Varun Beverages Limited (VBL) Earnings Call Transcript & Summary

Ladies and gentlemen, good day, and welcome to Varun Beverages Limited earnings conference call. [Operator Instructions] Please note that this conference is being recorded. I would now like to 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 2020 Earnings Conference Call. We have with us Mr. Ravi Jaipuria, Chairman of the company; Mr. Varun Jaipuria, Whole Time Director; Mr. Raj Gandhi, Group CFO and Whole Time Director; Mr. Kapil Agarwal, CEO and Whole Time Director; and Mr. Vikas Bhatia, CFO 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 may be forward looking in nature and a detailed statement in this regard is available in the earnings presentation shared with you earlier. I would now request Mr. Ravi Jaipuria to make his opening remarks.

Good afternoon, everyone, and thank you for joining us on our earnings conference call. Trust all of you had the opportunity to go through our results presentation, which provides detail of our operational and financial performance for the second quarter ended 30th June 2020. I hope and wish that you all and your families are keeping safe and healthy. The quarter gone by was an unprecedented one, which started amidst an uncertain and unpredictable operating environment. The spread of the COVID-19 pandemic, leading to multiple lockdowns, resulted in significant disruption across domestic and international markets. With this period being a key season for our product portfolio, the disruption in production level, supply chain and distribution operations, particularly in the months of April and May had a negative impact on overall demand and volume performance. With the relaxations provided by the government of India for essential services and particularly packaged food and beverages, VBL got the requisite permissions from respective state governments to operate most of its production facilities during the quarter. However, the manufacturing operations were at a significantly scale down utilization levels. Against this backdrop, organic volumes for the quarter declined by 50.1% in India and 33.3% in international territories. Revenue from operations during the quarter declined to INR 164,000 -- INR 16,401 million as the country moved to the unlock phase towards the end of May. We witnessed a steady revival in demand on a month-to-month basis, which continued in the month of June and July. To address this steady uptake in consumption, we steadily ramped up operations across manufacturing units to increase production levels and ensure continuity in deliveries and supplies. Over the last 3 months, we have been undertaking maximum efforts to secure our business operations by putting in place stringent safety standards across our plants and offices to ensure well-being of our people, rationalization of operating costs to boost financial strength and driving higher efficiencies in our overall business model. Showcasing a high degree of agility, our teams have efficiently adapted to the unprecedented changes in the operating environment and consumer ordering patterns in these uncertain times. As unlock norms further ease, we are hopeful that the demand scenario across the country will stabilize in the months ahead. In July itself, we have seen a steady revival in consumption, especially from rural and semi-urban regions, and there are positive signs that this momentum will strengthen on a month-to-month basis. In addition, a gradual recovery in economy led by normal monsoons in India, a good Rabi season and Kharif crop sowing should further enable higher recovery in demand and consumption. With the overall macroeconomic environment expected to normalize by the end of this calendar year, we remain confident of the strong demand revival in our product category in the coming fiscal, which we believe should enable us to deliver a robust operational and financial performance going ahead. Before I conclude, I would like -- I would also like to share that the Board of Directors have recommended an interim dividend of INR 2.50 per share. I now invite Mr. Gandhi to provide highlights of the operational and financial performance. Thank you.

Thank you, Mr. Chairman. Good afternoon, and a warm welcome to everyone joining us today. Let me provide an overview of the financial performance for the second quarter ended 30th June 2020. The quarter gone by was challenging with an unprecedented level of disruption, the spread of the COVID-19, the pandemic, and the subsequent lockdown restrictions imposed by the government of India severely impacted company's operations throughout the second quarter. In Q2 2020, revenue from operations adjusted for excise GST declined by 41.6% year-on-year to the level of INR 16,401.8 million, while EBITDA declined by 52.1% to the level of INR 3,777 million. Total sales volume stood at 104.8 million cases in Q2 2020 as compared to 195.5 million cases in Q2 last year, declining by 46.4%. Sales volume in India were down 48.2% year-on-year at 88.8 million cases in Q2 2020 as compared to 171.5 million cases in Q2 last year. This includes inorganic volumes of 3.15 million cases from South and West India subterritories for the month of April 2020 as the acquisition date was 1st May 2019 last year. Organic volumes for the quarter declined by 50.1% in India, 33.3% in international territories and 48% on a consol basis. As lockdowns and restrictions eased from mid-May onwards, sales volume gradually recovered in June and in the month of July. The company saw a steady revival in the volumes. The product mix underwent a change in Q2 2020. CSD constituted 85%, juice at 7% and packaged drinking water at 8% of total sales volumes. Realization per case improved by 8.9% approximately during the quarter, essentially on account of higher mix of CSD and controlled trade promotions. On the profitability front, EBITDA declined by 52.1% to INR 3,777 million in Q2 2020 from INR 7,878.8 million in Q2 2019. The overall input cost environment was favorable during the quarter as there has been moderation in key raw materials. This is -- this, in addition with the sharp focus on cutting nonessential costs during the quarter enabled healthy margins compared to Q1 2020 on a similar revenue base. So while EBITDA margins declined by 501 basis point in Q2 2020 as compared to Q2 last year on a similar revenue base, EBITDA margins expanded by 685 basis points as compared to Q1 2020 on account of cost control measures undertaken during the COVID period. Gross margins improved by 300 basis point year-on-year due to favorable PET chip prices and higher mix of CSD. Depreciation remained similar to last year, and finance costs declined by 12.5% on account of QIP done by the company in September 2019 and the repayment of debt during the quarter. Net debt reduced to INR 29,392 million as on June 30, 2020, as against INR 32,461 million as on December 31, 2019. With this, debt-to-equity ratio stood at 0.84x at a very healthy level as on June 30, 2020, and debt-to-EBITDA ratio stood at -- sorry, 2.70 for the trailing 12 months EBITDA. In H1 2020, net CapEx stood at approximately INR 2,437 million. The adjustments are mainly capitalization of INR 433 million in implementation of Ind AS 116 for leases and impairment provision of INR 665 million provided in last quarter. CapEx incurred is primarily towards commitments made prior to March for brownfield expansion at certain plants for new tetra lines for Slice and backward integration. Capacity utilization in India during the peak month remained well below the last year's peak month utilization of approximately 60%. On the working capital front, working capital days increased to approximately 20 days as on June 30, 2020, as compared to 14 days as of June 30, 2019, on account of lower sales volumes. On the whole, the company's financial position remains robust during the quarter. We have undertaken concerted efforts towards cost management and rationalized nonessential cost to boost financial strength in these tough times. We have also instituted optimum working capital measures and operating discipline to conserve cash flows and ensure steady profitability. The company has not availed moratorium for its debt repayments and has been timely servicing all its debt obligations. Here, I would also like to share that CRISIL has reaffirmed the credit rating for long-term debt as CRISIL AA and for short-term debt as CRISIL A1+. Overall, VBL is strong and robust and focus remains on generating strong free cash flows over the ensuing quarters and coming years. On that note, I come to an end to the opening remarks and would like to now ask the moderator to open the lines for the Q&A. Thank you.

