Leading beverage company Varun Beverages (VBL) has invested Rs 412.8 crore in its South Africa-based subsidiary The Beverage Company Proprietary Limited (Bevco), acquiring a stake of 2.42 percent.
“Varun Beverages Limited (the “Company”) has today (03:00 PM) invested INR 4,128.04 Million by subscribing to Ordinary Shares of its Subsidiary Company namely The Beverage Company Proprietary Limited, of South Africa,” said the company’s filing to the exchange.
The allotment of 1,984,695 Ordinary Shares issued on January 2, 2025 by Bevco to Varun Beverages was priced at ZAR 453.47 per share of ZAR 900 Million equivalent to Rs 412.8 crore, said the company’s filing with the exchange. With the proceeds from the deal, Bevco will reportedly pay down its existing debt and strengthen its balance sheet to grow the business.
Bevco’s total revenue for FY 2023-24 (July to June) is reported to be ZAR 4,090 million.
Earlier, last year in December 2023, the company announced the acquisition of Bevco and its wholly owned subsidiaries for a business value of Rs 1,320 crore, expanding its presence in the African market.
Beverage Company Proprietary Limited (“Bevco”), a subsidiary of Varun Beverages, is engaged in the business of manufacturing and distributing licensed (PepsiCo Inc.) / own non-alcoholic beverages in South Africa. Bevco has franchise rights from PepsiCo Inc. In South Africa, Lesotho and Eswatini.
What will the recent acquisition of a growing stake in Bevco mean for investors?
Brokerage firm JM Financial believes it has acquired Bevco ((the bottler of PepsiCo in South Africa) and other initiatives such as the purchase of distribution rights in the Democratic Republic of Congo (DRC), and the announcement of the purchase of 100% of the shares of SBC Beverages (PepsiCo bottler in Tanzania and Ghana) confirms the scope of geographical expansion in Africa.
Our estimate shows that Coca-Cola’s African operations covered an estimated 2.5bn incidents in CY23 (c.7.6% of all 33.3bn incidents). We think PepsiCo is focused on developing its market power in Africa by expanding its franchise-based operations, the brokerage added in its report.
So the brokerage is of the view that this will work well for VBL as it expects the company to be the preferred partner of Pepsico given its good track record in the Indian market.
The VBL record clearly highlights:
a) its ability to drive high growth makes it the franchisee of choice for Pepsico in India and Africa and
b) was able to use the big opportunity in a profitable way.
In view of the above, the domestic brokerage has initiated coverage of the stock as ‘buy’ with a target set at Rs 725, implying a potential gain of around 12 percent.
We clearly see more legs in terms of growth a) and portfolio penetration and portfolio (NCB/energy drinks/value added milk drinks) growth in the already formidable India business and b) market share gains + penetration + margin headroom improvement in Africa business, added the brokerage.
Good track record, huge opportunity on offer, faster growth compared to peers and debt-free balance sheet lend confidence to earnings growth/RoCE profile and justify premium valuations, it noted.
Better-than-expected growth in Africa is the main risk while any unreasonable competitive activity or bad season is a stock risk.