Varun Beverages Limited (VBL.NS) Q2 FY2025 Earnings Call Transcript & Summary

Ladies and gentlemen, good day, and welcome to Varun Beverages Limited's Earnings Conference Call. [Operator Instructions] Please note that this conference is being recorded. I now hand the conference over to Mr. Anoop Poojari from CDR India. Thank you, and over to you, sir.

Thank you. Good afternoon, everyone, and thank you for joining us on Varun Beverages' Q2 CY 2024 (sic) [ CY 2025 ] Earnings Conference Call. We have with us Mr. Ravi Jaipuria, Chairman of the company; Mr. Varun Jaipuria, Executive Vice Chairman and Whole-Time Director; and Mr. Raj Gandhi, President and Whole-Time Director of the company. We will initiate the call with opening remarks from the management, following which, we'll have the forum open for a question-and-answer session. Before we begin, I would like to point out that some statements made in today's call, maybe forward-looking in nature and a disclaimer to this effect has been included in the results presentation shared with you earlier. I will now the request Mr. Ravi Jaipuria to make his opening remarks.

Good afternoon, everyone, and thank you for joining us on our earnings conference call. I hope you had a chance to review our results presentation for the second quarter and half year ended June 30, 2025. We delivered a resilient performance during the quarter in spite of unusually early onset of monsoon rains in the peak summer months in India. We could keep our realizations per case and EBITDA margin intact. Due to growth in international markets, supported by strong positive currency movement in [ African territories ]. Company ended the quarter with a positive PAT in spite of 3% decline in consolidated sales volume. In international markets, Varun Beverages Morocco has commenced commercial production of PepsiCo snacks product, Cheetos. This marks another milestone in strengthening our presence in the high potential snack category, complementing our beverage portfolio and diversifying our revenue streams. We continue to focus on growth opportunities in South Africa market. We have enhanced our capacity by setting up a can line in Durban, one of our existing production facilities. We are awaiting approval from Competition Commission of South Africa for land parcel purchase as joining our production facility in Boksburg to further enhance capacity and backward integration. These are just a few steps in our series of initiatives to revitalize South Africa territory. Strong currency and our efforts in implementing backward integration last year have resulted in enhanced profitability in all our African territories. We have further strengthened Zambia, DRC and South Africa subsidiary, their balance sheets and through its process, equity infusion raising our stake in Zambia from 90% to 95%. In line with our dividend policy, the Board of Directors have approved a second interim dividend of 25% of face value, that is INR 0.50 per share, resulting in a total cash flow -- outflow of approximately INR 1,691 million. Although unseasonal rains have impacted performance during the quarter, we have successfully navigated such challenges in the past, and we have emerged stronger. We continue to strengthen our [ on-ground execution ] by adding more visi-coolers and ensuring wider product availability across retail touch points. With robust capacities now operational and expanding product portfolio and a sharply focused distribution network, we are well positioned to capture emerging opportunities and drive sustainable long-term value creation for all stakeholders. I would now like to invite Mr. Gandhi to share the key highlights of our operations and financial performance. Thank you very much.

