDA EPS PE EV /EBITDA ROE



Industry Overview

Global soft drinks market pegged at US$782bn and expected to grow at 4.5% CAGR:

Soft drinks market comprises bottled water, carbonates, packaged juices, ready to drink

tea and coffee. The global soft drinks market size is pegged at US$782bn in 2015 and

has grown at 3.4% CAGR in volumes over 2010-15 but the value growth was much

lower at 1.3% as realizations declined. Over the next five years, Euromonitor expects the

volume growth to remain at 3.4% while the value growth would be higher at 4.5% led

by positive realizations. Euromonitor estimates the global soft drinks market to reach a

size of US$973bn by 2020.

Per capita consumption for the world remains quite low at 92 litres relative to 347 litres

for USA and 292 litres for Germany. Per capita consumption in emerging economies like

China (65 litres) is c.30% below the world average. In India, per capita consumption is

abysmally low at 9.4 litres i.e. 1/7th of China and 1/10

th of World average. This compares

with per capita income being 1/5th of Brazil and China implying huge scope for increasing

consumption.

Per capita consumption in India is 1/10th of the world average Exhibit 41.


Indian soft drinks market valued at INR524bn; CSD contributes 48%: Indian soft drinks

market is pegged at INR524.3bn in value and has been witnessing a healthy growth of

18.7% CAGR. Off-trade consumption (defined as sales through retail outlets like grocery

stores, hypermarkets, super markets etc) constitutes 69% of total sales while the balance

is attributable to on-trade consumption (On-trade implies sales through consumer food

service outlets ) in volume terms. In value terms, on trade/off trade is almost equally

divided – 46%/54%. Carbonated soft drinks constitute 38% of the soft drinks market by

volumes while bottled water would constitute 47%. However, on value basis, CSD

constitutes 48% while bottled water is at 23%. The overall soft drinks market still

remains underdeveloped in India especially in terms of per capita consumption which

stood at merely 9.4 litres.



Overview of the Indian Soft Drinks Industry; Carbonates constituted 48% of the total industry Exhibit 42.

Source: Euromonitor, Company, JM Financial. Note percentages in the chart above denotes the value share

The Indian soft drinks market has been driven by innovation, particularly due to increasing

preferences of consumers towards product variety, as well as towards healthier

beverages. As a result, there have been a number of new product launches by leading

players in the industry over the past few years. Paper Boat by Hector Beverages

introduced several new flavors in small pack sizes, Nature’s First India Pvt Ltd launched

Tender Coconut juice in packaged format.

North and West regions together account for 68% of total Indian market; are also

amongst the fastest growing regions: Indian soft drinks market stood at 12.1bn litres in

volume terms in 2016 and has grown at c.18% CAGR. Of the total market. C.68%

implying nearly 8.3bn litres is concentrated in Northern and Western regions. Despite

constituting a larger proportion of the market, these regions have also exhibited higher

growth rates. Increasing population of middle class coupled with rapid urbanisation and

changing lifestyles has aided growth in these regions and these factors should also help

maintain growth at healthy rates. Higher disposable income for the middle classes should

also aid these growth rates.

Indian Sof t Drink s Indust ry

INR 524bn

(12.1bn litres)

Carbonates (48%)

INR 251bn

(4.6bn litres)

Non Carbonates (29%)

INR 153bn

(1.9bn litres)

Bot t led Water (23%)

INR 121bn

5.6bn litres

Cola Carbonates

INR103bn

(1.9bn litres)

J uices

INR 132bn

1.8bn litres

Non-Cola Carbonates

INR 148bn

2.7bn litres

Others

INR 21bn

0.1bn litres



Northern and Western regions constitute 68% of the total Exhibit 43.soft drinks volumes sold in India

Source: Euromonitor, Company, JM Financial

Norther and Western regions have also grown a little Exhibit 44.faster relative to South and East.


Rural has grown at c.1.7x the urban pace over past five years: Rural areas continue to

remain under-penetrated and constitute a mere 24.3% of the total soft drinks volume.

Consumer in rural India have recently also started exhibiting increased brand loyalty in

soft drinks in the recent past which has volumes growth in rural areas have outpaced that

of urban. Over the past five years, carbonated soft drinks have registered a 15.3% CAGR

over 2010-15 in rural areas relative to 9% CAGR in urban.

