varun beverages ltd share price Management discussions

Economic Overview & Outlook

Global Economy

The global economy is experiencing a slowdown in CY 2022 due to a combination of factors, including the ongoing effects of COVID-19, tightening financial conditions, higher-than-average inflation, and the ongoing Russia and Ukraine war. This has resulted in a forecasted decrease in global growth from 6.0% in CY 2021 to 3.2% in CY 2022. As the global economy continues to face these challenges in 2023, growth is projected to slow further to 2.7%, marking one of the weakest growth profiles since 2001, with the exception of the global financial crisis and the acute phase of the COVID-19 pandemic. The outlook for the global economy in 2023 remains uncertain as the world continues to navigate the ongoing challenges caused by the pandemic.

Source: IMF – World Economic Overview: Oct 2022

Indian Economy

The Indian economy has demonstrated tremendous resilienceinthefaceofachallengingexternalenvironment. Despite the impact of a tightening global monetary policy cycle, slowing global growth and elevated commodity prices, the economy is relatively well-positioned to weather global headwinds compared to most other emerging markets. India is expected to remain one of the fastest-growing major economies in the world due to robust domestic demand. The World Bank has revised its 2022-23 GDP forecast upward to 6.9% from 6.5%, reflecting a strong performance in the second quarter of 2022-23 financial year. Indias economy is relatively insulated from global spillovers due to its large domestic market and limited exposure to international trade flows. Despite some challenges, the outlook for Indias economy remains positive.

Source: World Bank – India Development Update – November 2022

Soft Drinks Market Overview & Outlook

In CY 2022, the domestic soft drinks industry experienced a year of robust growth, following two years of impact from the Covid-19 pandemic in the key summer season. The industry effectively adapted to changes in consumer behavior and demand brought about by the pandemic and continued to introduce new products in line with evolving consumer tastes and preferences. The resurgence of out-of-home channels and pent-up demand driven by consumers returning to socializing also contributed to the significant increase in demand. Additionally, with a favorable demand environment and strong performance, the market for energy drinks picked up and emerged as a growth category.

The Indian beverages industry presents significant growth opportunities in the future, driven by deeper penetration into rural markets, an expanding demographic profile, and a growing middle-class population. Furthermore, with the growth in per capita income, consumers are willing to spend more on premium and niche products. Urbanization is also playing a significant role in the growth of the industry, as more people move to urban areas and have greater disposable income. The main segments constituting the soft drinks market in India are carbonates, juices, and bottled water. Carbonates is the largest category in value terms.

Soft Drinks – Key Growth Drivers and Opportunities

Indian soft drink market is expected to see significant growth as consumption is steadily anticipated to increase, driven by a variety of factors including:

Positive Demographic Characteristics: India has a large young population with individuals in the age group of 15-64 years making up the majority of the overall population, which creates a sizable workforce to support economic growth. Due to the shifting population demographics, the rising spending power of young consumers, accelerated urbanization, and growing rural consumption, are likely to drive the demand for soft drinks in India.

Rapid Urban Growth and Increasing Earnings: Over 50% of Indias population falls within the working age group, resulting in an increase in disposable income and a shift in spending habits. Furthermore, the growing number of women joining the workforce in India has led to higher family disposable income, which has contributed to increazed consumer spending.

Rise in Average Expenditures Per Household: Over the past 10 years, there has been a significant increase in the average amount spent per household. Indian consumers are spending the majority of their discretionary incomes towards categories beyond basic necessities. Factors such as rising disposable income, evolving consumer preferences and a growing population are driving the demand for beverages.

Rural Development and Electrification: Predictions for the rural areas in India look optimistic with forecasts of good monsoon and improved agro-economic conditions which is a positive sign for the countrys economy as a whole. The increase in electrification in Indian villages along with improved electricity supply will further aid in the penetration of cooling systems in these regions, thereby promoting the expansion of the industry.

