Ladies and gentlemen, good day and welcome to Varun Beverages Limited earnings conference call. As a reminder, all participant lines will be in listen-only mode and there will be an opportunity for you to ask questions after the presentation concludes. Should you need assistance during the conference call, please signal an operator by pressing star then zero on your touchtone phone. Please note that this conference is being recorded. I now hand the conference over to Mr. Anoop Poojari from CDR India. Thank you. Over to you, sir.
Thank you. Good afternoon, everyone, and thank you for joining us on Varun Beverages Q2 and H1 2021 earnings conference call. We have with us Mr. Ravi Jaipuria, Chairman of the company, Mr. Varun Jaipuria, Whole-time Director, Mr. Raj Gandhi, Group CFO and Whole-time Director, and Mr. Kapil Agarwal, CEO and Whole-time Director of the company. We will initiate the call with opening remarks from the management, following which we'll have the forum open for a question and answer session. Before we begin, I would like to point out that some statements made in today's call may be forward-looking in nature, and a detailed statement in this regard is available in the results presentation shared with you earlier. I would now request Mr. Ravi Jaipuria to make the opening remarks.
Good evening, everyone, and thank you for joining us on our earnings conference call. Trust you and your families are keeping safe and healthy. I hope all of you had the opportunity to go through our results presentation. This provides details of our operational and financial performance for the second quarter and half year ended 30th June 2021. We have delivered an encouraging set of results during the quarter despite the soft operating environment due to pandemic-induced lockdowns and restrictions. While we registered strong sales in the month of April, May witnessed moderate sales on account of the disruptions. I'm happy to share that our team efficiently outlined and executed a set of SOPs and workflows to secure our business model and ensure continuity across operations during this time.
With last year's learnings, we had all the necessary protocols in place to handle and mitigate the business impact to a certain extent. Further, as lockdowns and curbs started easing from June onwards, we saw faster recovery in demand, which assisted growth in the quarter. Overall, we have delivered a healthy performance with a top-line growth of 49.4% year-on-year. The higher growth rate is on account of robust volume growth over a lower base of previous year as well as marginal increase in realizations. On the profitability front, we were able to maintain most of the cost optimization measures that we had undertaken last year, allowing us to report stable EBITDA margins at 23.3%. PAT increased by 123%, primarily driven by lower finance costs on account of lowering of average cost of borrowing and reduction in total debt.
We are also pleased to share that in line with our dividend policy, the board of directors has recommended an interim dividend of INR 2.5 per share. Our newly launched product variant, Mountain Dew Ice, which is a lemon fruit juice drink, has reported strong uptake in sales in the quarter and continues to be positively received by consumers across markets. As we look ahead to continue to monitor changes in the operating environment and are undertaking necessary precautions to safeguard our business and people, given that there are concerns triggered by a potential third wave of COVID, we believe the momentum in demand in consumption is steadily building and will further strengthen with higher vaccination drives, improving economic indicators and supportive macros such as good monsoons. We remain confident of reporting robust performance in the quarters ahead.
I would now invite Mr. Gandhi to provide highlights of the operations and financial performance. Thank you very much.
Thank you, Mr. Chairman. Good evening and a warm welcome to everyone joining us today. Let me provide an overview of the financial performance for the second quarter and half year ended 30th June 2021. Consolidated sales volume registered a solid growth of 45.4% to 152.3 million, as compared to 104.8 million cases in the Q2 of the 2020. Primarily on account of strong growth in the month of April as compared to low base of the corresponding period last year and a steady recovery in the month of June 2021.
Post easing of lockdown restrictions, CSD constituted 78%, juice mix was 7%, and packaged drinking water mix is 15% of total sales volumes in Q2 calendar year 2021. Revenue from operations adjusted for excise, GST grew up 49.4% year-on-year in Q2 calendar year 2021 to INR 24,498.5 million. Realization per case improved by 2.8% to INR 160.8 in quarter two, calendar year 2021, mainly on account of higher realizations in international territories, partially offset by higher mix of water. Gross margins declined by 128 basis points year-on-year to 53.5%, primarily due to change in product mix and marginal increase in raw material prices. EBITDA increased to 51.1% to INR 5,708 million in Q2 of calendar year 2021 from INR 3,777 million in Q2 of calendar year 2020. EBITDA margin marginally improved by 30 basis points to 23.3% in calendar year 2021 Q2.
