IPO Update

IPO UPDATE

Highly seasonal business with expensive valuation

Salient features of the IPO:

• Varun Beverages Ltd. (VBL) is one of the largest franchisee in the world (outside USA) of carbonated soft drinks (CSD) and non-carbonated beverages (NCB) sold under trademarks owned by PepsiCo (Source Company RHP).

• The issue is a mix of fresh issue and an offer for sale. Majority of the net proceed from the issue will be utilized for the prepayment/repayment of the debt.

Key competitive strengths:

• Demonstrated ability to grow sales volumes

• Tactically located and technologically advanced production facilities

• Wide reach and integrated sales & distribution network

• Experienced management team

Risk and concerns:

• Increase in key raw material prices

• Termination or non-renewal of contract with PepsiCo

• Acquisition and integration of additional franchises

Valuation & recommendation:

There is no listed peer in the domestic market. At the higher price band of Rs. 445, VBL’s share is valued at a P/E multiple of 62.5x (to its TTM consolidated EPS, post adjusting for convertible preference shares and debentures).

Below are few key observations of the issue:

• VBL has franchise to sell in 17 states and two union territories in India, across North and East India. Western India is the largest market for the soft drinks in India, followed by North India.

• Out of the total soft drinks sales volume of PepsiCo in India during FY15, the company handled 44.1% of it. The company’s market share in PepsiCo’s sales volume in India was 26.5% in FY11.

• CSD sales volume is around 82% of the total sales volume. Rest is contributed by NCB and water. On account of health concerns among the customers, the CSD market is not growing at a respectable pace as compared to NCD and water. Hence higher presence in the CSD market seems to be negative for the company.

• Soft drinks demand increases post winter season. VBL generates 45% of the annual sales volume in Apr-June period and 75% of the EBITDA in H1 (i.e. Jan-June period). Based on the H1 CY15 data, the company was loss making on EBIT level in H2 CY15. Moreover, in H2 CY16, it is likely to generate a loss of Rs. 284.2mn on EBIT level. Hence the profitability of the company gets eroded in the second half. One of the reasons behind the same would be the huge installed manufacturing capacity and lower asset turnover.

• Of the net proceeds of Rs. 6,675mn, around Rs. 5,400mn will be utilized to repay/prepay certain part of debt. Post this repay/prepayment, the debt equity ratio is expected to decline to 1.1x from current 1.3x.

• As of 30th June 2016, cost of key raw materials such as concentrates and sugar accounted to around 30% of the net revenue. The prices of sugar has increased over 15-20% in 2016, this might put pressure on the profitability of the company.

Thus, considering the above observations, we recommend a “AVOID” rating for the public issue.

1

Recommendation AVOID

Price Band (Rs.) Rs. 440 - Rs. 445

Face Value (Rs.) Rs. 10

Shares for Fresh Issue (mn) 15mn

Shares for OFS (mn) 10mn

Fresh Issue Size (Rs. mn) Rs. 6,675mn

OFS Issue Size (Rs. mn) Rs. 4,400 - 4,450mn

Total Issue Size (Rs. mn) Rs. 10,750 - 11,125mn

Bidding Date 26th Oct. – 28th Oct. 2016

Book Running Lead Manager Kotak Mahindra Capital Ltd., Axis Capital Ltd. and CLSA India Pvt. Ltd.

Registrar Karvy Computershare Pvt. Ltd.

Sector/Industry FMCG

Promoters

RJ Corp Ltd., Mr. Ravi Kant Jaipuria, Mr. Varun Jaipuria and Mr. Ravi Kant Jaipuria & Sons (HUF)

Pre - Issue Shareholding Pattern

Promoters and Promoter Group 86.3%

Public 13.7%

Total 100%

Retail Application Money at Higher Cut-Off Price per Lot

Number of Shares per Lot 33

Application Money Rs. 14,685

Analyst

Rajnath Yadav

Research Analyst (022 - 6707 9999; Ext: 912)

Email: rajnath.yadav@choiceindia.com

Oct. 25, 2016

Varun Beverages Ltd.

Consolidated Financial Snapshot (Rs. mn) CY12 CY13 CY14 CY15 H1 CY15 H1 CY16 Revenue from Operations (Net) 17,999.9 21,151.5 25,024.1 33,941.5 22,318.1 25,296.6

EBITDA 2,280.4 2,911.2 3,845.4 6,340.6 4,777.9 6,041.8

Reported PAT 251.1 (395.3) (201.6) 870.4 1,673.2 2,097.5

EBIDTA Margin (%) 12.7% 13.8% 15.4% 18.7% 21.4% 23.9%

Reported PAT Margin (%) 1.4% -1.9% -0.8% 2.6% 7.5% 8.3%

RoE (%) 14.6% -18.4% -5.9% 12.9% 22.2% 23.0%

RoCE (%) 4.6% 4.9% 7.0% 10.7% 10.2% 12.1%

IPO Update

IPO UPDATE 2

About the issue: • VBL is coming up with an initial public offering (IPO) with 25mn shares (fresh issue: 15mn; OFS shares: 10mn) in offering.

Total IPO size is estimated at around Rs. 11,075 - 11,125mn.

• The issue will open on 26th Oct. 2016 and close on 28th Oct. 2016.

