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Varun Beverages Ltd
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Ladies and gentlemen, good day, and welcome to Varun Beverages Earnings Conference Call. [Operator Instructions] Please note that this conference is being recorded. I now hand the conference over to Mr. Anoop Poojari from CDR India. Thank you, and over to you.
Thank you. Good afternoon, everyone, and thank you for joining us on Varun Beverages Q1 CY 2023 earnings conference call. We have with us Mr. Ravi Jaipuria, Chairman of the company; Mr. Varun Ravi Jaipuria, Executive Vice Chairman and Whole-time Director; and Mr. Raj Gandhi, Group CFO and Whole-Time Director of the company. We will initiate the call with opening remarks from the management, following which we'll have the forum open for a question-and-answer session. Before we begin, I would like to highlight that some statements made in today's call may be forward-looking in nature, and a disclaimer to this effect has been included in the results presentation shared with you earlier. I would now request Mr. Ravi Jaipuria to make his opening remarks.
Good afternoon, everyone, and thank you for joining us on our earnings conference call. I hope all of you had an opportunity to go through our results presentation that provides details of our operational and financial performance for the first quarter ended March 31, 2023. We are pleased to share that the company achieved remarkable operational and financial performance during the quarter despite weather disruptions in some parts of India in the month of March. Moving on to our expansion plans. We are happy to report the commissioning of our greenfield production facility at District Bundi, Rajasthan and brownfield expansion of 6 facilities. The additional greenfield plant in Jabalpur, MP is expected to be operational very soon.With regard to our international growth plans, construction of our new production facility in DRC Congo has already started. We expect the facility to be operational by the end of the year. Our energy drink product has achieved a significant share in our overall mix and has firmly established our leadership position in the category. Our focus now turns towards new performers like value-added dairy, sports drink, juice segments to sustain the growth momentum. These products continue to be well received by consumers, providing us with confidence that these products will fuel the company's next leg of growth.It gives me immense pleasure to announce as approved by shareholders in our Annual General Board meeting, the final dividend of INR 1 per share, taking the total dividend payout for the year to the level of INR 3.5 per share. Furthermore, the Board recommended the split of existing equity shares of the company from 1 equity share having face value of INR 10 each into 2 equity shares having face value of INR 5 each. This is subject to the approval of equity shareholders of the company.We are also committed to safeguarding our environment and promoting sustainability in our operations. One of the ways we are achieving this is by investing in PET recycling and implementing measures to improve energy and water efficiency. Our goal is to have a net positive impact on the environment. Overall, we are encouraged by our strong start and remain confident about delivering good performance this year with our robust on-ground execution capabilities, expanding manufacturing capacities and increasing distribution reach, we believe we are well positioned to achieve sustainable growth in the medium- to long-term.I would now invite Mr. Gandhi to provide the highlights of the operation -- operational and financial performance. Thank you very much.
Thank you, Mr. Chairman. Good afternoon, and warm welcome to everyone joining us today. Before we start with the update on quarterly performance, I am happy to share that over the last 5 years, the company has demonstrated strong growth across all key performance indicators. Sales volume has grown at a CAGR of 24% in 5 years, which is a testament of company's execution capabilities. Net revenue increased significantly at a CAGR over a period of 5 years by 26.7% during the same period of last 5 years, indicating the company's success in expanding the customer base as well as distribution reach. In terms of profitability, the company has achieved remarkable growth with EBITDA and PAT growing at a 5-year CAGR of 35.1% and 50.8%, respectively.Now let me provide an overview of the financial performance for the first quarter ended March 31, 2023. Net revenue from operations grew by 37.7% year-on-year in Q1 2023, to the level of INR 38,929.8 million, driven by robust volume growth and increase in net realization. Sales volume grew by 24.7% to the level of 224.1 million cases in Q1 of calendar year 2022 from earlier level of 179.7 million cases in Q1 of 2022, driven by strong demand across regions in India. In Q1 calendar year '23, net realization per case improved by 10.4% to INR 173.7 primarily driven by a price increase taken towards the end of the corresponding quarter last year, inflected SKUs and continued improvement in the mix of smaller 250 ml SKUs.On an overall consolidated basis, CSD contributed to 71.2%; juices, 7.4%; packaged drinking water, 21.4% of the total