[Operator Instructions] We take the first question from the line of Abneesh Roy from Edelweiss.

Sir, my first question is related to the cold nature of the product. So the FMCG companies in the fruit juice business had a very tough quarter. And they said that consumer is cutting down on anything which is cold because he doesn't want to fall ill, doesn't want to get cold, et cetera. So ex of lockdown, have you also faced this issue? And how are you building this in your marketing campaign to overcome this issue?

I don't think we have felt that. I mean, the only thing we have felt where the gap is that the people are -- on the go-to-market, since there are less people in the market, so our go-to-market sales have dropped and our sales in hotels and restaurants or cinema halls have dropped. But I don't think we have faced any challenge on the cold part as people are taking the -- our in-house consumption has gone up drastically.

And sir, what will be the breakup of the institutional and out-of-home, the cinema hall, restaurant, hotel, et cetera?

I mean, it's not very large, but I would say maybe close to 10% would be the institutional sale, which we are missing at the moment.

Sir, second question is, how are you seeing competition, the INR 10 price point, the FMCG companies have also become more aggressive. So are you also going to increase the aggression at the INR 10 price point, especially in the fruit juice side?

No, we already have our fruit juice at INR 10, and that is [ out ] of the tetra lines this year. But unfortunately, by the time the line started, the COVID had hit in March, so we couldn't get full results of it. But INR 10 is a very aggressive and a very interesting price point for the consumer, and we will see results from that coming next year.

And sir, last question on the product side. Are you doing something based on this crisis? So we have seen ice cream companies come out with Haldi ice cream, for example and Haldi Doodh, some of the other beverage companies have come out. So are you also launching some products on this crisis?

No. We are not changing our product mix. The difference is we are promoting juices. Tropicana juices is being promoted in a big way. And that is doing extremely well for us, and we are promoting home consumption, and that is what we are focusing on.

The next question is from the line of Vivek Maheshwari from Jefferies. [Operator Instructions]

Two questions. First to Mr. Jaipuria. You mentioned about July trends being better, but a lot of consumer companies and, in fact, companies across sectors are highlighting that because of the localized lockdown, things are a bit softer than what those were in the month of June. So how are you reading the situation given all the issues around the lockdowns and everything that's happening right now on the ground?

Well, we have done extremely well in July, even after the lockdowns, I mean, we would have done much better than what we have done. So -- but still, our sales in July have been percentage-wise much better in July compared to June. So we are not complaining. I mean, the only complaint we have is the lockdowns are, of course, affecting, but that is not within our control. Otherwise, we have seen better results in July than June.

Right. And do you have any sense on, let's say, the regional local competition, there is a bit of a tail in certain geographies, let's say, southern on central part of the country. How are those guys coping up? Do you have any intelligence on that piece? Basically, are there any gains from...

Well, local brands -- local brands are -- have gone down drastically because it was not possible for them to remain open or be -- they were much more vulnerable because of the drop in volumes. So we see much less competition except from our main competitor.

Got it. Got it. And second question for Mr. Gandhi. You have done well on the cost savings side. But do you think as the quarter progressed and you look at perhaps the -- all the heads under the expenses base. Do you think some part of the cost savings that you have done in this quarter is going to sustain as we -- as normalization sets in again, let's say, in few months from now?

Well, I'll answer this instead of Mr. Gandhi. I think we have been very successful in cutting costs and I think it gave us a real wake up. And we expect at least 50% of the cost savings will remain with us going forward. So we feel lot of things as we say, some fat has been cut where we were -- as the company was growing very fast and have very healthy balance sheets, we -- everybody tends to get carried away. So we -- I think we have cut all those fat. And I think going forward, we see minimum 50% of our costs not coming back to us.

Sorry, could you quantify? Let's say, when you say 50%, let's say, as a percentage of revenues, what is it that you are mentioning?

It's not based on percentage of revenue because revenue will be depending on what the sales are going to be. But whatever cost cuts we have done, which you can see from the P&L and the balance sheet, our cost cuts have come -- will be -- we will able to sustain this going forward. That's what I'm trying to say. A reasonable portion of it will be sustained back.

Sure. And lastly, if I may. Any support from PepsiCo, specifically, in this quarter on -- in any respect, given the...

We have not asked for any support from PepsiCo because the company is doing well. And if need be, we will definitely go to them and maybe they will help, I don't know, but we have not had the need to go to them.

The next question is from the line of Kashyap Jhaveri from Emkay Investment.

Yes. Sir, thank you very much for the opportunity...

Mr. Jhaveri, I'm so sorry to interrupt, but your audio is not audible, sir.

Am I audible now? Hello?

Requesting you to please speak a bit louder, sir.

This is good?

Yes. Thank you. You may please go ahead.

Sir, 2 questions. First one is on realization, which during this quarter...

Still can't hear you properly.

Hello?

Yes, that's fine.

Yes. Sir, my 2 questions are as follows. First, in terms of realization. It looks like in this quarter, realization quarter-on-quarter as well as on Y-on-Y basis seem to have gone up by almost about 4%, 5% higher. So any reason for that? And question number two is that we have given a slide in our presentation number -- Slide #6 about customer management and market execution. Just wanted to understand, in terms of the markets that we have recently acquired in terms of South and East and existing territory, how much more penetration is really possible? And if you could give some numbers on that front?

