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Hungry For More: Scaling up snack food business

Varun Beverages (VBL) has inched closer to its goal of becoming a full-scale F&B player with the recent agreement with PepsiCo to manufacture, distribute, and sell snack food items in Zimbabwe and Zambia. We believe this agreement will serve as a building block for VBL’s snack food business.

* This is an exclusive snacks franchising agreement with PepsiCo to manufacture, distribute, and sell snack foods under the brand name “Simba Munchiez” in Zimbabwe and Zambia. VBL will set up a 5,000mtpa manufacturing capacity in each location for aggregate capex of ~INR1.2b.

*  The total addressable market (TAM) for VBL’s snack food division has expanded by 67% with the addition of two new geographies (vs. only Morocco earlier). The snack food products market in these geographies is valued at ~USD833m (aggregate) in CY24. This region accounts for ~6.5% of Africa’s snack market size of USD12.9b, which is expected to clock an ~8.1% CAGR over CY24-29E. PepsiCo, which holds the highest market share globally in this segment (as of CY23), will be a perfect partner for VBL to tap into this massive opportunity.

* Going ahead, we believe VBL and PepsiCo may expand their partnership in this segment, especially within the African continent, where PepsiCo does not have any manufacturing partner and primarily relies on imports.

Accelerating activities in snack food segment

* In line with its strategy of becoming a full-scale F&B company, VBL has forayed into the snack food business by entering into a snacks manufacturing and distribution agreement with PepsiCo for Morocco in Feb’24 (VBL to invest INR1b for manufacturing facility; commercial production to commence in May’25).

* To further scale up and penetrate in this segment, VBL has entered into another agreement with PepsiCo for Zimbabwe and Zambia.

* Under this agreement, VBL, through subsidiaries Varun Foods Zimbabwe Pvt. Ltd and Varun Beverages Zambia Ltd, has entered into an exclusive snacks franchising agreement with Premier Nutrition Trading LLC, Dubai (a PepsiCo subsidiary), to manufacture, distribute, and sell snack foods under the brand of “Simba Munchiez” in Zimbabwe and Zambia.

* VBL will invest ~USD7m (INR600m) each in Zimbabwe and Zambia for setting up a manufacturing facility of ~5,000mtpa each.

* The manufacturing facilities in Zimbabwe/Zambia are expected to start commercial production by Oct’25/Apr’26.

Leveraging the existing distribution network to scale new business

* VBL, through its subsidiaries, expects to leverage its distribution prowess in the African region (through existing beverage business) to introduce the new affordable range of snack food products of PepsiCo.

* Currently, VBL has manufacturing and distribution presence in Morocco, Zambia, Zimbabwe, Eswatini, Lesotho and South Africa, with only distribution rights in Namibia, Botswana, Mozambique and Madagascar.

* Apart from this, PepsiCo will also give a strong push in certain fast-moving SKUs of Simba Munchiez through price initiatives.

 * Currently PepsiCo has multiple snack food brands in the African continent, e.g., Lays, Fritos, Doritos, Simba, Sunchips, Funyuns, Cracker Jack and Sabritones.

* We believe that these are the building blocks of VBL’s snack food business, and the company is consciously accelerating its activities in the segment in order to tap into the massive opportunity, which could potentially be a key growth driver for the company in the longer run.

Set to tap into huge opportunity by partnering with market leader

* Globally, the snack food market is valued at USD251b in CY24 and is expected to reach USD341b by CY29 (at a CAGR of ~6.3%), supported by changing consumer lifestyles, increasing urbanization, and a growing preference for on-the-go food options. (Source: Statista)

* As per PepsiCo’s latest annual report, the company generated ~59% of its revenue from the food business in CY23. As of CY23, PepsiCo held the top spot in the global snack food production (Source : Ibis World)

* The snack food market in Africa is valued at ~USD13b in CY24 and is expected to clock an ~8.1% CAGR over CY24-29E.

* While the snack food industry in Morocco/Zimbabwe/Zambia is estimated to grow to ~USD500m/USD177m/USD156m in CY24.

* Going ahead, we expect more such announcements from VBL, especially in the African continent, where VBL and PepsiCo will look forward to expand its presence.

Valuation and view

* We expect VBL to maintain its earnings momentum, aided by: 1) increased penetration in newly acquired territories in Africa, 2) higher acceptance of newly launched products, 3) ramp-up of snack food segment, 4) continued expansion in capacity and distribution reach, 5) growing refrigeration in rural and semirural areas, and 6) a scale-up in international operations.

* We expect a CAGR of 21%/22%/29% in revenue/EBITDA/PAT over CY23-26. We value the stock at 60x Sep’26E EPS to arrive at a TP of INR1,900. We reiterate our BUY rating on the stock.

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