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Varun Beverages Ltd
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Ladies and gentlemen, good day and welcome to the 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, sir.
Thank you. Good afternoon, everyone, and thank you for joining us on Varun Beverages' Q2 and H1 CY '22 earnings conference call. We have with us Mr. Ravi Jaipuria, Chairman of the company; Mr. Varun Jaipuria, Executive Vice Chairman and Whole-Time Director; Mr. Raj Gandhi, Group CFO and Whole-Time Director; and Mr. Kapil Agarwal, 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 state 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 the opportunity to go through our results presentation that provides details of our operational and financial performance.
For the second quarter and half year ended 30th June 2022, we are pleased to share that we have delivered a record performance during the quarter. Our continuous effort to invest in our business despite the pandemic-led disruption of peak season during the last 2 years and return of normalcy in day-to-day activities translated to robust demand, leading to consolidated sales volume growth of 96.9% year-on-year. In addition, we were able to improve our realization per case by taking price hikes in selected SKUs, reducing discounts, incentives and improving the mix, leading to doubling of our top line during the quarter as compared to last year.
On the profitability front, despite the inflationary raw material environment, we witnessed limited impact on our gross margins during the quarter because of our early stocking of key raw materials and improvement in realization. Further, operating leverage due to high volume growth translated into improved EBITDA margins of 25.2%. Healthy cash flows during the period enabled us to significantly reduce our debt, thereby strengthening our balance sheet position.
I'm happy to share that in recognition of our operational excellence, end-to-end execution capabilities, governance practice and strong track record, VBL was recently awarded from PepsiCo as the best bottler in Africa, Middle East and South Asia, AMESA region for the year 2021.
I'm also pleased to share that in line with our dividend policy, the Board of Directors has recommended an interim dividend of INR 2.5 per share.
With sustainability being a core principle of our business model, we continue to undertake efforts towards PET recycling and improving energy and water efficiencies with the goal of having a net positive impact on the planet.
On the demand front, we are seeing encouraging consumption trends across markets. Directionally, we continue to implement strategic initiatives to solidify our market position as a key player in the global beverage industry and are confident of continuing our journey of sustainable value creation for all stakeholders.
I would now invite Mr. Gandhi to provide the highlights of the operational and financial performance. Thank you very much.
Thank you, Mr. Chairman. Good afternoon and a warm welcome to everyone joining us today. Let me provide an overview of the financial performance for the second quarter and half year ended 30th June 2022.
Revenue from operations, adjusted for excise, GST, grew by 102.3% year-on-year in Q2 2022 to the level of INR 49,548 million. Consolidated sales volume registered a solid growth of 96.9% to 300 million cases as compared to 152 million cases in the corresponding Q2 of 2021 on account of strong demand during the peak season, driven by return to normal day-to-day operations and our continuous investment in expanding our distribution network and capacity. Realization per case improved by 2.7% to the level of INR 165 in Q2 2022 led by price hike in SKUs, reduction in discounts or incentives and improvement in mix CSD contributed to 73%, juices 9%, packaged drinking water 18% of the total sales volume in Q2 2022.
On the profitability front, gross margins for Q2 2022 reduced by 302 basis points to the level of 50.5% from 53.5% in Q2 of 2021, primarily because of the increase in preform pet chips prices by 30% over Q2 of 2021. The increase in input cost was more than offset by operating leverage, leading to improvement in EBITDA margin to the level of 25.2% during the Q2 2022 from the level of 23.3% in Q2 of 2021.
EBITDA increased by 119.1% to INR 12,506 million in Q2 of 2022 from INR 5,702 million of Q2 of 2021. Depreciation increased by 18.9% to the level of INR 1,531 million as compared to INR 1,288 million in Q2 of 2021. This is because of capitalization of assets in Q1 2022. PAT increased by 151.6% to the level of INR 8,020 million in Q2 2022 from INR 3,188 million in the corresponding period last year. This is driven by higher revenue from operational improvement in margins and transition towards lower tax rate in India. This is under the new regime to which company has transitioned in this quarter.
Our net debt stood at the level of INR 20,555 million as on June 30, 2022 as against INR 30,053 million as on December 31, 2021. Debt to equity to the level of 0.4x and debt to EBITDA of 0.8x as on 30th June was there based upon the trailing 12 months EBITDA.
Actual 2022 net CapEx was INR 6,700 million primarily for setting up of the new greenfield production facilities in Bihar and Jammu and brownfield expansion in Sandila factory. On the working capital front, working capital days reduced to 17 days as of 30th June 2022 compared to 24 days as on 30th June, 2021 as the business returned back to normalcy and most of the new material inventory stock for the new season has been utilized. Overall, the company's financial position continues to be solid and we look forward to delivering healthy growth in the years to come.
