Varun Beverages Limited (VBL) Earnings Call Transcript & Summary

Ladies and gentlemen, good day, and welcome to the Varun Beverages Limited Earnings Conference Call. 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.

Good afternoon, everyone, and thank you for joining us on Gurun Beverages Q2 CY 2026 Earnings Conference Call. We have with us Mr. Ravi Jaipuria, Chairman of the company; Mr. Varun Jaipuria, Executive Vice Chairman and Whole-Time Director; and Mr. Raj Gandhi, President and Whole-Time Director of the company. We will initiate the call with opening remarks from the management, following which we'll have the forum open for a question-and-answer session. Before we begin, I would like to point out that some statements made in today's call may be forward-looking in nature, and a disclaimer to this effect has been included in the results 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. I hope you have had a chance to review our results presentation for the second quarter and the half yearly ended June 30, 2026. We are pleased to report a strong performance during this quarter. Across our markets, consolidated sales volume grew by 19.8% and together with improved realizations translated into 20.4% increase in net revenue from operations. EBITDA increased by 17.2% to INR 23,430.4 million in quarter 2 2026. In India, we saw healthy volume growth in 20s since the onset of the season. That is from March onwards, except for the month of April, which was about flat, resulting in overall volume growth for the quarter of 14.4%. Our expanded manufacturing footprint, extensive distribution network and continued investments in chilling infrastructure continued to drive growth. We also extended our exclusive bottling and trademark license agreement with PepsiCo India. PepsiCo in India until April 2049 and removed the earlier restrictions requiring BPL to operate solely as the SPV for PepsiCo business. strengthening our long-term partnership and creating greater operational flexibility to pursue opportunities that can deliver scale and synergies. We also entered a strategic alliance with Asahi Group Holdings to introduce the iconic Calpus brand in India, marking our entry into the value-added fermented dairy beverage category. The international business maintained strong momentum. [ Tesa ] in South Africa helped overcoming capacity constraints while strengthening our manufacturing footprint and route-to-market capabilities in South Africa. We also entered into an agreement to acquire the business of Divani Foods Industries Kenya Limited which will provide us with the ready GTM in Kenya for expansion into carbonetic soft drinks and energy drinks. In accordance with our dividend policy, the Board of Directors has approved an interim dividend of 25% of face value, that is INR 0.50 per share, resulting in total cash outflow of approximately INR 1,691 million. Looking forward, we remain -- looking ahead, we remain confident in the long-term growth potential across our markets, supported by favorable demographics, rising disposable income and increasing consumption of packaged beverages. With adequate capacities, growing and diversified portfolio, strong partnerships and an extensive distribution network, we are all well positioned to deliver sustained and profitable growth and creating long-term value for all our stakeholders. I would now like to invite Mr. Gandhi to share the key highlights of our 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 and half year ended 30th June 2026. Revenue from operations net of excise and GST stood at INR 84,512 million in Q2 of 2026, up 20.4% year-on-year. For H1 2026 revenue increased by 19.4% to INR 150,254 million. Growth during the quarter was primarily supported by a 19.8% increase in consolidated sales volume to the level of 46.7 million cases. As mentioned by Chairman in India, we saw healthy volume growth in '20 since the onset of the season with the exception, of course, of April. International markets also delivered healthy growth with volumes increasing by 38.4%, including the contribution of 11.8 million cases from Tesa in South Africa. Net realization per case, beverages at the consolidated level improved by 1.2%, supported by better realizations in international territories. Gross margin improved by 44 basis points year-on-year to 50%, supported by a higher mix of international business. In India, early stocking of key raw materials and savings in sugar consumption driven by a higher mix of low sugar, no-sugar products helped maintain gross margins despite the inflationary raw material environment affected by Asian prices. EBITDA stood at INR 23,410 million, registering growth of 17.2% year-on-year with the EBITDA margin at 27.7% in Q2 of 2026. EBITDA margin declined by 76 basis points year-on-year, primarily due to consolidation of pizza business, which currently operates at lower margins. In India, the EBITDA margins improved by 38 basis points, driven by operational efficiencies arising from healthy volume growth, partially offset by higher other expenses, primarily transportation and distribution costs. PAT grew by 15.1% to the level of INR 15,253 million, supported by strong volume growth across India and international territories. Depreciation increased by 33.6% due to the commissioning of new plants in India last year, which was not part of the base quarter and the acquisition of Tesa in South Africa, finance costs increased by 5.8% primarily on account of [indiscernible]. For H1 2026, EBITDA increased by 18.7% to the level of INR 3,719 million, while PAT grew by 16.9% to the level of INR 2,040 million. Low sugar, no-sugar products contributed approximately 73% of the consolidated volume during the period. VPN India remained net debt free with surplus cash of INR 14,941 million. At the consolidated level, net debt stood at INR 3,713 million as of June 2026. This was primarily on account of acquisition of Visa in South Africa. Company's long-term rating for its bank loan facilities has been reaffirmed by CRISIL at AAA stable. During H1 2026, net capitalized CapEx amounted to INR 9,500 million. This included INR 200 crores or INR 2,000 million towards brownfield expansion in India, including value-added dairy beverages line at [indiscernible] and INR 1,000 million towards snack manufacturing plant in Zimbabwe and INR 4,000 million towards market infrastructure, including hey coolers, glass motors, pallets and vehicles, et cetera. The balance was attributable to foreign exchange fluctuations. As of 30 June 2026, capital work in progress stood at the level of INR 4,900 million, primarily relating to expansion in South Africa and a CSD line in Kenya. In addition, inorganic CapEx of INR 11,214 million was incurred towards the acquisition of [ Tisa ] Limited in South Africa. Looking ahead, we remain focused on sustaining our growth trajectory by leveraging our expanded capacities diversified portfolio and extensive distribution network in India, favorable demand trends, increasing beverage penetration and continued investments in market infrastructure provide a strong foundation for future growth. While the ongoing expansion of our international operations, they broaden our opportunity base across markets, we believe our strong execution capabilities will enable us to deliver consistent performance going forward. On that note, I have come to an end of opening remarks and would like to know now ask the moderator to open the forum for any questions or suggestions that you may have. Thank you.