• Not more than 50% of the issue will be allocated to qualified institutional buyers. Further, at most 15% of the issue will be available for non-institutional bidders and the remaining 35% for retail investors.

• The company will receive Rs. 6,675mn from the issue. Majority of the net proceed (Rs. 5,400mn) from the issue will be utilized for the prepayment/repayment of the debt.

• Pre-issue promoter group stake in Endurance stands at 86.3%. Post IPO, promoter group stake will decline to 73.7%.

Source: Company RHP

Pre and Post Issue Shareholding Pattern (%)

Pre Issue Post Issue

Promoter & Promoter Group (%) 86.3% 73.7%

Public 13.7% 26.3%

IPO Update

IPO UPDATE 3

Indian Soft Drinks Industry Overview: The beverage market in India is underdeveloped in terms of per capita consumption of 9.4 litres in 2015, compared to the more mature markets such as U.S. and UK, with per capita consumption of 347.3 litres and 162.9 litres, respectively. The per capita consumption is expected to almost double and reach to 18.4 litres by 2020. In 2015, the total off-trade and on-trade sales of soft drinks in India was 12,081mn litres. During the period of 2010-2015, the total off-trade and on-trade sales by volume grew at a CAGR of 17.9% and by value grew at a CAGR of 18.7%. As a trend, the sale of soft drinks is higher during the summer months from April to June. With the end of winter and the resultant rising temperatures during summer months, soft drinks manufacturers, especially carbonates players, record strong sales. The Euromonitor Report, while noting that the growth in 2015 was slightly slower than 2014 due to untimely monsoons, estimates that the soft drinks industry in India will witness further growth in the next few years (Source: The company RHP). The overall soft drinks market in India saw aggregate sales of 12,081mn litres, worth Rs. 524.3bn in the year 2015. The main segments constituting the soft drinks market in India are carbonated soft drinks, juices and bottled water, which together accounted for over 99% of the total volumes sold in 2015. The remaining is divided among products such as ready-to-drink coffee and tea, concentrates and sports and energy drinks. In terms of distribution channels, the soft drinks market is divided into off-trade and on-trade. Off-trade sales are those which take place at retail outlets such as grocery stores, hypermarkets, super markets etc. On-trade sales, on the other hand, are those taking place at food service outlets, restaurants, bars, clubs, etc. The distinction between the off-trade and on-trade channels holds particular relevance in the soft drinks industry, since on-trade sales generally take place at higher sales prices, and hence, impact the analysis of any value based sales data

Total Soft Drinks - Off-trade vs. On-trade Sales by Volumes (mn litres) in 2015

Total Soft Drinks - Off-trade vs. On-trade Sales by Value (Rs. mn) in 2015

Source: Company RHP Source: Company RHP

Sales of Soft Drinks in India (by volume and value): 2010-2015

2010 2011 2012 2013 2014 2015 CAGR (%)

Soft Drink Sales Volume (mn liters) 5,299.7 6,362.9 7,589.4 8,915.0 10,366.8 12,081.0 17.9%

Sales Value (Rs. mn) 222.6 264.2 315.2 374.8 446.6 524.3 18.7%

Source: Company RHP

Segment-wise break-down between off-trade and on-trade sales in 2015: In terms of volume, off-trade sales of soft drinks in India aggregated to 8,332.1mn litres in 2015, whereas on-trade sales, aggregated to 3,748.9mn litres in the same period. Whereas, in terms of value, in the same period, off-trade sales of soft drinks in India aggregated to Rs. 283.4bn in 2015, and on-trade sales, aggregated to Rs. 240.9bn.

69%

31%

Off-trade Sales Volume (%) On-trade Sales Volume (%)

54%

46%

Off-trade Sales Volume (%) On-trade Sales Volume (%)

IPO Update

IPO UPDATE 4

Indian Soft Drinks Industry Overview (Contd…): In terms of total volume, bottled water is the largest category in the soft drinks market in 2015, closely followed by carbonates. However, in terms of value, carbonates are the largest category in the soft drinks market in 2015. Juices came in third by volume and second by value while the other categories like ready to drink tea and energy drinks fall far behind in comparison.

Source: Company RHP

Segment wise total volumes - split of off trade/on trade (mn litres)

Segment wise total value sales - split of off trade/on trade (INR bn)

Source: Company RHP

Forecast sales of soft drinks (as sold) by channel: 2015-2020: The soft drinks market is expected to grow from 12,081mn litres (Rs. 524.3bn) in 2015 to 25,131mn litres (Rs. 1,176.3bn) in 2020 at a CAGR of 15.8% by volume and 17.5% by value. Long summers and higher spending on packaged products is expected to fuel this growth. The off-trade sale is expected to grow from 8,332.1mn litres (Rs. 283.4bn) in 2015 to 18,166.7mn litres (Rs. 696.4bn) in 2020 at a CAGR of 16.9% by volume and 19.7% by value.