Well, first of all, your answer for realization, as the water sales have gone down because of go-to-market, because of hotels, restaurants, all your transportation being shut, so our volumes have gone up drastically on CSD and water volumes have come down. So that is the main reason for the realization going up. And secondly, as far as the market penetration is concerned, I think the penetration we really wanted to do, we were not able to do because of COVID coming in this year. So I think that real penetration will only happen, I think, by early next year when the situation improves because half of the outlets were not open. So it was very difficult to penetrate further. Rather, we were supplying goods to the outlets, which were open. So this is not really a right year to really give answer to that question.

But just [ what ] I wanted is that in terms of what is the opportunity and where are we today? If you could give some numbers in terms of how many visi-coolers are possibility...

Opportunity still remains in the acquired territory. We were close to 25% market share as we have said. And obviously, the opportunity still remains because there was very little work we could do this year because the outlets were shut. So forget expansion of outlets, the number of outlets which were open contracted rather. So I think this expansion is only going to happen next year, and that's where we feel we will be -- we hope to gain some share.

And sir, in that particular -- in those geographies, what -- let's say, in terms of outlets, what's the opportunity? And we may do it, let's say, next year or probably next 2, 3 years, but in terms of total outlets, what is the possibility? If you have -- any market data if you could...

We have 25% share in the acquired territory. So the opportunity even if we want to come to our regular share, which is in the rest of the market, there is -- practically, we could double our number of stores and number of -- and volume, but that is not an easy job. It's over -- that's going to -- we are going to try it. Will it happen or not, I don't know. But we will try for that, and that's a long process. So the opportunity is huge. That's what we want to just add.

The next question is from the line of Rajiv Gupta from RBC Financial.

My first question was on the cost saving that you'll carry forward in the future. Is there any way where you could give some indications so that it helps us quantify in a normal regular year how much -- what numbers are we talking about? If we normalize...

Numbers in what way?

In absolute numbers or in percentage terms. Percentage, of course, you have said...

No, no. What do you want -- what are you talking? Are you talking of growth? Are you talking of number of outlets? What are we saying?

No, no, no. I'm talking about the fat you cut and you said you'll carry forward -- the cost savings you will carry forward or -- it's there for good, the 50% cost savings.

Well, it's quite large. And I think offline, if you call, we'll be able to try and give you the numbers. I don't have exact numbers handy. But if you look at it, even at volumes, which is lower than last quarter, if we have been able to get our PAT to double, it has to be substantial.

Okay. Yes. Okay. Fair. I'll get back to you offline on that. My second question was in terms of the loss while the outlet constraints were there in all territories. Your competitors would also have the same constraints during this period, including your local suppliers in various territories. How did we fare in terms of taking away the local suppliers? And did we see early indications of being a little more nimble footed in starting our factories a little faster than others? Did we see some early indications of gaining market share in various territories from local suppliers as well as our biggest competitor?

Well, we definitely grew share from the local suppliers because the -- most of the local plants come up only in the season. And because this season, before it started, our peak season is starting from Holi and ends at Diwali. That's the normal practice of a soft drink season. And before the season could start, the COVID problem started. And so these -- lot of these companies didn't even open up. So I think we definitely gained share from them. And we were reasonably nimble footed to make sure that our plant started -- a lot of our plants started as early as April. We were able to manage to make sure that we didn't have to take any write-offs of stock expiry because we were able to move stocks from one plant to the other wherever the sales were happening. So we took some hit on transportation, but we made sure that we were not -- we didn't take a hit on expiry of goods. So we did whatever was possible under those circumstances. And that is one of the only reasons why with less volume and why with all this, we were still able to be profitable and much more -- much better than what we should have been.

Mr. Jaipuria, my question was did we take away more from the local suppliers -- from the local manufacturers than our biggest competitor? Did we do better than our biggest competitor? Or you wouldn't have a...

Well, I hope so, but I don't know. I'm not sure. We think we did, but I don't know.

You think you did. Okay. And my last question would be in terms of our expansion, our future capital expenditure, cash conservation, has this last 3 months or 4 months affected any of that? Are we going to change our plans, cut down on capital, or conserve more cash going forward? If anything is going to...

Yes. The only change is going to be that we are going to be not putting a lot of CapEx going forward. And next year, we expect our CapEx to be much lower than 50% of our depreciation.

All right. And my last standard question to Mr. Gandhi was, how are we doing on the Zimbabwean currency and the reserves? Is everything being honored? And when do we expect that reversal of those provisions which we have made in Zimbabwe over the last couple of years or...

Well, everything is being honored. We are getting paid. That's the only country where we have not seen a negative in this quarter also. So things for us are very good in Zimbabwe. I mean, the country, I can't change. But for us, it's -- we are doing well. We are getting paid. All our plans are as per -- intact and things are going well for us.

And the reversal of the provision, the quantum and when should we expect that then?

That, Rajiv, will happen once the bank liability is paid for fully. Luckily out of INR 15 million -- INR 25 million, which we borrowed, about 11.5 -- 50% of that is already paid. And once the balance is paid, after that we will start reversing that provision, which we created in our books. So that is intact, lying and hopefully we will have to reverse to the P&L only. Although as a...

So how much is the like...

It is around the same, 130, which we created. So that's still preserved in the books.

We should repay this in the fourth quarter of this financial year, right, the entire loan?

In fact, every quarter, about INR 2.5 million gets paid, so 5 more quarters. And apart from this, there is some loan, about INR 9 million from Varun India to that subsidiary. That also is to be paid. Yes, that's internal and we can reverse -- start reversing after that, maybe 5, 6 quarters. Yes.

Okay. You'll reverse before. Do you plan to reverse at one go or you'll reverse it over a period of time?

Well, let's see at that point of time. So it's a reserve in any case if it's known that's with the company. The...

Anyway, it's a reserve, so we can do it anytime. As soon as we feel that there is complete safety, so we are giving rather more comfort level to everybody.

