How Varun Beverages Is Defying FMCG Sector Gloom To Grow

A prolonged slowdown in rural demand due to tough macroeconomic conditions and weak consumer sentiment have jammed the growth engine of the fast-moving consumer goods industry.

But Varun Beverages Ltd.—the country's largest bottler of PepsiCo.— bucked the slowdown trend, delivering a healthy volume growth of 14% in 2023, according to an exchange filing on Monday.

It sold 914 million cases of non-alcoholic beverages last year, when demand was impacted by rain in the peak season. The volume growth was fastest in the carbonated soft drinks category, led by Sting Energy drink.

The volume rose 17% in 2023 and 25% in a seasonally low December quarter, raising hopes of an even stronger performance this year as demand revives.

But, what is leading to this runaway growth? The VBL management said they are reaping the benefits of three things: increased penetration in newly acquired territories, continued expansion in capacity, and distribution reach, and higher acceptance of newly launched products.

The company invested steadily, even in a bad year, so that they have the capacity to take advantage of a potential upside in demand in 2024.

In 2023, the net capital expenditure amounted to Rs 2,100 crore, including addition of greenfield plants in Madhya Pradesh and Rajasthan with investments of Rs 850 crore, brownfield expansion for Rs 800 crore and land purchases worth Rs 150 crore for future capacity, according to the company. VBL will also add greenfield facilities in Uttar Pradesh and Odisha this year.

The new plants will add 45% to the peak month capacity over the levels in 2023. Apart from Rs 2,400 crore in capital works-in-progress as of December, VBL plans to spend an additional Rs 1,200 crore towards capacity expansion, taking the total capex to Rs 3,600 crore for 2024.

If these accelerated investments are any indication, VBL is clearly betting big on the country's consumption growth story. This comes at a time when Indians are losing appetite for fast food like pizzas and burgers and are also scrimping their budgets or trading down to cheaper groceries in the face of high inflation, as reflected in the FMCG firms' earnings.

Higher investments resulted in a net debt of Rs 4,730 crore in the year gone by, a 38% jump from Rs 3,400 crore in 2022. However, despite the capex push, the company's debt-to-equity ratio is improving, it said in a post-earnings briefing.

The debt-to-equity ratio reduced to 0.67 times from 1.3 times. It expects to maintain this ratio, even after the South Africa consolidation, as the capacity that is being created will generate profit to offset the debt.

The management said there is enough room for further distribution expansion to drive growth, especially in energy drinks. The company expects "strong" growth in sport drink Gatorade, juice, and value-added dairy segment as the production capacity has tripled.

The share of the dairy business is just 0.5% of the total volume and the company expects to double this in 2024. Currently, the dairy plant is just within north India. Now, VBL has commissioned a plant in the western region and will be soon setting up a plant in the eastern market, the management said. The juice segment is also expected to grow faster than the company growth rate.

VBL plans to add 4–5 lakh outlets per year. It has massive headroom with 1.2 crore retail outlets in the country, as compared with its current reach of 35 lakh outlets.

In South Africa, PepsiCo market share is only 1.5%, while The Beverage Co. brands' share is 12%, implying that the opportunity to gain share is meaningful, it said. The acquisition process is expected to close by February.

"We expect VBL's growth to sustain well above 20% for the next couple of years with strong margins and return ratios as well," analysts at Systematix Institutional Equities said.

They cautioned that factors like climate conditions in the summer, utilisation ramp-up of new capacities and extent of aggression from the new entrant—Reliance Industries Ltd.-backed Campa Cola—could pose a risk.