sales volume in Q1 of CY 2023.During the quarter, gross margins improved by 89 basis points to the level of 52.4% from 51.5% in QY 2023, driven by marginal savings in raw material prices and into product mix. EBITDA increased by 50.3% to the level of INR 798 crores, and EBITDA margins improved by 172 basis points to 20.5% in Q1 of calendar year 2023, driven by operational efficiencies on the back of strong revenue growth.Depreciation increased by 31% to the level of INR 1,721 million in CY 2023 as compared to INR 1,313 million. And finance cost increased by 33% in Q1 of calendar year '23 on account of capitalization of assets and our setting up of new production facilities. PAT increased by 61.8% to the level of INR 4,385 million in calendar -- in the quarter 1 of calendar year '23 from INR 2,710 million in Q1 of calendar year '22, driven by high growth in revenue from operations improvement in margins and transition to lower tax rate in India.As shared by the Chairman, we have successfully commissioned multiple greenfield and brownfield beverage manufacturing lines across regions in India, resulting in an increase in our production capabilities for the peak season. Overall, we are delighted to report a strong start to the year. We are currently witnessing a healthy demand environment and remain excited about our prospects as we enter the peak season with expanded capacities and stronger distribution network.On that note, I come to an end of the opening remarks and would like to now ask the moderator to open the forum for the questions and suggestions that you may have. Thank you.
[Operator Instructions] We have our first question from the line of Chirag Shah from CLSA India.
Mr. Jaipuria, you mentioned that sports drink and value-added dairy would fuel the next leg of growth. Can you please elaborate a bit more on this? And in that context, can you also touch upon how we are positioned to protect our market share in the energy drinks? Juices, I understand, earlier was restricted due to capacity constraints.
So both juices as well as value-added dairy, we were constrained with the production constraints, and we are putting up 2 plants, which are going to add our capacities in both these categories, which is Tropicana, as well as value-added dairy, which is going to be in Maharashtra and UP. And that is what is going to -- for next year, increase our capability because right now, we are -- we don't have the capacity to supply.
And sir, when you say value-added dairy, are we looking to further expand our product portfolio in dairy or the products that we have would suffice to -- for the national rollout?
Well, it is a national rollout. We have enough products. But at the moment, since we don't have capacity, we have not looked at expanding it. Once we have the capacity and if we feel there is a need. Right now, I don't think we have enough products, which are enough, to take care of it. But if we need, we can always add more flavors and more products in it.
And just your views on the emerging competitive landscape, especially with Campa looking to tie up with bottlers and packaging partners?
Well, it's a big market. We have competition. We had a lot of B brands before. So there is always going to be competition. And as the market is going to grow, there will be more people coming in Campa and Reliance will be a formidable competition. But I think the Indian market is so large, and we are still scratching the surface. So I think there is enough room for everybody.
And on the energy drink side, is there a change in strategy to protect our market share over there?
No. I think we are just increasing our distribution, and that is what is required right now. So we have still not -- as I keep -- as I said before, that there is so much room and there is so many more outlets which we can open, which we are adding every year that there is huge scope to keep on adding further the volumes and the number of stores.
And on that same note --
[indiscernible] do anything else except enhancing our distribution.
And on that note, I mean, of course, we have come a long way in terms of our visi coolers infrastructure on ground. Of course, last year itself has seen a huge ramp up. What are the plans in terms of the rollout of visi coolers infrastructure going forward? And how do we look at enhancing that capacity?
So that we'll keep on enhancing because as our number of outlets keep growing, our busy deployment will also have to keep on going in parallel to that. And as we want to open more stores, so we will have to keep on adding more visi coolers every year.
And Mr. Gandhi, can you just give us a sense of the raw material prices versus the last year? And what is the situation of PET inventory and the price that we have locked in for the same?
So we normally lock in enough for 6 months for our season, which we did this year also. And that's why our inventory levels go very high during this time, and then they start coming down by end of June. And which we try and maintain because the lowest pricing in PET is in the off season. And also, as the stated gross margin has slightly improved basically because of the commodity prices were under control.
Last question, sir, what is the net debt at the end of the quarter? And any clarity on the CapEx spend for the year?