Thank you, Mr. Chairman. Good afternoon, and a warm welcome to everyone on this call today. I will take you through the financial and operational performance for the second quarter and half year ended 30 June 2025. Revenue from operations net of excise and GST stood at the level of INR 70,173 million in Q2 of 2025 down 2.5% year-on-year. For the first half of the year, revenue grew by 9.3% to INR 125,843 million, the decline in Q2 was primarily due to a 3% drop in consolidated sales volume, which stood at 389.7 million cases. In India, volumes were impacted by abnormally high and unseasonal rainfall all through the quarter, resulting in a 7.1% decline in India. However, this was partially offset by healthy growth in international markets, where volumes grew 15.1% led by a growth of 16.1% in South Africa. Net realization per case at the consolidated level improved marginally by 0.5%, supported by a favorable mix in the international markets. Per case realization recorded a 6.6% increase. CSD accounted for 75% of the total volumes in Q2 of the CY 2025, with packaged drinking water contributing 18% and NCB making up the remaining 7%. Gross margins remained steady at 54.5%, reflecting a balanced product mix and cost discipline. EBITDA stood at INR 19,987 million with EBITDA margin improving by 82 basis points year-on-year to 28.5% in Q2 of 2025, driven by operational efficiencies and a strong currency in international operations. This margin expansion is a pleasant development, considering the higher fixed overheads from the commissioning of 4 new greenfield plants at Prayagraj, UP; Damtal, Himachal Pradesh; Buxar, Bihar; and Mendipathar, Meghalaya. These plants significantly enhance our production capabilities and supply chain agility laying a strong foundation to capitalize on long-term growth opportunities in the Indian beverage market. These 4 newly commissioned plants have been established to reinforce our growth priorities in high potential and underpenetrated regions while improving operational and logistics efficiency. With multiline configurations across CSD, JBD and water categories, these large-scale facilities provide the flexibility and scale needed to meet rising demand and capture market share gains over the coming years. As we ramp up volumes, the fixed costs associated with these new facilities will be better absorbed, further supporting margin stability and operational leverage. PAT grew by 5% to the level of INR 13,254.9 million, supported by improved operational efficiencies and lower finance costs. Depreciation increased by 26.3% due to the commissioning of the new plants in India and DRC. Along with brownfield expansion in other geographies, finance costs have been reduced significantly with the Indian business now net debt-free following the QIP proceeds and the remaining costs largely attributable to South Africa, including lease adjustments under the Ind AS 116. For the first half of the year, EBITDA increased by 9.5% to the level of INR 32,627 million, and the PAT rose by 13.6% to the level of INR 20,568 million. Low or no added sugar products contributed around 56% of the consolidated volumes in H1 2025, reflecting our continued efforts to evolve the consumer preferences. In H1 2025, we capitalized net assets of approximately INR 25,000 million, which included investments in the 4 greenfield plants across India, brownfield expansion in Sricity and strategic projects in DRC, Morocco and South Africa. Additional CapEx was allocated towards visi-coolers, returnable glass bottles, pellets and logistics infrastructure to strengthen our on-ground execution. As of June 30, 2025, capital working progress stood at INR 6,000 million, primarily for phase 2 of the greenfield expansion in India and the upcoming snacks facility in Zimbabwe. Working capital days remained broadly stable at approximately 35 days compared to the last year's 33 days, supported by disciplined inventory and receivables management despite high capacity additions and an expanded operating footprint across both domestic and international markets. Looking ahead we remain focused on driving growth by leveraging our enhanced capacities, diversified portfolio and strengthened distribution network. The commissioning of new facilities, expansion into high potential markets and sustained investments in distribution assets like visi-coolers position us well to capture demand recovery in the coming years. We are confident that the strategic initiatives, combined with operational discipline, will enable us to deliver consistent growth and create long-term value for our stakeholders. With that, I conclude my opening remarks and invite the moderator to open the floor for questions. Thank you.

[Operator Instructions] The first question is from Abneesh Roy from Nuvama.

I have 2 questions. My first question is on the other cost and general comment on the cost. The cost control this quarter has been very good. Specific question is other cost is down around 11% Y-o-Y. So I think 1/3 of this component is basically the freight costs, et cetera. So if you could explain how you have controlled this cost? And is this sustainable going forward?

So a couple of things what we've done, this is Varun. So in terms of freight cost optimization, we've consolidated a lot of distributors of ours, which has helped us obviously sell larger load sizes as well, which has helped us in our freight cost per case. At the same time, we've opened larger plants as well, which are closer to the distributors. So that has sort of helped us, obviously reduce our freight costs going forward because the distances have come down. So these are 2 major things what we've done in terms of cost reduction in -- yes, in terms of the freight optimization. The other thing what we've done is that we've done a lot of manpower cost optimization as well. We've relooked at all the routes what we have, and we've delayed the structure as well going forward of our sales structure and other structure as well. So that's where we've kind of been able to rationalize our manpower even more effectively. When it comes to power and fuel, we've got obviously newer lines what we've put up. So the efficiencies of the newer lines are -- the newer lines, efficiencies are much higher, so your cost to produce is much lower. And of course, we've added more renewable energy as well due to the sustainability angle. So I think these 3, 4 elements in a larger way have helped us to reduce our cost as well going forward.

And will continue. I mean this will -- this is all sustainable and will continue going forward.

