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With Bevco’s acquisition, VBL has access to 10 African nations (incl. 5 existing nations) and now controls most of southern Africa. Among the new regions, South Africa gains significance as its NARTD market is ~40% of India’s market, albeit growing at a slower pace (3-5% vol. CAGR). The market is mature, but we remain confident of share gains for VBL, given its strong track record in Zimbabwe and Nepal (over 50% share now). Portfolio-led pricing gain is also a big opportunity, given ~50% lower realizations for Bevco vs. CCBA, a Coke bottler. We also see cluster-based cost synergies, which should further boost earnings growth potential. Acquisition funding (Rs13.2bn) shall be a coinvestment from a PE fund and remaining through debt raise by VBL. Acquisition multiple at 0.7x CY23E sales is attractive, in-line with the previous acquisitions and provides a 5x-7x value creation opportunity. Post ~70% run-up in the last 12M, we have a REDUCE rating on VBL. However, consistent outperformance vs. peers and value creation in intl. geos provide scope for further re-rating.

SA market is mature; brand/product investments and GTM to aid share gains

SA is a large consumption market (USD5.4bn in FY20) but is a relatively mature market with 60-80% urbanization and high per-capita consumption of ~90L/annum (~4x to that of India). The-Coca-Cola-Company (TCCC) and local brands hold majority share in SA, while Bevco has ~10% volume share through a combination of PepsiCo and its own brands. VBL’s success in SA, in our view, will require marketing investments (ATL/BTL) and product/packaging innovation to influence consumer habits. Presence at magic price points also remains key to increasing market share from regional players. However, proof points of success in Zimbabwe/Nepal (>50% share now after starting from scratch) and VBL’s best-in-class execution strengths give us confidence of share gains in SA as well.

Africa − A large and long-term growth opportunity: PepsiCo’s low penetration in Africa and a sizable mix of regional brands offer it a long-term growth opportunity in the continent. We estimate PepsiCo’s bottlers cater to 40-45% of the African market (value terms) via its presence in 15 countries, while TCCC addresses the entire African population of >1.25bn (>50 countries). Besides TCCC, which has a healthy share in most African markets, the other competition is regional and can likely be beaten by improving the affordability, affinity, and availability of PepsiCo’s products, in our view.

PepsiCo’s wider product portfolio offers a key advantage: Energy drinks contribute a healthy value share of ~14% in SA (vs. <10% in India), which suggests 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 price points should help PepsiCo gain traction in this category in SA.

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