Well, CapEx spend for the year, the guidance stayed the same, which was around INR 1,500 crores. And out of which major portion is already spent and which resulted in debt to the level of around INR 4,000 crores. And going forward, in the season, it comes down, June quarter is the lowest and the pre-season is always highest.
We have a next question from the line of Vivek M. from Jefferies.
First, on the Sting can I get the Sting volume numbers for this quarter?
Vivek, Sting is doing extremely well, and we are in double digits, but exact numbers we would not like to disclose to be [indiscernible].
Vivek, here as the management, we -- keeping in mind the competitive scenario and the sensitivities around, we have decided not to share granule level numbers anymore. But directionally and overall number and the overall position, capacity, et cetera, everything and everything we'll always be sharing.
So momentum continues to be as strong in Sting?
Yes, momentum is still very strong.
Mr. Jaipuria, you mentioned about the next leg of growth, something what Chirag was also asking about regarding dairy, sports drink and juices. Is it only because of capacity? Or is it also because you think that Sting has reached a level where you think that you need the next driver because Sting will start to taper off -- the growth has started to taper off as we head into this year because the base has certainly moved up quite a bit in the past 8 quarters.
No, I don't think Sting should taper off. There's no reason for it because we have still a lot of outlets, which we still have to reach. But we are now -- the value-added dairy and our juices and our sports strength, we didn't have capacity. So that is what is being ramped up. For '24, that is what is going to play an additional role for us.
And my understanding is that dairy from a return perspective is a low return, low turns business. Is that understanding correct that it is going to be return dilutive? Or how do you think about the economics of dairy business?
No, we are not in the basic dairy business. We are not selling milk. We are selling value-added dairy. So our margins are as good as our soft drink in our dairy business. So it won't be dilutive at all.
Even for value-added business, you think the returns are as good as it is for the base business?
Yes, absolutely. And it's an additional and high-value product. We are not selling -- our selling price of dairy is much higher than our soft drink.
That's one revenue realization is higher. Secondly, the tax structure is against 40% GST on CSD. In case of dairy, it's at 12%. And any incremental cost in case of dairy gets compensated based upon the tax structure.
The other thing is if I look at your -- the trend in consol, let's say, gross margins versus stand-alone versus for the subsidiaries -- sorry, EBITDA margin. So what is the reason, Mr. Gandhi, there is a decline in EBITDA margin at a subsidiary level? And what is your outlook on subsidiaries?
The subsidiaries are doing well. It's just that we had some weather issues in one of our territories.
Vivek, this is Zambia currency, last quarter, depreciation was abnormal, which has affected the results. However, during the current quarter, currency has started either strengthening or at least will remain equal. And instead of spreading that loss to more than 1 quarter, we have booked a total loss, and therefore, temporarily, it's looking like this, otherwise, the basic model stays intact like earlier periods.
And just a follow-up, Mr. Gandhi, on this. The international margins have moved up quite a bit in the last 3 years. It used to be significantly below India business. What is your expectation on where this margin should settle on the international side?
Let me give you a fundamental shift which has happened from this quarter. Earlier, in every quarter, we used to discuss about the currency volatility in Africa. And we used to justify how Zimbabwe Reserve Bank has supported us by giving the currency for repayment of our debt. After the debt is repaid and our transactions, about 90% of this in Zimbabwe have moved to dollar -- in dollar terms. So which, in other words, this my 50% of business today in Africa is dollar-based. So instead of currency risk on the negative side going forward is going to be definitely positive. You may notice this in the comprehensive income this quarter also. It's in spite of minority interest comprehensive income, total comprehensive income is higher than the PAT. So these are some structural changes, which we have incorporated and the -- fundamentally, these things are continuing to be strong.
And my last question, you are growing so strongly for the last several quarters. And I just saw Coke's comment in the media, where they have said that they have gained market share in India. How is that possible if your growth is so strong and it doesn't look like industry is growing faster than that?
See, you are all smart people, and this we leave it to you to make your own assessment. Nothing beyond.
We have a next question from the line of Nihal Jham from Nuvama.
Congratulations on the strong performance. My first question was to Mr. Jaipuria. Historically, you have mentioned about staying ideally 15% of the market. And while we are not getting into the exact contribution, at least currently, it is more or less there in terms of our portfolio. So would it be fair to say that Sting currently has reached the so-called optimum percentage of the portfolio? Or you still see it becoming a much higher proportion going forward?