Forecast of Sales of Soft Drinks in India (by volume and value): 2010-15

2010 2011 2012 2013 2014 2015 CAGR (%)

Soft Drink Sales Volume (mn liters) 12,081 14,047.8 16,294 18,870.2 21,801 25,131 15.8%

Sales Value (Rs. mn) 524.3 616.1 723.8 851.3 1,000.4 1,176.3 17.5%

Source: Company RHP

IPO Update

IPO UPDATE 5

Indian Soft Drinks Industry Overview (Contd…): Segment-wise forecast of sales of soft drinks: Juice category is expected to record the maximum growth with a value CAGR of 26.0% followed by bottled water at 21.0%. The majority of volume and value growth is expected to come from these two categories, which are being accepted by consumers in urban and rural areas alike. Increased marketing efforts and communications from soft drinks manufacturers are expected to continue playing an important role in terms of pushing sales in most soft drinks categories.

Source: Company RHP

Within the off-trade channel, a significant majority of sales of soft drinks in India continues to take place through traditional grocery retailers, particularly due to their easy accessibility and penetration. In 2015, traditional grocery retailers contributed 63.3%, 87.9%, and 69.8% of the total off-trade volume sales for bottled water, carbonates and juices respectively, in 2015, whereas supermarkets contributed 4.9%, 4.6% and 10.9%, respectively for the same categories. Direct selling constituted 21% of the total off-trade volume sales for bottled water and modern grocery retailers constituted 30.2% of the total off-trade volume sales for juices. However, modern retailers continue to gain grounds on account of their ability to offer wider soft drinks assortments and more competitive prices than other retailers.

Region wise Soft Drink Market: North India: The growth and size of the Indian soft drinks market has varied on the basis of geographical regions. Out of the total soft drink sales in 2015, North India has been the second largest market in terms of volumes, with total volume sales of 4,104.1mn litres (Rs. 182,004.2mn). West India is the largest market in terms of volumes with total volume sales of 4,184mn litres (Rs. 180,885.2mn). However, in the off-trade channel, North India took the lead with total volume sales of 2,972.5mn litres in 2015, followed closely by West India (2,522.6mn litres). As per the Euromonitor Report, 2016 the increasing population of the middle class, coupled with rapid urbanisation and changing lifestyles, will support North India to emerge as a strong base for soft drinks over the forecast period. Long summers and people’s love for food and drinks will keep on driving soft drinks in the region. With the increase in the disposable income among the middle class and rising urbanisation, soft drinks are expected to witness strong growth. East and Northeast India: East and Northeast India recorded the lowest level of per capita consumption within soft drinks in India in 2015. The region is often given less priority by leading soft drinks players due to the difficult terrain, which makes transportation difficult. In addition, consumers in the region have lower average disposable incomes compared with the rest of India and therefore prefer affordable brands. As per the Euromonitor Report, 2016, given the limited availability of potable drinking water in many parts of the region, bottled water is expected to continue making inroads into the more remote reaches of the region (Source: Euromonitor Report).

IPO Update

IPO UPDATE 6

West India: In 2015, West India ranked first in the total sales of soft drinks in India with total volume sales of 4,184mn litres (Rs. 1,80,885.2mn in value). The off-trade value sales of soft drinks in West India grew by 19.8% in current terms during 2015. In the on-trade channel as well, the share of West India has been substantially higher, with recorded volume sales of 1,661.4mn litres in 2015 as compared to 1,131.7mn litres in North India, making it the largest overall market for soft drinks in India. Increasing disposable income among the middle class, coupled with rapid urbanisation and changing lifestyles, are the major factors which will support West India to emerge as a strong base for soft drinks over the next few years (Source: Euromonitor Report). South India: Rising health consciousness and changing food habits of consumers are set to remain the key drivers of the positive performance anticipated in juice and carbonates during the forecast period. Many more consumers are expected to become more active in terms of trading up to categories such as 100% juice, superfruit juice and cereal-based juice etc. for stronger health benefits. Price sensitivity and a fear of preservatives/poor quality in juice can act as a threat in growth pace of the sector over the next few years. Increased urbanisation, rising disposable incomes and growing health consciousness among the Indian youth has increased the demand for energy drinks. At the same time, cities like Hyderabad, Bangalore and Chennai, which are the IT hubs of the country, have long and erratic working hours and the increasing occurrence of social gatherings which are driving South Indian consumers towards the consumption of energy drinks.

Indian Soft Drinks Industry Overview (Contd…):

Total (On-trade + Off-trade) sales of soft drinks in terms of volume

Total (On-trade + Off-trade) sales of soft drinks in terms of value (at current prices)