Rural constitutes a mere 24% of Indian soft drinks market Exhibit 45.and remains under-penetrated


Rural has grown at 15% CAGR over past 5 years - 1.7x Exhibit 46.urban growth.

Source: Euromontor, Company, JM Financial

West India34%

North India34%

South India23%

East and North East India

9%

India Soft Drinks region-wise market split

18.3% 18.2%

17.6%

16.1%

13%

15%

17%

19%

West India North India South India East and North East India

Indian Soft Drinks Market - CAGR - 2010-15

Urban76%

Rural24%

India Soft Drinks market

9%

15%

3%

6%

9%

12%

15%

18%

Urban Rural

Cabonated soft drinks CAGR - 2010-15



Business Overview

One of the largest franchisee of PepsiCo: Varun Beverages is one of the largest franchisee

(outside USA) of carbonated soft drinks and non-carbonated beverages sold under

trademarks owned by PepsiCo. The company’s product portfolio includes carbonated and

non-carbonated soft drinks as well as packaged drinking water. It has been associated

with PepsiCo since 1990’s and has also enhanced the number of licensed territories and

sub-territories under its operation. Within India, VBL has a presence across 17 states and

2 union territories and accounts for 45% of PepsiCo’s sales in India. It’s operations also

spans across five countries including three in Indian sub-continent (India, Nepal and Sri

Lanka) and 2 in Africa (Morroco and Zambia). It has recently enhanced stake in its

Zambian subsidiary from 60% to 90% and has divested its 41% stake in Mozambique

subsidiary.

VBL: Significant milestones Exhibit 47.


Portfolio concentrated towards CSD; packaged water is the fastest growing segment:

VBL’s portfolio has a significantly higher concentration towards Carbonated soft drinks

(CSD) which constitutes c.81% of its volumes. However, within CSD segment, an

interesting fact is the share of Pepsi is a mere 22% while Mountain Dew is 47% of the

portfolio. Mountain Dew has grown at 15% CAGR over past five years while Pepsi has

grown at a mere 7.2%. Packaged water which constitutes c.13% of its total volumes and

has grown at a much faster clip of 32.1% CAGR.

Ye a r Pa rticu la rs

1991 Bottling & Trademark License Agreement with PepsiCo through a group Company

1993 Tropicana Slice introduced

1995 Varun Beverages Limited incorporated as public limited company

1995 Commenced operations in Greater Noida

1996 Commenced operations in Jaipur

1998 Acquired existing operations at Nepal

1999 Commenced operations in Alwar, Jodhpur and Kosi

2003 Mountain Dew introduced

2009 7up Nimbooz was introduced

2010 Expansion into international territories – Sri Lanka and Morocco

2011 /12 Investment by Standard Chartered PE

2012 7up Nimbooz Masala soda was introduced

2000-2013 Consolidation of territories held by various companies into Varun Beverages Limited

(includes Goa, North East, Sri Lanka, Nepal and Morocco territories)

2013 Acquired the business of manufacturing and marketing of soft drink beverages in Delhi,

India2014 Investment of Rs2bn by promoter group

2015 Investment of Rs2.5bn by promoter group

2015 Acquired PepsiCo’s India sub-territories in Uttar Pradesh, Uttarakhand, Himachal Pradesh,

Haryana, Punjab and the Union Territory of Chandigarh

2015 Acquired Pepsico India's business in Bazpur, Jainpur, Satharia and Panipat

2015 Investment by AION Capital

2016 Acquired PepsiCo operations in Zambia

2016 IPO and listing



CSD constitutes 81% of total volumes sold Exhibit 48.


Mountain Dew is 47% of total CSD Exhibit 49.


VBL’s product portfolio Exhibit 50.Product Description

Pepsi

Cola. Also available in variants like Pepsi Max and Diet Pepsi

Seven-UP

Lemon-lime flavor. Available in variants like Seven-Up Revive, Nimbooz

and Masala Soda

Mountain Dew

Citrus Flavor. Available in variants like Mountain Dew Game Fuel

Mirinda

Fruit Flavor. Available in variants like Mirinda Orange, Mirinda Pineapple,

Mirinda Apple and Mirinda Lemon

Evervess

Soda. Available in variants like Teem Soda and Duke's Soda

Tropicana Slice

Mango based drinks variant

Nimbooz

Lemon based drink variant

Tropicana Frutz

Lychee, Apple, Mango, Mix Fruit and Orange Flavours


Manufacturing capacity of 780mn cases: VBL has 16 production facilities across India and

5 facilities in the international licensed territories. The production facilities in India have an

annual production capacity of c.606mn cases while International facilities have a capacity

of c.175mn cases leading to a total capacity of 780mn cases (adjusted for seasonality the

total capacity would be c.550mn cases). Sales volume at 276mn cases is one-third the

level of production capacity implying limited investment required in future for enhancing

production capacity.