We had never said, Sting is 15% of the portfolio. I have said energy drink is becoming a 15% of the portfolio, which is the industry level. So there is still plenty of room for us to grow.
Yes. This is a comparison between other economies where energy drink is launched. India, it's a new item. And if we have to make an assessment about the industry size, so that's the benchmarking, and it will keep on growing and -- but also we wanted more horses to ride upon. So we are increasing simultaneously capacity in the Tropicana, in value-added dairy, in sports drink, et cetera, so that the momentum continues in many more quarters.
Just on that very aspect you highlighted about the new initiatives and I think in the question earlier that the only aspect about dairy is that given it's a cooperative driven business, and while I know we are more in the beverage and the value-added side, pricing and margins in that segment are controlled. Would it be fair for us to believe that maybe the sports and use would be more priority for us to scale up rather than dairy at this point in time?
Well, not necessarily because our dairy business is very profitable for us. So it is both, I think, the juice, dairy and the advantage we have is the same machines do both the products. So whichever demand comes, we can switch from one to the other overnight.
So would the gross and the EBITDA margins for the dairy be similar to the current portfolio as much?
It is as good or better.
Just one last bookkeeping question. For the realization increase that we've seen, we -- I think because price increase of 2%, 3% in the corresponding quarter of last year and maybe there was a reduction in discounts and plus there has been a product mix, if it's possible to just give a ball park bifurcation of that?
See, basically, there has been -- the main reason has been very slight increase in price, but mainly because of product mix and our water level has slightly come down. Water mix has slightly come down.
We have a next question from the line of Jay Doshi from Kotak.
Congratulations. Could you give us some idea in terms of what the potential of sports drink in India, the way you had articulated earlier that energy drinks can be potentially 15% of the market when you compare India versus other economies. Where does sports drink, in your assessment, how big can it be?
Well, we are not sure, to be honest. But sports drink, as more and more people are becoming health conscious. I think it is a category and we have one of the strongest brands in the world, which is Gatorade. So there's -- we expect that to be a good momentum once we start focusing on it, and we have the capacity to supplying -- to supply it.
Any color you can give us in terms of in other markets, is it comparable to energy drink half the size of energy drink or I know it's too early to give a guess on all that.
India is still not ready for it, but I think we need to really put it in the market properly, but we are getting huge demand wherever we are putting it and the growth is really exponential. But I think because of our capacity, we have not been able to put it. So hopefully, by this year, we'll have enough capacity, then we'll really be able to test it next year.
And what would be your reach of Gatorade in India today as a percentage of overall reach of...
The reach is there, but it's very exclusive. So we are only going to the top outlets, which is really not getting us anywhere actually.
My second question is how is -- if you can give some color, how is the summer shaping up this year? Because we hear from time to time the year about some disruptions in the northern part of India. So just...
Well, weather always plays a certain percentage of our -- but it's like sometimes the summer is extended, sometimes it's a little earlier. So these things keep on happening. So it can only make a difference of a couple of percentage up and down. So you can never really say what would happen [indiscernible] everybody...
Final question is, Mr. Gandhi, what should we model in terms of year-end net debt at the end of this year?
Well, we have yet to finalize the plan fully for the next year. All the 2 plants we have already stated, one in Maharashtra, another in UP, which already are inaugurated. And maybe one -- third one, we will be putting up in Bihar, no Orissa sorry, Orissa. And Kinshasa in DRC that is yet to be completed. So let's be ready with the final number. So as I stated earlier, the level, as of now, with more or less completion of these 2 plants, which were planned for this year, that is around 4,000 debt level. And we can give you a number maybe after a month or so.
We have a next question from the line of Devanshu Bansal from Emkay Global.
Congratulations on a great performance. Sir, we have started the year with about 28% volume growth in India. So does this contain any one-off or a favorable base last year? Or we can expect such trends to continue in coming quarters.
I don't know. We've always said double-digit growth numbers always look decent, but we cannot comment on exact, but we had a good year last year also and this year has started well. I hope we can end well also.
So your last year base was like normal, there was no one-offs, et cetera, because of Omicron, et cetera?