Understood. Second question is on the demand side. Yes, this quarter, April, May, June, all summer categories have suffered. We have seen AC companies report 20%, 25%. Even FMCG cooling summer categories have suffered. My question is now on the outlook front. You have mentioned one interesting comment that because of these challenging scenario, you always come out stronger. I wanted to understand now September quarter, again, the base is favorable at around 5% to 6%, in fact, next 2 quarters. But September quarter, in the scenario of high rain, which currently, I think every forecaster is expecting that and till now, we have seen high rain. How have you seen the demand till now for the start of the quarter? And how do you see -- this quarter, can you benefit because of the soft base also?

So I think the real answer would depend on the Rain Gods, which is very difficult to predict. But I mean, July has been -- the rainy season has been quite prevalent, and it's not been the best of the season. But overall, we are looking quite positively because last year was not a very good quarter. So hopefully, with slight breaks in the weather, we will do well. And otherwise, we are well poised for growth and things are looking good. Our products are doing well. So I don't see any reason, but depending on the rain that I don't really have the answer. But overall, if it rains earlier, it normally is a little better in the second quarter. So I think we just have to wait and see. But our costs are under control, the plants are under control. Everything else is under control and a little bit weather break will do extremely well.

Next question is from Vivek M. from Jefferies.

A couple of things. First, you mentioned about the cost savings in this quarter and India business. And I mean, do you think in the context of -- and I know every call, we are discussing competition quite a bit. But do you think in the context of high competition, there is a merit in plowing back some of the savings in the form of generating consumer demand? I know the quarter was marked by this unseasonal rains, but how do you think about it from a more medium-term perspective?

So I think, Vivek, consumer demand is there. I don't think that is a real challenge for us. And we have increased our go-to-market as we are adding more chilling equipment, which is visi-coolers and our routes to go to market. I think the only dampening part in this quarter has been the rains, which is totally unpredicted and was much heavier than it has normally been in this quarter. So I don't see any other challenge at the moment. Of course, competition is there, and they will get their share and we'll get ours.

Right. But Mr. Jaipuria, in the context of, let's say, the rising competition and whatever media is talking about significant CapEx investments by the new player. Your margins are, let's say, first quarter are like a fairly high on the -- at operating level, do you still think that these margins are sustainable or you see a need to -- as you go forward, as the competition further picks up, there's a need to basically...

We have always predicted margins at 21%. We have never gone beyond that. We've been showing better results, that's a separate issue. So we are quite clear on the margins and the challenges we are going to have. That's why we are becoming more and more nimble. We are cutting costs where it needs to be. We are making sure our plants are more productive. They are newer plants and more closer to the distributors. And we have -- wherever we can save, we are saving in efficiencies, plus our -- the company is totally debt-free, so there's no interest cost. Rather, we have actually accruing interest on the funds which are lying in the bank. So everywhere, we are much more stronger, and I don't see any reason why these margins should come down.

Sure. And just a last follow-up to this. I completely understand and respect the part that you have always maintained margins at a level which is lower than where you are at? Do you think that gets reset or the current margins get reset to those levels given the pickup in competition?

Why you want me to keep saying what I have been repeating, Vivek. The reality is we keep showing you what the reality is, but we keep on -- we never said that we'll reach this level. So we are always trying to attain better than what we say, and that's where we want to keep ourselves.

Sure, sure. And the second question is, how has been the response to Sting Gold and where are you in the distribution journey over there?

Well, Sting Gold, we tried and these are new products, some of them work very well, some don't work very well. So Sting Gold has got a mixed reaction. So it's not been anywhere close to our Sting Red. But certain markets have accepted it, certain markets have not accepted.

And I think I'll just add to that, Vivek, at the same time that the last quarter 2 is the main quarter we have. And looking at the unseasonal rains what we got, so we want to obviously keep pushing Sting Gold again for the next 2 quarters, I think we will have a better and clearer picture in terms of where that stand.

Next question is from Devanshu Bansal from Emkay Global.

Sir, this quarter numbers are obviously weak due to unanticipated rain. In some way, it is also shadowing the distribution expansion that we must have done ahead of this season. So I just wanted to check if you could throw some light on how many retail outlets are we catching as of now? And what is the target ahead of next year's season?

