Varun Beverages Ltd Q2 FY24 Conference Call Highlights: Resilient Growth, Strategic Expansion, and Future Plans

In the Q2 FY24 conference call for Varun Beverages Ltd, the company provided insights into its financial performance, capex initiatives, market strategies, and plans for future growth.

Financial Performance:

1. Sales exhibited a robust 22% growth, with Profit After Tax (PAT) surging by 30%, while volume growth reached an impressive 15%.
2. The strong recovery in sales volume followed unseasonal rains in the previous quarter, marking a significant improvement from the 4% volume growth recorded in the last quarter.
3. Gross Margin (GM) for this quarter stood at 55.3%, showcasing an enhancement from the previous quarter’s 53.7%.

Capex Initiatives:

4. FY23 witnessed a capex of 2000 Cr over nine months, directed towards greenfield projects in Bundi, Rajasthan, Jabalpur, and brownfield expansions in India and internationally.
5. Further capex of 1600 Cr is planned for the next year, focusing on greenfield projects in Gorakhpur (UP), Supa Partner (Maharashtra), Khorda (Odisha), and one in DRC – Africa.
6. Once commissioned, the combined capex is expected to increase the peak month capacity by 45% compared to FY22 levels, with the Congo plant set to be operational by April/May next year, capable of handling 35-40 million cases.

Operational Outlook:

7. EBITDA margin is projected to be around 21%, subject to fluctuations depending on the prices of raw materials like pet chips and sugar.
8. Varun Beverages anticipates achieving higher volume growth compared to the FMCG business, driven by rapid distribution expansion, particularly in rural areas, and unlocking value.
9. Formation of a subsidiary in Mozambique aims to leverage surplus capacity in Zambia and Zimbabwe to cater to the Mozambique market.

Product-Specific Performance:

10. Juice sales faced a challenge with a flat growth due to adverse weather conditions, impacting the April-June season, which is crucial for juice sales.
11. Gatorade experienced a significant 50% growth.
12. Value-added dairy products faced capacity constraints, which are expected to improve with the addition of new plants in January.

Market Dynamics and Challenges:

13. The slow pace in volume growth is attributed to a combination of base effects and adverse weather conditions in July.
14. Increasing penetration in South and West India is expected to improve the seasonality curve.

Operational Efficiency and Stake Acquisition:

15. Once all new plants reach full capacity, asset turnover is projected to be around 1.8-1.9 times.
16. Pricing corrections in large packs have been implemented, stabilizing net realization per case despite increased volume.
17. Margins in international business remain stable, except in Zambia, where currency devaluation occurred.
18. The company increased its stake in Lunarmech Technologies to 60%, focusing on backward integration as they manufacture caps for Varun Beverages.

Future Plans:

19. Varun Beverages plans to launch additional energy drinks from Pepsi’s product portfolio in India, with pricing details yet to be finalized.

In summary, Varun Beverages demonstrated strong financial performance, strategic expansion plans through capex, and a proactive approach to market dynamics, positioning itself for sustained growth in the evolving beverage industry.