Ravi Jaipuria, the head of RJ Group, started his journey as a vendor for Coca-Cola before switching to Pepsi in the 1990s. His main company, Varun Beverages, is now the largest bottler of PepsiCo drinks outside the US. It produces and sells a variety of carbonated soft drinks, non-carbonated beverages, and packaged water under PepsiCo’s trademarks.
Besides Varun Beverages, RJ Group also owns Devyani International, which runs Pizza Hut, KFC, and Costa Coffee outlets in India. Both companies have caught investors’ attention, but Varun Beverages stands out with its stock price skyrocketing 1,270% since April 2020. Its price-to-earnings (P/E) ratio jumped from 35 times in 2020 to over 100 times by May 2024. By comparison, Devyani International’s 47% rise since its 2021 listing looks modest.
Does Varun Beverages Deserve Its High Valuation?
Varun Beverages has a unique edge as the only listed bottler for a global beverage brand. The company operates in six countries, including India, Sri Lanka, and Nepal, which together make up 85% of its total revenue. The other 15% comes from Africa, where it operates in Morocco, Zambia, and Zimbabwe.
Varun Beverages has a vast reach, covering urban, semi-urban, and rural markets. It operates 37 factories in India and six more abroad, supported by a robust supply chain with 110 depots, 2,500 vehicles, over 2,400 primary distributors, and almost a million coolers. Its product mix is diverse: 70% of its sales are from carbonated soft drinks, 23% from bottled water, and 7% from non-carbonated drinks. Notably, 80% of its sales volume is from India.
To boost international sales, Varun Beverages is expanding in Africa by adding capacity, making acquisitions, and securing PepsiCo licensing rights. Its recent purchase of BevCo in South Africa and new distribution rights in Namibia, Botswana, Mozambique, and Madagascar have strengthened its position. It will also start making Cheetos and Doritos in Morocco.
The Indian soft drinks market is expected to grow by about 5% annually over the next four years, reaching $9 billion by 2027. To meet this rising demand, Varun Beverages has built new bottling plants in Uttar Pradesh, Maharashtra, and Odisha. It has also set up facilities to produce packaging materials, improving efficiency and quality.
Varun Beverages owns a 55% stake in Lunarmech Technologies, which makes PET bottle caps and crown caps. Each year, the company uses about 66,000 tonnes of PET resin for packaging. To boost its environmental credentials, it has teamed up with GEM Enviro Management to gradually achieve 100% recycling of used PET bottles.
The company has also invested in two special purpose vehicles that supply solar power to Maharashtra and Uttar Pradesh. With sales growing by 26% annually and profits by 47% over the past five years, and an average return on equity of 25%, Varun Beverages looks strong on fundamental grounds. Its debt-to-equity ratio of 0.8 times does not pose a big risk to its balance sheet.
Potential Risks: Enter Coca-Cola
Despite Varun Beverages’ strong fundamentals, there are significant risks.
One major concern for a franchisee is the length of its license agreement. Thankfully, Varun Beverages has clarity on this front: in 2019, PepsiCo extended its bottling and trademark license agreement until April 30, 2039.
However, what could affect the stock’s valuation is Coca-Cola’s move. Coca-Cola plans to sell part of its bottling business, Hindustan Coca-Cola Beverages (HCCB). To do this, it has approached the leaders of at least four big companies, including Jubilant Group, Dabur, Pidilite Industries, and Asian Paints. Coca-Cola wants to invest around $800 million to $1 billion to expand in India.
Selling a stake in the bottling franchise could be a double-edged sword for Varun Beverages. First, HCCB could use the extensive networks of these corporate groups. Second, investors might be tempted to profit from another leading beverage brand’s distribution network through a different stock. Moreover, HCCB is reportedly considering an initial public offering (IPO), which would end Varun Beverages’ monopoly.
While the sharp rise in Varun Beverages’ stock is exciting, investors should be aware of the significant downside risks.
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