Carbonated Soft Drinks81%

Non-Carbonated Beverages

6%

Packaged Water13%

Varun Beverages portfolio break-up

Mountain Dew47%

Pepsi22%

Mirinda17%

Seven-up10%

Other CSDs4%

Varun Beverages CSD portfolio break-up



VBL’s licensed territories and manufacturing facilities Exhibit 51.


Widespread distribution network covering urban and rural markets: VBL has, over the

years, developed a widespread distribution network covering urban, semi-urban and rural

markets in its territories of operation. It has 71 owned depots, 2024 owned vehicles and

1,186 primary distributors. It has a dedicated sales force that is focussed on driving

growth and expanding market shares across product categories and regions. It

undertakes local level promotion, in-store activations, customer relation management,

merchandising and evaluation of high demand region for strategic placement of vending

machines and Visi-coolers. It has presently installed nearly 0.5mn Visi-coolers across

various markets.



Chain of activities / responsibilities undertaken by VBL Exhibit 52.




Outline of the agreement with PepsiCo

Healthy relationship with PepsiCo India nurtured over time: Varun Beverages is a strategic

franchisee partner for PepsiCo in India and have over the years developed a significant

and mutually beneficial business association. The company is one of PepsiCo’s largest

franchisees in the world (outside USA) of both carbonated and non-carbonated beverages

sold under trademarks owned by PepsiCo. The strength of the relationship is also

reflected in the fact that PepsiCo granted additional licenses to new sub-territories in

India in 2015 to VBL which constituted c.79% of VBL’s existing volumes.

VBL has entered into an agreement with PepsiCo India whereby the former has been

granted license to manufacture, sell and distribute PepsiCo products across 17 territories

in India and the agreement is valid for a period of ten years upto October’2022 which can

be renewed for an additional period of five years. The agreements are non-exclusive for

PepsiCo which has reserved its rights to undertake production and distribution activities

within the licensed sub-territories in India either directly or through third party.

Key terms of the agreement include:

- PepsiCo has licensed some PepsiCo owned trademarks including Pepsi, Diet Pepsi, 7

UP, Mirinda Orange, Mirinda Lemon, Mountain Dew, 7UP Nimbooz Masala Soda, 7

UP Revive, Lehar Evervess Soda, Tropicana Slice, 7 UP Nimbooz and Aquafina. Royalty

is, however, payable only on the use of ‘Lehar’ trademark which is used in connection

with Aquafina and Evervess Soda. PepsiCo India is entitled to revise the royalty rates

from time to time.

- PepsiCo will supply the relevant concentrates to VBL. VBL has to purchase the

concentrates exclusively from either PepsiCo or PepsiCo approved manufacturers at a

price and terms and conditions approved by PepsiCo. In practice, though, the

concentrate price is determined in discussion with VBL and PepsiCo also allows

discounts on concentrates from time to time to encourage promotion of new products

and drive penetration in new markets.

- VBL is required to maintain adequate production and distribution capacities to fulfil

demand for PepsiCo products at all time. VBL is also required to conform to

production standards specified by PepsiCo and the latter is entitled to inspect facilities

at any time.

- PepsiCo remains responsible for pan-India advertising, marketing and brand

promotion campaigns for its brands. For sale of goods in local areas and enhancing

brand footprints, joint brand promotion campaigns are conducted.

- Annual operating plan relating to sales volume targets are discussed with PepsiCo for

the relevant fiscal year based on which capital expenditure, volume capacity,

distribution capacity and other operational resources are budgeted. VBL is required to

report sales information of each PepsiCo products sold by them to PepsiCo.

- VBL is prohibited from manufacturing, distributing or selling any non-PepsiCo

products which could be an imitation of PepsiCo products or could compete with

PepsiCo products.

- VBL has also entered into International agreements with PepsiCo International for Sri

Lanka, Morocco, Nepal and Zambia. The terms and conditions are similar to those in

the India agreements. The franchises are granted for certain identified PepsiCo

products in these particular territories. .