Even after a 128 basis point decline in gross margins, as we were able to sustain cost optimization measures that were implemented last year. Depreciation increased by 3.6% to INR 1,287.8 million as compared to INR 1,243.1 million in Q2 of the calendar year 2020. Finance cost reduced by 36.9% to INR 467.8 million from INR 741.9 million in Q2 of calendar year 2020. This is due to repayment of debt as well as a reduction in average cost of borrowing. Debt increased by 123% to INR 3,188 million in Q2 of calendar year 2021 from the level of INR 1,429.8 million in quarter two of calendar year 2020. This is driven by lower finance cost. During the quarter, an amount of INR 100.. If you remember, during the COVID quarter, the mix was slightly different than this year.
One is the mix, Sting and Mountain Dew has come in, and also juice has gone up slightly, Tropicana, and the international, this thing has also helped us a bit. It's a combination of the three things. If you want to know the breakup, my realization per case international business is INR 180+ , while India was INR 156+.
I see. Okay, got it. That was one. The second was on the gross margins. Gross margins at 53.5% have come off quite a bit. When I look at your other comment about higher working capital because you took positions ahead of expecting or anticipating a surge in, let's say, key input prices. Can you just elaborate on the two comments that you made, and what is your outlook on gross margins?
Vivek, the gross margins basically have improved. Yes. In India, actually, it has come down because of the stocking of the raw material, PET, et cetera. Also this has definitely resulted in the stocking of the working capital and higher number of days. As you know in the earlier calls we had stated, we knew that the PET prices international are going towards northwards, and therefore we had covered ourselves for the full season, and therefore the number of days had gone up.
What has happened, Vivek, because of the lockdowns, we had to transfer goods from certain places to another place, and that has incurred extra freight, which was not planned for. Instead of letting the goods expire, so that was another reason why our cost of goods became higher.
I see. Lastly, do you think the gross margins are close to now at its trough and should stay at this level to, let's say, start to move up?
It's slightly difficult to say because let's see how the things pan out to be.
You know what is happening, Vivek, because of the pandemic, every day, your correlation keeps changing.
Uncertainty.
There is so much uncertainty right now, I think, but we have been still able to manage, make sure there are no expiries, make sure our goods are Even every day to day, we are now looking at will the third wave come, not come? Very difficult to predict everything right now. It's not normal circumstances. Our stock also, which happened in resin and all, was only because we didn't have a May. We lost our peak month of May. Otherwise, this would have got consumed, and we would have not carried this kind of inventory. I think we have to be a little flexible during this period, and there will be some changes, which is very difficult to answer, actually.
Sure. Fully understand that part, Mr. Jaipuria. Just a small bit, a lot of your peers, competition in FMCG space have been taking up prices given that the input price environment is quite against. Do you anticipate any price hike in the foreseeable future to pass on some of that impact?
We don't think so right now. We are able to cover that up with our cost cuts, which we have done. That's why we don't say that our margins will go up, but I think we can manage with our margins and without taking price hike.
Very good to know that. I'm wishing you and your team all the very best. Thanks.
Thank you.
Thank you. The next question is from the line of Pritesh Chheda , from Lucky Investment Managers. Please go ahead.
Yes, sir. Thank you for the opportunity. Sir, wanted to know since now some of the consolidation also would have happened in these numbers. Versus 2019, what would have been our volume growth on a like-to-like or a volume decline on a like-to-like basis?
It is again, very difficult to answer because since we took over the territory in 2019, we've not even had one season. Even last year was our first season, that was both full of pandemic. This year has been full of pandemic and both the pandemics have come in our peak season, which is April, May, June. It's very difficult to really answer anything, the growth we were expecting, the new distributors we had made. Still, I would only say that we've been able to manage and give reasonably good results, which would have been much better if it was a normal time. That's the only thing I can answer you.