We take the next question from the line of Varun Goenka from Nippon Mutual Fund.

Sir, I have 3 broad questions. First, our out-of-home consumption is significantly higher than our in-home consumption. Are we making or planning anything -- and I'm overseeing this quarter and this year that is a distortion, I'm talking about a normal year where we could increase the share in terms of a product or go-to-market strategy, e-commerce strategy, anything that we can share? That's one. And second, over the next maybe 12 to 24 months, the demand is going to be unpredictable. So are we making any changes to our production planning so that we are more just-in-time, not getting saddled with any kind of inventory or we are more agile to responding to any product SKU packaging? The final -- third part is our digital ad strategy. Is there any major changes to our ad strategy at your level or at Pepsi level because all the FMCG companies are radically changing their media strategy.

Okay. I'll answer one by one. One, as far as stocks are concerned, we are -- we don't carry large stocks anyway. And even when in March this COVID came and suddenly there was a lockdown, we were able to make sure that we did not have any losses in inventory. So now there is no reason for us to overstock ourselves. So we normally keep not more than a week's finished stocks. So we will never get caught with that. It's only in the peak season, sometimes we prebook plans and prebuild some stocks, which also we were able to take care. So I don't see any issue as far as our stocks getting stuck. And worse come to worse if one state gets lockdown, so if we have to move the goods, we'll do that, which is if we feel that the lockdown is going to be much longer than planned. So I don't see any issue on that.

My question was also on the other side, Raviji. You could have demand -- excess demand in one product or SKU, how would you -- you might lose on demand also. We've seen it in several companies...

No, but we know what is happening. I mean, the demand doesn't change in 1 day. Now we know where the movements are, what packs are moving, what flavors are moving. So there is definitely a change towards mix of products, mix of flavors, what is happening. Actually, the pack size has changed. So that we are -- that we are working on what is required in the market. So lines are all flexible. They can produce smaller bottle, they can produce bigger bottle. So in-home consumption because it has increased our medium and large bottles are selling much more than our single serve, so which changes we have made. And the positive side, I see to it is I think we are making people getting used to consuming at home, which is happening all over the world, and which was not happening enough in India. And once the go-to-market starts when the market opens up, I think we'll get the benefit of both.

How much would be your guess as to the consumption at home? I'm sure water is 0, but otherwise.

No, that's why you see [Technical Difficulty] coming to us you see because people are still not consuming mineral water at home. I mean -- and that's one of the main reasons why we have got -- taken a hit on our contribution in water. But people are sitting at home and they are consuming soft drinks. So [Technical Difficulty] gone up at home drastically. But now we see a mix. It's very difficult to predict because everywhere there is a different -- every day, the policy changes. Some days they say weekends are closed, some day they say there is a complete lockdown. So it's very difficult to predict anything. But under the circumstances, I think we have reached very close to our normal sales, which is -- I don't think we could have done better.

Absolutely, sir. This is a -- at this point our media strategy at your level or Pepsi level?

So media strategy, we have started -- media has started, and we are working on digital and e-commerce and your deliveries and all that. So those are happening and Pepsi is fully involved in it, and Pepsi is taking a lot of initiatives to move that forward. So I think you will see some changes coming in that portfolio.

The next question is from the line of Anand Shah from Axis Capital.

First question is essentially, if you can share any color on the month wise progression in the quarter and also especially on July versus June, you did indicate that July is even stronger. I mean, would it be now sort of a marginal decline? Or any color that you can share on this, especially in India?

See, in July, for example, depending on the territory where the lockdowns were not there, we are pretty well coming back to our normal sales. But depending on which state and what the lockdowns are or what the conditions are, it's differing and changing every few days. But the good part is wherever the lockdowns are pretty well lifted, we are coming back to our normal volumes.

No, that is pretty good at that [ same, say ] because -- I mean, I would assume that water especially because of the on-the-go part would still be impacted. So I mean, would that mean that it is in the unhindered territories where the lockdowns and all are not there and demand is consistent, your in-home is driving -- in-home volumes have actually gone even up pre COVID level?

That's right. That's right. Even though the water volumes are still much lower, but overall, our CSD volumes have gone better than -- in some territories where the lockdown is not happening.

Okay. No, that's pretty good to know. And also, if you can share some color on international, how the territories are progressing in this quarter, especially on the exit side, how things are looking. I mean, you see that also recovering now to sort of normal or near normal?

Internationally, I think we are reasonably in good shape now. I think the real COVID effect is pretty well behind us. And going forward, I think we should be looking at 2019 plus numbers.

Okay. That is excellent to know. And just lastly, I mean, in the past quarter, you did share that despite the hit in volumes and revenue this year, you will still -- your endeavor will be at least be to maintain percentage margins. I mean -- are you on that trajectory with the cost-cuts that you've done, that you should for the full year basis be near to...

See, you can't be on overall EBITDA because if your volumes are up...

Yes, not EBITDA, I'm saying percentage margin, the percentage margin. I understand because your top line will be...

If you look at it, if we can maintain our margins by half in half the volumes, we can't do better than that. So we have really squeezed our operations, really become nimble footed, wherever we could cut costs, we have cut costs and increased our efficiencies basically.

The next question is from the line of Jaspreet Singh Arora from Equentis.

Congratulations on a good quarter despite challenging times. My first question was, sir, related to the EBITDA margin expansion, in which the main factor was the gross margin expansion of 300 bps. So ballpark, if you could give an indicative idea about the gross margin difference between the 3 categories, CSD, water and juices?

No, the EBITDA margins are, as we had said before, are the same. It's just that the value of each product is different. So for example, if we have to sell 3 cases of water to get the same value of one case of CSD. But EBITDA margins are about the same, but the volume number have to be -- so if the sales volume come down on water and they go up CSD, so EBITDA automatically goes up not in percentage, but in overall value because of the -- and that's why you see our growth in about 8% to 9% realization has become higher in this quarter than quarter 1.