VBL carries out entire range of activities from manufacturing to last mile distribution, while PepsiCo is responsible for concentrate Exhibit 53.supply, innovations and brand development


Key Financials Summary

During CY16, VBL reported net sales, EBITDA and adjusted net profit of INR38.3bn, INR8bn

and INR1.5bn representing a growth of 13.7%, 24.8% and 50.6% respectively.

Revenue trends: Net sales has grown at a CAGR of 20.9% over CY12-16 driven largely by

a volume CAGR of 19.4%. Volumes in the Indian territory (constituted 81% of total

volumes in CY16) have grown at 18.4% CAGR while International volumes grew at 24%

CAGR (from a smaller base though). Volume growth has been aided by acquisitions in

both domestic and International territories. In the existing domestic territories volumes

grew at 7% CAGR over CY11-15 despite a 7% decline in CY15 on poor macro and some

seasonal issues.

We are expecting the company to report a volume CAGR of c.8% over CY16-19 as CY17

would be partially impacted by supply chain adjustments during GST implementation

phase which occurs in its seasonally strongest quarter (2QCY17). Volume for CY17 is

expected to grow c.5% while we expect it to grow at 8-9% over CY18-19. Higher

growth in mountain dew (c.10% CAGR), seven-up (c.7% CAGR), non-carbonated

beverages (c.10%) and packaged water (c.15%) is expected to offset lower growth in

Pepsi-Cola (3%). We are expecting a realization CAGR 3.4% as RM inflation is expected

to be higher henceforth.



Volume trends – expected to register c.8% CAGR over Exhibit 54.CY16-19.


Net sales trends: expecting to grow at 11.5% CAGR over Exhibit 55.CY16-19


EBITDA trends: EBITDA has grown at 36.7% CAGR over CY12-16 and stood at Rs8bn in

CY16. EBITDA margin expanded by 800bps to 20.8% in CY16 vs 12.8% in CY12. EBITDA

margin was aided by a sharp 12.1% expansion in gross margin aided by mix-enrichment

and benign RM prices which was partially offset by sharp growth in SG&A (25% CAGR

over the same period).

We expect EBITDA to grow at 12% CAGR over CY16-19 aided by marginal expansion in

EBITDA margin (30bps) to 21.1% in CY19 vs 20.8% in CY16. This would be largely

attributable to positive operating leverage.

EBITDA and margin trends Exhibit 56.


Adjusted net profit trends: Adjusted profit has grown at 56.6% CAGR over CY12-16

from a mere INR251mn in CY12 to INR1.5bn in CY16. Profit growth was aided by a lower

growth in depreciation (29% CAGR) and positive financial leverage(net financial expense

accounted for 42.6% of EBIT in CY16 vs 77.4% in CY12).

We expect the strong trends in adjusted profit growth to continue – 33.3% CAGR over

CY16-19. This would be driven by continued deleveraging and lower growth in

depreciation.

136153

170

240

276286

316

346

0

50

100

150

200

250

300

350

400


Volumes - mn cases

17,883

21,028

24,745

33,642

38,25140,519

46,401

52,969

0

10,000

20,000

30,000

40,000

50,000

60,000


Net sales - Rs mn

2,2802,911

3,845

6,371

7,952

8,6469,825

11,173

13%

14%

16%

19%

21%21% 21%

21%

10.0%

13.0%

16.0%

19.0%

22.0%

0

2,000

4,000

6,000

8,000

10,000

12,000


EBITDA - Rs mn EBITDA margin - %



Adjusted net profit trends Exhibit 57.


Snapshot of profit and loss statement Exhibit 58.


