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 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 and H1 2021 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; and Mr. Kapil Agarwal, CEO 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 may be forward-looking in nature, and a detailed statement in this regard is available in the results presentation shared with you earlier. I would now reflect Mr. Ravi Jaipuria to make the opening remarks.

Good evening, everyone, and thank you for joining us on our earnings conference call. Trust you and your families are keeping safe and healthy. I hope all of you had the opportunity to go through our results presentation. This provides details of our operational and financial performance for the second quarter and half year ended 30th June, 2021. We have delivered an encouraging set of results during the quarter despite the soft opening -- operating environment due to pandemic-induced lockdowns and restrictions. While we registered strong sales in the month of April, May witnessed moderate sales on account of the disruptions. I am happy to share that our team efficiently outlined -- executed a set of SOPs and work flows to secure our business model and ensure continuity across operations during this time. With last year's learnings, we had all the necessary protocols in place to handle and mitigate the business impact to a certain extent. Further as lockdowns and curfews started easing from June onwards, we saw faster recovery in demand, which assisted growth in the quarter. Overall, we have delivered a healthy performance with a top line growth of 49.4% year-on-year. The higher growth rate is on account of robust volume growth over a lower base of previous years as well as marginal increase in realizations. On the profitability front, we were able to maintain most of the cost optimization measures that we have undertaken last year, allowing us to report stable EBITDA margins at 23.3%. PAT increased by 123% primarily driven by lower finance costs on account of lowering of average cost of borrowing and reduction in total debt. We are also pleased to share that in line with our dividend policy, the Board of Directors has recommended an interim dividend of INR 2.5 per share. Our newly launched product variant Mountain Dew Ice, which is a lemon fruit juice drink, has reported a strong uptick in sales in the quarter and continues to be positively received by consumers across markets. As we look ahead to continue to monitor changes in the operating environment, and are undertaking necessary precautions to safeguard our business and people, given that there are concerns triggered by a potential third wave of COVID, we believe the momentum in demand in consumption is steadily building and will further strengthen with the higher vaccination drives. Improving economic indicators and supportive metros, such as good monsoons, we remain confident of reporting robust performance in the quarters ahead. I would now invite Mr. Gandhi to provide highlights of the operations and financial performance. Thank you very much.

Thank you, Mr. Chairman. Good evening and a warm welcome to everyone joining us today. Let me provide an overview of the financial performance for the second quarter and half year ended 30th June 2021. Consolidated sales volume registered a solid growth of 45.4% to 152.3 million as compared to 104.8 million cases in the Q2 of the year 2020, primarily on account of strong growth in the month of April as compared to low base of the corresponding period last year and a steady recovery in the month of June '21. Post easing of lockdown restrictions, CSD constituted 78%, juice mix was 7% and packaged drinking water mixes 15% of total sales volumes in Q2 calendar year '21. Revenue from operations adjusted for excise GST grew 49.4% year-on-year in Q2 calendar year '21 to INR 24,498.5 million. Realization per case improved by 2.8% to INR 160.8 in quarter 2 calendar year 2021, mainly on the [ counterfired ] realizations in international territories partially offset by higher mix of water. Gross margins declined by 128 basis points year-on-year to 53.5% primarily due to change in product mix and marginal increase in raw material prices. EBITDA increased to 51.1% to INR 5,708 million in Q2 of calendar year '21 from INR 3,777 million in Q2 of calendar year 2020. EBITDA margin marginally improved by 30 basis points to 23.3% in calendar year '21, Q2, even after a 128 basis point decline in gross margins as we were able to sustain cost optimization measures that were implemented last year. Depreciation increased by 3.6% to INR 1,287.8 million as compared to INR 1,243.1 million in Q2 of the calendar year 2020. Finance costs reduced by 36.9% to INR 467.8 million from INR 741.9 million in Q2 of calendar year 2020. This is due to repayment of debt as well as the reduction in average cost of borrowing. PAT increased by 123% in to INR 3,188 million in Q2 of calendar year '21 from the level of INR 1,429.8 million in quarter 2 of calendar year 2020. This is driven by lower finance cost. During the quarter, an amount of INR 114.4 million from the total foreign currency provision got reversed to other income due to corresponding reduction in the total foreign currency liability in Zimbabwe. During H1 calendar year 2021, the net organic CapEx of INR 190 crores, including ForEx adjustments was primarily towards expansion in India, Morocco and Zimbabwe. On the working capital front, working capital days marginally increased to around 24 days as on June 30, '21 from 20 days as on June 30, 2020. On account of fire stock [ we have been ] raising and [ key ] preform inventory stopped to take advantage of lower PAT prices at the start of the year. Net debt reduced by INR 4,666 million to INR 25,492 million as on June 30, '21 from the [ at year ] level of INR 3,158 million as on 31st December 2020. Resulting in debt equity ratio, which was comfortable at 0.63x as on 30 June '21, and the debt-to-EBITDA ratio stood at 1.69x for the trailing 12 months EBITDA. On the whole, company's financial position remained strong during the quarter. We have seen a healthy month-on-month improvement in demand and the outlook remains positive for all our product categories over the medium to long term. Overall 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 forum for the questions and petitions that you may have for us. Thank you.