Okay. Okay. Okay. So this -- what I was referring to is this 85% share by volume of CSD, this obviously was partly attributing to this rise. So as things stand today and assuming this is broadly the barometer for the rest of the quarter, do you see this moving to the steady state contribution of less than 70% of CSD? Or it's still a couple of months away before water could pick up and this could go down?

I think it's much more than couple of months. You don't see the hotels, you don't see restaurants opening up so far. You don't see movie halls opening so far. So I think there will be a time gap before. I would say we don't expect that this year.

Sure. Sure. And on the...

I think it would depend on when the vaccine comes, so to make people comfortable, how many more people are willing to go out in the market.

Sure. Sure. So you think till that time this mix could be skewed in favor of CSD and therefore, 80% plus would continue?

CSD and juices. So it's BSD. Juices are picking up well. CSD and juices, I think water will definitely be -- stay low till these things open up.

Understood. Understood. And in terms of the comment that you made in terms of carrying forward the savings that you've done, so I'm just looking at the other expense, I'm trying to understand and quantify. So we've had another expense of roughly INR 49 crores on a quarterly basis till this quarter. And this quarter, we've had INR 32 crores. So the savings is about INR 17 crores. So are we trying to say that half of the INR 17 crores is there for good for the next couple of quarters? Is that the right way to look at it?

It's not exactly 50%, but to some extent, definitely, the volume will be suppressed. The offices were closed, starting from power, conveyance, travel, the repair and maintenance because the plants did not run for the full time, so lot of expenses are related to operations. When there was restricted movement, all those expenses, they were saving. Although we lost on revenue, but we tried to make good on these things. And apart from this, when there is no growth coming in, so the discount side, there was a discount, commodities behaved in a way, they were -- the prices were quite remained moderate. So everything helped us. And for the next 2 quarters, we see the same trend and should help us in maintaining our margins.

Sure, sure. And this tailwind you did get from the PET chip prices being soft. Is this -- does this continue as of today? And do you think it's there for some time?

So far yes because sugar prices have not shown any trend of going upward. And the same is for petroleum has not gone to the level where they were before the pre COVID time. So these advantages are still there. And moreover, the mix, which has changed is helping us. And the fourth thing is the Zambia, Zimbabwe, the busy season is in November, December and still is in intact. And the foreign territories are coming back to the normalcy faster than India. Nepal maybe and Sri Lanka, they have already started showing growth over the last year numbers. So maybe they are coming out of COVID effect faster.

I think internationally, we expect doing better than last year going forward starting from this quarter. So that will help a lot in the overall scenario.

The next question is from the line of Nikunj Gala from Principal AMC.

Sir, my question is to Mr. Gandhi. Sir, I wanted to understand about the government grant, which you have mentioned in the annual report. Sir, I just want to understand the nature of this grant. And till what year this would be continuing? So what is the expiry of this government grant?

This is -- there were certain plants where as per the [ Erstwhile ] policy before GST was introduced, government had the practice of inviting investment to their state, and we took advantage of the government policies, put up -- made investment in those states and that's linked to the volume, which we make and the GST which they refund us in 7 years or so, the money is to be paid back. But its accounting effect, luckily under the Ind AS is all accounted for. And the -- before we switched over to the Ind AS accounting, the -- all is provided for. Even if the grant comes, the money will become payable [indiscernible] or any effect on the balance sheet now gets captured because all assets and liabilities are on fair value. So these may be running for another at least 4, 5, 7 years at least. It's a longer duration benefit and the impact of that is not large, but runs for a longer period.

Okay. Sir, these are GST rebate which we get or are interest subsidy or -- any -- on the...

It's before the GST started. Post GST, all these things were abolished and there are certain policies of the state government under which we had made investment one in Assam -- in Guwahati and one in Haryana. So these 2 investments were made taking advantage of the government's policy.

Sure. And just -- if I just look at the last 5-year number, and still, I think approximately 60% of that number is still in the under government receivables. So how do you see that number going forward?

See, there are delays, but the things come. But I think the number which you may be referring to because the total grant we had to capitalize on one side and the liability we had to show on the other side and amortize during the period. So I think separately, we can explain you the accounting year by year.

The next question is from the line of Devanshu Bansal from Emkay Global.

Congratulations on a good execution and debt reduction in a challenging quarter. Sir, the larger peer has been indicating market share gains in the juice category. So what is your take in terms of industry growth for this segment going ahead as well as our market share in this category?

Well, I think it's -- at the moment, juice is pretty well where it was. So I don't think there is a major gain. The only gain it is showing in percentage terms because water has declined. So CSD as well as juice, both have gained. And similarly for us, we have also gained slightly in both the parameters. But overall, there's not some -- any -- because overall numbers have declined drastically. So...

Devanshu, here there is a huge opportunity. I tell you 2 years back when we have taken Tropicana, that's going to be the fastest growing in coming years, 100% juice category, which is not fully penetrated. With every move of penetration, the only thing is we should not run out of capacity as far as Tropicana is concerned. That comes with a lot of promise. And I think we have a lot of potential to enhance the share there.

Correct. And sir, what is your current utilization of juices in a normal scenario?

I think by the end of 2021, we should run out of capacity as far as Tropicana is concerned because the same equipment we use for our ambient temperature value-added products, which under the brand of Cream Bell we had launched a few quarters earlier.

Correct. And sir, realization in India is up 11%, but we saw a kind of a decline in international realization. So what is the reason for this? Why are we seeing a different trend there?

Realization towards what?

In India, in domestic business, we have grown in terms of realizations. But in international operations, our realizations have slightly dropped.

Actually, that is the play of currency, which happens every time. And the -- only Sri Lanka and Nepal, which are directly linked to -- Nepal is linked to Indian currency and Sri Lanka is in dollars. So that is -- rest is because of the currency play.

Okay. And one last on my side, sir, as per the PPP, we have indicated that we have reached 75% of last year sales in June. And we are indicating that July is further better than June. So how can we take [Foreign Language] in terms of volume decline, how should we see for July?

[ The takes ] are improving, we can say at this moment only this much. And as the time passes...

Definitely better than 75%, so we are improving month-on-month.

The next question is from the line of Shantanu Basu from SMIFS.