Okay. What should be the expected volume for us in the current year that is CY 2021?
You're asking the same question and how can I commit anything or tell you anything? I don't know what's going to happen in the next couple of months.
Okay.
It's looking positive and we are on the right track. We are getting reasonably good growth. Business is back to normal. Unless until we again see a third wave which is strong and lockdowns happen, we've seen reasonably good growth over last year.
Okay.
Pritesh , just to partially answer your question. See, if we see organic basis 21 over 19 up to April, which was like a pre-COVID period time we can say because up to April, the effect was not much. We had been growing and the growth had been as in the first quarter we had said CAGR of 10%. Similar we continued in the month of April also first four months and then again June onwards the growth has come back out of seven months of the current year, five months there had been substantial growth months.
Hopefully, let's see. As the Chairman said that it's not possible to give a guidance, hopefully.
I mean the business is back so I think the only question is depending on the pandemic, otherwise everything is looking very good.
Sir about South, when in the past calls we had mentioned about scope for market share expansion, scope for better servicing the market. In a normal year, let's say hopefully next year should be a normal year. At what run rate should South grow higher than your national average, if everything is kind of normal or business scenario based on whatever highlights you had given in the past?
We believe the new territories should grow faster than our existing territories. Again, we've not even had one season to stabilize those territories.
Okay.
I think we need to wait one season before we can start giving you how fast we can grow.
Okay.
As soon as we took over, both the seasons have been pandemic driven.
Yes, sir. Okay. My last question is, sir, for the next two years what should be our CapEx that is 2021 and 2022? How should the net debt look like in 2021 and 2022?
Our CapEx we are expecting to be very close to our depreciation. It could be little more one year and less one year, those depending on when the plant comes and then next year it becomes less or it can become more. Very close to our depreciation would be the guidance we would give.
Net debt will keep on coming down, right?
Of course.
Right.
Even a pandemic year, INR 450 crore or so, even the H1 it has come down. If pandemic would not have been there the reduction figure would have been much higher. Luckily we got supported by a reduction in the interest cost so interest servicing in any case was much lower as it is.
Okay. Thank you very much and all the best to you, sir.
Both the years we have lost our peak season.
Yes.
Please understand we are a summer driven industry.
Yes, sir.
If you lose April, May, June because both years the pandemic is hitting the April to June quarter.
Yes. Thank you very much sir. All the best sir. Thank you.
Thank you.
Thank you. The next question is from the line of Dhruv from Monarch AIF. Please go ahead.
Yeah, good afternoon, sir. Sir, my question is on the balance sheet part. If we see the other current liabilities and other financial assets they have a big jump. The other current liabilities have gone from INR 380 crore to INR 528 crore and other financial liabilities have gone from INR 85 to INR 130 crore. What will be the reason for this jump in these two line items?
I think it constitutes major portion of the current liabilities of the term loans which fall due in the next 12 months.
We have settled down.
Okay, these both constitute the current portion of long-term debt, which is payable this year, right?
Yeah, that's the major portion which comes to the mind. We can see further if there is anything.
Okay. Cumulatively, it goes to around INR 250 crores. Maybe I'll connect with you separately on this. Sir, for the first six months of this year, what has been our total debt repayment which has happened?
This is INR 450 crore around. INR 464 crore, precisely.
INR 466. Yeah, repayment. What is the plan for the last six months of this year? What is our plan to repay debt additional?
Normally what happens is, in the first year, the repayment happens. In the second part, the tax payment, the dividend payment, CapEx, et cetera, is taking place. However, still, we always are able to INR couple of hundreds, but the major portion of the debt reduction happens in the H1 only.
Okay. maybe additional INR couple of 100 crores we can expect to reduce from the long-term debt, right?
That's right.
Okay. Sir, thank you so much. I'll come back in the queue.
Thank you.
Thank you. The next question is from the line of Devanshu Bansal from Emkay Global Financial Services. Please go ahead.