On that note, I come to an end to the opening remarks. And I would like to now ask the moderator to open the forum for any questions or suggestions that you may have. Thank you. Thank you very much.
[Operator Instructions] The first question is from the line of Vivek M. from Jefferies.
A few questions. First, on the retail touch point number that you have given about -- at about 3 million, the last number that we have, it was a while back at about 2 million. So can you just highlight the expansion in this number and how much you would have done in this year, YTD?
Here, actually this number, Vivek, we have updated based upon the recent report provided to us by PepsiCo of AC Nielsen where they have also said that exclusively about 400,000 new outlets has been added because of the Sting sales. So 2.6 million are composite, 0.4 million are dedicated to Sting, so totally makes 3 million and this also includes the overseas, about 250 or whatever.
Okay. And sorry, what do you mean by exclusive Sting, so which will be those outlets which will just carry exclusive Sting?
What it means is, 2.6 million outlets are selling all our products whereas 400,000 outlets additional got added because of our energy drink Sting and they are mainly right now buying Sting from us and hopefully going forward they will be buying all our other products, but it's initial -- they have joined selling our products by taking sting, which is our energy drink.
In fact, we can piggyback on the strength of Sting to sell our other products at these outlets.
We will be doing actually and it's a starting point. So hopefully, the 3 million will become reality for all our products going forward.
Okay. That's very interesting. Second on the growth, volume growth. So there is obviously a base angle over here, but still adjusting for that, the growth is very strong. So first part is, can you just highlight, is there a big divergence between, let -- or let's say is south and west outperforming meaningfully to north and east geographies?
See, two things. One, I think the territories which we had taken and we had said that we are increasing our go-to-market, which we could not do because of 2 years of COVID, this is the first year we have been able to get fruits out of all the expansion of go to market, which we had done. So that is showing huge results for us. All the weak territories we had acquired from the different plants, from PepsiCo as well as the other franchisees are now all showing results which we could not show in the last 2 years, so, consolidated, as the market has opened up.
The other big thing which has happened is, initially people got used to having drink -- drinking our product at home and fortunately that has continued and go-to-market has also started. So I think both places now we are getting growth. So -- and I think our go-to-market and our filling equipment's and our plants expansion capability, our availability of products has really made the difference, which has shown this kind of growth which is practically unheard of.
To supplement what Chairman has given directionally, see, all the territories, be it need our core territories of North and Northeast or the territories acquired from PepsiCo south and west, in a very secular way everything has grown in the H1, say, 58%, 59%. The only difference which is performing much better than the rest are the 5 under-penetrated territory where the PepsiCo's share was around 15%, 20%. Those are giving huge opportunity, which in the past we had been saying, maybe NC, Orissa, Bihar, Jharkhand, Chhattisgarh. And here I think Chairman can mention about the new capacity in Bihar which we have added. We already have gone out of capacity and are planning.
In the first year, which we had put up a capacity in Bihar, which we had actually planned would be good enough for us for the next 3 to 4 years, we have already run out of capacity and we are expanding further capacity in Bihar to fulfill the demand of the people of Bihar. So clearly showing wherever there was real weakness and wherever we have enhanced our go-to-market, added our vehicles, put in more chilling equipment, that is all showing results and giving us the benefit.
Interesting. And I have a question on capacity as well, but just to complete -- so Mr. Jaipuria, if you have to take, let's say, a medium-term view, let's say next 3 year view, where do you think organic -- I mean, given that there are hardly any inorganic opportunity in India where -- how should we think about the volume growth for your business, let's say, either at India level or at an overall level assuming no further acquisitions?
I think realistically I mean I can't really tell you exact numbers, but we have always said double-digit growth really looks quite inevitable. But hopefully how…
Double digit volume growth, right?
Pardon me?
Yes.
Double-digit volume growth?
Double digit growth, minimum we are expecting and so how much it can be, we don't know, but the market is looking good. And our products are being very well accepted. Our energy drink has been -- has super passed all our expectations. Our dairy is doing extremely well and our juices are doing extremely well. So all our products have been well accepted and doing extremely well.
Sure. And just to clarify, double-digit growth implies double-digit volume growth, right? Volume is what you are referring to?
Yes.
Okay. My last question, your press release talks about 90% capacity utilization. You spoke about Bihar. So can you just highlight the plans on the CapEx side calendar '24 -- '23 and '24, if possible, what you are thinking on the CapEx side and capacity expansion?
Well, we are already in the process of setting up 2 large greenfield plants, one in Madhya Pradesh and one in Rajasthan. And we are adding a few more lines in the -- like I said, we are expanding Bihar and few more territories where our -- which are brownfield plants which are with our -- where our CapEx will be much lower. So hopefully, next year we are looking to add about 30% more capacity.