Source: Company RHP

Source: Company RHP

Region-wise Forecast of the Indian soft drinks market for the period for 2015-20

Source: Company RHP

IPO Update

IPO UPDATE 7

Market Outlook: The growing focus on rural and semi-urban markets from all major players has helped improve product penetration. This has also led to customization of products. Soft drinks manufacturers are likely to introduce the customization of soft drinks based on the specific requirements of rural consumers. For example, manufacturers would launch smaller pack sizes and soft drinks in glass bottles to make the products available at lower price points. It is estimated that long summers and higher spend on packaged products will fuel growth. Increased marketing efforts and communications from soft drinks manufacturers are expected to play an important role in terms of pushing sales in most soft drinks categories. The bottled water and juice segments are also expected to exhibit strong growth, as they are being embraced by consumers in urban and rural areas alike. The Indian soft drinks industry is likely to reach 25,131.0mn litres (worth Rs. 11,76,321.2mn) by 2020. This implies a growth with CAGR of 15.8% and 17.5% by volume and value respectively, over the five year period from 2015 to 2020. With several new brand launches and the expansion of comparatively new players such as Hector Beverages, the competition in soft drinks became even more intense during 2015. Competition in the soft drinks market in India: Multinational companies Coca-Cola and PepsiCo have occupied the first and second positions respectively in the off-trade soft drinks market in India in the period between 2011 and 2015, with a market share of 34.6% and 21.1%, respectively, in 2015. The third place has been held by Parle Bisleri, with an off-trade market share of 10.8% by volume in 2015, all of which can be attributed to its mineral water brand Bisleri. Overall, the top 10 players in the market have generally held about 75% of the off-trade market by volume in the last five years (being 84% in 2011 and 75% in 2015). Manufacturers have undertaken a variety of steps to compete in the market including undertaking marketing and promotional activities, especially in North and West India. This includes marketing through signing up of popular film celebrities. Sports has beenused as a platform by PepsiCo to reach a wider audience.

Indian Soft Drinks Industry Overview (Contd…):

IPO Update

IPO UPDATE 8

Company introduction: Varun Beverages Ltd. (VBL) is one of the largest franchisee in the world (outside USA) of carbonated soft drinks (CSD) and non-carbonated beverages (NCB) sold under trademarks owned by PepsiCo. It produces and distributes a wide range of CSDs, as well as a large selection of NCBs, including packaged drinking water. PepsiCo’s CSD brands produced and sold by it includes Pepsi, Diet Pepsi, Seven-Up, Mirinda Orange, Mirinda Lemon, Mountain Dew, Mountain Dew Game Fuel, Seven-Up Nimbooz Masala Soda, Seven-Up Revive and Evervess. PepsiCo NCB brands produced and sold by it includes Tropicana Slice, Tropicana Frutz (Lychee, Apple and Mango), Nimbooz as well as packaged drinking water under the brand Aquafina. In addition, the company has also been granted the franchise for Ole brand of PepsiCo products in Sri Lanka. Product Portfolio: VBL’s product portfolio includes various PepsiCo brands under the CSD, NCB and packaged drinking water categories. Carbonated Soft Drinks: The following table sets forth certain information relating to the most significant PepsiCo brands the company produces and distributes:

Source: Company RHP

IPO Update

IPO UPDATE 9

Company introduction (Contd…): Non-Carbonated Beverages: The following table shows VBLs major non-carbonated beverage brands:

Source: Company RHP

Packaged drinking water: The sole packaged drinking water brand of PepsiCo which the company franchises is Aquafina.

Source: Company RHP

IPO Update

IPO UPDATE 10

Company introduction (Contd…): As of 30 June 2016, VBL has been granted franchises for various PepsiCo products across 17 States and two Union Territories in India. India is its largest market and contributed around 85% of the consolidated revenue in FY15. The company has also been granted the franchise for various PepsiCo products for the territories of Nepal, Sri Lanka, Morocco, Mozambique and Zambia. In addition, it is in the process of setting up a greenfield facility in Zimbabwe in anticipation of franchise rights being granted by PepsiCo Inc. for such territory. According to the Euromonitor Report, the beverage markets in India, Nepal, Morocco and Sri Lanka are some of the fastest growing beverage markets in the world. Considering VBL’s ability to grow PepsiCo product sales in the assigned territories and sub-territories, PepsiCo is licensing additional franchises to it, including sub-territories in India that were earlier directly operated by PepsiCo or by third-party bottlers. PepsiCo soft drinks total volume sales (based on sales to end consumers) in India was 1,654.9mn liters in FY11 and 2,688.1mn liters in FY15. VBL’s sales volumes in its sub-territories in India were 437.9mn litres (equivalent to 77.1mn unit cases) in FY11 and 1,186mn litres (equivalent to 208.9mn unit cases) in FY15. Thus based on the sales volume, the company’s share of PepsiCo soft drinks total volume sales in India increased from 26.5% in FY11 to 44.1% in FY15. Relationship with PepsiCo: VBL is a strategic franchisee partner for PepsiCo in India and has over the years developed a significant and mutually beneficial business association with ongoing operational synergies. It manufactures, package, sells, and distribute beverage products under trademarks owned by PepsiCo. PepsiCo controls the global marketing of PepsiCo’s brands and supplies it with relevant concentrates for the production of its CSD and NCB products in its licensed territories and sub-territories. As a franchisee of PepsiCo products, the company produces, packages and sells the beverage products of PepsiCo; engage in local marketing and promotional activities customized to specific markets; develop business relationships with local customers and develop local distribution channels, e.g. through investment in chilling equipment such as visi-coolers, ice chests, bottle coolers, delivery vehicles etc.; and distribute PepsiCo products to retailers, which include traditional and modern retail outlets, either directly or indirectly, through distributors and wholesalers.

Competitive Strengths: • Demonstrated ability to grow sales volumes: VBL has been associated with PepsiCo since the 1990s and consolidated its

business association with PepsiCo, increasing the number of licensed territories and sub-territories covered by it, producing and distributing a wider range of PepsiCo beverages, introducing various SKUs in its portfolio, and expanding its distribution network. The company’s total sales volumes have grown at a CAGR of 32.8% from 437.9mn liters (equivalent to 77.1mn unit cases) in FY11 to 1,361.1mn liters (equivalent to 239.7mn unit cases) in FY15.

