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Outlier In Focus: A Quick View of Varun Beverages Limited


We come across a large number of interesting stocks in Capitalmind SNAP Outliers, our discovery tool for stocks with momentum. See a video of how Outliers works, and how to use Outliers to find all-time highs. Here’s a stock we found interesting that’s been an outlier. Catch them all here.

The outlier this time is Varun Beverages Limited, a 13,000 cr. market cap company that bottles Pepsi products. 

Varun Beverages was started by Ravi Kant Jaipuria as part of RJ group. Varun Beverages has been associated with Pepsi Co since 1990. It initially started as business associate of Pepsi Co in selected territories and has slowly expanded itself. Varun Beverages buys the franchisee rights from Pepsi for a territory and then sells the products in Pepsi Co name, effectively a bottling plant and reseller. Varun Beverages has been increasing number of licensed territories and sub territories either by directly procuring it from Pepsi or acquiring the firm which has the rights.

At the current juncture Pepsi Co is spread over 21 states in India apart from countries like Nepal, Sri Lanka, Zimbabwe, Zambia and Morocco. Most of the growth has come in terms of inorganic expansion by acquiring new territories and expanding the distribution network. Varun beverages has more than 51% market share in Pepsi beverages in India. The India portfolio contributes nearly 75% of the revenue.

VBL was unable to get a foothold in South Indian Market for a long time. It has recently acquired Franchisee rights from SMV group to manufacture PepsiCo beverages in 13 districts of Karnataka, 14 districts of Maharashtra and 3 districts of Madhya Pradesh.

Outlier In Focus: A Quick View of Varun Beverages Limited

Varun beverages currently has 20 manufacturing plants pan India and 5 manufacturing facilities in international geographies. Most of the manufacturing plants have been places to increase the reachability across their territory. Varun Beverages is currently serving 1/8th of worlds population and is the second biggest international franchise of PepsiCo.

VBL has 75 depots across India with 2,100 owned vehicles and nearly 1000 primary distributors. To incentivise the retail outlets VBL has provided the visi-coolers. By end of September VBL has distributed nearly 4,74,500 coolers.


Products of Varun Beverages can be classified into two divisions viz. Carbonated Soft Drinks (CSDs) and Non- Carbonated Beverages (NCBs).

Carbonated Drinks

Carbonated Drinks include Pepsi, Pepsi Black, Diet Pepsi, Mountain Dew, Mirinda, 7Up, 7Up Nimbooz Soda, Slice Fizzy Drinks and Everess. VBL has manufacturing and distribution rights for all the  carbonated drinks. (The products are Pepsi owned, but Varun Beverages is a contract manufacturer and distributor)

Outlier In Focus: A Quick View of Varun Beverages Limited

Non-Carbonated Beverages

Non carbonated beverages include Slice, 7Up Nimbooz, Tropicana, Sting, Gatorade, Aquafina etc. VBL has only distribution rights for Tropicana segment (they don’t make Tropicana, only distribute it) and for the rest it has manufacturing and distribution rights. VBL is setting up a plant for manufacturing of Tropicana, which will be up and running in 2019.


The business is seasonal in nature and the peak is usually summer and bottom is winter, when sales dry up. The below chart reflects the same. And if we look at YoY, the volume have been growing.

Outlier In Focus: A Quick View of Varun Beverages Limited

Note: VBL operates its financial year starting with Jan and ending with December.

To make any geography profitable, VBL needs to sell atleast 10 million cases.

Most of the revenue growth achieved is in by means of inorganic expansion. VBL has continuously added new territories (domestic and international) and simultaneously built capacity around it, rather than just eyeing distribution.

Outlier In Focus: A Quick View of Varun Beverages Limited

The same has been reflecting in its revenue. Revenue has roughly grown at 16% CAGR and profit by astounding 48% CAGR over the last six years.

And even now, most of the areas under which VBL is operational, has not been completely saturated (in terms of penetrtion). Also still it has South India to cover, where it doesn’t have any presence.

EBITDA Margins

Manufacturing and distribution of beverages has been a high margin business for VBL. The current EBITDA margins are at the level of 22%. Most of the margins come due to in house manufacturing and strategic locations of plants across India.

If we can see the margins in 2013, it was at 13.70%. Post that VBL has acquired new territories and added new manufacturing plants. The backward integration has bought more margins in logistics and manufacturing.