Right. And Mr. Gandhi, can you just quantify in terms of rupees million that you are going to spend this year and next year?
Well, exact amounts are not completely here right now, but we are looking at approximately about INR 1,200 crores.
The next question is from the line of Nihal Mahesh Jham from Edelweiss.
Congratulations on the strong performance. Sir, 3 questions from my side. The first one was, would it be possible to give a breakup of the volumes that you generate between India and the international territories and in that, also if you could bifurcate for the south and west part of it?
India is about 410 million This is H1. This is H1. You want quarter or you want the…
If you could give it for the second quarter?
Second quarter is 262, second quarter is 262. And 133…
37.7 Q2 of international.
37.7 is international and 262 is India.
So approximately what of this 262 would be South and West?
We don't have the breakup right now, but I mean the growth has been practically identical south as well as west.
Understood. The second question, Mr. Jaipuria was that, generally, how do you look at your market share even after such a strong season, because somewhere the statements keep coming up, but just wanted a sense from you that, how do you think your share has performed because you highlighted some of the underperforming territories in the eastern region along with the ramp at south and west territories. So versus, say, 3 years back or I mean 2 years back has the share of Pepsi overall increased in all categories or any things specifically you want to highlight?
Well, it's very difficult for me to say, but I think the market which has to judge -- I mean, everything is open. Coke has just partly disclosed their numbers and we are giving you our numbers. So I think for me to say we have gained share or lost share, I would not like to comment.
We can only say, in the last quarter, VBL India has grown 106% in volume terms.
Understood. My last question was, after such a robust quarter where I'm assuming that we've seen some benefit of the strong summer season. So historically over such a season is it possible or are we still targeting a double-digit volume growth or maybe assuming that there is some element of the strong summer season that could be enough as we look at next year, just trying to compile out of that?
No, we are definitely looking at double digit growth. So there is nothing which is after the summer. Obviously, little bit in the rainy season, it depends where it rains a little bit more or less, but fundamentally, overall, I mean, if one territory might perform a little less or one better because of the range, we are still looking at double-digit growth.
Nihal, here this confidence is coming from the fact that we have seen in this season what were the constraints we found on the supply chain or the preforms or on delivery or on the production, et cetera. So this is what we could achieve with our constraints. So all this CapEx which is happening and the corrections are happening for the next year is to encash to its full capacity what we had missed out during the year. So I think that if other things being equal, that should be a possibility.
Understood. Just one last thing, if you could give the contribution of Sting this quarter and I would be done.
Yes, Sting, we have grown 185% and that's a -- mix is about 7.2% of the total volume.
The next question is from the line of Chirag from CLSA.
Congratulations to the Varun team for such excellent numbers. Mr. Jaipuria, you've mentioned the dairy portfolio is also doing quite well. Could you just give us a sense around how...
I couldn't hear you. I couldn't hear you properly. Sorry.
And now it's clear?
Yes, please.
Mr. Jaipuria, you mentioned that the dairy portfolio is also now doing quite well. Could you just give us a sense of how many states have we launched this product and how much distribution touch points have we covered?
Well, we have not been able to go very far because of our capacity. Because dairy we can only produce in one of our plants, which is in the north in Punjab. So we have restricted most of our products to the north region only and whenever we had some extra capacity, we have sold to other provinces. But fundamentally, we've restricted it to north. So hopefully by year -- for the season 2024, we will be able to supply most of the other territories we -- after we have got the plant going.
I understand. So can we assume by the end of calendar year '24, we will have a [indiscernible]?
Yes, Chirag, by the end of 2024 or in the beginning of '24, we will be doubling the capacity.
I understand. And Mr. Gandhi, can you just elaborate a little bit around write-off that you have done, [indiscernible] consider to write-offs on the [indiscernible] last quarter. I understand that demand trends are moving from RGB to PET. Is there any further write-offs that is required now going forward on the RGB side?
Chirag, if there would have been any further, we would have done right away. See, this is something which is real time exercise and you will recollect, even in the last quarter, we had -- when we were reviewing it for Roha plant, we had written off those assets. And as we have stated, the mix is undergoing a lot of change. That is what is growing faster than the glass. And the mix of glass has come under 10% and, therefore, it was necessary to bring the value of the equipment producing large bottles, [indiscernible] et cetera in line with that which has already been done.
Right. And just one last question on the CapEx, on the Greenfield CapEx numbers. That number is to be spent over how many financial years?
Well, see, the capital work in progress starts because the land is purchased and things keep on happening, this is already started and -- but the capitalization from capital work in progress will happen when the assets are put to use, which will be sometime in February, March 2023.
Understand. But the cash outflow will happen from February '23, all the cash outflow, right?