[Operator Instructions]. The first question is from Abneesh Roy from Nuvama. My first question is on the demand side in India. So if you could tell us on INR 10 price point, is there any further scale up for your business and outlook on that. Second is, when I see the quarter number, clearly, April was challenging for the category. But if I see Kampa Kola's numbers, they claim to have achieved 50% of FY '26 sales in same quarter. So if you could tell us if the rain impact was more in your geographies because that could be the reason. So these -- that's my first question.

So let me answer that. Yes. So let me answer that. We have not scaled up INR 10 significantly. So if you see our growth right, which is March onwards, we are growing healthy 20% plus, right? Even post June, we're looking at a 20% plus growth at least minimum. So the INR 10 is a nonprofitable category for us. And as long as we're delivering 20% plus growth in most of our markets, we are pretty happy with those growths. And long-term sustainability is not there. Yes, certain markets we are obviously pushing INR 10, but it's not a very big mix for us as yet in our portfolio. So that's the first thing. Sorry, what was your second question?

The Kampa is growing and...

Kampa growing, I think, yes, the positioning, what we've always taken is that Kampa at that price point will grow because there is a certain population, which is not able to access or have access to the price points, right, in terms of consumption. So Kampa is growing, the rupee tennis growing, maybe they're eating out local brands where at the same time, but in our markets, at least we are seeing that we are growing at the same time as well with our price points. So I'm sure a lot of new people are getting recruited in the category as well at 10. Hence, they could be getting a lot of volume from there. They could be eating a lot of brands as well, which is significant in a lot of our markets as an industry base. And we are seeing good growth in terms of where we are apart from April where the El Nino effect was there heavy.

Also, I think Tampa is expanding their territory. So I think it's very difficult to analyze the growth is coming from the same territory or for expanding territory.

Sure. So one follow-up here, essentially, if I see, because of Kampa, the entire industry is offering more grammage at the same SKU. So even for your SKU at 20, there is more grams. So if I the volume growth of, say, 14% or 13%, and this kind of grammage growth, could you comment on how much is the pack difference versus earlier? So because that will give us 1 metric of the consumption? Because if you add grams, your volume growth will be benefiting because of that. If you could comment on PAC growth.

Yes. But that -- I think we keep on changing our pack sizes. So we always look at and announce our details are based on 8-ounce and which is what we base it on. And all our territories are all somewhere we downsize, somewhere we upsize. So these will continue in the whole business. But overall, we are growing in pack size as well as overall terms.

Abneesh, as chairman mentioned, the -- everything is train 1 basis if realization has not come down per 8-ounce case, my EBITDA or the gross margin has not come down. So that's immaterial. Basically, the idea is to give the benefit to the ultimate consumer instead of giving to the trade or otherwise and utilize the new governments coming -- giving the product at a cheaper price. So that's why we are continuing from the onset of this with the exception of April, growing with the 20% plus from the pinning. So that's the biggest indicator.

My second and last question is on the Economic Times article which came 4 days back. So I wanted more clarity on that article and focus of the group and company on Alcobev in India. So that article says that the group has hired from Diageo very senior person to head the group's beverage footprint. So I wanted to understand, is Varun also going to participate in this because clearly, you have expanded your agreement with Pepsi to go beyond soft drinks. So -- and this article also says on bidding for Bira. So if you could address this [ alcobev ] entry in India, what are the long-term plans for the company specifically? Yes.

Well, at the moment, we are not we are still looking at what are the categories we would expand. We are hiring some people to look at new ventures, new possibilities, but it's too early. We have just got clearance with Pepsi and we are not looking at data.

[indiscernible] for group or for company?