Yeah, hi. Thanks for taking my question. Sir, my question is on margins on a slightly longer term. We did around 23%-24% margins in India business over 2016, 2017 time frame. Since then, margins have dropped for understandable reasons. When do you expect getting back to those margins levels in India? Even if we assume FY 2022 to be a normal year.
If we assume Yeah, exactly. You made the question easy for us. If we assume 2022 to be a normal year, we will immediately be back to those level of margins, actually. That was the only thing which was holding up, otherwise we are totally scaled up, as explained by Chairman, to go to a next level. Yeah.
Sure. Secondly, wanted to understand India gross margins in the current quarter have been more or less stable. The RM inflation and higher water share, is that in international operations?
International operations margin are definitely always slightly higher, but they come with a currency risk. As the currency also was stable, so that has helped the overall margin that been consistently good for last few quarters.
Sure. You indicated that new innovation, new introductions have been doing well for us. If you can highlight some of the trends in Sting and Mountain Dew Ice. What is the current contribution and possible potential contribution that we could see from these new introductions?
I think basically our energy drink, which was Sting, which we launched a couple of years back, has really taken off and is becoming an important part of our mix, which it used to be a small mix at one time.
Mountain Dew Ice has done very well, but unfortunately, as soon as we launched it, within two months, pandemic came again and go-to-market became very difficult, and mostly Mountain Dew Ice was originally launched in smaller packs, which is mainly go-to-market. We are again starting it again. That's why to say what growth we will get is very difficult and what percentage of share it will take, because I think we have to give it a year and a half for the brand to start getting any type of mix.
Answer to your question, yeah. Whole portion of your question, which is that what are the new launches. On that, the launches, Mountain Dew Ice, Creambell dairy-based beverages, and Sting are all there. The only thing is, these itself are to be expanded further. There's a huge potential and has to grow manifold like Sting over two years has happened. In H1, we have already crossed 10 million mark, which is supposed to be very good for any brand to be a long-term player. The potential of these is yet to be exerted before new launches can come in.
Lastly, sir, is this catering to a different consumer base or somewhat it may cannibalize the existing consumer base? I am specifically talking about Sting.
No, it is the same consumer base. The only difference is that compared to Red Bull, we are at a very reasonable price. People who could not afford or wanted to have a Red Bull is now going for Sting, and lot of your other customers are also going for it. They like the taste. It's going to become, according to us, a big brand, one of our core brands. I think again, this would have been much larger, provided pandemic would not have been there. Again, this is a small pack, and all small pack sales happen more while on the go instead of taking it home. You will see huge growth in Sting coming in the next 6 months also and going forward next year.
People have a special liking for Sting and therefore, this is expanding the market and growing a different base for itself.
Sure. I have one more question. Can I go ahead?
Sure. Kumar said yes
Yeah. Sir, PepsiCo U.S. consistently has been indicating market share gains in India beverages space. Somehow we have remained tight-lipped on this front. Any comments that you can share in this regard?
Well, I think we have done well, and I think that is where I would like to keep it.
Sure. Thanks. That's it from my side.
Thank you.
Thank you. Operator, you may press star and one to ask a question. The next question is from the line of Sameer Gupta from IIFL. Please go ahead.
Hello, sir, and thank you for taking my question. Sir, first question was on the Zimbabwe provision reversal. I just wanted to understand now how much of this foreign currency liability is now remaining, and when is it expected to be settled?
We are left about $15 odd million, which is some to VBL India only and some to these bank there. About $20 million, half, $3 million on quarterly basis, we are settling this, and this is committed by Reserve Bank of Zimbabwe. Every quarter, as and when the liability gets repaid. We will be reviewing every quarter this provision which is already there, and if need arises, we will be reversing it to the P&L.
Sir, $15 million is currently the liability on the balance sheet as well, and every quarter you are expecting $2-3 million to be reversed just like this quarter?
That's right. To be settled every quarter.
