Initial public offering (IPO) of Varun Beverages, PepsiCo’s largest franchise bottler, opened for subscription on Wednesday to raise Rs 1,112.50 crore through the public offer at the upper price. The company has fixed the price band at Rs 440-445 per share. The issue will close on October 28 (Friday).
The issue was subscribed by 1 per cent on the first day of the offer till 11 am. The public offer received bids for 1,67,739 shares against 1,76,50,000 shares offered by the company.
Below are 10 things you should know before investing in Varun Beverages IPO:
1) About the company: Varun Beverages is the largest franchisee of PepsiCo in the world, excluding the USA. It manufactures and distributes PepsiCo products that include carbonated soft drinks (CSD), non-carbonated beverage (NCB) and packaged drinking water. Some of the key brands manufactured and distributed by Varun Beverages include Pepsi, 7 Up, Mirinda, Mountain Dew, Tropicana and Aquafina among others. Associated with PepsiCo since 1990, the company now enjoys manufacturing and distribution rights in 17 states and 2 Union Territories (UTs) that covers North and North-East India. It has also been granted franchisee rights in international geographies such as Sri Lanka, Nepal, Morocco, Mozambique and Zambia.
2) Objective of offer: The motto of the issue is to utilise the net proceeds for capital expenditure, repayment of loans and for other general corporate purposes.
3) Anchor Investors: The company on Tuesday raised over Rs 327 crore by allotting shares to anchor investors at the upper price band of Rs 445 per share. Among the anchor investors are Abu Dhabi Investment Authority, Merrill Lynch, Morgan Stanley and Small Cap World Fund.
4) Lead managers: The issue is being managed by Kotak Mahindra Capital Company, Axis Capital, CLSA India and YES Securities.
5) Financials: The company’s consolidated revenues and EBITDA witnessed 24 per cent and 41 per cent CAGR through CY12-15E, while net profit increased to Rs 87 crore from Rs 25.1 crore in the same period. Reported numbers are higher on account of addition of several new sub-territories in India and overseas in the past few years. Varun Beverages’ volume CAGR from existing sub-territories through CY11-15 stands at 7.4 per cent.
6) Strength and Opportunities
a) Low per-capita Consumption of Soft Drinks in India
b) Robust Distribution Network
c) Strategically-located Advanced Manufacturing Facilities
d) Strong relationship with PepsiCo
7) Key Concerns
a) Heightened competitive intensity
b) Highly capital intensive business model
c) Increased regulatory oversight
8) Robust Distribution Network: The company distributes its products through a robust distribution network which comprises of 60 depots, 1,438 delivery vehicles and 562 primary distributors in India.
9) Valuations: Reliance Securities in a research note said, “Based on reported profit of Rs 87 crore in CY15, the stock would trade at P/E ratio of 93 times CY15 earnings at upper end of the price band, while EV/EBITDA multiple stands at 14.9 times. Even after considering the performance in 1HCY16 and factoring the debt repayment, we believe that the valuations are stretched. While there are no listed peers in India, there are several bottlers listed overseas, which trade at significant discount to these multiples.”
10) Should you invest: According to Choice Broking, as of 30th June 2016, cost of key raw materials such as concentrates and sugar accounted to around 30 per cent of the net revenue. The prices of sugar has increased over 15-20 per cent in 2016, this might put pressure on the profitability of the company. The brokerage house has ‘Avoid’ rating for the public issue.
Angel Broking believes the issue looks expensive at P/E of 51.4 times, calculated on estimated CY2016E PAT of Rs 157cr. Lots of MNC brands have presence in India through franchisees. Few of these franchisees have been able to grow their business by taking strategic decisions such product launches, advertising etc. which is not the case with Varun Beverages. Considering its inconsistent financial performance, low RoE, asset heavy business model and high valuation, Angel Broking rate this IPO as ‘Neutral’.