It's for the group. It's for the group. So he will be helping us in a lot of other things. It's not alcohol only

The next question is from Aditya Soman from CLSA.

So two questions. Firstly, can you give us a sense of growth by category, especially some of the new categories that you've launched like Nimbles or milk-based beverages, how the growth has sort of evolved? And is there any meaningful difference between those categories and carbonated beverages. And second, we've seen that post -- during the GST changes end of last year, we saw a meaningful change in some of the beverage categories where the GST has come down, but in carbonated beverages not so much. So is that leading to any sort of differences in category level growth. Those are my two questions.

Yes, I can answer that. So I think our focus has been very, very strong to kind of build a differentiated portfolio as well over the last 3 to 4 years. It's just didn't start now. So if you look at our other categories, which is Tropicana juice, it could be value-added dairy. We expanded the range, added a lot of new products at different price points. we got Nimbus in the Hydration Category. So if you look at hydration and dairy, particularly and juice, these have been high growth and focused categories for us. So in terms of growth, where I can't give you the specifics here, but at least, we're seeing 3x, 4x growth compared to our overall business, and we are heavily focusing on driving these categories.

Yes. No, that's very clear. And maybe if you can just answer on the GST effect, any sort of meaningful positive effect on the other businesses?

So I can also give you some numbers for your comfort, that VAT is growing at over 40% for us and Nimbus is growing at more than 30% for us. What was the other question? Any other question?

So just in terms of the GST impact, right, because one of the areas...

[indiscernible] very minimal with certain products, which was like dairy and water and soda. So that was -- we are seeing growth, and we were -- because of the geopolitical issues, the pricing, some of these categories would have actually be taken up. But because of this, it has helped, and we are now sustaining the prices and continuing to be able to sell at the old prices, which is helping us grow the business.

Very clear. And since you talked about sort of the geopolitic ratio, just a follow-up here. In terms of raw materials, last quarter, you had indicated that obviously, you had sufficient supplies of input materials to run through sort of 2Q. From here, how do you see that play up.

We are still -- we keep buying, so we don't dry ourselves just because -- so we have now made sure that we have enough material for quarter 3. But obviously, there is an impact of cost and which has got mixed with the -- so we average our cost price and we have taken part of it in the second quarter also. And the balance would come in the third quarter. So our pricing would remain the same and overall effect would not be large because we have averaged out the pricing.

Understand. That's very clear. So some of the effect has already come in 2Q.

Yes, yes, reasonable portion because we've averaged it and we have got enough stock for quarter 3, so we acquired more goods at higher price, but we average out the price of -- in the second quarter.

Aditya, basically, the COGS and the inventory valuation is not on people, it's on average costing. So the purchases which were earlier opening stock, which was sufficient to cover for the quarter, although consumption might have happened of that, but the pricing to the P&L goes based upon the average because in the last quarter also, we kept -- we purchased and kept sufficiently the inventory for ongoing quarter also. As Varun mentioned, we are continuing to grow at the same percentage from the onset of the season, we are growing with the exception of March when B20. So this inventory is going to be really useful and handy and at average price, which may be actually lower than the today but it's average price because part of this is booked in the pen of last quarter is going to be helpful. So there won't be any surprises on that account.

The next question is from Anand Shah from Axis Capital.

Just two questions. Firstly, any sense you can share on the industry growth, how it has been this time? I mean, general broader view as to our industry would have grown in volumes. And second, also on international part, I mean, you've seen quite a strong growth even if I take out tease more than 25% growth Y-o-Y. So I mean, are all geographies firing there or South Africa, Congo are growing much faster, and it seems even Morocco, Zimbabwe may have grown well there. Just wanted some color on international and broader industry growth this quarter.

Internationally, all our countries except the MBA is slightly slower. But all other countries, which is a very small market for us. All our countries are growing at a reasonably fast pace. And there is a huge opportunity in Africa. And last year, we had some issue with the Zimbabwe, which has also started firing now because of sugar tax and all that. But that -- now all our -- all the countries in the African region are firing for us. So our international market, rather. So we see good potential going forward, and we are expanding in the African continent.

Got it, sir. And anything on the industry growth in India? I mean this quarter, any sense they will be in line with the industry growth or.

I can't give you the exact -- but if we are growing at 15%, if you see in the first half and Tampa, you are saying it's growing at 50% or doubling. So and I'm sure coke is also growing. So there's no reason. That means the industry has to be growing more than 20%. So I don't know the numbers.

So in fact, here, you also have to see, Anand, the cannibalization of B brands in that category.

The exact numbers are not there, so -- but I think all the three main players are all growing. So there's enough growth which is happening in the industry.

And just last question was on the food distribution and manufacturing in Africa. I mean, how is that scaling up? You had shared some numbers in 0.6 what are the targets or...?

Also growing well for us. That is growing well for us. And -- what's the number on the -- so about 50%, that is growing at about 50%.