In fact, that -- even for last year also happened the same way. This is something because our year ends in December and some part of CWIP stays and it may create little problem for calculating ROCE, but for that purpose June is better way.
The next question is from the line of Dhruv Bhimrajka from Monarch AIF.
Yes. Congratulations on a good set of numbers, sir. Sir, just to get the clarity on the CapEx part. You said for CY '22, what will be the CapEx be?
It's about INR 800 crore and above INR 200 crore because of foreign exchange et cetera adjusted. So the amount spent is about INR 670 crore.
No, I am asking the guidance for the full year CY '22.
'22, this is already done for 2022 because the season is over. Now whatever we will be spending will be...
Will be for '23.
Which will be parked as the capital work in progress and will be capitalized as capital expenditure when the assets will be put to use.
Which will be early next year.
Okay. Sure. Got it. And sir, on this part I missed, you said domestic volumes were 262 million cases, so what would be the south and west combined contribution?
We don't have the breakup right now and I think the India volumes are INR 262 crores. And south and west both have done well for us.
The next question is from the line of [ Nitesh Seth ] from [ Vedant Securities ].
Congrats for the good quarter and a very good execution. Sir, my question is regarding to more to -- on the qualitative aspects. Like, could you please share some qualitative detail about the direction of the volumes and the territories which are still under-penetrated and where there is a different scope, I mean, more than double-digit 20%, 30% scope of the penetration and volume incremental volumes are?
See, most of our territories which we acquired are underpenetrated and there is still lot of scope, but there are challenges with it. And if things go well, we should -- that's why we are quite confident that double-digit growth look very feasible going forward for the next few years.
Okay. So still there is a -- can you suggest like whether there is a more scope in south and west territories, can north also north and northeast also still there is a decent scope?
Well, there is scope in every territory north, south, and west, obviously, there is more scope. And even in east which we acquired, there is enough scope. So north was the only original territory we had where the growth will be the regular growth, but the rest of the territories we expect better growth.
Congrats once again for the superb execution.
The next question is from the line of Jaykumar Doshi from Kotak.
Yes. Congratulations on very solid results. I've got 2 or 3 questions. The first one is, I would like to understand distribution number that you have shared a little bit better, so just to get a -- understood it correctly. 3 million outlets as per AC Nielsen, which includes about 250,000 overseas retail outlets, 400,000 exclusive Sting outlets and the balance would be India outlets that you are able to sell the entire portfolio. Is that understanding correct?
Yes, the 400,000 is also India outlets. But right now, they have started with Sting and as every month passes by, they will start carrying our other products also.
Correct. But that 3 million includes 250,000 internationally, right?
That's right.
Now how does this compare versus Coco-Cola in India as per the same AC Nielsen data, your overall India outlets today?
So we have still less than them, that's why our share is much lower than them. And lot of our territories are much weaker which as I said where we are holding 15%, 20% market share. So there is lot of scope and the only thing I can tell you, there is enough headroom and enough opportunity for us to grow.
Right. Possible to give us an idea what is the magnitude of opportunity if you were...
I would not like to comment on that.
Sure. Second is, sir, you had indicated that you had -- at the time of acquisition for south and west, you had indicated that you would -- the target at that point of time was to double distribution in 3 years. Now we have lost 2 years. So how much of this distribution expansion has come from south and west, if you can give us some color, the 2 million to 3 million?
Let me answer you because 3 years have passed, but 2 years were complete disaster for us, because both the years COVID happened in the peak season of April and May. So the real expansion has happened only this year and you cannot double your distribution in 1 year. So we are on the right process. Things are happening in the right way and that's why you're seeing such healthy growth and that's why I'm also saying that, going forward, it looks very positive and we feel that double-digit growths are very doable. Hopefully we can do better, but I don't know, but that -- those are the numbers which look very feasible.
Correct. So do you see a scenario were south and west will accelerate from here on while the growth over the past maybe couple of years would have been ballpark similar to north and east?
[indiscernible] South, west and east all 3, north was the only original territory we really had. So even in east, lot of territories came later on which was Bihar, Jharkhand, Orissa, all these territories came later on. So as we have mentioned, when we have put up a plant in Bihar, the growth has been just out of proportion and we have already run out of capacity. So I really don't know how large can it be large, because we had planned this capacity for 3 years and we have now done the first year. So I don't know. Some of these territories are so under-penetrated, that it's very difficult to really answer.
On Sting, is there an opportunity for Sting in overseas market or are you already sort of selling Sting in...
We are already selling Sting in overseas market. We have just launched in Nepal, and other countries we were already selling.
Okay. And finally, the INR 1,200 crore CapEx number that you indicated for this year and next year in terms of expansions that you have sort of planned, is it on the growth CapEx or does it include maintenance CapEx will be over and above this, right?
