What's driving PepsiCo India bottling partner Varun Beverages' stupendous growth story?

In 1996, when Varun Beverages Ltd (VBL) started its operations in Rajasthan’s capital Jaipur, it was a small city that aspired to become a metropolis. Like the city, Ravi Jaipuria—the Founder and Chairman of VBL—had bet on the country’s newly liberalised economy, which promised a glorious future. Two and a half decades later, Jaipuria’s VBL has not only established itself as one of the leading bottlers in the country, its future today looks more promising than ever before. Its home, Jaipur, too, has transformed itself and has more than doubled its population.

Over the years, VBL has steadily grown to become a top bottler of fizzy and non-aerated drinks, and it has raced past its rivals in the fast moving consumer goods space. In FY23, VBL’s total income surged 49 per cent year-on-year to Rs 13,212 crore—up from Rs 8,891 crore in FY22—while its profit after tax (PAT) jumped 108 per cent YoY to Rs 1,550 crore in FY23, from Rs 746 crore in the previous financial year. As a result, in the one-year period between October 2022 and September 2023, VBL’s average market capitalisation jumped a whopping 97.8 per cent over the previous year to Rs 93,515 crore. And VBL, which was at No. 103 on the BT500 list in 2022, shot up to No. 57 in the 2023 edition.

Today, Jaipuria’s crown jewel is not just one of the top bottlers in the country, it is also the only Indian company to feature among the largest bottlers in the world for the American cola giant PepsiCo, and not without reason. VBL has been growing steadily for years, keeping pace with Indians’ thirst for branded colas, juices and packaged drinking water. But the company has received a major boost in recent quarters thanks to the re-franchising exercise undertaken by PepsiCo India in 2019. According to Jaipuria, the last round of re-franchising resulted in a major increase in the territory that VBL serves in India. From serving nearly 50 per cent of the India market on behalf of PepsiCo with its Pepsi, Mountain Dew, 7 Up, Sting and Mirinda in 2019, VBL’s coverage increased almost overnight to over 92 per cent of the country. It also sells products of group company CreamBell and packages PepsiCo snacks like Lays, Doritos, Cheetos, and Kurkure. But Jaipuria could only reap the benefits in FY23 because of the outbreak of the Covid-19 pandemic in 2020.

Factors in Favour

Jaipuria says two major factors played in his favour at that time. First, with the economy opening up post-pandemic, VBL increased its market coverage at a rapid pace. “It was only in 2022 and 2023 that we could ramp up on-ground coverage with manpower, infrastructure and distribution network, which are key to growing the business,” Jaipuria tells Business Today. And second, the overall infrastructure push by the government—by improving road connectivity and rural electrification—aided VBL’s business. Better road infrastructure helped it reach remote locations at lower costs, and the improving electricity supply in rural areas across north India meant VBL could put its freezers at retail outlets that had poor electricity connections earlier. After all, placing chilled bottles of colas in the neighbourhood is one of the most effective ways to lure consumers. “For many FMCG players, the rural market is not performing well. But with better infrastructure, we are now moving deeper into the hinterlands, which were earlier unattended. This is also boosting our growth,” he says. Cashing in on the opportunity, VBL has added 500,000 outlets under its fold in the past 12 months—taking its total outlet reach to 3.5 million stores.

According to K.S. Narayanan, FMCG industry veteran and former MD of McCain Foods India, in the case of VBL, territorial expansion played an important role in the massive jump in revenue and profits. Plus, its international operations are also growing. Apart from 27 states and seven union territories in India, which together form well over 90 per cent of the country’s consumer market, VBL has a major presence in foreign markets like Nepal, Sri Lanka, Maldives, Morocco, Zambia and Zimbabwe.

It already has plants in five out of those six markets, Jaipuria tells BT, and to increase its capacity further, VBL is setting up a greenfield bottling plant in the Democratic Republic of Congo (DRC). Per estimates by Nuvama Institutional Securities, with that plant, VBL will serve 60 per cent of the DRC market. Recently, the firm also got distribution rights in another African country, Mozambique. Jaipuria’s close and trusted relationship with PepsiCo over the decades is another factor that underpins VBL’s rise, says Narayanan.

Momentum Intact

Factors like these have helped keep the momentum going in FY24. Its performance in the key season (April-June quarter) suffered due to a milder summer, but in the July-September period, VBL reported 22 per cent YoY growth in top line at Rs 3,870 crore, backed by 16 per cent growth in volumes, while its PAT surged 31.5 per cent to Rs 501 crore. According to Abneesh Roy, Executive Director at Nuvama, VBL’s performance has been way better than most of its local FMCG peers. But there are some downside risks that are associated with the type of business it is in. As VBL’s entire business is highly dependent on PepsiCo’s bottling and packaging contracts, non-renewal of such deals remains a threat. Moreover, the price it pays PepsiCo for the proprietary concentrates and seasonal variations are key risks that it would have to manage efficiently. But for now, VBL’s dream run is only expected to accelerate.

As per Emkay Global Financial Services, several factors continue to drive VBL’s business in FY24 and it will continue at least till FY25. Identifying the growth potential, in the past few years, VBL has invested Rs 3,000 crore in capacity expansion, which will continue to boost its sales. This will help it grow its peak 2022 production capacity by over 45 per cent. “The beverage category is outperforming other FMCG categories on under-penetration and improved road and electricity infra. VBL has identified these tailwinds and has invested close to Rs 3,000 crore in capacity expansion,” says Devanshu Bansal, Research Analyst at Emkay Global Financial Services. It is benefitting from new products in the energy, sports and dairy categories at affordable price points, which should together drive its Ebitda (earnings before interest, tax, depreciation and amortisation), says Bansal. He expects CAGR of 25-30 per cent in earnings per share over the 2022-25 period. Emkay estimates that by 2025, VBL’s revenue will nearly double to Rs 23,570 crore, while its PAT could reach Rs 3,350 crore.

Jaipuria is confident that this is only the beginning of a new chapter of growth for the company. After bagging the new markets, VBL is today the largest bottler in the country—ahead of arch rival Coca-Cola’s in-house bottling arm Hindustan Coca-Cola Beverages (FY23 revenue of Rs 12,840 crore). While HCCB bottles and sells in nearly 50 per cent of Coke’s India market, the rest of the market is fragmented among 13 smaller bottlers. “This also means that we can decide and grow much faster than our competition as they would have to first convince multiple parties to take a step ahead,” says Jaipuria. So, for the foreseeable future, VBL may be hard to catch.

@arndutt

The full BT500 List can be accessed here