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

A few questions. First, on the realization bit. So on a Y-o-Y basis, there is a 2.8% positive number, and that is despite the fact that water actually has moved up quite a bit. So I'm just curious, can you just elaborate if there is any price hike? Because to my understanding, you haven't taken price hike YTD, at least, right?

Yes, we have not. Vivek here, the -- thank you, first of all, for asking the question and participating in our call. One of the things is the mix has changed and also the international thing. Last year, if you remember during the COVID quarter, the mix was slightly different. And this year, we -- one, is in drinks, Sting and the Mountain Dew has come in and also juice has gone up slightly, Tropicana and the international, this thing has also helped us a bit. So it's a combination of these 3 things. If you want to know the breakup, my realization per case, international business is 180-plus while India was 156-plus.

I see. Okay. Got it. That was one. The second was on the gross margins. So gross margins at [ INR 53.5 ] have come off quite a bit. But when I look at your other comment about higher working capital because you took positions ahead of -- expecting or anticipating a surge in, let's say, input prices. So can you just elaborate on the 2 comments that you made? And what is your outlook on gross margins?

We think the gross margins basically have improved. Yes. In India actually has come down because of the stocking of the raw material PET, et cetera. And also, this has definitely resulted in the stocking of the working capital and a higher number of days. As in the earlier calls, we had stated, we knew that the PET prices in international are going towards northwards. And therefore, we had to cover ourselves for the full season. And therefore, the number of days has gone up.

Also what has happened, Vivek, because of the lockdowns, we had to transfer goods from certain places to another place, and that has incurred extra freight which was not planned for. And instead of letting the goods expire. So that was 1 of the -- another reason why our cost of goods became higher.

I see, I see. And lastly, do you think the gross margins are close to now at its trough and should stay at this level to, let's say, start to move up?

It's slightly difficult to say because let's see how the things pan out to be.

What is happening, Vivek, because of the pandemic, every day the correlation keeps changing. So there is so much uncertainty right now. I think -- but we have been still able to manage, make sure there are no expiries, make sure our goods -- even every day to day, we are now looking at will the third wave come, not come. So very difficult to predict everything right now. It's not normal circumstances. And our stock also which happened in [ seasonal award ] only because we didn't have in May -- we lost our peak month of May. Otherwise, this would have got consumed and we would have not carried this kind of inventory. So I think we have to be a little flexible during this period, and there will be some changes, which is very difficult to answer, actually.

Sure. Sure. Fully, fully understand that part. Mr. Jaipuria, but just a small bit, a lot of your peers' competition in FMCG space have been taking up prices, given that the input price environment is quite against. Do you anticipate any price hike in the foreseeable future to pass on some of that impact?

