If your Dil Maange More returns, Varun Beverages is ready to deliver. As PepsiCo's largest bottling partner in India, this industry giant has been one of D-Street's top wealth creators over the past five years — and it seems its growth story is far from over. Recently, Varun Beverages announced plans to raise a substantial Rs 7,500 crore through a Qualified Institutional Placement (QIP) to reduce debt and invest in subsidiaries, joint ventures and existing operations. However, a closer look at its balance sheet and management commentary suggests it may be aiming for something even bigger than just deleveraging. Here's why.
More than just deleveraging
Varun Beverages has previously stated in several conference calls that it plans to bring its debt down to December 2023 levels, which means paying off around Rs 1,300 crore from the Rs 6,700 crore of debt currently on its balance sheet. But deleveraging would only require a small portion of the funds raised. In fact, the company generated around Rs 300 crore of free cash flows till Q2 CY23, meaning it is possible to reduce debt using just internal accruals.
So, if debt reduction isn't the primary reason for the QIP, where is the bulk of the Rs 7,500 crore headed? While some might argue it's for expanding existing operations, it's important to note that Varun Beverages already accounts for over 90 per cent of PepsiCo's sales in India, leaving limited room for domestic growth. Given these factors, it's likely that the company is planning significant international expansion — a direction the management has hinted at in recent communications.
Aiming for Africa
The company has outlined plans to spend around Rs 2,300 crore on capex by CY2025. If India isn't the main investment destination, the next logical frontier is Africa. Historically, Africa has been a high-consumption market, with per capita consumption of carbonated drinks being five to six times that of India. Currently, Varun Beverages operates in just nine out of the 54 African countries, meaning there's a vast untapped market for the company to explore.
Additionally, most beverage distributors and bottlers in Africa are unorganised, giving Varun Beverages a competitive advantage. In the Q2 CY2023 earnings call, Chairman Ravi Jaipuria highlighted South Africa as a promising market, noting that "South Africa looks like another big market after India."
This sentiment was reinforced in March 2024, when the company acquired a 100 per cent stake in BevCo, which holds franchise rights from PepsiCo in South Africa, Lesotho, Eswatini and distribution rights for Namibia and Botswana. After this acquisition, PepsiCo's products contribution to BevCo's revenue jumped from 15 to 19 per cent, underscoring that Varun Beverages is indeed brewing a new growth strategy focused on Africa.
Before you invest
While our analysis is based on management commentary and recent moves, Varun Beverages has yet to provide a concrete strategic roadmap for its Africa-based expansion. It's also crucial to acknowledge that much of Varun Beverages' success — both past and future — hinges on its strong partnership with PepsiCo. Any fallout between the two could have significant negative repercussions. However, PepsiCo appears committed to this relationship, having recently expanded it by granting Varun Beverages the exclusive franchise rights to manufacture, distribute and sell "Simba Munchiez" in Zimbabwe by October 2025 and in Zambia by April 2026. This further solidifies the strong business ties between the two companies.
Varun Beverages' upcoming fundraise clearly signals that the company is gearing up for a major expansion drive, likely centred around Africa. But before investing, it's essential to conduct a thorough analysis of the company's financials and ensure that its growth strategy aligns with your investment goals.
Disclaimer: This is not a stock recommendation. Please do your own due diligence before investing.
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