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Potential long-term Africa opportunity drives valuation upgrade; maintain BUY

VBL posted ~19% revenue CAGR in CY12-21, led by revenue CAGR of 18% in India and 23% in international geographies. The robust global growth was driven by strong rampup in three-country Africa operations and a sustained growth in Nepal. In our view, Africa is a large soft-drinks market (Emkay Est: >USD25bn industry size as of CY19) and its attractive macro growth + demographics offer a low-teen revenue CAGR opportunity over the medium-to-long term. We estimate that PepsiCo currently addresses 40-45% of the Africa market (value terms) via presence in 13 countries vs. ~100% for The Coca-Cola Company (TCCC) via presence in >50 countries. Hence, potential distribution expansion by PepsiCo should help it to grow faster than the industry. Moreover, VBL’s proven execution capability in Zimbabwe/Nepal (~50% of market share now vs. marginal share at the time of acquisition of distribution rights) and PepsiCo’s focus on growing franchise-owned bottling operations should help VBL to foray into more markets in Africa; its procuring distribution rights in the Democratic Republic of Congo (DRC) recently is a testament to this. Factoring-in conservatively the potential Africa opportunity, we increase our CY25-35E growth by 300bps to 18%, effecting a higher multiple, at 40x Sep-24 EPS (vs. 34x earlier). RoIC for international geographies has also improved, to ~20% in CY21, led by margin gains and better sweating of assets. We maintain BUY with revised TP of Rs1,220 (vs. Rs1,060 earlier)

Africa − A large & long-term growth opportunity: PepsiCo’s low penetration in Africa, distribution expansion with acquisition of Pioneer Foods in CY20, and sizable mix of regional players offer it a long-term growth opportunity in the continent. We estimate PepsiCo’s bottlers cater to 40-45% of the Africa market (value terms) via presence in 13 countries, while TCCC addresses the entire Africa population of >1.25bn (>50 countries). Besides TCCC (with healthy share in most Africa markets), competition is regional and can likely be beaten by improving affordability, affinity & availability of PepsiCo products.

We increase medium-term growth est. by 300bps, led by large Africa potential: We see potential of USD25bn incremental retail sales for PepsiCo in Africa by CY35E, provided it expands its presence further. With strong execution in Zimbabwe/Morocco (31%/21% rev. CAGR in CY18-21), we expect VBL to capture 30% of this opportunity. This incremental opportunity, along with ~15% CAGR in existing geographies, should help VBL to deliver ~26% CAGR in Africa, over the next decade. Led by the long-term Africa opportunity, we raise our CY25-35 growth expectations by 300bps to 18%

PepsiCo’s wider product portfolio a key advantage: CCBA, a Coca-Cola bottler, handles 40% of TCCC’s volumes in Africa. Energy Drinks contribute a healthy value share of ~14% in CCBA markets (vs. <5% in India), which suggests a strong demand for the category in Africa. PepsiCo has built a robust energy-drinks portfolio via the acquisition of Rockstar, its partnership with Starbucks/Bang in USA, and through organic investments in Mountain Dew/Sting. We reckon that a broad-based energy-drinks portfolio across pricepoints should help PepsiCo gain traction in this category in Africa.    

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