We don't think so right now, we are able to power that up with our cost cuts, which we have done. So that's why we don't say that our margins will go up, but I think we can manage with our margins and without taking price hike.

[Operator Instructions] The next question is from the line of Pritesh Chheda from Lucky Investment Managers.

Sir, I wanted to know, since some of the consolidation also would have happened in these numbers. So what would be versus 2019, what would have been our volume growth on a like-to-like or a volume decline on a like-to-like basis?

This is, again, very difficult to answer. Because since we took over the territory in 2019, we have not even had 1 season. I mean even last year -- last year was our first season. So that was full of -- both the full of pandemic. Again, this year has been full of [ disruptions ] . And both the pandemics have come in our peak season, which is April, May, June. So it's very difficult to really answer anything. The growth we were expecting, the new distributors we had made there is -- and still, I would only say that we have been able to manage and give a reasonably good results, which would happen much better if it was a normal time. That's the only thing I can answer you.

Okay. What should be the expected volume for us in the current year that is CY '21, if you could...

You're asking the same question, how can I comment anything or tell you anything because I don't know what's going to happen in the next couple of months. But it's looking positive, and we are on the right track. We are getting reasonable good growth, business is back to normal. Until we again see a third wave, which is strong and lockdowns happen, we see reasonably good growth over last year.

Okay. Just to partially answer your question, See, if we see organic basis '21 over '19, up to April, which was like a pre-COVID period time, we can say because up till April, the effect was not much. So we had been growing and the growth has been -- as in the first quarter, we had said CAGR of 10%, similar in -- we continued in the month of April also first 4 months. And then again, June onwards that the growth has come back out of 7 months of the current year 5 months, there have been substantial growth months. So hopefully, this year, let's see, as the Chairman said that it's not possible to give a guidance, but hopefully, we...

I mean the business is back. So I think the only question is depending on the pandemic, otherwise, everything is looking very good.

Sir, about South, where in the past calls, we had mentioned about scope for market share expansion, scope for better servicing the market. So in a normal year, let's say, hopefully, next year should be a normal year. And what run rate should South grow higher than your national average if everything is kind of normal business scenario, based on whatever highlights you had given in the past year?

At least, the new territories should go faster than our existing territories. But again, we have not even had 1 season to stabilize those territories. I think we need to wait 1 season before we can start giving you how fast we can grow. Because as soon as we took over, both seasons have been pandemic driven.

Yes, sir. Okay. And my last question is, sir, for the next 2 years. What should be our CapEx that is '21 and '22. And how should the net debt look like in '21 and '22?

CapEx, we are expecting to be very close to our depreciation. It could be a little more 1 year and less 1 year. So those depending on when the plants comes and then next year, it becomes less or it can become more. So very close to our depreciation would be the guidance we would give.

And net debt will keep on coming down, right?

Of course, yes, yes.

In the pandemic year, INR 450 crores or so even the H1, it has come down. If pandemic would not have been there, the reduction figure would have been much higher. But luckily, we got [ ported ] by a reduction in the interest cost. So interest servicing, in any case, was much lower as it is.

Both the years, we have lost our peak season. So please understand we have a summer-driven industry. And if you lose April, May, June, because both years, it has the pandemic has hit in the April to June quarter.

[Operator Instructions] The next question is from the line of Drew from Monarch AIS.

Sir, my question is on the balance sheet part. If we see the current liabilities and other financial assets, they have a big jump. So the other current liabilities have gone from INR 380 crores to INR 528 crores. And other financial liabilities have gone from INR 85 crores to INR 130 crores. So what would be the reason for this jump in these 2 line items?

I think if they [ can't soon pay the portion, the current ] liabilities of the term loans, which fall in during the next [ 5 ] months.

Okay. So these both constitute the current portion of long-term debt which is payable this year, right?

That's the major portion, which comes to mind, but [ indiscernible].