Location: A large portion of the Indian population resides in regions with hot, dry, or moderate climates. This will significantly boost the consumption of soft drinks in the coming years.

Innovative Products: The Indian market has a large young population which has been driving the demand for new and unique flavors. To cater to this trend, the industry is continuously focusing on expanding its product offerings and introducing innovative options, such as new and creative flavors. and packaging solutions.

Business Overview – A Key Player in the Beverage Industry

VBLs Presence

Varun Beverages Limited ("VBL" or the "Company") is a key player in Indias beverage industry. The Companys operations span 6 countries – 3 in the Indian Subcontinent (India, Sri Lanka and Nepal), which contributed to ~85% of the net revenues, and 3 in Africa (Morocco, Zambia, Zimbabwe), which contribute to ~15% of net revenues in CY 2022.

Symbiotic Relationship with PepsiCo

The Company enjoys a strategic, symbiotic, and longstanding association with PepsiCo spanning 31 years, since the beverage companys entry in India, accounting for ~90%+ of its sales volumes in India. With its vast manufacturing facilities and established distribution network, VBL manufactures, markets, and distributes PepsiCo-owned products like carbonated soft drinks, carbonated juice-based beverages, juice-based beverages, energy drinks, sports drinks and packaged drinking water.

The various PepsiCo brands manufactured and distributed by VBL include Pepsi, Pepsi Black, Mountain Dew, Sting, Seven-Up, Mirinda Orange, Seven-Up Nimbooz Masala Soda, Evervess, Duke, Slice, Tropicana Juices (100% & Delight), Gatorade, as well as packaged drinking water under the brand Aquafina.

The Company has built a strong sales team that collaborates closely with PepsiCo on local advertizing and marketing campaigns. The Company has also been granted franchise rights for several PepsiCo products in Indias 27 States and 7 Union Territories, as well as Nepal, Sri Lanka, Morocco, Zambia, and Zimbabwe.

Business Model

The Company manufactures and distributes a wide range of carbonated soft drinks ("CSD"), as well as a large selection of non-carbonated beverages ("NCB"), including packaged drinking water. It has a unique business model with end-to-end execution capabilities from manufacturing, distribution and warehousing, customer management, and in-market execution, to managing cash flows and future growth. PepsiCo offers brands, concentrates, and marketing support to VBL. In turn, VBL takes complete control over the manufacturing and supply chain processes, driving market share gains, enhancing cost efficiencies, and managing capital allocation strategies.

VBL has vast experience in managing the distribution of soft drinks, involving complex logistics and packaging of products. While business operations are similar across all markets, each territory and sub-territory has unique operational challenges. These challenges range from reliable electricity supply to refrigeration and cooling equipment to logistics infrastructure as well as demographics and general socioeconomic conditions in the relevant market.

The Company has a solid and well-entrenched distribution network covering urban, semi-urban and rural markets, addressingthedemandsofawiderangeofconsumers.The distribution network is strategically located to maximize market penetration across licensed sub-territories in India. The Companys solid production capabilities and distribution network enables it to effectively respond to competitive pressures, market demand and evolving consumer preferences across targeted territories.

As of December 31, 2022, the Company has 37 state-of-the-art manufacturing facilities (31 in India & 6 in international territories). Further, it has a robust supply chain with 110+ depots, 2,500+ owned vehicles, 2,400+ primary distributors and presently installed 925,000+ visi-coolers across various markets.

Over the years, VBL has expanded its operations in India both organically and in-organically. In-organically it has expanded through the acquisition of additional territories from PepsiCo as well as previously franchized territories. With its committed and knowledgeable sales staff, the Company focuses on driving growth and expanding market share across categories through various customer push strategies in licensed territories. It undertakes local level promotion, in-store activations, customer relation management, merchandizing, individual account management and evaluation of high demand region for strategic placement of vending machines and visi-coolers.