Maintenance we write-off. We don't -- in the P&L, we don't take it to in CapEx, but we write-off on our P&L.
From a cash flow perspective, what will be the total outgo this year and next year, including INR 670 crore that you have done in the first half of this year?
For this year it's INR 670 crores and next year, when the plants -- by March, which is when we capitalize because all the lines start -- the expansion happen. So the cash flow keeps going from as we purchase the land, the buildings are happening. Part of it is -- this year and part of it is going to be next year. Above 40% would be this year and 60% next year.
The next question is from the line of Devanshu Bansal from Emkay Global.
Our organic volumes, if we see before COVID, by '18, '19 sort of so organic volume growth of about 13% and now also post COVID after unlocking, if we see on a 3-year CAGR basis, it's about 15%. So I wanted -- if you can still -- you have provided that you can see double-digit volume growth going ahead and that's quite encouraging, but if you can sort of narrow it down into in terms of low teens, mid-teens, high teens, then it would be really helpful for us to sort of understand this better?
So that is not possible. I mean, when I'm telling you -- I wish I could predict that specifically, but double digit itself is a good enough number and that is what realistic we look at. It could be 12, it could be 18. I'm not very sure. Depends partly on the season and depends on our execution. We believe we are executing well and depends on our competition also how they execute.
Sure, sir. And secondly, wanted to understand, within categories, juices have seen relatively faster growth this quarter versus carbonates and water if we see on a 3-year CAGR basis. So wanted to check currently versus carbonate, what would be the extent of distribution for juices?
The distribution or the volume you are asking? What...
Sir, I am asking, so if there are 3 million -- yes, 3 million retail outlets, in how many outlets we are distributing juices?
I would say about 60% to 70% of the outlets, but exact numbers we don't have to be honest.
And all the rest, 30% or 40%, we can service or distribute juices to those outlets as well or there are certain limitations where --?
We can, but some of the outlets don't take juices. All the outlets don't take juices. So as we have said, 400,000 outlets out of this, which is about 18%, 20% have only started with our energy drink. So ultimately, as I said to you, they will start carrying our other products also, but it takes time to enter a new market, a new outlets. Sometimes we have to accept what he wants and then slowly once you have a relationship, you start penetrating with your other products.
Sure, sir. And last question is to understand the margin profile. So, currently in this year, despite significant raw material inflation in PET chips et cetera, most likely, we will be doing like pre-COVID sort of margins at about 20%. So when these gross margins sort of recover going ahead, so can we sort of build in better than 20%, 21% EBITDA margins. So how should we...
I think we will ask Mr. Putin if he stops attacking and the oil prices come down. Very difficult. Again, the world scenario is such that our key raw material, one of the key raw material is the PET raisin and that depends exactly on the petroleum prices. So I think depending on the world market conditions, but I feel it has already reached...
Assuming they come off?
Assuming they come off, obviously our margins will improve.
The next question is from the line of Percy Panthaki from IIFL.
Sir, just a question on the pricing. First of all, let me know if the data I have with me is right or not. But on a 3 year CAGR basis, for India, the volume growth is 20% CAGR -- sorry, 15% and the value growth is 20% which assumes a 5% pricing on a 3-year CAGR which means about 15% point to point. Am I looking at this correctly or is there some other sort of explanation to this?
No, I think fundamentally you're pretty close to it. See, what happens is partly because our lowest value product, which is glass has stopped selling and reduced, so our high value products have started selling more. So that's why you're seeing a change in the value of the product. Also, as I said, our energy drinks have -- energy drink is doing better, our dairies are doing better with a little high price and our Tropicana Juices are doing better, which have slightly higher value. So both ways -- as we said double-digit zcourse some value will keep on -- thisdd is what we anticipate growth to be coming for the next few years.
So of this 15% difference between volume and value on 3-year basis, would you be able to split up that 15% between pure pricing and mix?
No, it's very difficult at the moment. If you have some queries then offline maybe they can -- they have to do -- get into the exact numbers and give you.
Sure. Secondly, when you earlier said that we would be able to do a double-digit volume growth stable state going ahead, is that -- I mean, I just wanted to understand how much of this would you attribute to the industry growth itself and how much is sort of your confidence of growing faster than industry? So if, let's say, you have a 10, 11...
I've never said I am growing faster. So I believe that we are doing a good job and the rest I leave it to the market to judge, but the industry is growing very healthily and I think we are doing a better -- good job.
So basically, over the next 3, 4 years, you believe that the industry itself can do a double-digit volume growth?
Sure.