251

-395-202

1,003

1,510

1,990

2,678

3,573

-1,000

-500

0

500

1,000

1,500

2,000

2,500

3,000

3,500

4,000


Adjusted net profit - Rs mn

Ke y Fina nc ia l s - INR mn CY12 CY13 CY14 CY15 CY16 CY17 CY18 CY19

Volume - mn Ca se s 136 153 170 240 276 286 316 346

YoY Growth - % 12.5% 11.1% 41.2% 15.1% 3.6% 10.4% 9.6%

Re ve nue 18,000 21,151 25,024 33,941 38,520 40,803 46,727 53,341

Cost of goods sold 10,278 11,992 13,761 17,165 17,363 18,319 21,055 24,095

Gross Profi t 7 ,722 9,159 11,263 16,777 21,157 22,485 25,672 29,246

Gross Margin 42.9% 43.3% 45.0% 49.4% 54.9% 55.1% 54.9% 54.8%

Employee expenses 1,524 1,830 2,168 3,238 4,264 4,557 5,195 5,930

Other costs 3,917 4,418 5,250 7,169 8,941 9,282 10,652 12,142

EBITDA 2,280 2,911 3,845 6,371 7,952 8,646 9,825 11,173

EBITDA margin 12.7% 13.8% 15.4% 18.8% 20.6% 21.2% 21.0% 20.9%

Depreciation and amortisation 1,358 1,844 2,101 3,174 3,724 4,046 4,295 4,622

EBIT 922 1,068 1,745 3,197 4,228 4,600 5,531 6,551

Net financial costs 714 1,524 1,707 1,545 1,800 1,535 1,449 1,134

Exceptional income / (expenses) 0 0 0 255 0 0 0 0

Taxes -43 -52 248 789 829 980 1,305 1,733

Minority interes / associate profits 0 -8 -9 -13 87 95 98 112

Adjuste d Profi t 251 -395 -202 1,130 1,513 1,990 2,678 3,573

YoY Growth - % -257.4% -49.0% -660.8% 33.8% 31.6% 34.6% 33.4%

Re a l i sa tion pe r c a se - INR 132 138 147 141 139 143 148 154

EBITDA pe r c a se - INR 17 19 23 27 29 30 31 32



Fixed assets constituted nearly 100% of capital employed in recent years; largely Exhibit 59.on high capital creditors leading to negative working capital


Net working capital expected to be largely stable Exhibit 60.


Pre-tax ROCE expected to touch 15% as asset turns (capacity utilisation) scales-up Exhibit 61.


1924

24 35 38

0.10.1

0.1 0.02.10.4

0.53.4 0.6

0.72.51.5 1.3

-6.8-3.7

-20%

0%

20%

40%

60%

80%

100%


Net fixed assets Goodwill Cash & Investments Net Working Cap (excl cash) Others

Incl capital creditors

21.5%

10.0%

7.0%8.3% 8.1% 8.1% 8.0% 8.0%

0%

5%

10%

15%

20%

25%


Net working capital - % of sales

5%

7% 10%

11%11%

12% 12%

4%

6%

11%

13%

12%

13%

15%

0.9

0.9

1.21.2

1.0

1.1

1.2

0.8

0.9

1.0

1.1

1.2

1.3

2%

7%

12%

17%

CY13 CY14 CY15 CY16 CY17 CY18 CY19

EBIT Margin ROCE (pre-tax) Asset Turns



Key risks

Complete dependence on PepsiCo for running its operations: Varun Beverages operates

under a franchisee agreement with PepsiCo while the entire brand portfolio is owned by

PepsiCo and the key formulations of the product as well as innovation capability resides

with PepsiCo. VBL handles the manufacturing, production, distribution and outlet

management part of the business. This sort of an arrangement makes VBL totally

dependent on its agreement with PepsiCo. Any issues that may arise between VBL and

PepsiCo or revocation of franchisee rights could jeopardise the future of the company. In

reality, though, most matters relating to the business are jointly discussed before any

decisions are taken thereon and the relationship between VBL and PepsiCo are extremely

healthy - this is evident from the fact that PepsiCo has granted additional territories to

VBL to manage and currently, VBL controls higher volumes in India (45%) that what

PepsiCo manages on its own (32%).

Concentrate pricing: PepsiCo is entitled to various rights under the PepsiCo India

Agreements and PepsiCo International Agreements, including the right to unilaterally

determine the price of the concentrates purchased by the Varun Beverages. If such a right

is exercised and pricing is set at a level which is detrimental to VBL, it would possibly

jeopardise its financial performance. However, it is important to note here that Varun

Beverages is an important and a sizeable partner for PepsiCo (responsible for 45% of

PepsiCo’s volumes in India) and hence these decisions are typically taken only after a

proper dialogue and taking into account the mutual interest of both the parties. In fact,

PepsiCo has even discounted concentrates pricing in the past, when competitive situation

necessitated that VBL spend more on promotions in the marketplace.

Emergence of Ethnic Flavours: There is a trend in India where consumers are increasingly

beginning to prefer beverages based on ethnic flavours like jal-jeera, aam-panna (raw

mango), coconut-water etc. These are also somewhat healthier as options relative to

carbonated drinks. A sharp increase in the share of these ethnic flavours could begin

impact the expected growth opportunity available to VBL unless PepsiCo is quick and

agile enough to spot and capture these kinds of evolving consumer-preferences into its

product-development cycle, in our view.