No, no, it was a normal year.
Typically, sir, what is the revenue savings of this quarter because there has been a change in geography mix also versus [indiscernible]. So typically, Q1 is what percentage of our sales?
The first quarter, around 24% is our [ TVF ]. And however, this is always a start and what we do is 1 quarter, so 25% and we then keep on building it and then the quarter will start getting over. But broadly, if you see the longer period, it works out to 24% and 61% for the H1 and the balance for H2.
So in terms of marketing PepsiCo this time around is visibly aggressive this season with a very celebrity endorsement. Do we also foresee any margin impact due to this in our P&L?
No. This is being spent by PepsiCo is not dilutive to our margins.
And last question from my end. Typically, we have indicated like we'll be adding about 70,000, 80,000 visi coolers. Is it fair to assume that majority would have been added before this season itself.
Mostly, yes.
We have a next question from the line of Percy Panthaki from IIFL.
Just wanted to check the progress on the distribution, the number of retail touch points that we are catering to, currently, how much have they gone up to on an all-India basis. And how much is the universe just for me to understand what is the upside?
We have already given the last year's number, actually, this data, not on a very regular basis. Periodically, we get it from PepsiCo, PepsiCo gets it from their agency. So we had not yet updated, but the guesswork is, might have gone around 10% because we have put about 75,000, 80,000 pieces. But that's only a guess work.
And that is how much, sir, in a number of millions of outlets?
So we are -- we had about 3 million outlets. So you can look at 300,000 to 400,000 more outlets.
And out of these, how many would you be directly going to.
We don't go directly to any outlets. It's basically our distributors who go. And the distributors go to 100% of other outlets directly where we serve.
So as we understand it in FMCG parlance, it would be called 100% direct distribution.
Yes, yes. Through our distributors.
Secondly, on Gatorade, I mean do you think it can be a big opportunity given the pricing? I mean it's a little bit more niche or premium kind of product. So -- and correct me if that understanding is wrong. So given that constraint or do you think that you would be willing to break that constraint and price it sort of more to parity versus the rest of the portfolio in India?
We have brought it very close to parity. So we are going to like we brought our energy drink, and we are looking to expand the market in quite substantial way next year.
See, per se, Gatorade was available only in the packing of 500 ml at INR 50. Now we also have a pack of 200 million at INR 20. If you compare with PepsiCo or other products, it's very comparable with that.
And on dairy, value-added dairy here, what is the game plan? I mean what do you need to do differently versus your other part of the portfolio? Or you think that it can just sort of be one more product and you don't need to think too differently here?
No, we don't need to think too differently. The main advantage we have is our distribution and our chilling equipment. All we need to do is make sure that our partners carry it and we place it in our visi coolers. And the product is excellent. And wherever we have been able to do that or supply, it has done extremely well for us.
And what is the current market size of this product, industry size?
So the market size is very large. We are very small because we only have one plant which can produce it. So it's only being mainly serviced in the north because of our distance in one plant being available only in Pathankot.
We have a next question from the line of Amit Purohit from Elara.
Congratulations. Sir, just on the distribution side, you earlier used to provide some, I mean, guidance in terms of our outline the Sting versus the rest of the CSD. Has that gap further increased, I remember last was some 4 lakh more outlets for Sting versus [indiscernible].
We can't give you exact numbers, but Sting is doing extremely well for us.
On distribution, the exclusive 400,000 distributors, which were there. As stated earlier, we get this data on distribution from the agency once a while. So the early data only, we can only do a guesswork and exact data for the latest period is not available. However, the idea, like we have given in the past is exclusivity wherever we got reach to a bigger base, we always then try to cross-sell our other products also. So they -- once having come in the fold, exclusivity will go away with them carrying our other products also.
And sir, just on Gatorade, would the touch points would be, I mean, broadly similar kind of thing because this would be more available in, I mean, gyms or currently, how it is getting distributed largely when you say A class outlets, is it like gym and...
No, we will expand our distribution. Of course, it won't be exactly like our soft drink. It will be much less than our numbers than our soft drinks. But still, it is -- there's enough scope and there is -- it's large enough because we have brought it to the right price point.
And sir, on the region-wise growth, would you be able to -- I mean at least give qualitatively whether southwest has done better than northeast? Or this is broadly similar?