VBL has also implemented several strategic initiatives aimed at enhancing operational excellence such as backward integration of manufacturing processes and centralized raw material sourcing. The Company has established backward integration facilities for production of preforms, crowns, plastic closures, corrugated boxes, corrugated pads, plastic crates and shrink-wrap films in certain facilities to ensure operational efficiencies and high-quality standards.

Key Business Developments – 2022

Commenced commercial production at greenfield facilities

During the year, the Company established the following new manufacturing facilities in India:

A facility in Bihar to manufacture carbonated soft drinks, juice-based drinks and packaged drinking water

A backward integration plant in Jammu & Kashmir to manufacture plastic preforms and closures

A manufacturing line in Kosi Uttar Pradesh for production of Kurkure Puffcorn for PepsiCo

Agreement to distribute & sell "Lays, Doritos and Cheetos" in Morocco

During the year, the Board of Directors approved the proposal for Varun Beverages Morocco SA, a wholly-owned subsidiary of the company, to enter into an agreement to distribute and sell PepsiCos snack products namely "Lays, Doritos and Cheetos" in the territory of Morocco.

Credit Rating

During the year CY 2022, CRISIL (an S&P Global Company) has upgraded the long-term rating for bank loan facilities as CRISIL AA+/Stable from CRISIL AA/Positive and reaffirmed the rating for short-term instruments as CRISIL A1+.

Awards & Accolades

The Company was awarded "Best Bottler in Africa, Middle East and South Asia (AMESA) sector" of the year 2021 by PepsiCo during the year. This annual award recognizes the quality standards, commitment towards sustainability, support to local community, customer service, and volume performance of PepsiCos bottling partners. The award is a testament to VBLs operational expertize, end-to-end execution capabilities, governance practices, and strong performance track record.

In addition, the Company received the following three prestigious Corporate Governance Awards in CY 2022:

Capital Finance International for Best FMCG Corporate Governance India 2022

Business Brand Awards for Best Corporate Governance Practices

CNBC TV18 - Incredible Brands of India Awards for Best Corporate Governance of the Year

Bonus Issue

During the year under review, the Company has issued and allotted 216,516,540 Bonus Equity Shares in the proportion of 1:2 (i.e. one equity share for every two equity shares) to the eligible Members whose names appeared in the Register of Members / list of beneficial owners as on the record date fixed for this purpose.

Dividend Payout

The Companys Board of Directors agreed to formalize a dividend strategy in line with good corporate governance practices with the companys listing in November 2016.

Salient Features –

Endeavor to maintain a dividend payout in the range of 10-30% of annual profit after tax on standalone financials

Consider financial parameters like earnings outlook, future capex requirements, organic growth plans, capital restructuring, debt reduction, cash flows, etc.

Consider external parameters like macroeconomic environment, regulatory changes, technological changes, statutory and contractual restrictions, etc.

For a detailed perspective, please refer to the Companys website at

For CY 2022, in line with the guidelines of dividend policy, the Board of Directors recommended an interim/final dividend of Rs 3.50/- per share, resulting in cash outflow of approx. Rs 2,273 million

Financial Summary

Sales Volume

Total Sales Volumes (MN Unit Cases*)

*A unit case is equal to 5.678 liters of beverage divided in 24 bottles of ~ 237 ml each


Particulars (Rs in Million) CY 2022 CY 2021 YoY (%)
1. Income
(a) Revenue from operations 133,905.58 89,582.91 49.5%
(b) Excise Duty 2,174.16 1,350.61 61.0%
Net Revenues 131,731.42 88,232.30 49.3%
(c) Other income 388.49 679.25 -42.8%
2. Expenses
(a) Cost of materials consumed 64,170.92 39,689.13 61.7%
(b) Purchase of stock-in-trade 1,885.71 1,654.69 14.0%
(c) Changes in inventories of FG, WIP and stock-in-trade (3,445.07) (997.22) -245.5%
(d) Employee benefits expense 12,166.42 10,076.99 20.7%
(e) Finance costs 1,861.22 1,847.00 0.8%
(f) Depreciation, amortization and impairment expense 6,171.89 5,312.62 16.2%
(g) Other expenses 29,072.39 21,262.26 36.7%
Total expenses 111,883.48 78,845.47 41.9%


