PepsiCo bottler Varun Beverages has stepped into the alcoholic beverages market by amending its memorandum of association (MoA) and tying up with Carlsberg for distribution of beer in select geographies in Africa.
On Wednesday, the company said that its MoA would now include the manufacturing and distribution of alcoholic beverages, including beer, wine, whisky, brandy, gin, rum, and vodka, in both India and international markets. While a few of its African subsidiaries would test-market the Carlsberg brand in their respective territories. The news sent shares of Varun Beverages up 9% on the bourses intra-day. It finally closed trade at Rs 495.45 apiece, up 9.17% on the BSE.
Analysts see the diversification by the company as a significant move since carbonated beverages, which is seasonal in nature, have faced demand challenges due to weather concerns. Both PepsiCo and Coca-Cola flagged volume declines in India in their September quarter earnings due to prolonged rains. Ravi Jaipuria, chairman, Varun Beverages, said that the move into alcohol would help the firm tap demand for ready-to-drink (RTD) and premium alcoholic beverages, both of which offered long-term growth potential. Analysts also see the move as being margin-accretive.
On Wednesday, Varun Beverages saw September quarter profit rise 19.6% y-o-y to Rs 741 crore, while revenue growth was sluggish during the period, at 2.3% y-o-y to Rs 5,048 crore, due to extended rains in India.
Consolidated sales volumes rose 2.4% to 273.8 million cases from 267.5 million cases a year ago, led by international volumes, which grew 9%. The company’s product mix includes 74% carbonated drinks, 22% packaged water and 4% non-carbonated beverages. It follows a January-December accounting year.
Earnings before interest tax depreciation and amortisation (Ebitda) was flat at Rs 1,147 crore in Q3, while Ebitda margins declined 60 basis points to 22.7% in the quarter under review versus 23.3% reported last year. While revenue growth was in line with Bloomberg consensus estimates of Rs 5,081 crore, the company beat net profit estimates of Rs 676 crore. The forecast for Ebitda was higher at Rs 1,223 crore for the period.
The company said the contraction in Ebitda margins was due to a shift in cost structures following its backward integration initiatives. Gross margin, however, improved by 119 basis points to 56.7%, supported by increased mix of water in international markets.