Okay, fair enough. Sir, second question, final one from me. Sir, the dairy-based beverages portfolio, I know it's been a difficult time. You relaunched this year and again, the pandemic struck. Any kind of update on this product, where is it being sold currently? Have we resumed the scale-up in June or are we going to again postpone it to the next year? Which market this is being sold at? What is the current consumer feedback? Anything on this would be helpful.
We have again resumed the sale of it, and we are focusing more for the sale of it in the north. Right now, we are not sending everywhere. Right now, our conscious decision is to make sure it is fully marketed properly in the north belt first.
It is capable to be scaled up as and when required. You don't need to set up a new plant.
Capable of when it was doing well, again, any new product launch cannot be in the off-season. It doesn't work fully.
No, sir. My question was it is from a shelf life point of view. It can be-
That is not the issue because it's a six-month shelf life. Still, people, where there is any crisis or pandemic or anything, people only want to buy what is currently selling. Nobody wants to keep stock. Anything which is new or is slow-moving initially, people don't like to buy it.
Got it, sir. Thank you. I'll come back in the queue if I have any more questions.
Thank you. The next question is from the line of Nihal Jham from Edelweiss. Please go ahead.
Yes, sir. Thank you so much, and good evening to the management. Sir, three questions from my side. First is that when you ideally guide for adding INR 1 lakh outlets each year on the base of 2 million that we have, that is something that can happen regularly even in the off-season? Is it that most of it would happen during the season and ideally we'll have to wait for next year to do that addition again?
Obviously that store addition is not going to happen this year. A lot of stores are shut down, rather. We don't expect additions coming this year. It has to be a normal year for the number of stores to add.
Sure. Most of it can only happen during the season time itself. It's not as if that even if the situation-
It's not only that the question of season time, but right now the people who have shut down, even if we are opening new stores, they are just covering up what the people have shut down. The number of additions is not going to happen this year.
That's helpful. The other part was, is it right to assume that most of our international operations did not face any COVID impact this quarter?
Well, some of them did. Nepal did, for example. Sri Lanka did. Even Morocco did some, but everywhere it was the African part was much less. Even though COVID was there, but it was not complete lockdowns like here.
Absolutely. If I compare the performance of the subsidiaries, also say two years back, there is a significant improvement. Most of it would be driven by Zimbabwe or it would be some other driver too? Hello?
Zimbabwe and Morocco.
Sure. That's helpful. Sir, one last question from my side. While you've spoken of Sting and also dairy is one of the recent additions that we've had. Ideally, over the longer term in terms of a product addition, are we looking at mainly extension of the brand, like in case of Mountain Dew, or there could be a new category also that we contemplate launching anytime soon? Similar to Sting.
Sting we have added actually. Mountain Dew Ice is a completely new category. It's a juice-based lemon drink. Sting is only two years, three years old, and huge traction is coming now. Tropicana juices we have expanded drastically, and that is showing traction. There is enough work for us to do with the products which we have launched, and every year just to launch product doesn't help if the portfolio becomes too large. I think we have enough potential in the products we've already launched, and we would first like to get enough momentum on that.
That is absolutely, sir. I'll come back in the Q&A session.
Thank you.
Thank you. Participants, you may press star and one to ask a question. The next question is from the line of Rakesh Roy from Indsec Securities. Please go ahead.
Hi, sir. My first question is, how do you see?
Can I request you to speak a little louder, please?
Hello. Yeah, is it okay?
Yes, sir.
Yeah. Sir, how do you see a demand scenario, especially in South India after rising cases in near term, sir?
South is doing well for us, but as I said, the real momentum or the real go-to-market changes we wanted to do, we have not been able to do completely. Otherwise, we are doing well. That's why you are seeing growth overall.
Okay. Sir, can you share the number, domestic volume or international number for Q2?
Q2 India is 127 million cases, and international as against this is 25.3 and total 152.3.
Yes, sir. Sir, out of 127, how much is from the South India?
No, I don't think we have that number right now handy, but South is. South what, sir?
Just the South India numbers.
Broadly, we can give you the benchmark. North and East is 1, and South and West is half of it. 1 and a half, like that.