So we are doing well throughout and across the country, give or take one small state better or worse. So we would not like to. But generally, our market -- growth is quite good every year, all across the country.
And lastly, sir, you highlighted the facility in Maharashtra. That would be also for dairy as well or the...
It will be for dairy and Tropicana also.
Okay. So -- and including the CSD and...
Yes.
We have a next question from the line of Sumant Kumar from Motilal Oswal.
What is the gross debt and net debt as on date?
It is around INR 4,000 crores as on 31st March.
Gross debt?
It's a net debt.
And the increase in interest in this quarter is a combination of increase in debt and interest rate.
That's right. And because in the first quarter, these plants have not come to -- put to use, and it increases the borrowing. But in the next quarter, when the borrowings start coming down, so it will start coming down. But yes, in the last quarter, the interest cost is higher because of these 2 plants were under implementation and the company had to borrow.
And can you talk about the rural growth momentum compared to urban in -- for our units?
Rural has started bouncing back. So our growth in urban and rural is now just about the same now, even though rural is slightly going ahead of the urban now.
Currently, the rural is ahead of urban growth side.
We have our next question from the line of Sanjaya Satapathy from Ampersand Capital.
Fantastic result yet again. Sir, one thing, if you can just tell us that how the weather vagaries affecting your sales performance nowadays that is considering that summer has not been -- has not really started the way it used to be in the past. And you have also mentioned in the press release that March was not good in terms of weather. So will that kind of affect your growth plan this year?
No, no, it doesn't affect. But there is always some months which are slightly weather is negative, there are some months with weather it's slightly positive. So they are also talking of extended summer. So you can't -- but this makes a difference of a couple of percentage up and down. This is not really -- unless until something really terrible happens or something really positive happens. Otherwise the percentage is this -- every month is a little different than last year than that month.
So the reason why I was asking that that it has become a bit of a more lifestyle or something that it is no longer as dependent on weather -- as it used to be earlier because nowadays Coco Cola et cetera are talking about much better sales in winter.
It's changing what you are saying. I agree with what you're saying is changing, but it is changing mainly and more in the urban areas, but if you start going to rural, it is still climate, partly climate dependent.
And sir, you mentioned that your next key growth driver will be sports and fruit juices as well as dairy, which is [indiscernible] Gatorade, et cetera. Do you have to -- and you are putting up capacity for Tropicana and dairy. But do you have to put something especially for your sports drinks or you are fully equipped.
No. The same plant can make sports drink also.
But the bottling are different, but doesn't matter.
No. Now we can make the sports drink in our bottling plants also.
And sir, last thing that I wanted to ask you that when you were saying that we will be a lot more aggressive on sports. Is it -- I mean, of course, you have mentioned that you have changed some pricing and -- but has it got something to do with the fact that the plain vanilla beverages are now seeing new entrants and the best way to really keep doing better is to have this differentiated products --
I don't think that is -- I mean, our basic product range will keep growing. So -- but we have to keep on adding something to show you guys all good growth. So we -- unless until we keep on adding some new things, how will we grow faster than in the market.
And if you can just highlight the INR 1,500 crores CapEx that you are talking about, is it cash outgo or it is because that -- this --
Cash out.
We have a next question from the line of Pritesh Chheda from Lucky Investment Managers.
I have a few queries. One, did we mention that the CapEx is INR 1,500 crores. And if it is so, then have we changed our policy, where the CapEx will be more than depreciation now here onward? That's first question. My second question is for the movement in EBITDA for sales, which we have seen in the last 4, 5 quarters from, let's say, the 30% or 32% to about 35%, 36% today. A lot of it seems to have come from operating use, right? So are we at the situation where the assets are fully utilized and that this is the upper end of the EBITDA per case. And my third question is, if not so then --
We can't hear you properly. There's too much noise from the background, please.
Okay. You heard the first 2 questions.
Yes.
Yes, you may answer that, then I will ask you the other ones.