Outlier In Focus: A Quick View of Varun Beverages Limited

Tropicana for which VBL has not yet started manufacturing and only has distribution network, has lower margins compared to peers. The margins are as low as 10-12%. This is a significant low compared to peers.

Inorganic Growth Comes At A Cost

All the acquisitions of territories and plants VBL has done is through debt. This has spiked up the debt levels of VBL. VBL started with debt of Rs 1,940 Crs and at its peak of expansion it had a debt of Rs 2,654 Crs.

Despite this, their cash flows seem strong enough to be able to repay this very fast.

Outlier In Focus: A Quick View of Varun Beverages Limited

(Figures in Rs. Cr.)

Post 2017, debt levels has come down as most of the capex done in previous years have started generating cashflows. And they did not do any new capex in 2018. Currently it pays roughly 4% of its revenue towards finance costs.

Their Debt to Equity is 1:1, but out of about 980 cr. of operational EBIDTA, they pay about 211 cr. towards interest – an interest coverage ratio of 4x.

Trigger factors

Acquiring New Territories

VBL has very recently acquired manufacturing and distribution rights in Karnataka and Maharashtra. Both are comparatively big states, which till now were out of bounds for VBL. This will add a significant growth to its top line. And still it has some states like Tamil Nadu, Kerala, Andhra Pradesh, Telangana and Gujarat to cover. These are regions which see higher temperatures in summer and have higher demand during the period.

Apart from Indian sub-continent, VBL has got a foothold in Africa. a high growth market. Zambia has seen a growth 35% in last one year. Any new territories added over their will be an added advantage.

Improving The Revenue and Margins In Existing Territories

VBL has gone into an acquisition spree. All the new acquisitions have lower penetration with just 20%. In comparison, the older territories have penetration level to 30-35%. This gives lots of headroom for newer territories like Jharkhand for future growth.

Also with in house manufacturing of Tropicana, the margins will improve significantly. Till now Tropicana has been dragging the consolidated margins. (Tropicana drags down margins by 3%, since they don’t make the product)

New Innovative Products With Changing Trends

PepsiCo has evolved with time. As the generation changes so is their drinking habits. Consumers are going towards lower calorie drinks. In line with that Pepsi has launched diet Pepsi, Pepsi Black and Sting. The recently launched products contribute nearly 2-3% of VBLs revenue. More new products offerings are required to drive the future growth.


Sugar And Crude Prices Key To Margins

Sugar and Crude has been the major cost factor involved in manufacturing. Most of the beverages have sugar content in it (except diet Pepsi). Any increase in sugar prices directly hits margins. Crude prices are important as most of the packaging materials are derivatives of crude. Rise in crude prices will adverse effects on VBL. According to management, any increase in input cost up to 5% is borne by the firm. Anything above that is directly passed on to customers.

Fad of Carbonated Drinks is Waning Away

Globally, most of the developed countries are shunning beverages with high calories. And consumers are moving towards more healthy drinks rather than carbonated drinks. This trend has left beverage giants like Pepsi and Coca Cola in search of newer emerging markets like Africa, South Asia etc. . India too has placed higher taxes on sugared drinks. Smaller countries like Sri Lanka have shunned high sugar drinks

VBL is facing degrowth in the by almost 20% this year, in Sri Lanka.

The same trend has been catching up the upper urban consumers in India. This might at some stage reach a tipping point and start spiralling down. New products with changing times will keep the beverage industry going forward.

Shareholding Pattern

Promoters hold 73.56 % stake in VBL. FPIs hold another 13.03% stake. Mutual Fund like Reliance Growth Fund, Sundaram Value Fund and Tata Large and Midcap Fund together hold another 5.72%. Corporate bodies in Singapore own 3.73% and the tiny 3.96% is controlled by retail investors.

Outlier In Focus: A Quick View of Varun Beverages Limited

Share Price Chart

Outlier In Focus: A Quick View of Varun Beverages Limited

Note: We just provide a context for various stocks look at fundamentals and their price charts, in the Outlier in Focus articles.

Disclosure: The authors at Capitalmind may have positions in the stocks mentioned, please assume our bias exists. This is not a recommendation to buy or sell securities. This is purely information about the company mentioned.


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