Shares of Varun Beverages Ltd. (VBL), a major PepsiCo franchisee, experienced a 5% decline in Tuesday's trading after the company reported its second-quarter results. Despite a 15.1% year-on-year rise in profit after tax, reaching Rs 1,525.36 crore, the figures fell short of market estimates, leading to the stock's drop to Rs 439.45 on the BSE.
Q2 Performance Highlights and Challenges
VBL's net revenue from operations saw a significant 20.4% increase, climbing to Rs 8,451.23 crore for the June quarter. Consolidated sales volume also grew by 19.8% year-on-year, totaling 46.67 crore cases. This growth was fueled by a 14.4% volume increase in India and a robust 38.4% growth in international markets.
However, several factors impacted investor sentiment:
- EBITDA Margin Decline: The Earnings Before Interest, Taxes, Depreciation, and Amortization (EBITDA) margin decreased by 76 basis points year-on-year to 27.7%. This was primarily attributed to the consolidation of the recently acquired lower-margin Twizza business in South Africa.
- Rising Finance Costs: Finance costs surged by 55.8% year-on-year, largely due to expenses associated with the Twizza acquisition.
- Increased Depreciation: Depreciation expenses rose by 33.6% compared to the previous year. This reflects the commissioning of new plants across India over the last year, which were not operational in the base quarter, alongside the Twizza acquisition.
Despite these challenges, VBL noted an improvement in its realisation per case for beverages by 1.2% at a consolidated level, driven by better realisations in international territories. In India, the company observed healthy volume growth from March onwards, coinciding with the summer season, except for April when volumes remained largely flat.
Strategic Acquisitions and Market Presence
The Twizza acquisition contributed 1.18 crore cases to VBL's international volumes during the quarter. Varun Beverages holds extensive franchise rights for various PepsiCo products across 26 states and 6 Union Territories in India, which accounts for 67% of its operational revenues. Beyond India, VBL also manages PepsiCo franchises in Nepal, Sri Lanka, Morocco, Zambia, Zimbabwe, South Africa, Lesotho, Eswatini, and DRC, with distribution rights in Namibia, Botswana, Mozambique, and Madagascar.
The company continues to expand its footprint, but the integration of new businesses like Twizza presents short-term financial adjustments that are closely watched by the market.