Particulars (Rs in Million) CY 2022 CY 2021 YoY (%)
EBITDA 27,881.05 16,546.45 68.5%
3. Profit before share of loss of associate and joint venture (1-2)) 20,236.43 10,066.08 101.0%
4. Share of loss of associate and joint venture (0.06) - NA
5. Profit before tax (3+4) 20,236.37 10,066.08 101.0%
6. Tax expense 4,735.23 2,605.56 81.7%
7. Net profit after tax (5-6) 15,501.14 7,460.52 107.8%


Balance Sheet
Particulars (Rs in Million)


Equity and liabilities
(a) Equity share capital


(b)Other equity


(c) Non-controlling interest


Total equity


Non-current liabilities
(a) Financial liabilities
i. Borrowings


ii. Other financial liabilities




(c) Deferred tax liabilities (Net)


(d) Other non-current liabilities


Total non-current liabilities


Current liabilities
(a) Financial liabilities
i. Borrowings


ii. Trade payables


iii. Other financial liabilities


(b) Other current liabilities


(c) Provisions


(d) Current tax liability (Net)


Total current liabilities


Total liabilities


Total equity and liabilities


Particulars (Rs in Million)



Non-current assets
(a) Property, plant and equipment



(b) Capital work in progress



(c) Right of Use of Assets






(e) Other intangible assets



(f) Investment in associates and Joint Venture



(g)Financial assets



(h) Deferred Tax Assets (Net)



(i) Other non-current assets



Total non-current assets



Current assets
(a) Inventories



(b)Financial assets
i. Trade receivables



ii. Cash and cash equivalents



iii. Other bank balances



iv. Others



(c) Current tax assets (Net)



(d) Other current assets



Total current assets



Total assets



Varun Beverages Limited reports its financials on a calendar year basis. Given that the soft drinks business is seasonal, with the bulk of sales occurring during the summer season, it is best to track the Companys performance on an annual basis. Revenues and profits follow a bell-curve with a significant portion accruing in the April-June quarter.

In CY 2022, VBL registered strong performance, with notable growth across all key parameters. The Companys efforts to invest in its business despite the pandemic-induced disruptions during the peak season over the last two years and return to normalcy in daily activities resulted in robust demand, leading to a consolidated sales volume growth of 40.9% year-over-year. The Companys India business saw robust volume growth, and key international markets reported healthy double-digit sales volume growth.

The overall macro-environment was largely supportive and out-of-home consumption saw significant growth, driven by increased travel, reopening of offices, and the general opening up of markets. The Company also set up additional infrastructure and expanded its major distributor network, which supported growth in the underpenetrated South and West regions and enabled VBL to gain a larger share of the growing market.

Net Revenue from operations stood at Rs 131,731.42 million as against Rs 88,232.30 million in CY 2021. Total sales volumes stood at 802 million cases in CY 2022 as compared to 569 million-unit cases in CY 2021. In the domestic market, sales volume stood at 653 million cases as compared to 454 million unit cases in CY 2021. The international business registered a sales volume growth of 30%. CSD constituted 70%, Juice 7%, and Packaged Drinking water 23% of total sales volumes in CY 2022.

Realization per case stood at Rs 164 in CY 2022, driven by a price hike in select SKUs, rationalized discounts/ incentives, and improvement in the mix of smaller SKUs (250ml) especially the energy drink - Sting which has a higher net realization.

During the year, gross margins declined by 180 bps to 52.5% primarily due to a surge in preform prices by more than 30%, despite inflationary pressures in raw material costs, gross margins were minimally impacted during the year due to early stocking of crucial raw materials and an increase in realizations. However, EBITDA still increased by 68.5% to reach Rs 27,881 million YoY. This improvement was driven by a rise in realizations and operating leverage from increased sales volume, which resulted in an improvement in EBITDA margins by 241 basis points to 21.2% in CY 2022.

