Varun Beverages buys incremental stake in Bevco: What it may mean for investors?

Leading beverage company Varun Beverages (VBL) has made an investment to the tune of 412.8 cror in its South Africa-based subsidiary company- The Beverage Company Proprietary Limited (Bevco), acquiring an incremental stake of 2.42 per cent.

"Varun Beverages Limited ("Company") today (at 03:00 P.M.) invested INR 4,128.04 Million by subscribing Ordinary Shares of its Subsidiary Company i.e. The Beverage Company Proprietary Limited, South Africa," said the company's filing with the exchange.

The share allotment of 1,984,695 Ordinary Shares  executed on January 2, 2025 by Bevco to Varun Beverages was at a price of ZAR 453.47 per share for ZAR 900 Million equivalent to Rs 412.8 crore, said the company's filing with the exchanges. Through the proceeds from the transaction, Bevco will reportedly repay its existing debt and strengthen balance sheet for business growth.

Bevco's net revenue for the FY 2023-24 (July to June) is reported to be at ZAR 4,090 million.

Earlier, last year In December 2023, the company announced the acquisition of Bevco together with its wholly-owned subsidiaries at an enterprise value of Rs 1,320 crore, for expanding its geographical footprint in the African market.

The Beverage Company Proprietary Limited (“Bevco”), an existing subsidiary Varun Beverages, is engaged in the business of manufacturing and distribution of licensed (PepsiCo Inc.) / own-branded non-alcoholic beverages in South Africa. Bevco also has franchise rights from PepsiCo Inc. in South Africa, Lesotho and Eswatini. 

What the recent incremental stake acquisition in Bevco would mean for investors?

Brokerage firm JM Financial believes he acquisiiton of Bevco ((PepsiCo’s bottler in South Africa) together with other endeavors such as the procurement of distribution rights for Democratic Republic of Congo (DRC), and the announcement of 100 per cent stake buy in SBC Beverages (PepsiCo’s bottler in Tanzania and Ghana) validates scope for geographical expansion in Africa.

Our estimate indicates that Coca-Cola’s Africa operating unit clocked volumes of 2.5bn cases in CY23 (c.7.6% of its overall volumes of 33.3bn cases). We reckon that PepsiCo is focusing on enhancing its market strength in Africa by growing its franchise based operations, added the brokerage in its report.

Hence the brokerage is of the view that this will augur well for VBL as it expects the company to be a preferred choice of partner for Pepsico given its well demonstrated track record in Indian market.

VBL’s track record clearly highlights:

a) its ability to drive high growth makes it the franchisee of choice for Pepsico in India & Africa and

b) it has been able to tap the large opportunity in a profitable manner.

In view of the above, the domestic brokerage has initiated coverage on the stock with a 'buy' with a target pegged at Rs 725, implying probability to gain nearly 12 per cent.

We clearly see more legs to the growth story with a) penetration and portfolio play (NCB/energy drinks/ value-added dairy beverages) led growth in an already formidable India business and b) market share gain+ penetration + margin improvement headroom in the Africa business, added the brokerage.

A well demonstrated track record, large opportunity on offer, faster growth in comparison to peers and a debt-free balance sheet provides confidence on the earnings growth/RoCE profile and justifies premium valuations, it noted.

Better than expected scale up in Africa a key upside risk while any irrational competitive activity or adverse seasonality are downside risks for the stock.