India's 'Cola King' Ravi Jaipuria Taps Global Markets To Unlock Growth 2.0

Ravi Jaipuria, billionaire business magnate and chairman of the diversified RJ Corp., is planning to bolster his empire’s presence outside India in a bid to unlock the next phase of growth for two of its biggest assets.

As part of his global ambitions, two major international deals were struck just a day apart—one in the beverages space and the other in food.

Varun Beverages Ltd., which is the second largest bottling partner for PepsiCo Inc.'s soft drink brands outside the U.S., announced its entry into the South African market through acquisition of The Beverage Company (Proprietary) Ltd., or BevCo, and its subsidiaries for Rs 1,320 crore.

Separately, Devyani International Ltd., which is India's largest franchisee of Yum! Brands and operates KFC and Pizza Hut outlets, is set to expand in Thailand, through a share purchase agreement to acquire controlling interest in Restaurants Development Co.—a KFC franchise partner.

The consideration for the acquisition is Rs 1,066 crore, which will be funded through a combination of equity investment by Devyani (Rs 341 crore), Temasek Holdings Advisors India Pvt. (Rs 328 crore), a local Thai partner (Rs 11.9 crore) and local debt.

The two strategic buyouts have cheered investors. Shares of the Pepsi India bottler was the top gainer on the Nifty FMCG, rising 18% to hit a fresh 52-week high, following the announcement of the deal. In fact, the stock has risen 95% so far this year, boosting Jaipuria's fortune by over $5 billion to $13.7 billion, according to the Bloomberg Billionaires Index.

The stellar rally over the past few days saw Varun Beverages' market capitalisation jump to more than Rs 1.68 lakh crore.

A majority of his fortune is derived from his stake in Varun Beverages, the company named after his son; followed by its second biggest asset—Devyani International—named after his daughter. As of July, Jaipuria owns about 64% stake in VBL and 63% in DIL directly and through RJ Corp.

Of the two deals, analysts are cautious about Devyani's Thailand foray, while Varun Beverages' acquisition is seen as a step in the right direction to unlock value.

Jaipuria's decision to globalise with two of its biggest assets marks the resurgence of Indian consumer goods firms flexing their global muscle in acquisitions.

Over the last decade till the pandemic hit, a host of companies including Godrej Consumer Products Ltd., Marico Ltd., Tata Consumer Products Ltd., Dabur India Ltd. as well as Emami Ltd. tapped overseas markets and bolstered their presence in West Asia, Africa, Latin America and south-east Asia, which in turn helped them to hedge weak demand on their home turf. Today, the international markets contribute 20-50% of sales for these domestic FMCG companies. In FY23, their international business grew 6-25% as against India's 4-10% growth. Tata Consumer, however, was an exception with its domestic business growth outpacing international due to geopolitical tensions and decadal-high inflation hurting demand.

In a bid to replicate its success at home, Varun Beverages has been on the prowl for acquisitions abroad for quite some time.

Before the BevCo deal, VBL had incorporated a wholly owned subsidiary in Johannesburg, South Africa, in May this year to explore the business of manufacturing and distribution of beverages, after the management felt it was a large market that they could target for expansion outside of India.

According to the company, the acquisition has plenty of positives—a large market with favourable demographics, a ready capacity network and access to half of South Africa's beverage market share through BevCo's own brands.

South Africa is among the largest soft drinks market in Africa, with a per capita carbonated soft drinks consumption of 244 bottles per year, much higher than India, according to VBL's investor presentation. The market growth, however, has been tepid at 3.1% CAGR, in the last five years.

Namibia and Botswana, for which BevCo already has distribution rights, also have high per capita consumption at 155-260 bottles per year.

The rising affluence of South African households would result in a market growth at a CAGR of 5.3% in the next five years, the presentation showed.

The deal will help fructify VBL's plans to cater to the growing demand for beverages in the African nation. BevCo's existing distribution network can further facilitate faster and broader penetration of VBL's products.

Analysts concurred. They see the acquisition as part of VBL's efforts to scale up PepsiCo brands in South Africa, which currently has less than 5% share, to take on its peer Coca-Cola, with its lion's share of 45%.

Besides, a dedicated focus on PepsiCo brands should also be margin-accretive and presents a 5-7 times value creation opportunity, said analysts.

VBL would likely focus on PepsiCo's brands in a bid to better operating margin despite royalty (concentrate price) payouts, Jefferies said.