Depreciation increased by 16.2% to Rs 6,172 million as compared to Rs 5,313 million in CY 2021, on account of capitalization of assets. Finance cost remained almost flat in CY 2022. For CY 2022, PAT grew by 107.8% to Rs 15,501 million driven by high growth in revenue from operations, improvement in margins, and transition to lower tax rate in India.

On the balance sheet front, Net Debt stood at Rs 34,096 million as on December 31, 2022, as against Rs 30,053 million as on December 31, 2021. This increase was due to greenfield expansion in the states of Rajasthan and Madhya Pradesh, as well as brownfield expansion at 6 plants in India for CY 2023.

Debt-to-Equity ratio stood at a healthy level of 0.65x and the Debt to EBITDA ratio stood at 1.23x as on December 31, 2022. During CY 2022, the Company invested in various expansion projects including

Rs 6,300 million primarily for greenfield expansion in Bihar & Jammu and brownfield expansions in India. It also invested for brownfield expansion in Morocco and Zimbabwe. Additionally, it invested, Rs 3,700 million for purchasing land for future capacity expansion. As of December 31, 2022, the Company had a CWIP of approximately Rs 6,066 million for further greenfield expansion in Rajasthan and Madhya Pradesh, and for brownfield expansion at 6 existing plants for CY 2023 in India. The growth-oriented capex will be primarily funded through internal accruals, further reinforcing the companys financial position.

The Company is in the process of further expanding its capacities to meet the higher demand expectations. Its strong distribution model and on-the-ground end-to-end infrastructure facilities continue to be the key growth drivers and VBL remains committed to extending it to newer areas and under-penetrated regions to further boost its market presence.

From an operational standpoint, VBL continues to focus on new product categories in order to stay ahead of market trends and evolving customer preferences. During the year, the Companys energy drink, Sting, performed exceptionally well across various geographical regions. Additionally, the Companys relatively recent launches in the value-added Dairy segment have received positive consumer response.

Overall, VBL is confident in its ability to deliver strong and sustained growth moving forward, owing to the exceptional performance during the year, normalization of the environment, and the expanded capacities to meet the high demand expectations.

Threats, Risks, and Concerns

The risks and opportunities of all corporations are inherent and inseparable elements. Directors and management of the Company take constructive decisions to protect the interests of stakeholders. The Company has in place a Risk Management Policy which is monitored and reviewed under the guidance of the Audit and Risk Management Committee. The Committee comprizes various departmental heads who meet regularly to identify processes exposed to risks, determine risk mitigation strategies, and monitor their implementation.