So currently, Devanshu, we are at about 4 million outlets. And post that this year, the goal was to increase by another 10%, about 300,000 to 400,000 outlets. Now of course, given that when it rains, rural demand goes down and there are a lot of temporary outlets which do open and close. So we are hoping that with the new Nielsen report, which comes out post quarter 2, we are able to achieve that number. But as per the last report, we are close to what we had planned.

Understood. So maybe we may end towards like 4.3%, 4.4%, right, by this year's time?

Maybe a little less. We might not have been able to achieve exactly what we wanted because of the unseasonal rains.

Understood, understood, Mr. Jaipuria.

Industry phenomena at the same time, Devanshu, it won't be just us. So the temporary outlets in rural, which usually do open up, those might not be there this season. So hence, you will see that gap at the outlet level of the industry as well not just with us.

No, fair enough. Sir, the capacity utilization would be currently lower, sir. So I wanted to check if you could sort of indicate the CapEx intensity in the coming 2, 3 years, so that would be helpful.

So we are close to 70% capacity utilization. And I think we have enough room for the next 2 years, at least, hopefully. So I don't think our CapEx would be very much except mainly in international markets, our CapEx would be there and Indian markets would be much lower...

Any quantitative terms, maybe in terms of -- any quantitative number or maybe in percentage of...

We are not looking at more than INR 600 crores, INR 700 crores maximum. But outside internationally -- we haven't done the exact numbers, but internationally, we are looking to expand in South Africa and some other countries.

Okay. Understood. Sir, last question I have on balance sheet front. So there is some INR 1,000 crore of additional investments that we have made in the overseas operations. So I wanted to check by when these international operations will be able to sort of sustain their growth with their own internal accruals. So just some thoughts around that, maybe geography-wise, some geographies we'll already be doing. But if you could indicate either via geographies or on an overall level, till when do we need to sort of help those geographies sustain their growth?

In fact, the amount which is reflected as capital, this was a loan earlier given DRC, for example, or in Dubai or in South Africa. So these are converted into capital to strengthen those balance sheets. So it's not that we had to send the money now to sustain their operations. They're doing well already.

Sir, even if I add back -- so sorry for continuing on this, but INR 3,400 crores was total loan and investment. This time around, it is around INR 4,500 crores. So net-net, it is INR 1,000 crore of investment that has spent, right, if I'm reading it correctly.

So basically, there are 3 projects which were undergoing DRC, the backward integration, South Africa one canning line and the plots which we are going to take. Morocco, we have this year completed the snack foods plant in the last quarter. Zimbabwe snack foods plant is under implementation. And the broad thing on the capital account is only conversion, but the funding which was required was under these 3 things.

Next question is from Jay Doshi from Kotak.

Could you give us some outlook on 3 or 4 international territories, geographies that you operate in Zimbabwe, Morocco, DRC and South Africa? And also, I believe that the snacks plant in Zimbabwe has probably started commissioned a little bit ahead of expectations. So how should we think about the revenue trajectory from that portfolio and the other 2 plants in the other 2 geographies on the snacks side? And especially because Zimbabwe was quite weak over the last 3, 4 quarters since introduction of sugar tax. So is the demand in the beverages portfolio there sort of stabilizing now?

So regarding Zimbabwe, the demand has started to stabilize. Our volumes are coming back to original volumes. And I hope this quarter, we'll start growing. But the snacks was -- Morocco was started, not Zimbabwe. Morocco started last month. I think in June, it started. And Zimbabwe is going to start in October. So those are the 2 snacks and the initial response is very good in Morocco. And we have started distribution in Zambia and Zimbabwe for snacks and the plant will be starting in October, November.

Understood. And volume growth for beverages portfolio in the other markets, DRC and Morocco, if you could give us some color on how should we think about at a full year level this calendar year?

Well, I think Zimbabwe will stabilize, I mean, instead of going negative anymore. And the other markets are doing well. So Morocco is doing well. South Africa is doing well. DRC is a new plant, so we need to wait. This is the first year. So we need to wait and see. But overall, all the international -- Zambia is doing well. So all the territories are doing well internationally.

Next question is from Percy Panthaki from IIFL Securities.