Okay. Because okay, cumulative, it goes to around INR 250 crores, maybe I'll connect with you separately on this. And thirdly, for the first 6 months of this year, what has been our total debt repayment which has happened?

This is INR 450 crores around, INR 464 crores precisely.

INR 464 crores, repayment.

Yes.

And what is the plan for the last 6 months of this year? What is our plan to repay debt additionally?

Normally, what happens is in the first year, the repayment happens in the second part, the tax payments, the dividend payment, CapEx, et cetera, has taken place. But however, still, we always are able to -- couple of hundred. But the major proportion of the debt reduction happens in the H1 only.

Okay. Okay. So maybe additional couple of hundred crores we can expect to reduce from the long-term debt, right?

That's right.

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

Sir, my question is on margins on a slightly longer term. So we did around 23%, 24% margins in India business over '16, '17 time frame. And since then, margins have dropped for understandable reasons. But when do you expect getting back to those margins levels in India, even if we assume CY '22 to be a normal year.

If we assume -- yes, exactly. Your basic question is easy for us. If we assume the '22 to be a normal year, we will immediately be back to those level of margin pursuits. That was the only thing because holding up. Otherwise, we are totally scaled up as explained by Chairman to go to a next level.

Yes. Sure. And secondly, I wanted to understand India gross margins in the current quarter have been more or less stable. So the RM inflation and higher water share, is that in international operations?

International operations margin are definitely always slightly higher, but they come with the currency risk. But as the currency also was stable, so that has helped the overall margins have been consistently good for last few quarters.

Sure. Any -- you indicated that new innovation, new introductions have been doing well for us. So if you can highlight some of the trends and staying in Mountain Dew Ice, what is the current contribution and possible potential contribution that we foresee from the payment reductions?

So I think basically, our energy drink, which was Sting, which we launched a couple of years back has really taken off and is becoming an important part of our mix, which it used to be a small mix at one time. And Mountain Dew Ice has done very well. But unfortunately, as soon as we launched it within 2 months pandemic came again and go-to-market became very difficult, and mostly Mountain Dew Ice was originally launched in smaller packs, which is mainly go-to-market. So we are, again, starting it again. So that's why to say what growth we will get is very difficult and what percentage of share it will take because I think we have to give it 1 year, 1.5 years for the brand to start keeping any type of mix.

And the answer to your question, yes -- portion of your question, which is that what are the new launches. On that, the launch is Mountain Dew Ice, still the dairy-based beverages and Sting are all there. The only thing is these are itself are to be expanded further. So there's a huge potential like as you go manyfold, like Sting over 2 years has happened. In H1, we have already crossed 10 million mark, which is supposed to be very good for any brand to be a long-term player. So the potential of this is yet to be expected before new launches can come in.

Lastly, sir, is this catering to a different consumer base? Or somewhat it may cannibalize the existing consumer base and specifically talking about Sting?

No, it is the same consumer base. The only difference is that compared to Redbull, we are at a very reasonable price, so people who could not afford or wanted to have a Redbull is now going for a Sting, and a lot of your other customers are also going for it. They like the taste. It's going to become according to us, a big brand, 1 of our core brands. So I think again, this would have been much larger provided pandemic would not have been there because, again, this was a small pack. And all small-pack sales happen more while on the go instead of taking it home. So you will see huge growth in Sting coming in the next 6 months also and going forward next year.

People have a social liking for staying. And therefore, this is expanding the market and growing a different base for itself.

Sure. I have 1 more question. Can I go ahead?

Sure. From our side, yes.

Yes. So sir, PepsiCo U.S. consistently has been indicating market share gains in India beverages space, but somehow we have remained tight lipped on this front. So any comments that you can share in this regard?

I think we have done well. And I think that is where I would like to keep it.

[Operator Instructions] The next question is from the line of Sameer Gupta from IIFL.

First question was on the Zimbabwe provision reversal. So I just wanted to understand now how much of this foreign currency liability is now remaining and when is it expected to be settled?