Sure, sure. Pritesh, thanks for asking. The first is on the depreciation, the policy still is the same, but the policy has to be read in totality. That is for getting growth of low double digit, 10% to 12%, 12% growth, depreciation policy still stays the same. That's very sacrosanct. But if, say, instead of 12%, if we have growth expectation organically, 24% depreciation has to be, the CapEx has to be equal to 2 years depreciation. This is what actually is happening because we are growing that pace as of now. So that the situation -- policy still is the same. This is on depreciation. And your second question, was on, the EBITDA per case. See, the percentage stays the same and the economies of scale start playing and my realization then goes up due to mix change and the high revenue or bigger -- smaller packs where realization is higher. So naturally, they contribute higher profit margins. Here, I would like to say that 1% mix of water then changes, we always had been telling that water realization is about 1/3 of the CSD. So volume is going, even 1% increase, there increases 3x revenue extra. So when we divide this by number of cases, it's bound to give you a per case realization much higher. And if the same percentage is applied or a better percentage is applied to revenue, the profit, it also, therefore, goes up. So this is a brief answer to you both the questions, Pritesh.
Just a follow-up here. Incrementally, this will be valid even when the mix moves for in the -- it is moving for juices, sports drink and dairy?
See, Pritesh, the realization in those 2 cases, this will continue much faster because the realization is higher than CSD also. That's -- you take it, whether Gatorade or juices, juice, if we sell at INR 30 per serving as against INR 15 or INR 20 in case of CSD and the tax structure is favorable at 12%. So definitely, yes, to your question.
We have our next question from the line of [ Onkar Gutari from Sri Investments ].
Yes. My question was regarding the targets, which we have set since we are growing this much from last 3, 4 years consistently. Just wanted to know your targets in terms of ROE and ROCE for the next couple of years? That's the first question.
Our ROC so far had been growing anything between 200 to 250 basis points. And now, we have reached a level around touching 30% ROCE. So our guidance is 100 to 125 basis points. Still, we have a scope to improve for another couple of years.
So 100 to 125 basis points every year, you say, right?
Every year for a few more years. And then we'll keep on reviewing this target, going forward.
So you are expecting around, say, 34%, 35% kind of ROCE in the next 3, 4 years, right?
It is possible, why I saying this is out of our 6 territories, 2, 3 are already doing even higher than that 35%. So therefore, we feel it's achievable, but how much we are able to achieve, how much on the ground that it turns into reality, we will keep -- we will watch at appropriate time.
So in terms of distribution reach, you have said that you have 2,400 distributors. Is there any target in mind for, say, next couple of years again, just like the ROCE?
See, with the more business, more spreading and going deeper into the market and urbanization, this will keep on growing with the economy.
Yes. But internally, you must have set some targets, right, that we want to reach at this particular point.
No, it's very simple. As we are increasing, looking at increasing 10% to 12% of the outlet base. So we have to keep on increasing our distribution parallel.
So around 10%, 12% growth you are expecting on the distribution front as well, right, every year?
Mostly, yes.
And if I can ask one question, you have said that dairy, sports and other juices segment, I mean, all these products command same margins as of the base category?
That's right. That's right, if not better.
And what are your plans in terms of debt for, say, next couple of years? As you will be expanding more and more and you have been expanding?
No. So it depends what the growths are. It's all relevant to the growth. If your growth have been -- like last year, we grew more than 40%. So these type of growth you have to expand. If our growth come down to what we have been saying in double digits, which is 10%, 12%, then we don't need to expand and then we don't need debts. And it will depend on where we are and how the growths are happening.
See, our debt-to-EBITDA is 1 or a small section of more than 1, 1.1 or so. So basically, if in any year, if we are not expanding, I mean it's equal to 1 year's EBITDA.
All right. Another question is I wanted to know is the size of opportunity in all the business you are doing? And another thing is that what kind of more products you can launch in the segments, all the segments you are catering to?
I think we have enough products and what I've named there's enough room to grow in these products for the time being. As we keep on growing and expanding once we start getting saturated, we'll look at more products.
And any more products from Pepsi's front?
Yes, it will be mostly from Pepsi's front. Only the dairy is our own product.
Okay. So like, for example, just to take into -- just to take the example of the main business of Pepsi, how many products are there? And how many products are currently available.
There is no end to it. Their portfolio is in hundreds of products.
But all the products are not available here, right? So that's what I'm asking how...
So it depends what suits this market, we can keep picking from their portfolio. There's nothing which stops us.