Regulatory risks driving consumer preferences away from carbonated soft-drinks: Food

and beverages industry is increasingly witnessing higher supervision from regulatory

authorities. Enhanced regulations on carbonated soft-drinks may require the company to

change its product formulations (e.g. sugar-content) and this may pose significant risk in

terms of the acceptability of new formulations by consumers. Such kinds of regulatory

interference could also adversely impact the brand-image of the brands that the company

deals with and upset the volume growth trajectory over the longer term.



Financial Tables (Consolidated)

Profi t & Loss Sta te me nt (Rs mn) Ba la nce She e t (Rs mn)

Y/E Ma rch CY15A CY16A CY17E CY18E CY19E Y/E Ma rch CY15A CY16A CY17E CY18E CY19E

Sa le s 33,642 38,251 40,519 46,401 52,969 Shareholders' Fund 6,743 18,939 20,929 23,607 27,180

Sales Growth 36.0% 13.7% 5.9% 14.5% 14.2% Share capital 1,338 1,823 1,823 1,823 1,823

Sa le s a s pe r Ind-AS 47,619 54,532 62,250 Reserves & Surplus 5,405 17,116 19,106 21,784 25,357

Other Operating Income 299 269 285 326 372 Preference Share Capital 0 0 0 0 0

Tota l Re ve nue 33,941 38,520 40,803 46,727 53,341 Minority Interest 0 1 1 1 1

Cost of Goods Sold/Op. Exp. 17,165 17,363 18,319 21,055 24,095 Total Loans 20,773 16,247 19,171 17,254 13,803

Personnel cost 3,238 4,264 4,557 5,195 5,930 Def. Tax Liab / Assets (-) 1,429 2,158 2,321 2,539 2,827

Other expenses 7,169 8,941 9,282 10,652 12,142 Tota l - Equi ty & Lia b 28,945 37,344 42,422 43,400 43,811

EBITDA 6,371 7,952 8,646 9,825 11,173 Net Fixed Assets 35,335 40,589 38,975 38,856 38,736

EBITDA margin (%) 18.9% 20.8% 21.3% 21.2% 21.1% Gross Fixed Assets 41,455 47,521 49,952 54,128 58,631

EBITDA ma rg in - Ind-AS(%) 18.2% 18.0% 17.9% Intangible Assets 4,870 7,048 7,048 7,048 7,048

EBITDA Growth (%) 65.7% 24.8% 8.7% 13.6% 13.7% Less: Depn. & Amort. 11,369 14,936 18,982 23,277 27,899

Depn & Amort 3,174 3,724 4,046 4,295 4,622 Capital WIP 379 956 956 956 956

EBIT 3,197 4,228 4,600 5,531 6,551 Investments 33 56 56 56 56

Other Income 143 348 235 281 342 Current Assets 8,945 11,578 11,983 14,403 16,429

Finance Cost 1,688 2,148 1,771 1,730 1,475 Inventories 4,247 4,899 5,217 5,975 6,821

PBT before Excep & Forex 1,651 2,428 3,065 4,081 5,418 Sundry Debtors 979 1,303 1,332 1,526 1,741

Excep & forex Inc/Loss(-) 255 0 0 0 0 Cash & Bank Balances 581 657 437 1,194 1,365

PBT 1,906 2,428 3,065 4,081 5,418 Loans & Advances 2,994 4,577 4,848 5,552 6,338

Taxes 789 829 980 1,305 1,733 Other Current Assets 144 142 149 156 164

Extraordinary Inc/Loss(-) 0 0 0 0 0 Current Liab. & Prov. 15,367 14,880 8,592 9,915 11,410

Assoc. Profit/Min. Int.(-) 13 -87 -95 -98 -112 Current Liabilities 14,552 13,826 7,489 8,593 9,820

Reported Net profit 1,130 1,513 1,990 2,678 3,573 Provisions & Others 815 1,053 1,104 1,321 1,590

Adjuste d Ne t Profi t 1 ,003 1,510 1,990 2,678 3,573 Net Current Assets -6,422 -3,302 3,391 4,488 5,019

Net Margin (%) 3.0% 3.9% 4.9% 5.8% 6.7% Appl ic a tion of Funds 28,945 37,344 42,422 43,400 43,811