• Strategically located large and technologically advanced production capabilities: As of 30 June 2016, VBL operated 16 production facilities across India and five production facilities in its international licensed territories with an estimated aggregate annual production capacity of 3,438.4mn litres (equivalent to 605.6mn unit cases) in India and an estimated aggregate annual production capacity of 991.6mn litres (equivalent to 174.6mn unit cases) in its international production facilities. The company uses advanced machinery and production techniques in its manufacturing process for water treatment, packing etc. in certain of its production facilities. These techniques enable it to improve production efficiencies and reduce personnel costs. Additionally, VBL’s production facilities are strategically located in geographical proximity to various target markets, which results in lower transportation and distribution expenses thereby enabling it to leverage economies of scale. The company has also set up backward integration facilities in certain of its production facilities for preforms, crowns, corrugated boxes, corrugated pads, plastic crates and shrink wrap films to ensure operational efficiencies and quality standards.

• Wide reach and integrated sales & distribution network: VBL’s wide spread and integrated sales & distribution network enables it to reach a wide range of consumers and ensure effective market penetration. As of 30th June 2016, the company distribution network in India included 60 depots and 1,438 delivery vehicles. It also has 562 primary distributors in India and 415 distributors in its international operations. VBL’s distribution network is strategically located to maximize market penetration across its licensed sub-territories in India, with an increased focus on higher growth markets such as semi-urban and rural sub-territories.

IPO Update

IPO UPDATE 11

Competitive Strengths (Contd…): • Significant markets with high growth potential: The soft drinks market in India is underdeveloped in terms of per capita

consumption of 9.4 litres in 2015, when compared to the world average of 91.9 litres and the more mature U.S. market, with a per capita consumption of 347.3 litres. VBL believes that there is significant growth potential for PepsiCo’s beverages in its licensed territories in India. In North India and East & North-East India, sales volume of soft drinks grew at a CAGR of 18.2% and 16.1%, respectively, over CY10-15. The company believes that this trend to continue as consumer disposable income increases further.

• Experienced management team: VBL has a qualified and professional management team with significant experience in all operational aspects of its business, which helped it to deliver consistent sales growth. Its senior management team has extensive experience in the food and beverage industry in India. VBL’s Promoter and Chairman, Mr. Ravi Kant Jaipuria, has an established reputation as an entrepreneur and business leader and is the only Indian company’s promoter to receive PepsiCo’s International Bottler of the Year award, in 1997. Mr. Jaipuria provides strategic leadership to the company and is also closely involved in its operations.

• Consistence financial performance on operating levels: On the back of double digit sales volume growth over CY12-15, VBL reported a 23.5% CAGR rise in the total operating revenue to Rs. 33,941.5mn in CY15. Business from its core segment (which contributes 98% to the consolidated gross operating revenue), the beverages reported a 25.6% rise in the business over the same period. Total operating expenditure increased by 20.6% CAGR, thereby leading to a 40.6% CAGR rise in the consolidated EBITDA to Rs. 6,340.6mn. EBITDA margin improved by over 6ppts during the same period to 18.7%. Despite reporting growth on operating level, the company’s profitability was impacted by higher depreciation and finance charge, which increased by 32.7% and 13.4% CAGR over CY12-15. Reported PAT was volatile during the period, as it reported a net loss in CY13 and CY14, while with the reduction in the financial charge, the company reported a net profit of Rs. 870.4mn in CY15. Over CY12-15, VBL reported 25.9% CAGR increase in operating cash flow to Rs. 5,598mn.

Financial Performance over FY12-16 Operating Performance over FY12-16

Source: Company RHP Source: Company RHP

-5%

0%

5%

10%

15%

20%

25%

30%

15,000

20,000

25,000

30,000

35,000

CY12 CY13 CY14 CY15 H1 CY15 H1 CY16

Revenue from Operations (Rs. mn)EBITDA Margin (%)Reported PAT Margin (%)

-20.0%

-15.0%

-10.0%

-5.0%

0.0%

5.0%

10.0%

15.0%

20.0%

25.0%

0

3

6

9

12

CY12 CY13 CY14 CY15 H1 CY15 H1 CY16

Debt Equity Ratio RoE (%) RoA (%) RoCE (%)

IPO Update

IPO UPDATE 12

Business strategy: • Growing business by capitalizing on brand strength and diversifying product portfolio: According to Euromonitor

Report, Slice and Pepsi brands of PepsiCo are amongst the leading beverage brands in India. The company intends to continue to leverage the PepsiCo’s brand portfolio to increase market penetration in its licensed territories. Also it will continue to expand its product portfolio and distribution reach, focus on increasing consumption volumes, particularly in markets and demographic segments with relatively low per capita consumption. It believes that its increased focus on semi-urban and rural markets, and ability to understand consumer preferences, will enable it to further increase market penetration in these markets, resulting in organic growth.

