Move to have a negligible effect in near term though; ‘Buy’ retained with TP of Rs 1,215; top FMCG pick
VBL has entered into an agreement to manufacture Kurkure Puffcorn for PepsiCo India. While the one-sentence release from VBL underplays this move, this is the first extension into a non-beverage category. By itself, this move seems to have negligible impact on VBL’s overall P&L & B/S in the near term. However, this move could be a precursor to something big over time as VBL is known to enjoy a strong relationship with PepsiCo & is an execution powerhouse. Buy.
Snapshot on VBL: With Rs 88bn in revenues and contributing c.85% to PepsiCo’s beverages volumes in India, VBL is among its largest bottlers with a presence in the markets of Africa, Sri Lanka & Nepal. The company started its journey with PepsiCo in 1996 and through a series of consolidations, has reached its current position, including acquisition of bottling operations run by PepsiCo.
PepsiCo snack numbers…: PepsiCo India reported revenues of around Rs 41 bn in FY20 and Rs 43 bn in FY21 in the snacks business. Ebit margin for the snacks business was at 9.2% in FY20, which was down to 4.8% in FY21.
… & manufacturing spread: PepsiCo seems to have three large manufacturing plants of its own for the snacks business, which are spread across Punjab, Maharashtra and West Bengal. The company also inaugurated its largest plant in Uttar Pradesh in Sep-21 at a total investment of Rs 8.1 bn. Media reports indicate that the company is looking to build another plant in the state of Assam.
The announcement: In a first, PepsiCo has extended its partnership with a bottler into its snacks business; per our understanding this reflects the strong relationship between the two. VBL aims to spend around $3 m to manufacture & pack one of the snacking brands, Kurkure Puffcorn, at Kosi in Uttar Pradesh, where there is already a beverage line.
Small step: We understand that this is a small brand for PepsiCo which counts Lays & Kurkure as its key brands offering chips & extruded snacks in India. Given the size of the investment and VBL’s role of a co-packer, this move is unlikely to have any meaningful impact on VBL P&L and B/S.
Looking beyond: As much as the step is small, we think this may be a precursor to something bigger, although it is difficult to visualise its form, at this stage. We however note that VBL’s existing distribution network for beverages has a fair amount of overlap with the snacks business, at the point of sale. There is also a fair amount of logistics network overlap which may drive scale benefits for VBL, in case a broader partnership materialises.
Maintain Buy: Irrespective of this news flow, we remain positive on VBL and retain our high-conviction Buy — it remains our top pick in FMCG sector.