We have left about $15-odd million, which is come to -- we billed India only and some to the bank there. So about $2.5 million, $3 million on a quarterly basis, we are settling this and this is committed by the Reserve Bank of Zimbabwe. And every quarter, as and when the liability gets repaid. So we will be reviewing every quarter, this provision which is already there. And if a need arises, we will be reversing it to the P&L.

Sir, USD 15 million is currently the liability on the balance sheet as well. And every quarter, you are expecting $2 million, $3 million to be reversed just late this quarter?

That's right, to be settled every quarter.

Okay. Fair enough. Sir, second question, final one from me. Sir, the dairy-based beverages portfolio. I know it's been a difficult time when you relaunched this year and again, the pandemic struck. But any kind of update on this product, where is it being sold currently? Have you resumed the scale-up in June? Or are we going to again postpone it to the next year? Which market this is being sold at? What is the current consumer feedback? Anything on this would be helpful.

So we have again resumed the sale of it, and we are focusing more for the sale of it in the North. Right now, we are not sending everywhere. So right now, our conscious decision is to make sure it is fully marketed properly in the Northwest first.

But it is capable to be scaled up as and when required. You don't need to set up another plant?

We are capable of and it was doing well. But again, any new product launch cannot be in the off season. It doesn't work fully.

My question was, it is from a shelf life point of view, it can be...

It's not an issue because it's not shelf life. But still, people when there is a -- any crisis or pandemic or anything people only want to buy what is currently selling, nobody wants to keep stock. So anything which is new or is slow moving initially, people don't like to buy it.

The next question is from the line of Nihal Jham from Edelweiss.

Yes. Sir, 3 questions from my side. First is that when you [ ID guide ] for adding 1 lakh outlets each year on the base of 2 million that we have. That is something that can happen regularly even in the off season? Or is it that most of it would happen during the season and ideally, we'll have to wait for next year to do that addition again?

Obviously, the store addition is not going to happen this year. A lot of stores have shut down rather. So I mean, we don't expect additions coming this year. It has to be a normal year for the stores -- number of stores to add.

So most of it can only happen during the season time, is it's not as of that in the other situation?

Not only that's the question of season time, but we are -- right now, the people who are shut down, we are just -- even if we are opening new stages they're just covering up what the people have shut down. So the number of additions is not going to happen this year.

That's helpful. The other part was, is it right to assume that most of our international operations did not face any COVID impact this quarter?

Well, some of them did, but Nepal did, for example, Sri Lanka did, but are even Morocco did some, but everywhere, it was -- the African part was much less even though COVID was there, but it was not complete lockdowns like here.

Absolutely. And if I compare our performance of the subsidiaries also say, 2 years back, there is a significant improvement. So most of it will be driven by Zimbabwe? Or it would be some others also?

Zimbabwe and Morocco.

Sure, that's helpful. Sir, one last question from my side. Now while you've spoken of Sting and also dairy is one of the recent additions that we've had. Ideally, over the longer term in terms of a product addition, are we looking at mainly extension of the brand like in case of Mountain Dew? Or there could be a new category also that we contemplate launching anytime soon, similar to Sting where we...

Things we have added, actually Mountain Dew Ice is a completely new category. It's a juice-based lemon drink. Then Sting is only 2 years, 3-years old and huge traction is coming now. Tropicana juices, we have expanded drastically and that is showing traction. So there is enough work for us to do with the product which we have launched. And every year, just to launch what it doesn't help if the portfolio becomes too large. So I think we have enough potential in the products we've already launched and we'd first like to get enough momentum on that.

[Operator Instructions] The next question is from the line of Rakesh Roy from Indsec Securities.

So my first question is how do you see...

Can't hear you properly, Rakesh.

Can I request to speak a little louder, please?

Sir, how do you see demand scenario, especially in South India after rising cases in the interim?