Okay. Understood. And lastly, I know you have said this, but I just wanted to again ask because it was not clear to me. What is the CapEx plan in FY -- sorry, CY '22 and '23? And here I'm talking about -- I understand the CWIP moving into gross block when it is commenced, et cetera. I'm looking at it from the point of view of the -- in which it moves into gross block. So let's ignore the CWIP, let's ignore the cash flow impact of the CapEx, but let's look at when the CapEx come into the balance sheet, on that basis, what's the CapEx in CY '22 and in CY '23, please?
'22, it is INR 670 crore, which is given in the presentation. And for next year, Chairman has stated INR 1,200 crore.
Approximately INR 1,200 crores.
INR 1,200 crores. And with this CapEx, INR 670 crore plus INR 1,200 crore, what percentage would it result in expansion in the capacity?
Well, I had already said about 30%.
30%.
INR 670 crores is already captured in this year, which we have already used that capacity. INR 1,200 crore will be adding about 30% of capacity.
And this INR 1,200 crores is all in India?
This is mostly in India. Yes.
The next question is from the line of Anirudh Joshi from ICICI Securities.
Yes. Sir, in case of distribution getting more color on it, can you indicate what is our current share of e-commerce, modern trade, B2B channels like HoReCa and then the general consumer market? And also, what is the revenue share of in-home consumption versus out-of-home consumption? So maybe 500 ml SKU and below and 500 ml SKU and above share for us?
So our mix is approximately on-trade about 23% and off-trade about 77%. And this includes HoReCa modern trade as well. So the 23% includes that.
Can you please repeat?
23% is [indiscernible] Okay. So HoReCa [indiscernible] and modern trade is about 4% and off -- home consumption is 23% and off-trade is 77%.
Okay. Understood. Sir, lastly on the Sting, can you indicate the current market size, the total market potential for this brand and…
Very difficult to say because there are very few players in the energy. Coke has just entered the energy segment, so worldwide energy segment is doing extremely well and we believe it should do extremely well here also, but if we see in lot of countries it has reached about 12% to 15% of the mix and even larger.
So in India it is currently 7%, so --?
So India it is not 7%. 7% is our mix. It's not 7%, because coke was not in energy drink.
Okay. So overall mix -- in the overall...
Right now it's very low. Energy drink is very low. I mean, Red Bull and all are many niche products. They are expensive niche products, so there is huge opportunity to grow this product.
Okay. Sure, sir. Understood. Last question. So the 3 million distribution outlets that we are looking at, where do you see this number by end of CY '23? Yes, that's it.
Well, we normally look at about 8% to 10% expansion in our footprint. So that is what we expect. If we can do better, it will be great, but that is what we expect.
The next question is from the line of Chetan Gindodia from AlfAccurate.
Congratulations for a great set of number. Sir, is it possible for you to give some color on the region-wise international geographies? And secondly, I wanted to understand, so last year, if I see, for CY '21, the profitability in Nepal region, Sri Lanka region, and Morocco region was slightly lower compared to the company level PBT margins. So what could be the reasons for this and what are the steps that we are undertaking?
See, internationally, every year something -- now Sri Lanka this year the profitability -- I mean, the Sri Lanka itself is in -- is shaky. So things keep happening, but that's why we consolidate international and give you one. But all our markets are doing well. Sri Lanka has its challenges, but it's such a small portion of our overall business that it really doesn't effect. It's about 1%. So it doesn't really affect us to that level, but that also we believe -- even though we are growing there, we believe it will come back and it might take a little longer.
Okay. In the Nepal and Morocco region, any updates of...
Morocco and Nepal are both doing well for us and they are both growing and we are quite happy. And profit margins are also increasing. So they are in line with what we have -- what our business is.
Okay. And just lastly, wanted to understand what is the industry volume growth -- long-term volume growth for our carbonated drinks category over the last decade or so. Do you think this is changing -- going to change going ahead or do you think the increased penetration impacts this number?
Well, it's basically because of increased penetration you are getting double-digit growth. Otherwise why would you get the growth. Because we are penetrating where we are saying 8% to 10% new outlets are being added and the markets have opened up. So go to market as well as home consumption both are growing. Even HoReCa channel is growing. If you see fast food is growing as fast. So everywhere consumption is growing.
The next question is from the line of Sumant Kumar from Motilal Oswal.
Yes. So when we talk about the under-penetrated market like Bihar, UP and West Bengal, Jharkhand. So can you discuss about how the penetration in these markets compare to the developed markets like west and some markets in south?
So see, each state -- I mean, if I start describing it will take too long, but as we said, most of the territories we acquired, a lot of them were very under-penetrated where we had 15%, 20% share. So there all we need to do is keep on increasing our distribution. And as we said, Bihar was one state where we did not have a plant and after putting a plant, we have had real healthy growth and we have run out of capacity in the first year. So these under-penetrated markets as we are putting more go-to-market vehicles, visi coolers, they are all growing at a faster pace than our regular markets. And there is still so much scope because when you are at 15%, 20% market share, then the gap is so large that hopefully next few years we don't see any challenges, except putting in enough vehicles and visi coolers and go to market.