So basically, I just want to understand what was your out-of-home consumption in the pre COVID era? And that is one. And if you could just give me the other operating revenue figure for Q1 and Q2?

So on-the-go, it used to be close to 70% at one time.

Okay. In the pre COVID era?

Pre COVID era, including water. Now that has come down to less than 50%.

Okay. Okay. Right. And I mean, what about your other operating revenue figures for Q1 and Q2?

Pardon me?

Other operating revenue figure for Q1 and Q2.

Just 1 second.

Just 1 minute.

Okay. And just another question. I mean, can I assume that your other expenses and employee expenses, what you booked this quarter would remain more or less the same for Q3 and Q4?

That's right, it will.

The next question is from the line of Percy Panthaki from IIFL.

First question from me, the international business -- hello, am I audible?

Yes, yes.

Yes. So for the international business, can you give some sort of flavor geography-wise, not only on the performance that we are doing now, but what is happening on the ground in terms of the COVID situation and what kind of -- sort of growth expectations we can have in the next couple of quarters?

Well, the one indication I can give you is that going forward from July onwards, the international business is, I would say, 90% back on normal. Second, I think Africa, Zambia, Zimbabwe, very difficult to say because I don't even know if they know how many COVID patients they have because there's no testing facility, there's no system. So it seems even though they have lockdown, it's still half open, so it's -- but our business is back very close to normal. So -- and Nepal, Sri Lanka, we are growing, so -- Morocco, we are growing, so I don't see any issue going forward to be honest. Zimbabwe, we have grown even in the last quarter. So I think we are -- internationally, we are back to normal and we see positive signs going forward.

Right. Understood. And in terms of the India business, you are saying that out-of-home is still about 40% to 50% of the turnover. So -- and with so many out-of-home...

Used to be. Because if you take out water, it's even lower, but it's slowly coming back.

But how much would it be, I mean, your out-of-home turnover...

Very difficult to tell you because as I said to you, it depends on how much lockdown happens. So it changes overnight. Suddenly now, Tamil Nadu is complete lockdown. So the out of -- go-to-market is completely collapsed, whereas...

No, sir, I was asking pre COVID, what was this number? Was it 70%? Did I hear that correctly?

Used to be 70% including water.

And excluding water, sir, how much would it be?

So water was about 25% of our volumes. So water has come down to 5% out of 25% practically.

Okay. So let us go with the figure of 40% to 50% excluding water...

We are now 8%, instead of 25%?

Instead of 26%.

Instead of 26%. So there's a clear 18% difference in just water itself.

Right. Right. So sir, my question is this that excluding water, even in the CSD portfolio, if we are at like 40% to 50% kind of out-of-home exposure, out-of-home has sort of really taken a beating, right, because restaurants are closed, movie theaters are closed. I mean, so...

That is not that large you see. Out-of-home when we say is what we call on-the-go, people drinking, standing on the shops, people going while sitting in a bus or at bus stations, railway stations, all this is out of -- on-the-go.

But sir, even that kind of activity has reduced so what my question is, if I look at the in-home consumption, what kind of growth are you seeing in that to offset a 40% salience of out-of-home, even excluding water?

I would say more than half of it is. So about 20%, 25% have been captured by in-home consumption.

Okay. So there is like a growth of 20%, 25% in in-home consumption. Is that the correct way to read it?

Yes, you can look at it that way. Because if you look at it, if we are reaching 75%, 80% of our business and water is 18% down, so practically, it's in-home consumption, which has taken over the go-to-market difference.

Understood. Understood, sir. And lastly, just one figure I wanted to check. Your market share in the old geographies of North and East, earlier, I think it used to be around 40%. Has there been any change to that number?

We don't know yet because this quarter, we don't know what has happened and it's very difficult to say this year till we -- till the actual figures come out and Pepsi and Coke give us the figure, it's very difficult to say.

But earlier, it used to be 40, that is correct, right?

That is correct.

Based upon...

It used to be 40 in our original territories.

Yes. Percy, based upon market intelligence, we have not lost any share, I can only say this.

The next question is from the line of Chirag Shah from CLSA.

I just wanted to understand, have we changed any strategy on the dairy product rollout? Unfortunately, of course, we were planning for a national rollout. But given the circumstances, I'm assuming that could have got delayed.

Yes, we have delayed it till next year, and we are going to do a proper launch early next year.

Understand. And just another question on the realization this quarter. I'm assuming that realization this quarter was also partially helped by rationalization and promotions. Was this rationalization and promotion consistent across product segments? And do you think promotions are now back to usual as we speak?

Well, they're coming back slowly. They are not fully back to because still reaching and distribution is still a challenge in lot of places. So -- because number of outlets are still shut. So promotions are coming back, but not exactly to where it used to be at one point. And of course, the gaps will still remain as our CSD and juice volumes are higher than -- mix is much higher still against -- yes, so that gap will still remain. And water is still low.

Sure. And in terms of -- you mentioned supply chain challenges. If I can just extend that question to juices, given the fact that we have one plant servicing the entire market for juices, did we face higher supply chain constraints in juices? And from that perspective, what is the CapEx that we are planning next year on the juices portfolio? And are we thinking of an additional location for juices?

No, we are not looking for next year. So there is no CapEx on juices next year. But we have not faced any challenge of supplies from manufacturers or product availability has not been a challenge. And we will not be expanding next year.

The next question is from the line of Ritesh Chheda (sic) [ Pritesh Chheda ] from Lucky Investment.

Sir, I have 2 questions. One, on the expenses side, where you said that some of the expense cut would be permanent reduction in nature, so this INR 30 to -- let's say, INR 30 to INR 32 EBITDA or let's say, INR 32 EBITDA per case that we have seen for the past few years, what would be the upside to this INR 32 EBITDA per case on account of this cut in expenses beginning FY -- calendar year '21, obviously, not calendar year '20?

Very difficult to again because this depends on the market conditions, what products are going to sell, how fast the market comes back because -- and what percentage of water remains in the mix. So we have been able to cut our costs, so that cost cut what we have done will remain, but of course, depending on our competition and the market reality next year, what the competition is going to be or what packs will sell, it's very difficult to predict that.