I was just looking at the India numbers. So there is a 7% volume decline and a 9% volume -- value decline, which is that the derived ASP is negative by 2%. So any idea why this is happening?

The reason this has happened this quarter because to make sure that the route profitability for a distributor ends up coming and he ends up running the route, we push water a little bit more, so realization has been lower which usually does happen during the off-season period. So we've consciously pushed water a little bit more. So that's why the water mix has gone up by 2% as well if you see for this quarter, so hence the realization is down a little bit.

And within the CSD portfolio, is it that there is a change Y-o-Y in terms of the large pack versus small pack salience, like when people are stepping out of homeless, I would assume that the decline in the small packs would have been larger than the decline in the large packs and the large packs would also be at a lower ASP. So is that also one of the reasons why the overall ASP is negative?

Not really. I think it's the opposite. Actually, the smaller packs are still doing well because of the set price point at which we are selling. So the larger packs, which have declined also because due to the unseasonal rains, events are happening less, weddings have probably happened less, outdoor functions are happening less. But our small pack continue still to do much better than the large pack because that is the industry norm.

Got it. Understood. And on water, at the end consumer level, would I be right in assuming that the demand for water would be more affected because it is almost an entirely out-of-home consumption product unlike CSD, which has some in-home portion. And therefore, the increased salience of water is mainly just a pipelining issue which will reverse next quarter?

No, no, it's not a pipeline issue. It's a question of how much we want to push water. So water, the overall market is much bigger than what we are selling. So it's only how much percentage we want to push water, we push water, otherwise, we don't push water.

See, water is simply a commodity. The cheaper you go on water, you get into different categories of competing with a lot of brands, locals and regionals. So it really depends how much you want to discount on water. So it's nothing to do with the reason what you had mentioned.

But given that your margins are not impacted, I'm assuming that you have not taken the discounting growth, right?

We have taken some, little bit support on the -- to the distributors, which does not actually overall impact on the discounting. But just to support our distributors, which we normally don't do in the season. So this quarter because of the weakening of the season, we have supported our distributors. That's how we...

Understood. Understood. Second question is on the international. Yes, sorry, sorry, sir. Please continue.

Yes. Percy, in fact, in the rainy season, out of home, people in this season for infections to avoid that, they consume more water as it is because the rains were higher. And therefore, the water sales has gone up, although the beverage sales has come down. And there is this small realization difference. Otherwise, we should not read too much between the lines because it's very small difference.

Got it. Got it, sir. Secondly, just wanted to understand on the international. So if I derive the international by doing a consol minus stand-alone, the sales growth is 23%, and the EBITDA growth is 45%. So what is driving, which region is driving the high 23% kind of sales growth? And also, where is the margin expansion coming from? Because the EBITDA growth is double that of the sales growth.

Basically, Percy, one is that backward integration at 3 locations, Zambia, DRC and enhancing in Morocco, which has started. And in South Africa, the land thing which we have said that if we get the approval from Competition Commission ASAP, so that will be started, and you will have more surprise impact on that. That helps us a lot. India, we had been doing a lot, but there, it's just a beginning on these 3 things. And secondly, currency also supported us. And once the volume and those things start going up, they definitely help us.

Also partly sugar prices were lower in the international market, which have helped.

Right, sir. And the 23% sales growth, which is -- which geography is driving that mainly?

So except Zimbabwe, I think all the geographies are doing well. Zimbabwe only temporarily dipped down because of the sugar tax and the prices going up, which is also starting to bounce back.

And South Africa was higher than the average for the international, which also we...

Got it, sir. Got it. So basically, you're saying 20% plus kind of growth is a normal even going forward for international geographies?

We are not saying that but we keep trying.

Next question is from Aditya Soman from CLSA.

Two questions from me. Firstly, on this cost reduction, is there any element of reduction in marketing spend in India? And in terms of the volume mix in India, is there any meaningful change other than the increase in water salience that you talked about? Is there any change in the other products, particularly energy drinks or otherwise?