When we talk about the under-penetrated that is, you are talking about your distribution channel number one? Number 2, this also includes the changing consumer behavior, consumer drinking pattern also?
Well, it does because if your product not available in lot of outlets, I mean, under-penetration is basically your availability in outlets is much lower and that's why we have to keep expanding the number of outlets and keep on increasing our distribution. As we keep doing that, the basic products are approved -- the local people like the product. It's just that it's not available. So as we are making it available, the volumes are growing.
The next question is from the line of Sanjaya Satapathy from Ampersand.
Yes. Congratulations for a fantastic set of numbers. Sir, my -- just to -- can you just clarify your distribution outlet expansion growth plan? I heard that you were annually targeting 8% to 10%, just want to reconfirm that.
That's right. You've got it right. That's what we are saying.
Okay. And the second question that I just wanted to understand is that this CapEx plan which you have said will take up your capacity by 30%, so that will be ready by onset of next summer season. Is that right, sir?
That's what we are planning.
Okay. Last thing that I just wanted to check that your margin, which you stated you are protected by buying these preforms in advance, but probably you have run out of stock now. And so how will the cost structure step up from here in the near term? And secondly, as people have been trying to probe that now that south and western market is kind of completing the turnaround and you are...
So our margins are what we have shown would be approximately that. Unless until the oil prices come down then the resin prices come down, then our margins could improve, but we have got very healthy margins and we have never said better margin than this. So we should be able to maintain our margins, we don't see a challenge.
Okay. And despite running out of those preform stocks?
Yes. It's ongoing. You keep buying and you keep selling, so you keep adjusting that.
Understood. And if I can just check with you that the kind of operating leverage which we saw in this quarter, was it something that was affected somewhat because you run out of capacity?
No, as it is -- we have got grown 106%. Rest of the things are fine to be -- as a guide for building capacity for the next year. Otherwise, rather we have taken advantage of operating efficiency by -- in spite of direct costs going up, improving the EBITDA margin So we have availed that advantage to the fullest.
Sir, if I can check one more thing that what I feel is that the beverage market has been growing so fast that the advertisement and brand visibility in -- by the respective brands has probably come off. That at least appears from the minutes of advertisement that we see on media channels. Is that something which is the demand is taking for granted?
Budgets are going up only. They are not coming down, so advertising levels don't come down.
Okay. And also in terms of product innovation from your side, like are there more products on the anvil and are likely to keep the excitement going?
Absolutely. Although every year first, we need to consolidate what we have added and then there is always categories in our portfolio whenever we need, we can take out and start adding it.
And the reason why you have chosen this greenfield capacity in these 2 states is because again under-penetration in that -- those regions or --?
Not, under-penetration because our demand to supply has -- our capacity is much lower. It has become lower than what our requirement is for these 2 states.
Because if you can repeat the Bihar like experience here and these are 2 much bigger states in terms of --?
But Rajasthan we already have 2 plants. So this is -- because we are -- our sales are higher than our capacity has come to exhaustion. That's why we are adding more capacity. And similarly in Madhya Pradesh we already have a plant, but we are putting on the border of near Chhattisgarh where we don't have a plant. So Andhra Pradesh and Chhattisgarh will be catered from there.
The next question is from the line of [ Akash Patel ], an individual investor.
Sir, I have one small query about the company is doing fantastic as per we've seen. We've seen result today also and following the other quarter also. But I have one small -- can you just highlight on the what is the debt plan of the company that after some 5 years or 7 years? Can we see VBL can be a debt fee company or it can be of manageable?
It can be debt free if we don't expand even 1 year.
No, I'm saying that after some 5 years or 7 years after, can we see a VBL net debt free company?
See, question is, do we want to be exactly debt free, our debt is so low that we will keep on getting some opportunities or the other and we will keep expanding, but do -- if we really want to be debt free, we can do it in a year.
[Operator Instructions] The next question is from the line of Gautam Jain from GCJ Finance.
Congratulations for very great set of numbers. You have exceeded all the expectation of all the people, I think so. My question pertains to, is there any deliberation regarding any new product to be added from Pepsi side and/or any new geography still to be added?
Well, India there is nothing very much left and we are always open to Pepsi. They give us any territory, which is good. We are always looking to expand and what we can handle. So limited expansion we will keep doing in geographies whichever Pepsi keeps offering us.
Okay. In terms of new products?
New products, there is always the -- Pepsi always has a slew of products which are available. Question is, once we launch couple of products, then we need to make sure that they're properly serviced. Just by adding new products, it doesn't help. So once we feel that we have reached a scale with those products, then we keep on adding more products. So there is no shortage of new products.
