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Informist, Tuesday, Jul 30, 2024

 

By Avishek Rakshit

 

KOLKATA – Despite posting volume-driven growth in the Apr-Jun period, Varun Beverages Ltd missed the Street's estimates on its consolidated net profit, but surpassed the projections for consolidated revenue and volume growth.

 

The company, which is the franchisee for Pepsico Inc's products in India and parts of Africa, posted a 26% on-year growth in consolidated net profit at 12.5 bln rupees, as against the Street's estimates of 12.8 bln rupees. The consolidated topline grew 28.7% year-on-year to 73.3 bln rupees as compared to the Street's projection of 71.9 bln rupees.

 

Its consolidated sales volume also beat the Street's projections. Against an estimated volume growth of 27% on year at 401 mln cases, as estimated by some sector analysts, Varun Beverages' sales volume grew by 28.1% to touch 401.6 mln cases. Sales volumes in India grew by 22.9%, while international volumes, namely in Africa, was almost flat.

 

The stagnancy in Africa was primarily on account of sales volumes in Zimbabwe getting negatively affected, due to a portfolio transition to zero-sugar products. However, in India, a strong summer season, and increasing distribution network, backed by capacity expansion supported volume growth.

 

Although the company surpassed the Street's estimates for revenue and sales volume, higher finance cost to fund its global expansion, and rising employee costs hit the net profit, leading to the company missing the Street view.

 

Its outgo on employee benefits rose by 36.9% on year to nearly 5 bln rupees, and finance cost escalated by 86.2% on year to 1.3 bln rupees. Raw material costs also rose by 29.5% on year to 28.7 bln rupees. These cost overheads, and some others, led to Varun Beverages' total expenses increasing by nearly 29% on year to 57.1 bln rupees.

 

The company follows Jan-Dec as its financial year.

 

The company's earnings before interest, tax, depreciation, and amortisation increased by 31.8% on year to 19.9 bln rupees, as against the Street's expectations of 19.8 bln rupees. Its gross margins also improved by 222 basis points on year to 54.7%, from 52.5%, primarily due to timely procurement and storage of some polyethylene terephthalate chips to avail pricing benefits.

 

The company is reducing sugar content in its products, and is making its packages of lighter weight. The gross margin also helped the EBITDA margin, which improved by 74 basis points year-on-year to 27.7%.

 

"We are excited to announce further expansion in our partnership with PepsiCo, having entered into an exclusive snacks franchising appointment to manufacture, distribute, and sell 'Simba Munchiez' in Zimbabwe by October 2025 and in Zambia by April 2026," Ravi Jaipuria, chairman at Varun Beverages said in a statement.

 

"This follows our recent announcement to manufacture and package Cheetos in Morocco by May 2025. These agreements complement our existing distribution of PepsiCo's portfolio, marking another significant step forward in our strong, symbiotic partnership."

 

The Simba Munchiez franchising deal was struck between the subsidiaries of Varun Beverages--Varun Foods (Zimbabwe) Ltd, and Varun Beverages (Zambia) Ltd, and Dubai-based Premier Nutrition Trading LLC, which is a subsidiary of PepsiCo. The deal also includes manufacturing and distribution of the Simba Munchiez brand of snacks in Zimbabwe and Zambia. Varun Beverages is expected to invest around $7 mln to set up manufacturing capacities in Zimbabwe and Zambia.

 

Jaipuria said the company is on track to deliver healthy double-digit growth in this calendar year, and is banking its hopes on India, which he said, remains a high-demand market with massive growth potential, driven by a growing consuming class and a young population.

 

"To capitalise on this demand, we are focused on further strengthening our infrastructure, distribution network, and product portfolio. With a focus on strategic growth and leveraging new opportunities in both India and international markets, we are confident in our ability to deliver sustainable value to all stakeholders," he said in the statement.

 

However, shares of Varun Beverages fell after the results and optimistic financial guidance given by its chairman.

 

The company's board today recommended a sub-division or split of existing equity shares of the company from one equity share having face value of 5 rupees each, into such number of equity shares having face value of 2 rupees each. It also declared an interim dividend of 1.25 rupees per share which will result in an outflow of 1.6 bln rupees.

 

Although Varun Beverages is bullish on its growth prospects in Africa, a section of investors are concerned about the growth prospects in the region. A sector analyst tracking the company said that the African region is having low population growth, which may restrict the addressable market for Varun Beverages. The currency depreciation issue, and high borrowing costs in Africa, and the inflationary economy are also concerns among investors for the short-medium term.

 

Following the board's decision made public and announcement of its financial results, the company's scrip tanked on the bourses. At 1514 IST, shares of the company were down 6.5% at 1,576.85 rupees on the National Stock Exchange.  End

 

IST, or Indian Standard Time, is five-and-a-half hours ahead of GMT

 

Edited by Aditya Sakorkar

 

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