That's because the India experience suggests making money in own brands is always tough, as they fail to see brand pull, the brokerage said. BevCo adds 7% and 15% in terms of consolidated Ebitda and volume, respectively, it said.

"VBL already has operations in Zambia and Zimbabwe, which are geographically closer to South Africa, which will lead to the benefit of operating efficiency and economies of scale," according to KR Choksey.

VBL is also setting up a greenfield plant in the Democratic Republic of Congo, with an annual capacity of 35-40 million cases. The plant will be ready for production by April-May 2024, according to the company.

"Operating in South Africa will also help to reduce seasonality for VBL, as the summers in South Africa are from November-January, which is the off-season for beverages in India," it said.

VBL has been able to register strong growth as compared with other FMCG players, mainly due to the aggressive expansion of its go-to market and distribution reach. Its demonstrated strength in distribution capabilities beyond Indian markets may help it increase market share in South Africa too, analysts said.

Varun Beverages now has over 50% share in the relatively new territories it has entered—Zimbabwe and Nepal—despite starting from scratch.

Nepal has seen consistent trends with an 11% top-line CAGR over CY18-22, despite pandemic-led disruptions. In Zimbabwe, it has grown strongly at a 21% CAGR over CY18-22. "VBL’s best-in-class execution strengths give us confidence of share gains in South Africa as well," said Emkay Global Financial Services Ltd.

The BevCo buyout has the potential to add at least 10% incremental revenue to Varun Beverages in 2025, as the proposed acquisition will be completed sometime in the second half of next year, KR Choksey said.

Emkay also highlighted that PepsiCo’s wider product portfolio offers a key advantage: energy drinks contribute a healthy value share of 14% in South Africa (versus less than 10% in India), which suggests strong demand for the category in Africa. PepsiCo has built a robust energy drinks portfolio via the acquisition of Rockstar, its partnership with Starbucks/Bang in the U.S., and through organic investments in Mountain Dew/Sting.

"We reckon that a broad-based energy drinks portfolio across price points should help PepsiCo gain traction in this category in South Africa," it said.

The acquisition of BevCo also provides a much-needed thrust to expand VBL's businesses beyond PepsiCo, according to Preeyam Tolia, research analyst at Axis Securities Ltd. These include segments such as energy drinks led by the Sting brand, sports drink Gatorade, value-added dairy and juices. "These would be key growth drivers for the company in the coming years."

Devyani International sees a strong opportunity in the Thai market, where KFC is the market leader with around 1,000 stores, which is four times the next competitor—McDonald's. The expansion follows a consumption slowdown in India, especially for its pizza business, putting pressure on profitability.

The deal valuation looks attractive, according to Jefferies. "We, however, would have liked an India growth effort instead and hope this does not kick-start overseas M&As."

The brokerage expects Restaurants Development to add 35-40% to Devyani's revenue and Ebitda. Although this would be 14-19% on economic interest basis, routed via minority interest.

Opportunity In Thailand Market

• Thailand has a population of 70 million, with an upper-middle income economy, strong and persistent urbanisation and steadily rising per capita income.

• Poultry is the largest contributor to the country’s meat consumption basket.

• Tourism, being a strong contributor to the Thailand economy, there is a high incidence of out-of-home food consumption, which benefits QSR.

• For Restaurants Development, average daily sales per store was Rs 1.5 lakh pre-Covid (FY20), which dipped to Rs 1.1 lakh in FY22 and has recovered to Rs 1.37 lakh in the first half of FY24, which is also higher than the Rs 1.13 lakh clocked by Devyani's KFC business. There is scope for further recovery, as tourist arrivals in Thailand, especially from China, are yet to fully recover.

"An acquisition in the Indian market would have commanded a premium valuation as the QSRs are trading at a higher multiple of 30-35 times EV/Ebitda," says Karan Taurani, analyst at Elara Securities (India) Pvt. As such, an international acquisition seems fitting, he said.

Restaurants Development has earlier explored to sell the KFC business at around $300 million, but the process was shelved due to Covid. DIL has acquired the company at a more reasonable valuation of $130 million. With an acquisition valuation of 0.9 times FY23 EV/sales and 8 times FY23 EV/Ebitda, the deal is at a significant discount to Devyani's own valuations of 7 times FY23 EV/sales and 50 times EV/Ebitda.

But the quantum of boost to Devyani’s consolidated earnings remains to be seen. This is because Restaurants Development’s brand contribution to margin—a measure of profitability—in the first half of FY24 stood at 14.4%, which is lower as compared with 20.3% clocked by Devyani International.