Risk Description Mitigation
1. Demand Risk A cyclical downturn can lead to a slowdown in the Companys target markets and impact its sales velocity. Over the years, the Company has demonstrated its ability to drive significant growth in sales volumes by aiming to provide the right brand, the right price, the right product, and the right channel. In addition, the business is present in relatively under-penetrated markets with favorable demographics, climatic conditions and the rising population that indicates steady demand growth. Further, its wide range of product portfolio enables it to cater to diverse consumer segments.
2. Business Agreement Risk The Company relies on strategic relationships and agreements with PepsiCo. Termination of agreements or less favorable renewal terms could adversely affect profitability. Over the last three decades, the Company has been partnered with PepsiCo, consolidating its market relationship with them, increasing the number of territories and sub-territories, producing, and distributing a wider range of PepsiCo beverages, adding multiple SKUs into the portfolio, and expanding distribution network. The proven ability of the business to substantially strengthen the market share of PepsiCo enables it to be a reliable partner. The business maintains a symbiotic relationship with PepsiCo, working closely as active development partners, investing in joint projects and business planning with a focus on strategic issues. In 2019, bottling appointment and trademark license agreement for India with PepsiCo India has been extended till April 30, 2039, from October 2, 2022, earlier.
3. Regulatory Risk Regulations on consumer The Company proactively works with PepsiCo, the
health and the risk of the Companys products being targeted for discriminatory tax and packaging waste recovery may adversely impact business. government and the regulatory authorities to ensure that the facts are clearly understood and that its products are not singled out unfairly. VBL adheres to the sustainable manufacturing practices and focuses on environmental issues related to packaging waste recovery / recycling, water management and greenhouse gases emissions. The Company consistently works together with stakeholders to establish sustainability solutions that focus on protecting the environment, including NGOs and the communities in which it operates. PepsiCos strategy of introducing healthier and zero sugar variant of products also augur well for the Companys future. The Company has undertaken certain sustainability initiatives such as engagement of GEM Enviro Management Pvt. Ltd. for phased implementation of 100% recycling of used PET bottles and Deutsch Quality Systems (India) Private Limited for Companys water footprint assurance, and for measurement and improvement of Companys carbon footprint.
4. Business Viability Risk The inability to integrate the operations or leverage potential operating and cost efficiencies from the newly-acquired territories and sub-territories may adversely affect the Companys business and future financial performance. The clear strategy and financial requirements of VBL ensure that all future acquisitions or collaborations are value-added and in compliance with the acquisition guidelines of the Board. The Company also spends considerable management time and financial resources to ensure the performance of the newly- acquired activities, develop local market strategies (including for possible cultural and language barriers), and assimilate business practices to ensure business viability.
5. Consumer Preference Risk Failure to adapt to changing consumer health trends and address misconceptions about the health effects of soft drink consumption may adversely affect demand. In order to remain relevant, VBLs sales team works closely with PepsiCo to assess evolving consumer habits and continually concentrate on product innovation and increasing product range. In addition, the new product plan of PepsiCo lays more emphasis on healthy products with zero / limited calorie and sugar content.
6. Raw Material Risk An interruption in the supply or significant increase in the price of raw materials or packaging materials may adversely affect the Companys business prospects, results of operations and financial condition. An integral part of VBLs strategy is to maximize cost efficiencies, focus on actively reducing the cost of goods sold, minimizing operating expenses efficiently and increasing cash flows. Hence, the business has pursued significant programs for this purpose, including backward integration and consolidated sourcing of materials. It also leverages on its scale of operations to achieve better bargaining power with suppliers resulting in better working capital management. The Company is focused on optimally utilizing its assets to help achieve higher operating efficiency and to amortize overheads costs on a wider case. In addition, the Company continues to invest in innovative solutions to boost operational efficiencies and work processes in its activities, ensuring consolidated operational data from production, scheduled sourcing, and superior monitoring of the supply of goods from manufacturers to the retail point of sale.

Human Resources

As of December 31, 2022, VBL has a total workforce of 11,500+ full-time employees from around the world (8,600+ in India and 2,900+ in overseas subsidiaries). Consistent with every other aspect of its business strategy, the Company recognizes the value of talent within the organization to fuel future growth and progress. The Company has always laid great emphasis on training employees, improving their skill levels, and fostering long-term employee involvement. VBL provides in-house training for employees through skill development initiatives and career development opportunities at all levels and across all functions. Key employees are also engaged in PepsiCos management and staff enhancement initiatives as well as in Indias leading management institutions.

Risk Management, Audit and Internal Control System

The Company has well-equipped and effective internal control systems in place that match the scale of its sector and the complexity of the market it operates in. Such stringent and detailed controls ensure the effective and productive use of resources to the degree that the Companys assets and interests are safeguarded, transactions are approved, registered, and properly reported, with checks and balances that guarantee reliability and consistency of accounting data. The Audit, Risk Management, and Ethics Committee is undertaking a comprehensive system of internal audits and periodic assessments to ensure compliance with best practices. The Company has employed Walker Chandiok & Co. LLP, Chartered Accountants & M/s O.P. Bagla & Co. LLP, Chartered Accountants, as the Joint Statutory Auditors of the Company to report on the financial controls of the Company.