All right.
Two-third comes from North and East, and 1/3 comes from West and South.
Yeah. Thank you, sir.
Thank you. Participants, you may press star and one to ask a question. A reminder to all the participants, you may press star and one to ask a question. The next question is from the line of Mahavir Jain from Aditya Birla Money. Please go ahead.
Hi. Good evening, sir. Sir, my question is, first apologies if I'm repeating the question. I joined a little late. My question is on the other expense side. When we see on a sequential basis, we have sustained the cost efficiency. Just wanted to know which are the areas of cost where we have worked well, and how much is it sustainable going forward?
In fact, as we have given in the earlier calls, in the organization, in transportation, consolidating plants into two and on the discount side. This is actually not under one as a head of other expenses. It's a top to bottom, everything. Realization, for example, has gone up over last year substantially. It's an efficiency across which has come in. We have to analyze line by line the total P&L actually for that.
Okay. We can expect it to be a sustainable operation.
Yes. What has come this year is definitely sustainable. Last H1 was immediately done, and then there were certain.
All right. Thank you a lot, sir.
Thank you. The next question is from the line of Suvarna Joshi from Axis Securities. Please go ahead.
Sir, thank you for the opportunity. I had 2 set of questions. One was if you can just highlight this growth of 45% in volume. In terms of the SKU mix, can you just help us understand what has grown for us? That is one.
I'm sorry, Suvarna. The line for the management got disconnected. Please stay connected on the line when we rejoin them to the call.
Sure. Thank you.
Ladies and gentlemen, thank you for your patience. We have the line for the management reconnected. Suvarna, may I request you to repeat your question for the management once again, please?
Yeah. Sir, thank you for the opportunity. I had about two questions. One was if you can just help us understand how has the SKU mix done for us because in the last two quarter phone calls, we've said that the larger SKUs have typically done well because of the in-home consumption. Two parts to that question, one is on the SKU mix and how is the in-home consumption trend doing? Is it continuing to grow at the rate that we have been seeing or there has been some tapering down noted? That is one. The second bit is on if you can help us understand and the growth in semi-urban and urban markets, because during this second wave of the COVID, we have seen that the hinterland and the rural regions were more impacted versus the 1st one. What has been our experience on that?
I think as far as your in-home consumption, that is steady, and it has been doing well. Similarly, the large packs are doing much better than the single serves. Both of these things are continuing during the pandemic time, both these things continue to remain. As far as your rural or urban is concerned, last year rural was very strong. Even this year rural was good, but not as strong as last year, and urban did quite well this year compared to last year.
Sir, can you give us the delta of how the rural has grown versus the urban this year around versus the last year?
I don't have the exact number, but I can tell you only one thing. Last year, the complete growth, most of it was coming out of rural. It is balanced, and I think rural as well as your urban is growing at about the same pace. Otherwise, it was completely skewed on the rural side.
Basically, the total business including the growth pattern, sales mix, is coming something like pre-COVID like. There had not been much of a change, including market discounts, penetration, except a few items like HORECA was absolutely shut and May was totally shut. Other months, out of seven months of the current calendar year.
What happens in the summer months, rural grows much faster, which is the basic change we saw that urban was doing all right and rural did not grow as fast as what we had expected.
Sure. This is very helpful. Going forward, can we then say that gradually urban will start picking up over the rural region growth, or it should remain in the balanced territory of growth?
Right now, I think it will remain balanced because the peak season is off, and after peak season, always the urban sales are better than the rural.
All right, sir. Thank you so much, and wish you all the best.
Thank you.
Thank you.
Thank you very much. I now hand the conference over to the management for closing comments.
Thank you. I hope we have been able to answer all your questions satisfactorily. Should you need any further clarifications or would like to know more about the company, please feel free to contact our investor relations team. Thank you once again for your interest and support, and for taking the time to join us on this call. Look forward to interacting with you soon. Thank you very much once again.
Thank you very much. On behalf of Varun Beverages Limited, that concludes this conference. Thank you for joining us. You may now disconnect your lines. Thank you.