No. So see, the ATL, the top line -- the ATL marketing is done by Pepsi. The BTL marketing is what we do. So there's no change, Aditya, in terms of what spends we've done because those spends usually happen by March before the season comes in, right? So the spends are as per what the budget was, there's no reduction. On the other side, we are obviously working very closely with Pepsi to grow categories, right? So the hydration category under Nimbooz has done very well for us despite the seasonal rains because we've been pushing that. Our own brand, which is value-added dairy, we've launched newer flavors. We've been building on that brand for the last few years. We've added more capacity last year on that as well. So that's done very, very well. Energy is, of course, holding on. We're not seeing any dips in energy. So at an overall product into portfolio play, these are the categories which are outstanding and doing well for us.

Understand. Varun, very clear. And sir, just to clarify on the margin, so there's no reduction in the BTL spend, right?

No, no, there is nothing.

Next question is from [ Onkar Ghugardare from Shree Investments ].

If you look at the newly commissioned 4 capacities which you are talking about, how much would be the total capacity if you can quantify, excluding that?

Excluding what?

Excluding the newly commissioned 4 capacity plants we are talking about the capacity?

No. So as we -- as I just said that we are about 70% utilization of the capacity. So we have enough headroom for the next couple of years. We don't need any major CapEx in India.

Just wanted to get a sense like how much this new capacities have contributed in Q1?

Well, it just came up by March, April. So there's very little -- this has contributed. So these lines are actually now available for next season because this season was not very strong anyway. So we had reasonably enough capacity.

Basically, you had to read it like this. If overall, my volume stays the same and new facilities has come up, instead of focusing everything shifting here or staying with the earlier plants, we have rationalized our freight, we have rationalized our other expenses and used these facilities to bring in other savings, which are reflected in our P&L.

Okay. All right. The second question is on the cash, like what would be the utilization of that? Would they be used for like adding new markets or like acquiring companies or like you have already said that no -- like not that much of CapEx will be for the Indian market. So how they will be used?

So we are looking for new acquisitions, and we are very actively looking at it and also expansion in the international market.

So mostly, it will be utilized for the new acquisitions in the overseas markets, right?

Acquisition and expansion in the existing market internationally.

Next question is from Sheela Rathi from Morgan Stanley.

Sir, for the previous participant question, you said that we will be looking for more international expansion, probably international M&A. And within India, we are not seeking any CapEx at this point of time. Just want to understand from...

I didn't say any CapEx, but major CapEx. There will be some CapEx depending on the location, but major CapEx will not be there for the next year or 2 years.

Understood. And the question I have is that, are there any opportunities which lie ahead of us in the India market from an investment standpoint? Just trying to get your thoughts here as to what lies ahead within the India business model? And my second question is that while we have always believed in building our own capacities, if there's an opportunity to rely on a third-party bottler in certain markets, do we choose that route? So these are my 2 questions.

Well, we have not chosen the route of third-party manufacturer as of now. And at the moment, we are not looking at it also, but we are definitely looking at expansion and acquiring new territories or new businesses outside India. In India, there is very little room to expand at the moment because capacity-wise, we have enough capacity, except that it could be in one region that suddenly we are short, so we don't want to pay extra freight. And we will be expanding our energy segment, which will be solar energy so that we can further save costing on our energy portfolio. But other than that, no.

Understood. And sir, just one question because you have talked in detail about how we are working on our GTM strategy. Just on the visi-cooler side, is there a number to keep in mind in terms of what is the kind of expansion we should see this particular calendar year?

So we have expanded our visi placement. We have gone by -- our visi placements have gone up by more than 50% from last year. And I think we will continue at this pace going forward.

Sheela, in fact, you should see that today, we have made an announcement of forming a JV with Everest to manufacture visis in-house. So if we will have such kind of availability, we will definitely try to use that in the expansion of our business.

And that will be for India as well as...

As we had already announced that we have already taken 50% equity in the Sri Lankan plant of Everest, so we are already going to start using that facilities for our South and West territories.

We'll take that as the last question. I would now like to hand the conference back to the management team for closing comments.

Thank you. I hope we have been able to answer all your questions satisfactorily. Should you need any further clarifications or would like to know more about the company, please feel free to contact our Investor Relations team. Thank you once again for your interest and support and for taking the time to join us on this call. Look forward to interacting with you soon. Thank you very much.

Thank you very much. On behalf of Varun Beverages Limited, that concludes this conference. Thank you for joining us. Ladies and gentlemen, you may now disconnect your lines.