2nd  Feb , 2011     
  
Varun Beverages Ltd AVOID   BP WEALTH

IPO Note 26th Oct, 2016

Company Overview: Varun beverage is bottler and largest distributer of PepsiCo outside USA,
the company is promoted by Ravi Jaipuria. The company is associated with PepsiCo since 1990.
VBL has distribution rights of CSD & NCBs for north and east India, also company has acquired
Issue Details
rights to sell PepsiCo products in Sri Lanka, Nepal and some African countries. VBL also has fran- Offer Period 26 to 28 October
chise for distribution of Ole brand for Sri Lanka. The company is having 562(sales more than 5 lac 2016
liters) primary distributors in India and 415 distributors in international operations. VBL has turnover
Price Band 440-445
of 3394 cr, with bulk of sales in H1 of year.
Bid Lot (No. 33
Objectives: The issue comprises of fresh issue of shares by VBL and OFS by existing minority Shares)
shareholders. The key objectives of issue are Listing NSE,BSE
Repayment or scheduled repayment of a portion of outstanding indebtedness availed by Company;
and general corporate purposes.  Issue Size (Rs mn) 11100

Investment Rationale Issue Size (Sh mn) 25

Strategically located large and technologically advanced production capabilities
Face Value (Rs) 10
VBL operates 16 production facilities across India and five production facilities in international li-
censed territories. As of June 30, 2016, it had an estimated aggregate annual production capacity
of 3,438.38 million litres(equivalent to 605.56 million unit cases) in India and an estimated aggre- Issue Structure
gate annual production capacity of 991.57 million litres (equivalent to 174.63 million unit cases) in
our international production facilities. These 16 production facilities also include the Satharia – 2 QIB 12,250,000
production facility which company recently acquired from its co-packer in September 2016. As a
result of this acquisition, they have been able to improve control on the quality of products and it
has also enabled to reduce conversion charges of buying from a co-packer. The use advanced NIB 3,675,000
machinery and production techniques in its manufacturing process for water treatment, packing etc.
production facilities. These techniques enable us to improve production efficiencies and reduce
personnel costs. In Fiscal 2013, 2014, 2015, and in the six months ended June 30, 2016, VBL in- Retail 8,575,000
curred capital expenditure of 6,415.92 million, 2,161.76 million, 15,324.85 million and
5,671.71 million, respectively, primarily in connection with property, plant and equipment, in order to
increase production capacities and modernize its production facilities, as well as on visi-coolers and Kotak Mahindra
other chilling equipment placed with retailers and other points of sale. Capital ltd, Axis
Capital, CLSA,
BRLMs YES secutities
Integrated sales and distribution network that ensures effective market penetration
VBL has wide spread and integrated sales and distribution network enables it to reach a wide range
of consumers and ensure effective market penetration. Points of sale for its products include tradi-
tional retail points, such as grocery stores, as well as modern retail outlets including e-commerce, Registrar Karvy computer
supermarkets, hypermarkets, convenience stores, bars and restaurants. As of June 30, 2016, com- share
pany’s distribution network in India included 60 depots and 1,438 delivery vehicles. As of June 30,
2016, VBL had 562 primary distributors (i.e., distributors that recorded sales in excess of 0.5 million
litres of our PepsiCo beverages in the 12 months ended June 30, 2016) in India and 415 distribu-
tors in its international operations. The 562 primary distributors in India accounted for 74.36% of Share Holding Pattern  (%) 
aggregate Sales Volumes in India in the 12 months ended June 30, 2016. The distribution network
covers urban, semi-urban and rural markets, targeting a wide range of consumers. VBL has also Particulars Pre- *Post-
developed an extensive distribution network in its international markets which as of June 30, 2016 issue % issue %
included 20 depots and 518 delivery vehicles. The distribution network is strategically located to Promoter 86.35 73.73
maximize market penetration across the licensed sub-territories in India, with an increased focus on
higher growth markets such as semi-urban and rural sub-territories. The company has over the Others 13.65 26.27
years successfully managed its large distribution network and developed strong supply and distribu- Total 100 100
tion chain relationships across licensed sub-territories in India.
(*Assuming issue subscribed at higher band)
Creating value through alignment with PepsiCo
PepsiCo owns some of the most visible soft drink brands in India (Source: Euromonitor Report).
PepsiCo CSD brands produced and sold by us include Pepsi, Diet Pepsi, Seven-Up, Mirinda Or-
ange, Mirinda Lemon, Mountain Dew, Mountain Dew Game Fuel, Seven-Up Nimbooz Masala
Soda, Seven-Up Revive, and Evervess. PepsiCo NCB brands produced and sold by us include
Tropicana Slice, Tropicana Frutz (Lychee, Apple and Mango), Nimbooz as well as packaged drink-
ing water under the brand Aquafina. VBL’s operations benefit from its long association with Pep-
siCo, including access to modern technology, marketing leverage, operational know-how, industry
best practices, access to raw materials and equipment at competitive prices as well as access to
experienced personnel. The company has developed a strategic and operational alignment with
PepsiCo across all functions and organization levels.

