PremiumVarun Beverages Ltd (VBL), the second-largest bottling company for PepsiCo outside the US, had a rough financial year owing to the covid-19 pandemic. VBL follows a January to December financial year.
While the company ended CY2020 on a strong note, with better-than-expected December-quarter results, revenues for the year have declined by 9.5% year-on-year to ₹6450 crore, as demand was hit due to the pandemic. A Motilal Oswal Financial Services Ltd report dated 15 April, said its analysis of VBL’s CY20 annual report highlights the management’s efforts to improve its presence, product mix, and utilization levels.
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“Over CY13-20, volume mix of carbonated soft drinks (CSD) has fallen by about 10% percentage points to 73% in CY20 (309 million units)," said Motilal Oswal’s analysts. This drop in the share of CSD in volume mix is owing to management’s increased focus towards diversifying its product portfolio via introduction of newer products in non-carbonated beverages. In CY20, 21% of the company’s volumes came from packaged drinking water and non-carbonated beverages contributed the remaining. Note that VBL’s overall volumes in CY2002 declined by 13.5% year-on-year to 425 million cases.
The company’s earnings before interest, tax, depreciation and amortisation (Ebitda) margin contracted by about 170 basis points compared to last year to 18.6%. One basis point is one-hundredth of a percentage point. Although, subsidiaries’ profitability was better and this was driven by a sharp decline of forex loss in Zimbabwe.
Kotak Institutional Equities’ annual report analysis dated 22 March said, “Operating cash flow stood at ₹1010 crore, down 22% year-on-year with a healthy conversion ratio (cash flow from operations/ Ebitda) of 84%."
To be sure, the VBL stock seems to be factoring a good number of these positives. After all, the shares are just around 6% lower from their annual highs of ₹1055 per share seen on 2 March. Investors now await the next phase of growth. VBL’s shares trade at around 30 times estimated CY22 earnings per share.
According to Kotak, “Recovery of volumes, share gain opportunity in South/West, sustained cost savings and financial leverage benefits augur well for strong 31% earnings compound annual growth rate over CY2019-22E."
Motilal Oswal expects strong demand traction over the next few years. Some factors that would drive this growth include increasing penetration in the newly acquired regions (South and West India) on the back of a robust distribution network, diversifying product portfolio, and greater refrigerator penetration in rural/and semi-rural areas.