So South is doing well for us. But as I said, the real momentum of the real go-to-market changes we wanted to do, we have not been able to do completely. But otherwise, we are doing well. That's why you're seeing growth overall.

Okay. Sir, can you say the number of the domestic volume or an international number sir, Q2?

Q2, India is 127 million cases. And this is -- and international as against this is 25.3 and total 152.3.

Yes, sir. Sir, out of 127 , how much is from the South India?

No, I don't think we have that number right now handy. But South [ it lacks ] South India numbers.

Broadly, we could give you the benchmark. It's in the North and East is 1 and South and West is half of it. So 1 and a half, like that. So 2/3 comes from North and East and 1/3 comes from West and South.

[Operator Instructions] The next question is from the line of [ Mavi Jain ] from Aditya Birla Money.

First, apologies if I were I'm repeating the question. I joined the queue late. So my question is on the other expense side. So when we see on a sequential basis, we have not sustained the cost efficiency. So just wanted to know which are the areas of cost where we have worked well? And how much is it sustainable going forward?

Intake, as we have given in the earlier calls, we in the organization and in transportation, consolidating plants into 2 and on the discount side, this is actually not under 1 as a head of other expenses, it's. And to talk to about everything, realization, for example, has gone up over last year substantially. So it's an efficiency across, which has come in. So we had to realize line by line, the total P&L actually for that.

Okay. So we can expect it to be a sustainable operation.

What has come this year is definitely sustainable. Last H1 was immediately done and then there were certain... [Audio Gap]

The next question is from the line of Suvarna Joshi from Axis Securities.

I have 2 set of questions. One was, if you can just highlight the growth of 45% in volume. In terms of the SKU mix, can you just set understand what has grown for us? That is one. The second question is on...

The line from the management got disconnected. Please stay connected when we rejoin. [Technical Difficulty] Ladies and gentlemen, thank you for your patience. Suvarna, may I request you to repeat your question for the management once again, please?

I had about 2 questions. One was, if you can just help us understand how has the SKU mix done for us? Because in the last 2 quarter con calls, we've said that the larger SKUs have typically done well because of the in-home consumption. So 2 parts to that question. One is on the SKU mix and how is the in-home consumption trend doing? Is it continuing to grow at the rate that we have been seeing? Or there has been some tapering down noted? That is one. The second bit is on -- if you can help us understand the growth in semi-urban and urban markets because during this second wave of the COVID, we have seen that the hinterland and the rural regions were more impacted versus the first one. So what has been our experience on that?

So I think as far as your in-home consumption that it's steady and it has been doing well. And similarly, the large packs are doing much better than the single cells. So both of these things are continuing as the pandemic -- during the pandemic time, this -- both these things continue to remain. As far as your rural or urban is concerned. So last year, rural was very strong. Even this year, rural was good, but not as strong as last year. I mean urban did quite well this year compared to last year.

So can you give us the delta of how the rural has grown versus the urban this year around versus the last year?

So I don't have the exact numbers, but I can tell you only one thing. Last year, the complete growth, most of it was coming out of rural. Now it is balanced, and I think rural as well as your urban is growing at about the same pace. Otherwise, it was completely skewed on the rural side.

Basically, the total business, including the growth pattern sales mix is coming something like pre-COVID like, there has not been any much of a change, including market discounts, penetration, except few items like Horeca was absolutely shut and May was totally shut. Other months out of 7 months of the current calendar year.

Also what happens is in the summer months, rural grows much faster, which is the basic change we saw that urban was doing all right and rural did not grow as fast as what we had expected.

Sure. This is very helpful. So going forward, can we then say that gradually, urban will start picking up over the rural region growth? Or it should remain in the balance territory of growth?

Right now, I think it will remain balanced because the peak season is off. And after peak season, always urban sales are better than the rural.

I now hand the conference over to the management for closing comments.

Thank you. I hope we have been able to answer all your questions satisfactorily. Should you need any further clarification 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, once again.

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