Research Team
022-61596406
 B P W E A LT H

Varun Beverages ltd

Key Risks
⇒ The company doesn’t own the brand and is not having any control over both selling price and
purchase price of concentrate; these prices are decided by PepsiCo only.

⇒ VBL has to constantly carry on capex which further lowers FCF generation.

⇒ PepsiCo has been losing market share in CSD segment which will directly affect VBL revenues
as this segment has highest contribution to revenues.

⇒ VBL has no presence full fruit juices(100% fruit) which is fastest growing category.

Outlook & Valuation

VBL issue at upper price band of 445 post equity dilution arrives 94 times CY15 earning which ap-
pears to be over-valued for the company which lacks pricing power(decided by PepsiCo), has sub-
optimal balance sheet compared to its peers and needs constant capex to drive volumes which
further keeps Free cash flow under pressure. Hence we give AVOID rating for the IPO on basis of
weaker business model and high valuations.

Income Statement (mn)

Particulars CY12 CY13 CY14 CY15

Revenue
Revenue from operations 18,000 21,151 25,024 33,941
Total revenue 18,000 21,151 25,024 33,941
Expenses
Cost of materials consumed 9,732 11,503 13,162 14,253
Purchase of traded goods 513 574 597 3,202
Changes in inventories of finished goods, work-inprogress and
traded goods 33 (85) 2 (290)
Employee benefit expenses 1,524 1,830 2,168 3,238
Other expenses 3,917 4,418 5,250 7,199
Total Operating expenses 15,720 18,240 21,179 27,601
EBITDA 2,280 2,911 3,845 6,341
Depreciation and amortisation expense 1,358 1,844 2,101 3,174
Other income 442 174 147 143
EBIT 1,364 1,241 1,892 3,309
Finance costs 1,156 1,697 1,854 1,688
Exceptional Item - - -
PBT 208 (456) 38 1,621
Current tax 102 59 187 530
Minimum alternate tax credit entitlement (89) (121) (468)
Deferred tax (56) (111) 181 704
Total Tax expense (43) (52) 248 766
PAT (excl Minority Interest) 251 (404) (210) 855
Less: Share of Minority interest 11 13 8 9
Profit for the Period/ Year 241 (416) (219) 846
Diluted EPS 1.4 (2.5) (1.3) 5.1

Institutional Research BP Equities Pvt. Limited (www .bpw ealth.com) 7/12/2015

 B P W E A LT H

Varun Beverages ltd

Balance Sheet (mn)

Particulars CY12 CY13 CY14 CY15
Liabilities
Share Capital 268 1,338 3,338 5,838
Reserves and surplus 1,449 416 93 885
Net worth 1,716 1,754 3,431 6,723
Minority interest
Total Debt 17,013 20,328  21,387  18,319 
Long-Term Provisions 138 176 259 440
Other long term liabilites 352 314 111 6,363
Deferred tax liabilities 725 638 812 1,512
Total liabilities 19,944 23,210 26,000 33,357
Assets
Tangible Assets 16,838 22,157 22,132 31,057
Intangible Assets 194 1,493 1,321 3,839
Goodwill on consolidation 95 95 95 95
Capital work in Progress 1,893 274 248 379
Intangible assets under development -
Non-current investments 0 9 18 33
Deferred tax assets (net) 13 38 34 27
Source: BP Equities,
Long-Term RHPAdvances
Loans and 644 369 446 1,190
Other non-current assets 25 21 68 50
Total fixed assets
Balance Sheet (Rs.19,704
Mn) 24,457 24,361 36,670
Inventory 2,306 2,464 2,893 4,247
Trade Receivables 907 652 973 979
Cash and Bank Balances 384 509 344 581
Short-Term Loans and Advances 2,198 1,709 1,251 1,804
Other current assets 50 102 108 94
Total Current Asset 5,844 5,436 5,569 7,704
Less:Current Liabilities 8,988 9,660 12,035 13,542
Net Current Assets (3,144) (4,223) (6,466) (5,838)
Total assets 16,560 20,234 17,895 30,833

Source: BP Equities, RHP

Cash Flow statement (mn)

Particulars CY12 CY13 CY14 CY15

Cash Flow from operating activities 2,804 2,971 4,309 5,598

Cash flow from investing activities (5,066) (5,736) (5,000) (2,916)

Cash flow from financing activities 2,292 2,743 577 (2,490)

Net increase/(decrease) in cash and cash equivalents 31 (22) (114) 191

Cash and cash equivalents at the beginning of the period 157 187 165 157

Cash and cash equivalents at the end of the period 187 165 52 348

Source: BP Equities, RHP

Institutional Research BP Equities Pvt. Limited (www .bpw ealth.com) 7/12/2015

 BP WEALTH

Research Desk Tel: +91 22 61596406

Institutional Sales Desk Tel: +91 22 61596403/04/05

Disclaimer Appendix

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