Varun Beverages IPO review (May apply)

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Review By Dilip Davda on October 20, 2016

Varun Beverages Ltd (VBL) is one of the largest franchisee in the world (outside USA) of carbonated soft drinks (“CSDs”) and non-carbonated beverages (“NCBs”) sold under trademarks owned by PepsiCo. VBL produce and distribute a wide range of CSDs, as well as a large selection of NCBs, including packaged drinking water. PepsiCo CSD brands produced and sold by it include Pepsi, Diet Pepsi, Seven-Up, Mirinda Orange, Mirinda Lemon, Mountain Dew, Mountain Dew Game Fuel, Seven-Up Nimbooz Masala Soda, Seven-Up Revive and Evervess. PepsiCo NCB brands produced and sold by us include Tropicana Slice, Tropicana Frutz (Lychee, Apple and Mango), Nimbooz as well as packaged drinking water under the brand Aquafina. In addition, VBL have also been granted the franchise for Ole brand of PepsiCo products in Sri Lanka.

The companies has been associated with PepsiCo since the 1990s and have over two and half decades consolidated our business association with PepsiCo, increasing the number of licensed territories and sub-territories covered by us, producing and distributing a wider range of PepsiCo beverages, introducing various SKUs in its portfolio, and expanding VBL’s distribution network. As of June 30, 2016, VBL has been granted franchises for various PepsiCo products across 17 States and two Union Territories in India. India is its largest market and contributed 82.48%, 80.67%, 84.38% and 83.46% of our revenues from operations (net) in Fiscal 2013, Fiscal 2014, Fiscal 2015, and in the six months ended June 30, 2016, respectively. The company is also been granted the franchise for various PepsiCo products for the territories of Nepal, Sri Lanka, Morocco, Mozambique and Zambia. In addition, it is in the process of setting up a Greenfield facility in Zimbabwe in anticipation of franchise rights being granted by PepsiCo Inc. for such territory. Although the Company is using water from bore well resources and have R.O. system in place to maintain hygienic products, recent uproar on R.O. may have some negative impact for the company’s working. We are also witnessing shift from cola to non-cola beverages, although PepsiCo is gearing for non-cola and less sugar content beverages, it’s likely to take some time for growth in coming years.

To meet its prepayment or rescheduling repayment of outstanding debt and meet general corpus fund requirements, the company is coming out with a maiden IPO consisting offer for sale of 10000000 equity share and also fresh equity issue of 15000000 shares of Rs. 10 each via book building route in a price band of Rs. 440-445 to mobilize Rs. 1100.00 to Rs. 1112.50 crore (based on lower and upper price bands). It has reserved 500000 equity shares for its eligible employees for allotment. Issue opens for subscription on 26.10.16 and will close on 28.10.16. Minimum application is to be made for 33 shares and in multiples thereon, thereafter. BRLMs to the offer are Kotak Mahindra Capital Co Ltd, Axis Capital Ltd, CLSA India Pvt Ltd and Yes Securities (India) Ltd. Karvy computershare Pvt Ltd is the registrar to the issue. Post allotment, shares will be listed on BSE and NSE. After initial equity issue at par in 1995-96, it raised further equity at a price of Rs. 149.51 to Rs. 440 during March – October 2016. It has also issued bonus in the ratio of 4 shares for every 1 share held in May 2013. Post IPO its current paid up equity capital of Rs. 166.95 crore to Rs. 181.95 cr. With around Rs. 667.50 cr. coming to company from primary issue, it is expecting to save around Rs. 66 crore on interest cost in coming year.

On performance front, it has shown mixed trends. For last four calendar years it has (on a consolidated basis) posted turnover/net profit - (-loss) of Rs. 1844.19 cr. / Rs. 25.11 cr. (2012), Rs. 2132.50 cr. / Rs. (-39.53 cr.) for (2013), Rs. 2517.10 cr. / Rs. (-20.16 cr.) for (2014) and Rs. 3408.43 cr. / Rs. 87.047 cr. (2015). For first half ended on 30.06.16 of current calendar year it has earned net profit of Rs. 213.42 cr. on a turnover of Rs. 2539.35 cr. Thus sudden jump in bottom lines is surprising. According to management, the main season for the company’s products is first half of calendar year, thus it may not be able to maintain the tempo shown for the first half. However, based on its inconsistent trends, the issue appears to be aggressively priced. As per RHP, it has no listed peers to compare with.

On BRLM’s front, four merchant bankers associated with this offer have handled twenty nine issues in the past three years, out of which nine issues closed below the issue price on the listing date.

Conclusion: As issue is aggressively priced, only risk savvy cash surplus investors may consider investment for long term.

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