Okay. Sir, my second question is on the CapEx side. So CY '21, you called out that CapEx is less than depreciation. The juices line you need in CY '22. Slightly more on a structural side. So on a structural side, largely, the CapEx will be less than depreciation is what we should look at? And incrementally for a significant number of years, we do not need any large growth CapEx in the CSD side?

Well, first of all, next year, we are talking of less than 50% of depreciation. Much less than 50% of depreciation. And in going forward, '22, there will be CapEx requirement, but very little in greenfield in juice -- in CSD. If there will be a greenfield, it will only be for juices. Otherwise, it will be brownfield wherever we feel that volumes have gone up drastically and we need to add a line. So overall, CapEx is -- will be much lower than what we've been having.

Sir, I just may add here, this very little in CSD CapEx and a lot of it is brownfield, up to what kind of volume scale up you would have this kind of a structure and you will not need a greenfield plant? So we do about...

I think for the next 25% to 30% growth, we don't need because we are about 70% utilization. This year, it has been even lower, but -- because of the volume drop. But otherwise, about 70% of utilization is happening.

Which means if you grow the beverages at about a double-digit number, volume of about 8%, 10%, then another 3 years, probably, you don't need any large CapEx in CSD?

Fundamentally yes, except sometimes what happens is one territory grows faster than the other. And if that's -- because we don't like to sell goods from one territory to the other, which is higher than x amount of kilometers. So sometimes, even though your overall capacity might be higher, you still do some capacity expansion in a individual territory.

The next question is from the line of Anirudh Doshi (sic) [ Anirudh Joshi ] from ICICI Securities.

Yes, sir, basically, the cost savings that we are looking at. And as you indicated that most of the cost savings will be structural in nature. So what will be the plan of the company, whether it will be completely pocketing the benefits, and we will see jump in EBITDA margins in coming quarters? Or there will be more push or promotions or investment in ad spend, et cetera, to increase the revenues or straightaway, we will be passing on the benefits via price reductions?

No, price reductions, we are not doing. Right now, our revenues have been lower so there's no question of pocketing anything. Right now, we are making sure that we suffice properly and we do -- still do a good job for our shareholders. And that is why we have been very rigid in cutting our costs and making sure that we don't have to ask for any moratoriums or anything like that. And that is what we have done and the company has done extremely well in cutting costs and making sure we are still fully productive. And we have cut all the fats, which maybe we have gained over the last few years. Going forward, the discounts or the promotions are based on market demand. And sometimes it's not completely relevant to your bottom line only. So if the competition is aggressive and we need to go more aggressive, we go more aggressive.

Okay. Okay, sir. Sir, last question, what is our total institutional contribution, including hotel, restaurant, the cinema halls, et cetera, all put together.

Less than 10%.

Less than?

Less than 10%.

The next question is from the line of Rakesh Roy from Indsec Securities.

Sir, my first question, can you share the domestic or international volume for June...

Sir, I'm so sorry to interrupt. May I please request you to speak a bit louder?

Sir, can you share the international volume number and southwest number for Indian market?

Just 1 minute, we'll give you the percentage.

India, 84.6%, and the balance is international for the Q2.

Okay. For India, sir, how much from the Southwest markets and new acquired territories?

1/3 and 2/3 normally is the split between the existing and the new territory. And the growth in the South and West in the Q2 was slightly better than the North and East.

Okay, sir. Right, sir. Sir, my second question, can you highlight the, sir, demand scenario in urban area, semi-urban and rural area...

Can't hear you properly.

Hello?

Yes.

Sir, can you give a -- highlight on the demand scenario in urban area, rural and semi-urban compared to last year -- in last 3 months, sir?

Well, the rural has been the fastest-growing during this COVID time. And semi-urban is the second. Urban is the most less growing or negative because of the most -- the major lockdowns mostly happening in the urban towns. And the main cities are getting hurt much more than the rural and the semi-urban.

Okay. Sir, if I'm right, sir, your semi-urban is nearby 30% to 33% and rural is 33% to 33%?

You can say around that.

Around that, yes, very close to that.

If we compare this go-to compared to last year, any improvement in the sales volume or sales number?

No, the improvement when you say, the mix has definitely changed. The rural mix has gone up compared to 30%, it might have gone up by 5% to 10%.

Okay rural mix has gone up...

So 70% used to be urban and semi-urban, and 30% used to be rural. Now that 30% could have gone up to 35%, 38%. Exact number I don't have handy right now, but definitely the rural mix has gone up.

Okay, sir. Sir, my next question is, sir, can you highlight on the, sir, your -- this quarter, your juice volume, it declined, sir, and juice is mostly home consumption, sir. So why it declined, sir, this quarter, sir? Okay. Water is okay because water is out-of-home sale and definitely -- what about the juice, sir, any comment on juice, sir?

See, lot of juice was being sold in single-serve, like the INR 10 pack and all that. Now since there was no on-the-go and juice at home consumption is not very large still in India. So that is what has hurt us. And that is why it's coming back, and we are making some changes in the portfolio so that we can make in-home consumption more.

The juice mix has not changed. Actually, it's overall the portfolio has come down. So that's why.

Sir, one question is -- okay, sir, you had just mentioned [Foreign Language] you can postpone the value-added just -- dairy beverage for next year. Is it already launched? Or you will launch next year, sir?

So we have launched it, but we -- as we launched it about -- in February, by the time we could actually send it to the -- across the country, the COVID effect came and we didn't want to have a poor launch. So we held it back, and now we are going to launch it next. We had great success wherever we launched it, but we didn't want to go beyond a point because we couldn't launch it properly.

The next question is from the line of Soniya Varnekar from Equentis.

My first question is on the number of outlets, which are open currently. If you can just share the percentage, how much it is opened right now. And the second question is on the region-wise mix, if you can share from like Northeast, Southwest, what is the mix? I don't want current figure. I want Jan, February figure, like pre COVID what was the mix?

I think what I can tell you is about -- less than 50% of the outlets are open. And the Jan, Feb mix, you might have to call offline, I don't have it handy with me right now.

