Release Date: July 30, 2024
For the complete transcript of the earnings call, please refer to the full earnings call transcript.
Positive Points
- Varun Beverages Ltd (NSE:VBL, Financial) reported a robust consolidated sales volume growth of 28.1% for Q2 2024, driven by a 22.9% increase in India.
- The company has expanded its partnership with PepsiCo, securing exclusive snack franchising agreements in Zimbabwe, Zambia, and Morocco.
- Commercial production of carbonated soft drinks and packaged drinking water has commenced at the new greenfield facility in DRC, representing a significant growth opportunity.
- Gross margins improved by 222 basis points to 54.7%, attributed to timely procurement of PET chips and ongoing focus on reducing sugar content and lightweight packaging.
- The Board of Directors approved an interim dividend of 25% of the face value of INR 5 per share and recommended a stock split to enhance retail participation.
Negative Points
- International markets remained relatively flat, with African markets experiencing a seasonally weak quarter.
- Finance costs increased by 86.2% due to new production facilities, the acquisition of Banco, and higher borrowing costs.
- Depreciation rose by 41% in Q2 2024, driven by new production facilities and the acquisition of Banco.
- Net debt increased to INR 58,808 million as of June 30, 2024, up from INR 45,000 million as of December 31, 2023, due to significant CapEx and acquisitions.
- Working capital days increased to approximately 33 days as of June 30, 2024, from around 21 days as of June 30, 2023, due to strategic purchasing and inorganic expansion.
Q & A Highlights
Q: Can you give us a sense of how growth has panned out in 2Q, especially since we had a very strong calendar 2Q? How did the various subsegments perform, particularly energy and CSD?
A: Our Q2 growth was close to 23% in India, which is very healthy. We have increased growth in juice and CSD, while deliberately keeping water sales low due to lower margins. The outlook remains healthy going forward.
Q: On the new snacking opportunity, what are the margin levels compared to beverages?
A: The margins for snack foods are quite healthy and better than beverages. We are running at a very healthy margin of 27-28% EBITDA overall.
Q: With respect to expanding the snack portfolio in India, is there a chance of launching our own brands?
A: We would not like to do that as it would not make our parent company happy. We are getting full support from PepsiCo, especially in African countries.
Q: On the water business, have you seen an impact due to less out-of-home travel?
A: Yes, there is an effect due to high temperatures reducing market traffic. We are also not pushing water sales aggressively.
Q: Can you provide guidance on the expected growth for the second half of the year?
A: We see no reason why we should not achieve double-digit growth. The seasonality in South and West India is flat, and African markets are expected to contribute significantly in the fourth quarter.
Q: What are the pros and cons of expanding in Africa, given the challenges like currency fluctuation and low per capita income?
A: The per capita consumption in Africa is significantly higher than in India. Population growth is also strong. We see huge potential and have been successful in gaining market share and improving margins.
Q: Can you give some guidance on the expected sales from the snack business in the next couple of years?
A: We can look at close to $100 million in volume from the three countries we are currently focusing on. The snack market is lucrative with lower CapEx and higher turnovers.
Q: How much CapEx should we expect in the next six months?
A: We expect to incur about 1,200 to 1,300 crores for the season of 2025, with around 200 crores already incurred. The total CapEx for the next six months will be approximately 4,000 crores.
Q: What is the market share of Varun Beverages in Africa?
A: Market share varies by country. In Zimbabwe, we finished at 71% last year, 35% in Zambia, and 30% in Morocco. South Africa has a low single-digit market share.
Q: How are you planning to comply with the regulation requiring 30% recycled PET content by April 2025?
A: Our joint venture plant will be operational next year, which will be sufficient to meet the 30% requirement. The cost impact is minimal as recycled PET chip prices are close to original PET chip prices.
For the complete transcript of the earnings call, please refer to the full earnings call transcript.
