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Exponential trends in India; maintain ADD on outperformance

VBL’s Q4 EBITDA was 8-13% ahead of estimates, led by better margins as revenue was in-line. Trends for the peak summer season remain robust, with 100% utilization of enhanced capacity in Apr-24 (which is up ~40% vs. the CY22 season). Given VBL’s strong track-record of successful turnarounds for Pepsico, the acquired South Africa business (SA) improves VBL’s medium-term growth profile, as Pepsico’s market share is in a low single-digit in this large 1bn case market. Further, traction in DRC (Africa) and expanding engagement in Pepsico’s foods business remain potential upsides. Our EPS estimates increase by 5-9% on strong trends and margin beat in the India business. Though consolidation of the SA business drives a ~9% increase in revenue estimate, we believe EPS contribution will be largely neutral for the forecasted period. We increase our multiple by ~10%, which is largely attributable to value creation in the SA market; maintain ADD with TP of Rs1,650 (Rs1,500 earlier)

Better margin drives 14% PAT beat in Q1; capacity ready for current season:

VBL posted a tepid but in-line sales growth of 11% in Q1, led by 7%/4% growth in volume/realization. Among geographies, India reported 7% growth, whereas the intl. business grew higher, at 30%. India/Intl. volumes were up 4%/22%. Realization increased 2%/6% for India/Intl. business, likely led by a higher mix of smaller SKUs. India volume was impacted by postponement of the Holi festival and preponement of Eid. However, this should translate into stronger sales in the peak summer season. Among categories, carbonate/juice volumes grew 6%/5%, whereas water volumes saw higher growth, at 10%. EBITDA margin improved by 240bps to 22.9% (~270bps higher vs Emkay Est.), largely led by ~390bps improvement in gross margin, partially offset by higher operating expenses. Higher gross margins were a result of favorable PET prices, light-weighing of PET bottles, and reducing sugar content. Low/no-sugar products contributed 46% to sales. Among geographies, India’s EBITDA margin (standalone) improved by 290bps, whereas subsidiary margin (consol-standalone) was up by 50bps.

Earnings call KTAs:

1) Q1TD trends remain encouraging, in view of the on-going heat wave and election-related events. 2) All the 3 new plants (Supa-Maharashtra, Gorakhpur-UP and Khurda-Orissa) commenced operations in April; encouragingly, VBL has been operating at full utilization, to cater to demand and avoid stock-out scenarios. 3) International growth was led by Morocco and Zimbabwe. 4) Capex for CY24 is estimated at ~Rs24bn for Gorakhpur, Khurda, DRC and Brownfield expansion. In addition, VBL made an investment of Rs13bn for acquisition of the SA business (Bevco); VBL will be watchful about utilization in the CY24 season, to decide the CY25 capex. 5) Depreciation is likely to remain in line with historical trends, at 4.0-4.5% of sales. 6) VBL is focused on attaining better traction in Gatorade with renewed focus from Pepsico on pack-size correction, price correction, and permission to produce the product from more plants. 7) VBL plans to replicate its Morocco, Zimbabwe success in SA via Bevko, with focus on improving market share and profitability. 8) VBL has reached 89% of Low/No sugar sales in Africa, and Morocco is following the same path. Focus remains on increasing this in India too (~46% currently). 9) VBL aims to reduce debt to CY23 levels by CY24-end. 10) VBL has put 2 lines with 35-40mn case capacity in DRC which is likely to serve a population of ~100mn. 11) VBL acquired 5 plants from Bevko, all being operational; however, it is optimizing these plants aiming for full utilization before the season starts in Sep-24. 13) Cost of borrowing increased to 8.0% vs 7.7% earlier. 14) VBL secured the rights to produce and package Cheetos for the Morocco region, and is likely to set up a plant for this by May-25. In line with its Morocco operations, VBL has also formed a foods subsidiary in Zimbabwe.

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