Okay. Okay. No problem. And sir, last question, if I may ask. At domestic level, can you just share which are the top 5 states contribution in revenues?

Well, UP is the largest for us.

No sir, I'm talking about domestic.

I'm talking domestic only. UP is domestic, I don't think it's international. UP is domestic, ma'am.

Yes. No, I heard this wrongly, I heard U.K., that's why I got confused.

Yes. No, no, UP. Ayodhya, madam.

Okay. Okay, sir.

See, again, the question is, since our strength was more in the North, our market share was also stronger in the North. So technically, some of the states might be overall larger in the industry, but we might not be strong. But for us, UP has been the largest and some of the northern states have been much larger for us.

The next question is from the line of Ankit Mahajan from Reliance Securities.

Sir, my first question is on the working capital. As you said that there is increase in working capital days, and also receivables and inventory is also higher. So can you throw some light on it?

Well, the inventory is higher because we had planned our inventories based on our volumes going on normal season and because suddenly COVID came and the sales and everything was shut down for 2 months practically.

See, there are -- marginally, these are higher. Actually, these are not higher on a particular number of days. You are getting it higher, basically, the denominator has been reduced by 40%, 50%. If the sale is lower and the figure even stays the same, number of days, it goes up. So otherwise, if you see, in absolute terms, numbers are not that variant from the last years.

Okay, sir. Yes, sure, sir. And sir, my second question is, what are the steps taken by you to drive the demand? And are there any changes due to upcoming IPL schedule?

IPL is happening in UAE, is the -- number one. It's not happening here. So I don't think that it will happen. Second, it is happening in the off-season time. And the third thing is, I think the delivery and the opening of the outlets is going to drive the volume more. At home, in fact, 25%, 30% increase, whatever best we could do by reaching out to the people through digital or otherwise, we already achieved and we have done.

See, we are changing in our pack sizes and making more viable the home consumption, which is what is where the demand is going now. So we are -- our focus has slightly changed on instead of going go-to-market in the market than going home. So our pack size and focus on home consumption has changed drastically, and we are focusing and marketing that much more vigorously.

We take the last question from the line of Shirish Pardeshi from Centrum Broking.

I have 2 questions. One is a small observation. If I refer the May 5 presentation, it says that you had 38 manufacturing facilities. While this presentation says we have 37. So is there a mistake or have we closed any of the production facility?

Thank you for minute observation. We appreciate it. If you see the last presentation, we took impairment of our Bargarh plant in Odisha and we also stated that we have reduced a lot of our expenses. Chairman made -- most of -- lot of the expenses are going to be permanent in nature and we reduced fat observing these. So this is the first step in that direction. So what we have done is we rationalized our deliveries and the production, and the smaller unprofitable plant, one has been shut down. So the 31 plus 6 is the number of operating plants as against 32 plus 6 in the last presentation. And I think this process is going to continue for another few quarters. We are in the process of rationalizing and that's what Chairman meant when he said, lot of fat is getting reduced, and expenses are going to be -- part of which is going to be permanent.

Mr. Gandhi, you have preempted my question what I was trying to understand. What kind of rationalization this can happen because now practically you're covering all the geographies in India. So is that number can come by maybe 25% or maybe you would...

No, no, 25% is too large. Out of 38 plants, one plant is equal to the fraction of 3%, but 3, 3 makes big this thing. If I had to give a ballpark figure, average about INR 30 crore is the fixed expenses in a year in a single plant, so you can take this that, that much saving has happened. And when I made a statement that it's going to come in the next few quarters again, so the initiative and the effort of the management, I think, directionally, you can get a clear view, and we will be coming back when we update our numbers in the next quarter.

Sure. A related question on the same slide. On the distribution front, we said that we have 90 depots and 1,500 primary distributors. So now we have acquired South and the West part, 2 geographies, would you be able to specify or give us some indication how this number will look like next year, March '21?

South is, already a part of which we acquired on 1st May 2019. It's not a development of this or the last quarter, number one. Number two, going forward, in the next year, hopefully, we'll be back to the same volume and numbers should not change that drastically.

Okay. Okay. And I have now last question. This is on the consumer behavior. Would you be able to quantify or give some color in our CSD business? What is the cola versus non cola growth? Or maybe if you can give us how the consumer perception and behavior has changed during this lockdown?

See, this you have to break it in various parts to understand fully. If I take you to the history when cola mix used to be 70%, today it's 16% -- 15%, 16%. So what you are saying the behavioral change, major part of that is already played out and is captured in our presentation and in our -- the market mix. Now COVID did not bring any special effect to this, one. And the second is the things are evolving. And if you see our product portfolio slide in our presentation and if you compare last few quarters, you will see new additions coming up and share is going towards the new product lines. We never used to have a dairy, for example, which we are launching. We never used to have our presence in the energy drink or Gatorade or -- Tropicana was never franchised anywhere in the world. So Varun is the only company in the world, PepsiCo has taken initiative and franchised it to Varun. And we have -- therefore, we look a big opportunity in that to grow fastest. So that is already happening. Company is evolving in all these fields, and the question which you raised is getting addressed actually.

Sure. Just related question on the product mix. Would you be able to help me to understand what is the sports drink contribution in Q2 versus last year Q2?

Sports drink, it's very little. Actually...

Right now, it's quite small, but it is picking up considerably. And I think in the coming couple of quarters, you will see it playing a reasonable role.

So if I look at the price point, Ravi, from that perception, is that our margins on sports drink is much higher than our CSD business?

This is slightly higher because we have made the pricing very competitive so that it can grow. So it is definitely slightly higher.

Do you think there is a price change which will be required warranting us going forward?

Not at the moment. We don't see any price changes right now.

Well, ladies and gentlemen, that was the last question for today. I would now like to hand the conference back to the management for their closing comments.

Thank you once again for your interest and support. We will continue to stay engaged. Please be in touch with our Investor Relations team for any further details or discussions. Look forward to interacting with you all soon and hopefully in person. Thank you very much, all the best.

Thank you. On behalf of Varun Beverages Limited, we conclude today's conference. Thank you for joining. You may now disconnect your lines.