We have a next question from the line of [ Dinesh Shirvani ] an individual investor.
Congratulations on a great quarter. So how are you going to compete with the competition in the category of energy drinks compared now seeing that Thumps Up has come up with their Charged drink, which also cost the same pricing?
But they were always there. So it's not that they have come up something new this year. They have been there from -- after we launched Sting, they launched their product maybe a year or 2 years later. So they've been in the market -- so they have their share and we will have our share. The market is large enough.
[indiscernible] has been gaining their customer base for them have been gaining rapidly.
So I'm sure they are also gaining and we are gaining -- both are -- energy drink is a big market. So there's scope for both of us to gain.
Okay, sir. And could you please share some light on how the snack sector performance in Morocco is going on considering you started the distribution this year?
Well, it's too early because we just started in February, so end of January, early February. And then Ramzan had come in March and in April. So I think it's doing extremely well, but it's still too early.
We have our next question from the line of Nikunj Gala from Sundaram AMC.
My question is on the dairy products. Sir, what was the volume contribution in calendar year '22 for us from the dairy products?
It's still so small that it has -- because one plant is what is servicing the whole country practically. So I think it's still very small, maybe, what maybe 4 million cases, maybe something. It's very small. I think we need to wait for next year.
And in case of accretion here in terms of expansion, how the procurement like we have tied up with anyone or like farmers or like how are we looking here in case of the...
Availability of milk is not a problem because we are not fighting for pennies here. Our product is not selling plain milk, where we are fighting for pennies. We have -- ours is a value-added products so even if we get milk INR 1 more expensive or cheaper it really doesn't impact the overall portfolio. We have no shortage of getting the product.
We have a next question from the line of Mitul Shah from Reliance Securities.
Sir, I have a question on the media reports on sugar availability, being a super production this time very low and prices are also lower. So any direct/indirect impact in terms of procurement as well as on the gross margin side?
Because of sugar?
Sugar availability is [indiscernible] now sugar production is lower. So...
But there is enough sugar in this country. So maybe they will export less this year. Otherwise, the sugar production is still much higher than the consumption in the country. So there is no problem or there's any shortage. So maybe as a commodity, it can go up by a couple of percent or come down. So that much effect it will have.
And sir, similarly, second question on the PET bottles, price trend during the last quarter and what is in the April and May trend?
It's pretty similar. It's not much different. I mean very little difference.
In fact, in both the commodities, be it sugar, be it PET in the last 2, 3 quarters, the prices have remained broadly the same. There's not any...
No any major difference. I mean minor tweaking it keeps happening.
And sir, lastly, on any update on this recycling, which we're planning in [indiscernible]?
We are in the process. We are finalizing land and hopefully, we are targeting that we should be in production by '25.
But any permission and approval which we were seeking if we already received or still it's under process.
No, it's still a national policy, which has to be framed. So right now, they are not allowing food-grade PET to be produced, but it can be exported or you can use -- still recycle it, but not use it for food grade.
We have our next question from the line of Saket Mehrotra from Tusk Investments.
Sir, any color on the snack portfolio that we've got for the India portfolio? You mentioned about Morocco, but the [ Pascon ] contract manufacturing and any developments or updates you expect for this year?
No, we are doing co-packing for Pepsi and is -- we are practically getting complete utilization of our plant, but nothing beyond that. I mean, marketing and selling is PepsiCo's call. We're just producing for them.
And the other question I had, you mentioned about Gatorade scale up. So just wanted to get an understanding as to what in terms of our strategy is here with this product because it's been around in our portfolio for quite some time. So...
No, it was a niche product in our portfolio, and it was for only for certain exclusive clubs and all. Now we want to mass market it and make it available into much more number of outlets, which we plan to do from early next year.
Ladies and gentlemen, that was the last question for today. I now hand the conference over to the management for closing comments. Over to you, sir.
Thank you. I hope we have been able to answer all your questions satisfactorily. Should you need any further clarifications or would like to know more about the company, please feel free to contact our Investor Relations team. Thank you once again for your interest and support and for taking the time out to join us on this call. Look forward to interacting with you all soon. Thank you very much.
On behalf of Varun Beverages Limited, that concludes this conference. Thank you for joining us, and you may now disconnect your lines.