And can you just highlight few points on the recent tie-up with Pepsi regarding Kurkure?
That we are going to start manufacturing I think by end of October or November. And once we start that then hopefully in the coming years we will expand with that.
And the license would be same like other products...
So we are producing for PepsiCo. PepsiCo is doing the marketing. We are going to manufacture and give it to PepsiCo.
Okay. But in future [ that discourse ] is also there, I mean, we can get that distribution also, right?
I wish I could decide for Pepsi. I wouldn't -- there is opportunities there and we can keep trying.
Wonderful results. Congrats.
[Operator Instructions] The next question is from the line of Aarushi Lunia from Hem Securities.
In the last con-call you had mentioned that in Zimbabwe you are adding capacity by end of May or early June So could you please give some light on the development?
We have added one line in Zimbabwe and the line has started producing, so it will give us results for this season because their season starts end of August and we will have enough capacity to feed that market.
The next question is from the line of Percy Panthaki from IIFL.
Assuming that you are very close to full capacity utilization, your current asset turnover on a gross block basis is about 1x, I am adjusting the gross block for whatever Ind-AS adjustments happened in 2016. And on that basis, it is approximately 1x or 1.1x. Now with the sale of INR 8,800 crore expected approximately in CY '22, if I add 30% to that, which is your capacity enhancement, it can generate INR 2,600 crore of sale with INR 1,200 crore of CapEx. So the incremental asset turnover on this CapEx would be more than 2x versus your overall India sales by about 1.1x. So, can you explain why the asset turnover for the incremental CapEx is going to be higher?
See, whenever you are adding brownfield CapEx, it will always be less, because your cost of land, the development around it, there is no cost. Its only cost is of the line. Your cost is higher when you are doing a greenfield plant.
But of this INR 1,200 crore, a large part is greenfield, right?
No. About 60% is the greenfield, 60% to 65%. 35% is -- so whereas in that 35% is practically the same capacity.
Okay. I see. But this calculation is correct, right, that for the INR 1,200 crore of CapEx you put in, once it is fully utilized, then you will be able to generate INR 2,600 crore of sales from that?
See, it's a very -- I mean, you have to look at overall the company's, because it depends where you are putting the line. What's the seasonality of that territory. If it is put in south or west the turnover per line is much higher, because the seasonality curve is much lower, but there are lot of permutation combinations. But overall, you have to look at the overall company's total turnover and based on that your CapEx...
Sure. So I'm not asking what would be the turnover generated from those plants, I am just saying that once you do this INR 1,200 crore of CapEx at all India level, you would be okay to add INR 2,600 crores of sales...
Practically what you're saying, yes. Practically, what you're saying, yes. It could be little higher depending on what products we are making.
The next question is from the line of Jenish Karia from Antique Stock Broking.
Joint venture with IVL Dhunseri as in how do we expect to benefit from it and what is the scale of PET recycling that we are expecting, some color on that front, sir?
I couldn't get your question. Sorry, I couldn't understand it.
Yes. So I saying that recently we announced take purchase in a joint venture with IVL Dhunseri for PET recycling. So, are we expecting some benefits on PET preforms from that venture, what is the scale of opportunity, some color on that front, sir?
Well, there are 2 things. One, that is the need of the hour, because we need to -- we have commitments and we want to make sure that we recycle our products on our ESG platform also. At the same time, when we are going to produce our own raisin out of that, so we will get benefits out of that.
Any color on what would be the size of recycling, how many PET bottles do we expect to recycle in a year or something like that?
I don't know, but the first capacity we are looking at is about 30,000 tonnes.
The next question is from the line of [ Gagan Goyal ] from [ Trinity Capital ].
Sir, the question might have been answered earlier, but how are we investing in the dairy business expansion across geographies and product mix?
The dairy is doing extremely well. It has done extremely well. So we are adding -- we are doubling our capacity next year. And as sales keep on going up, we will keep on adding, but at the moment we are doubling our capacity for next year.
Sir. In terms of geographies like are we like expanding…
Yes, it would be the Western region which would service west and south.
And in terms of product mix?
No, dairy you just said. You asked for dairy, so dairy is I'm giving you.
Within the dairy, what product mix are we -- product mix which we have, we can't supply right now, the mix we have right now. So we are just going to add that to the western and the southern region.
Thank you. Ladies and gentlemen, that was the last question. I now hand the conference over to the management for closing comments.
Thank you very much to all the participants for their participation and 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 in food and for taking the time to join us on this call. Look forward to interact with you soon. Thank you very much.
Thank you. On behalf of Varun Beverages Limited, that concludes this conference. Thank you for joining us and you may now disconnect your lines.