Diluted share capital (mn) 133.8 182.3 182.3 182.3 182.3 Source: Company, JM Financial

Di lute d EPS (Rs ) 7 .5 8 .3 10.9 14.7 19.6

Diluted EPS Growth -597.5% 10.5% 31.8% 34.6% 33.4%

Total Dividend + Tax 0 0 0 0 0

Dividend Per Share (Rs) 0.0 0.0 0.0 0.0 0.0


Ca sh Flow sta te me nt (Rs mn) Dupont Ana lys i s

Y/E Ma rch CY15A CY16A CY17E CY18E CY19E Y/E Ma rch CY15A CY16A CY17E CY18E CY19E

Profit before Tax 1,651 2,428 3,065 4,081 5,418 Net Margin 3.0% 3.9% 4.9% 5.8% 6.7%

Depn. & Amort. 3,174 3,724 4,046 4,295 4,622 Asset Turnover (x) 1.2 1.2 1.0 1.1 1.2

Net Interest Exp. / Inc. (-) 1,545 1,800 1,535 1,449 1,134 Leverage Factor (x) 5.6 2.6 2.0 1.9 1.7

Inc (-) / Dec in WCap. -419 820 -6,947 -449 -504 RoE 19.7% 11.8% 10.0% 12.0% 14.1%

Others 79 112 31 41 54 Ke y Ra tios

Taxes Paid -483 -581 -783 -979 -1,300 Y/E Ma rch CY15A CY16A CY17E CY18E CY19E

Ope ra ting Ca sh Flow 5,548 8,303 947 8,439 9,423 BV/Share (Rs) 50.4 103.9 114.8 129.5 149.1

Capex -6,095 -10,758 -2,431 -4,176 -4,502 ROIC (%) 7.3% 9.1% 8.4% 9.5% 11.3%

Free Cash Flow -547 -2,455 -1,484 4,263 4,921 ROE (%) 19.7% 11.8% 10.0% 12.0% 14.1%

-Inc/dec in investments 3,034 -1 0 0 0 Net Debt-equity ratio (x) 3.0 0.8 0.9 0.7 0.5

Others 65 79 235 281 342 PER 72.2 65.3 49.6 36.8 27.6

Inve sting Ca sh Flow -2,997 -10,680 -2,196 -3,895 -4,161 PBV 10.7 5.2 4.7 4.2 3.6

Inc/(dec) in capital 0 6,808 0 0 0 EV/EBITDA 14.5 14.4 13.6 11.7 9.9

Dividend+Tax Thereon 0 0 0 0 0 EV/Net Sales 2.8 3.0 2.9 2.5 2.1

Inc/dec in loans -952 -2,175 2,924 -1,917 -3,451 Debtor days 11 12 12 12 12

Others -1,408 -2,173 -1,896 -1,869 -1,641 Inventory days 46 47 47 47 47

Fina nc ing Ca sh Flow -2,360 2,459 1,028 -3,786 -5,092 Creditor days 193 165 85 85 85

Inc / De c (-) in Ca sh 191 82 -220 758 170 Source: Company, JM Financial

Opening cash balance 390 575 657 437 1,194

Closing cash balance 581 657 437 1,194 1,365




APPENDIX I

JM Financial Inst itut ional Secur it ies Limited

Corporate Identity Number: U65192MH1995PLC092522 Member of BSE Ltd. and National Stock Exchange of India Ltd. and Metropolitan Stock Exchange of India Ltd.

SEBI Registration Nos.: BSE - INZ010012532, NSE - INZ230012536 and MSEI - INZ260012539, Research Analyst – INH000000610 Registered Office: 7th Floor, Cnergy, Appasaheb Marathe Marg, Prabhadevi, Mumbai 400 025, India.

Board: +9122 6630 3030 | Fax: +91 22 6630 3488 | Email: [email protected] | www.jmfl.com

Compliance Officer: Mr. Sunny Shah | Tel: +91 22 6630 3383 | Email: [email protected]

Definition of ratings

Rating Meaning

Buy Total expected returns of more than 15%. Total expected return includes dividend yields.

Hold Price expected to move in the range of 10% downside to 15% upside from the current market price.

Sell Price expected to move downwards by more than 10%

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varun beverages buy - sakshi · 2017-08-28 · varun beverages 15 june 2 017 jm financial...

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