VBL - Varun Beverages Limited Share Price

In the Q2 CY2025 earnings conference call, Varun Beverages Limited's management conveyed an optimistic outlook despite facing challenges like unseasonal rainfall impacting sales in India. The consolidated sales volume saw a decline of 3%, with PAT at Rs. 13,254.9 million, marking a 5% growth. Revenue from operations was Rs. 70,173 million, down 2.5% YoY, while EBITDA stood at Rs. 19,987.7 million, with an EBITDA margin of 28.5%, improved by 82 basis points YoY.

Management highlighted the following key forward-looking points:

1. New Product Lines: The commencement of commercial production of PepsiCo's 'Cheetos' in Morocco diversifies revenue streams.
2. Capacity Expansion: Investments in expanding production facilities in South Africa, including a new can line in Durban, aim to capture emerging market demand.
3. Dividend Policy: The board approved a 25% interim dividend of Rs. 0.50 per share, totaling approximately Rs. 1,691 million in cash outflow.
4. Focus on Efficiency: Continued efforts to optimize costs, including freight and manpower, have resulted in improved profitability across international markets.
5. Sustained Investments: CAPEX focused on new plants and logistics is aimed at long-term growth and efficiency, with estimated 2026 CAPEX for India around Rs. 600-700 crore.
6. Market Positioning: With a target to reach an increased number of retail outlets, management aims to capture growth opportunities in the subsequent quarters.

Overall, management emphasized a strong foundation for long-term value creation, leaning on operational efficiencies, enhanced distribution networks, and readiness to leverage favorable market conditions as they arise.

Question 1: "If you could explain how you have controlled this cost and is this sustainable going forward?"

Answer: We optimized freight costs by consolidating distributors to send larger load sizes, and opening larger plants closer to markets, reducing distances. Additionally, we streamlined manpower costs through route rationalization and improved efficiency with newer lines. More renewable energy aligns with our sustainability goals. These strategies have successfully reduced costs and are sustainable.

Question 2: "How have you seen the demand till now for the start of the quarter and how do you see in this quarter can you benefit because of the soft base also?"

Answer: Demand depends on the rains, which are unpredictable this year. While we've faced challenges, we're optimistic. Contextually, last year's Q3 wasn't strong; hence, a favorable base also supports growth. If the weather permits, we anticipate a successful quarter and we're well-prepared operationally to leverage opportunities arising from demand recovery.

Question 3: "Do you see a need to plow back some of the savings in the form of generating consumer demand?"

Answer: Consumer demand remains robust; our challenge has solely been the unpredictable rains. We've expanded our go-to-market presence by increasing chilling equipment and distribution routes. Despite competition, we don't foresee challenges in capturing our market share, as we can meet consumer demand effectively.

Question 4: "Could you give us some outlook on international territories like Zimbabwe, Morocco, DRC, and South Africa?"

Answer: In Zimbabwe, demand is stabilizing after a dip, while our Morocco snacks plant is performing well. South Africa and Zambia are showing impressive growth. DRC is in its early stages; however, overall, international operations are on a positive trajectory, with expansion plans in the pipeline.

Question 5: "How much are you considering for CAPEX in India for the next year?"

Answer: For India, we anticipate our CAPEX will be around Rs. 600-700 crore in the coming year, focusing mainly on international expansions, as we believe the Indian market has sufficient capacity for now.

Question 6: "On the additional investments in overseas operations, when will these international operations sustain growth with their accrual?"

Answer: The amounts viewed as capital are essentially loans converted to equity for strengthening balance sheets. These international operations are already performing well and do not require fresh funds for sustainability.

Question 7: "Could you provide insight into how your margins are expected to hold up against rising competition?"

Answer: We maintain a target consolidated margin of 21%, and despite higher competition, we have consistently outperformed that. With effective cost management and operational efficiencies, we believe our margins are sustainable. We're optimizing productivity, minimizing costs, and currently, we're even holding cash with no debt.

Question 8: "What is the expected expansion rate for visi-coolers this year?"

Answer: Our Visi placements have increased by approximately 15% year-on-year, and we plan to maintain or enhance this pace as we continue investing in this area.

Question 9: "Is there a possibility of partnering with third-party bottlers in your business strategy?"

Answer: Currently, we are not considering third-party manufacturing options; our focus remains on expansion through acquisitions and enhancing our own capacities in the international markets.

Question 10: "What is the response to Sting Gold, and how is its distribution journey?"

Answer: Sting Gold has received a mixed reaction; it's not performing as strongly as Sting Red in some markets. We plan to continue pushing Sting Gold in upcoming quarters to gain a clearer understanding of its potential.