• Continue to acquire and integrate additional franchisee rights: VBL continues to play a significant role in the consolidation of PepsiCo’s production and distribution operations in South Asia and Africa. For further expansion in the operations, the company may strategically target territories that either have significant growth opportunities for PepsiCo products or are located contiguous or in close proximity to its existing licensed territories and sub-territories so as to get various operating benefits. It will continue to work closely with PepsiCo to identify such strategic consolidation opportunities.

• Expanding the distribution network and optimize distribution operations: VBL wish to continue to focus on increasing sales volumes in its licensed territories and sub-territories by expanding its distribution network, optimizing its distribution operations and increasing product supply to under-penetrated markets, particularly to semi-urban and rural areas. VBL aims to have an optimal utilization of its existing distribution infrastructure by implementing effective brand and product promotion strategies. The company further intends to expand its distribution network by setting up additional distribution centers, consolidating existing distributors and increasing the number of distributors in underpenetrated markets. With this it is expecting to increase brand awareness and sales of PepsiCo beverages.

• Continued focus on cost efficiencies and operational efficiency: As an integral part of VBL’s continuing efforts of ensuring cost efficiencies, it has undertaken a number of initiatives aimed at reduction of cost of goods sold, effective management of operating expenses and improvement in cash flows. These initiatives include backward integration of production facilities and having a centralized procurement team. The company in future will continue to focus on consolidation of its production activities to ensure all components of its products are supplied internally. VBL also targets to increase its margins through a reduction in freight and distribution costs.

Risk and Concerns:

• Acquisition and integration of additional franchises: VBL in the past has expanded its operations organically and through

the acquisition of territories operated by PepsiCo or the third party bottler. The company has reported improvement in the profitability through proper integration and in-depth analysis of the target market. In future also, it has guided that the expansion will be through such arrangements and thus the inability to integrate the additional operations/ franchise in an efficient way will negatively affect the company’s operations and profitability.

• Sales volume and price: Over the years, VBL has increased its sales volume mainly through acquisition and improvement in the marketing and distribution activities. The company has increased its share in the highly competitive CSD market, which is growing at a slower pace. Inability to do the same in future will affect the profitability. Moreover, it has less pricing power in the CSD market, while the pricing power is high in the NCB market, which is less competitive. Inability to pass on the increased production cost and marketing and distribution cost will lower the profitability of the company.

• Termination or non-renewal of contract with PepsiCo: Since 1990, VBL is associated with PepsiCo and sell products under the trademarks owned by PepsiCo. There is a mutual understanding that the contract is renewed without any material modification. Thus, in case if the contract is not renewed or there is any material change in the terms and conditions, it will adversely impact the operations of the company.

• Increase in key raw material prices: Some of the key raw materials required for the production of PepsiCo’s beverages include concentrate and sweeteners (sugar). The company sources concentrates from the PepsiCo, while sugar is procured domestically. Historically, cost of concentrates was between 28-34% of the total cost of raw material consumed over CY12-15. In H1 CY16, it stood at 28.9% of the total raw material cost. Cost of sugar is around 26-28% of over raw material cost over CY12-15. On account of increase in sugar prices in in H1 CY16, it stood at 33.7% of the total raw material cost. VBL prices its product based on the competition and pricing trend of the key raw materials. Inability of the company to pass on the increased raw material prices to the customers will be negative and affect the profitability of the company.

IPO Update

IPO UPDATE 13

Peer comparison and our recommendation:

There is no listed peer in the domestic market. At the higher price band of Rs. 445, VBL’s share is valued at a P/E multiple of 62.5x (to its TTM consolidated EPS, post adjusting with convertible preference shares and debentures). Moreover, on P/BVPS and EV/EBITDA front, the company is available at 6.1x and 12.8x. Below are few key observations of the issue: • VBL is one of the largest franchisee in the world (outside USA) of CSD and NCB sold under trademarks owned by PepsiCo.

According to Euromonitor Report, Slice and Pepsi brands of PepsiCo are amongst the leading beverage brands in India.

• The company has franchise to sell in 17 states and two union territories of India. Western India is the largest market for the soft drinks in India. VBL has presence in North and East India. North India is the second largest market soft drinks in India. The company has no presence in West and South India.

• Out of the total soft drinks sales volume of PepsiCo in India during FY15, the company handled 44.1% of it. The company’s market share in PepsiCo’s sales volume in India was 26.5% in FY11.

• As of 30th June 2016, the Beverages segment contributed 98.9% to the consolidated gross revenue. CSD sales volume is around 82% of the total sales volume. Rest is contributed by NCB and water. On account of health concerns, the CSD market is not growing at a respectable pace as compared to NCD and water. Higher presence in the CSD market seems to be negative for the company.

• Of the net proceeds of Rs. 6,675mn, around Rs. 5,400mn will be utilized to repay or prepay certain part of debt of the company. As of 30th June 2016, VBL has total outstanding debt of Rs. 17,229.3mn (post adjusting for the conversion of debentures), with a debt equity ratio of 1.3x. Of the total debt, around Rs. 6,000mn is interest free and is provided by PepsiCo. Post the repayment or prepayment, the debt equity ratio is expected to decline to 1.1x.

