In the last two trading days, shares of Varun Beverages Limited (VBL) have gained 4% as compared to 1.8% fall in Nifty 50 index. Investors are expecting that its foray into snack making will pave the way for huge opportunities in the food segment.
The board of VBL has approved the company’s plan to enter into an agreement to manufacture crunchy puffcorns for PepsiCo India. As of now, this is a contract manufacturing agreement and the initial impact on VBL’s financial position is expected to be negligible.
“Based on Varun’s progress in the crunchy puffcorn business, we expect PepsiCo to introduce Varun with more products and segments,” analysts at ICICI Securities said in a report on March 3. Expect to invest in VBL 200 million- 25 crore to set up a manufacturing unit in Uttar Pradesh, where it already has a drinking line.
Kotak Institutional Equities sees PepsiCo and VBL expanding the scope of this partnership over time.
“Even though the packaged snacks category operates at around 40% gross margin and 10-15% EBITDA margin versus 60-65% gross margin and beverages at 25-30% EBITDA margin, its asset turnover is approximately 4X better than 1.5-2X Is. of beverages business,” the brokerage said. EBITDA is earnings before interest, taxes, depreciation and amortization.
“The return profile of this business will be significant as and when it grows,” Kotak analysts said in a report on March 3.
Meanwhile, VBL, which is one of PepsiCo’s largest franchisees outside the US, saw its total sales volume grow nearly 34% year-on-year (Y-o-Y) to 569 million in calendar year 2021 (CY21). seen in the cases. Growth was partially helped by a favorable base as CY20 volumes declined 13% year-on-year.
Nevertheless, the volume recovery can be expected to continue with the waning impact of the COVID-19 pandemic. Note that VBL’s peak season sales in the last two years were hit due to restrictions imposed to contain the spread of coronavirus. As such, the volume outlook for CY22 looks bullish, provided there are no Covid-led disruptions. Improving mobility and reopening offices should have a positive impact on demand.
Investors are sitting on smart gains. Over the past year, VBL stock is up nearly 40%, indicating that investors have factored in some degree of optimism, at least. Margin performance is a monitorable given the volatile input cost environment.
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