Varun Beverages IPO – Jump in profits – What are the hidden factors?

Varun beverages IPO ReviewDelhi based, the Varun Beverages IPO would open for subscription on 26th October, 2016. Varun Beverages Ltd is a franchisee of carbonated soft drinks (CSD’s) and non carbonated beverages (NCB’s) sold under trademarks owned by PepsiCo in India and internationally. The company has been running in losses in FY13 and FY14 and generated profits of 2.6% in FY15. However, for the 6 months ended Jun-16, it showed abnormal profits of over 8%. Should you invest in a Varun Beverages IPO? What are the hidden factors an investor should consider if they want to invest in a Varun Beverages IPO?

About Varun Beverages Limited


The company is one of the largest franchisee in the world (outside USA) of carbonated soft drinks and non-carbonated beverages (“NCBs”) sold under trademarks owned by PepsiCo. The company produce and distribute a wide range of CSDs, as well as a large selection of NCBs, including packaged drinking water. PepsiCo CSD brands produced and sold by us include Pepsi, Diet Pepsi, Seven-Up, Mirinda Orange, Mirinda Lemon, Mountain Dew, Seven-Up Nimbooz Masala Soda, Seven-Up Revive and Evervess. PepsiCo NCB brands produced and sold by us include 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 the Ole brand of PepsiCo products in Sri Lanka.

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Issue details of Varun Beverages IPO


IPO opens: 26-Oct-2016

IPO closes: 28-Oct-2016

Face Value: Rs 10 per share

Issue price band: Rs 440 to 445 per share

Issue size: Rs 1,100 Crores on upper price band

Market lot: minimum of 33 shares

Minimum investment: Rs 14,520 on lower price band

Global BLRM’s: Kotak Capital, Axis Capital, CLSA India

Book Running Lead Managers: Yes Bank

Listing: BSE / NSE

Download Varun Beverages IPO  Prospectus at this link

Objects of the Varun Beverages Ltd IPO issue


The Net Proceeds from the Issue will be utilized towards the following objects:

1) Offer for sale – The Selling Shareholders will be entitled to their respective portion of the proceeds of the Offer for Sale. Company will not receive any proceeds from the Offer for Sale.

2) Prepayment or scheduled repayment of a portion of outstanding indebtedness availed by Company

3) General corporate purposes.

Company Financials (reinstated-Consolidated)


1) The company generated revenue of Rs 1,844 Crores  for the year ended Dec-12 and Rs 3,408 Crores for the year ended Dec-15.  For 6 months ended Jun-16, revenues jumped to Rs 2,539 Crores.

2) The company posted a profit of Rs 25 Crores for the year ended Dec-12 and profit of Rs 87 Crores for the year ended Dec-15. For 6 months ended Jun-16, revenues zoomed to Rs 213 Crores.

3) Its restated-consolidated EPS for FY ending Dec-2015 is Rs 6.46 and last 3 years average EPS Rs 2.21.

Varun beverages IPO - Financials

Reasons to invest Varun Beverages IPO


Revenue grew at 16% CAGR in last 4.5 years.

Reasons not to invest in an Varun Beverages Ltd IPO


It generated losses for the year ended Dec-13 and Dec-14, thin margins for the year ended Dec-15. However, it published over 8% margins for the 6 months ended Jun-16. Such jump in high margins is surprising. One need to wait and watch to see consistent margins for a couple of years.

Termination or non-renewal of the PepsiCo India Agreements or the PepsiCo International Agreements by PepsiCo India / PepsiCo Inc. or PepsiCo International Entities or any material modification to the existing terms under such agreements, adverse to its interest will materially and adversely affect its ability to continue its business and operations and its future financial performance.

PepsiCo India / PepsiCo Inc. and the PepsiCo International Entities are entitled to various rights under the PepsiCo India Agreements and the PepsiCo International Agreements, including the right to unilaterally determine the price of the PepsiCo beverage concentrates company purchase. In the event any such right is exercised by PepsiCo India / PepsiCo Inc. and / or the PepsiCo International Entities in a manner adverse to its business interest, its business prospects and future financial performance will be materially and adversely affected.

Its growth plans and expansion strategies are subject to prior approval of PepsiCo, and an inability to secure such approval may adversely affect its business prospects and future financial performance.

There are certain criminal and other outstanding legal proceedings against the Company, certain of its Directors and Promoters, Subsidiaries and Group Companies which may adversely affect its business, financial condition and results of operations.

A significant majority of its production and sales take place during the summer months, and any adverse weather conditions during such peak sales seasons may materially and adversely affect its sales, results of operations and financial condition.

Other risk factors (Internal and external) can be viewed in the draft prospectus from Page no. 20 onwards.

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Recommendation / Investment strategy – Varun Beverages IPO


On the upper price band of Rs 445 and on FY15 EPS of Rs 6.46, P/E ratio works out to 68x. Similarly, on last 3 years EPS of Rs 2.21, P/E Ratio works out to 200x. Means company is asking the upper band of issue price of Rs 445 for a P/E ratio between 68x to 200x. There are no listed peers to compare issue price. However, considering the high P/E ratio, we can assume that the issue is over priced.

Company revenues grew at 16% CAGR in last 4 years. It generated profits from last year onwards. However 6 months ended Jun-16 profits are abnormal and surprising. One need to wait and watch for consistent performance. The issue price is also over priced. Personally, I would not like to invest in such high risk IPO’s.

Disclaimer: I do not have an interest in investing in this IPO. The idea of giving positive and negative factors to investors in this article is to create awareness and education about this IPO. One should NOT constitute this as investment advice to buy. Please consult your investment advisor before you invest in such high risk investment options.

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Suresh

Varun Beverages IPO – Bump in profits – What are the hidden factors

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