• The company has investment from two major private equity players namely Standard Chartered Private Equity (Mauritius) II Ltd. and AION Investments II Singapore Pte. Ltd., each holding 7.7% and 4.9%, respectively. These investors are not participating in the public issue and thus, post issue their holdings will come down to 7.1% and 4.5%, respectively.

• Soft drinks demand increase post winter season. VBL generates 45% of the annual sales volume in Apr-June period and 75% of the EBITDA in H1 (i.e. Jan-June period).

• Based on the H1 CY16 results and guidance from the VBL’s management, we are anticipating a CY16 top-line of Rs. 38,209.8mn, while EBITDA of Rs. 7,995.8mn, with an EBITDA margin of 20.9% (representing an expansion of 225bps over CY15 levels). Based on the H1 CY15 data, the company was making loss on EBIT level in H2 CY15. Moreover, in H2 CY16, it is likely to generate a loss of Rs. 284.2mn on EBIT level. Hence the profitability of the company gets eroded in the second half. One of the reasons behind the same would be the huge installed manufacturing capacity, which is currently operating at 67-68% capacity utilization. CY16 reported PAT is likely to increase by 74.1% over CY15 to Rs. 1,515.4mn, with a PAT margin of 4% (representing an expansion of 140bps over CY15).

• Currently, VBL pays around 35-37% of the realization as tax (under various heads). With the implementation of GST and the anticipated max rate of 26%, the company is expected to benefit from the same. However, is additional tax such as sin tax is applied, then it might be neutral or negative for it.

• As of 30th June 2016, cost of key raw materials such as concentrates and sugar accounted to around 30% of the net revenue. The company prices its product taking into consideration the competition and raw material pricing trend. The prices of sugar has increased over 15-20% in 2016, this might put pressure on the profitability of the company.

Thus, considering the above observations, we recommend a “AVOID” rating for the public issue.

IPO Update

IPO UPDATE 14

Financial Statements:

Source: Company RHP

Source: Company RHP

Consolidated Profit and Loss Statement CY12 CY13 CY14 CY15 H1 CY15 H1 CY16

Revenue from Operations (Net) 17,999.9 21,151.5 25,024.1 33,941.5 22,318.1 25,296.6 Cost of Materials Consumed (9,731.6) (11,502.7) (13,162.2) (14,253.1) (10,590.9) (12,040.8) Purchases of Traded Goods (513.1) (573.9) (597.0) (3,201.5) (2,092.0) (683.7) Changes in Inventories of Finished Goods, Work in Progress and Traded Goods

(33.1) 84.5 (1.9) 289.9 909.0 746.1

Employee Benefits Expense (1,524.2) (1,829.9) (2,168.0) (3,237.5) (1,589.5) (2,108.4) Other Expenses (3,917.5) (4,418.3) (5,249.6) (7,198.6) (4,176.8) (5,168.1) EBITDA 2,280.4 2,911.2 3,845.4 6,340.6 4,777.9 6,041.8 Depreciation and Amortisation Expense (1,357.9) (1,843.6) (2,100.6) (3,174.1) (1,455.2) (1,894.9) EBIT 922.5 1,067.7 1,744.8 3,166.5 3,322.7 4,146.9 Finance costs (1,156.0) (1,697.1) (1,854.0) (1,687.9) (892.6) (1,112.3) Other Income 442.0 173.5 146.9 142.8 82.9 96.9 EBT 208.5 (455.9) 37.7 1,621.4 2,513.0 3,131.5 Tax Expenses 42.6 52.2 (248.1) (766.2) (847.3) (997.3) PAT Before Minority Interest 251.1 (403.7) (210.4) 855.2 1,665.8 2,134.2 Share of Profit in Associate 8.4 8.8 15.2 7.4 15.4 Minority Interest (0.0) 0.0 0.0 0.0 0.0 (52.2) Reported PAT 251.1 (395.3) (201.6) 870.4 1,673.2 2,097.5

Consolidated Balance Sheet Statement CY12 CY13 CY14 CY15 H1 CY15 H1 CY16

Equity Share Capital 267.5 1,337.7 3,337.7 5,837.7 5,837.7 5,856.7 Reserve & Surplus 1,448.6 415.9 93.1 885.3 1,703.9 3,258.1 Share Application Money Pending Allotment 400.0 Minority Interest 0.1 0.1 0.1 Long Term Borrowings 13,628.1 16,951.9 16,302.4 15,795.2 13,774.2 18,375.2 Deferred Tax Liabilities (Net) 724.7 638.2 811.8 1,511.5 1,617.7 2,291.7 Other Long Term Liabilities 352.1 314.2 110.7 6,362.8 6,362.8 3,151.2 Long Term Provisions 138.4 176.0 259.1 440.0 415.5 532.6 Short Term Borrowings 3,384.4 3,376.5 5,085.2 2,524.1 2,133.7 3,004.2 Trade Payables 906.6 1,391.8 1,806.3 1,845.6 4,320.5 3,297.2 Other Current Liabilities 4,632.6 4,828.5 4,967.5 8,797.9 10,207.4 12,407.1 Short Term Provisions 64.9 62.9 176.3 374.4 733.2 781.3 Total Liabilities 25,548.0 29,893.7 32,950.1 44,374.5 47,106.5 52,955.4

Tangible Assets 16,837.9 22,157.4 22,132.5 31,056.7 31,611.9 34,405.1 Intangible Assets 194.2 1,493.4 1,320.8 3,839.3 4,093.1 3,608.5 Capital Work in Progress 1,893.5 274.3 247.5 379.1 215.7 191.9 Goodwill on Consolidation (Net) 95.4 95.4 95.4 95.4 95.4 2,366.7 Non Current Investments 0.1 8.8 17.6 32.7 25.0 48.1 Deferred Tax Asset (Net) 13.4 38.0 33.7 27.1 28.7 28.4 Long Term Loans & Advances 644.2 369.3 446.0 1,189.6 1,102.0 1,845.8 Other Non Current Assets 24.9 20.7 67.7 50.1 42.8 52.6 Current Investments 0.0 0.0 3,019.8 0.0 0.0 0.2 Inventories 2,305.8 2,464.1 2,892.5 4,246.6 5,077.2 5,591.6 Trade Receivable 906.5 652.1 972.9 979.1 1,711.8 1,478.8 Cash & Cash Equivalents 383.8 509.0 344.1 580.7 1,015.0 1,155.3 Short Term Loans and Advances 2,198.2 1,709.4 1,251.3 1,803.8 1,992.5 2,023.7 Other Current Assets 50.1 101.9 108.4 94.2 95.5 158.7 Total Assets 25,548.0 29,893.7 32,950.1 44,374.5 47,106.5 52,955.4

IPO Update

IPO UPDATE 15

Financial Statements (Contd…):

Source: Company RHP

Source: Company RHP

Consolidated Cash Flow Statement (Rs. mn)

Particulars (Rs. mn) CY12 CY13 CY14 CY15 H1 CY15 H1 CY16

Cash Flow from Operating Activities 2,804.3 2,970.7 4,308.6 5,598.0 6,392.3 7,329.5

Cash Flow from Investing Activities (5,065.8) (5,735.8) (4,999.6) (2,916.4) (1,607.9) (8,215.0)

Cash Flow from Financing Activities 2,292.1 2,743.2 577.3 (2,490.4) (4,120.1) 1,466.5

Net Cash Flow 30.5 (21.9) (113.7) 191.2 664.3 580.9 Cash and Cash Equivalent at the Beginning of the Year 156.8 187.3 165.4 51.7 51.7 242.9 Cash and Cash Equivalent at the End of the Year 187.3 165.4 51.7 242.9 716.0 823.8

Consolidated Financial Ratios

Particulars (Rs. mn) CY12 CY13 CY14 CY15 H1 CY15 H1 CY16

Revenue Growth 17.5% 18.3% 35.6% -34.2%

EBIDTA Growth 27.7% 32.1% 64.9% -24.6%

EBIDTA Margin 12.7% 13.8% 15.4% 18.7% 21.4% 23.9%

EBIT Growth 15.7% 63.4% 81.5% 4.9%

EBIT Margin 5.1% 5.0% 7.0% 9.3% 14.9% 16.4%

Reported PAT Growth -257.4% -49.0% -531.8% 92.2%

Reported PAT Margin 1.4% -1.9% -0.8% 2.6% 7.5% 8.3%

Liquidity Ratios

Current Ratio 0.7 0.6 0.7 0.6 0.6 0.5

Quick Ratio 0.4 0.3 0.5 0.3 0.3 0.2

Debt Equity Ratio 9.9 9.4 6.2 2.7 2.1 2.3

Turnover Ratios

Inventories Turnover Ratio (x) 8.9 9.3 9.5 4.8 4.7

Trade Receivable Turnover Ratio (x) 27.1 30.8 34.8 16.6 15.9

Accounts Payable Turnover Ratio (x) 18.4 15.6 18.6 7.2 6.6

Fixed Asset Turnover Ratio (x) 0.9 0.9 1.1 1.0 0.6 0.6

Total Asset Turnover Ratio (x) 0.7 0.7 0.8 0.8 0.5 0.5

Working Capital Turnover Ratio (x) (5.7) (18.1) (10.2) (4.2) (4.2)

Return Ratios

RoE (%) 14.6% -18.4% -5.9% 12.9% 22.2% 23.0%

RoA (%) 1.0% -1.3% -0.6% 2.0% 3.6% 4.0%

RoCE (%) 4.6% 4.9% 7.0% 10.7% 10.2% 12.1%

Per Share Data

Restated BVPS (Rs.) 9.4 11.8 18.9 36.9 41.4 50.1

Restated Diluted EPS (Rs.) 1.4 (2.2) (1.1) 4.8 9.2 11.5

Restated Cash EPS (Rs.) 8.8 8.0 10.4 22.2 17.2 21.9

Restated Operating Cash Flow Per Share (Rs.) 15.4 16.3 23.7 30.8 35.1 40.3

Restated Free Cash Flow Per Share (Rs.) (10.4) (9.3) (51.5) 9.4 22.5 0.6

Trade Payable Days 19.8 23.3 19.6 50.4 55.0

Inventories Days 41.2 39.1 38.4 76.2 77.0

Trade Receivables Days 13.4 11.9 10.5 22.0 23.0

Cash Conversion Cycle (Day) 34.8 27.6 29.2 47.8 45.0