Varun Beverages IPO gets thumbs down from retail investors

Initial public offerings (IPOs) are being cold-shouldered by retail investors of late, as is evident from the two recent public issues — Varun Beverages and PNB Housing Finance. While the PepsiCo bottler saw the retail portion not getting fully subscribed (0.79 times), in the case of the housing subsidiary of state-run lender Punjab National Bank, the response was a tad better at 1.29 times.

After the final day, the bottler's IPO saw overall subscription of 1.84 times, with institutional investors showing the maximum interest, oversubscribing almost five times. 

One reason for the tepid response could be valuation. "On CY2015's net profit of Rs 87cr, the issue, at its upper band is priced at a P/E ratio of 85.4x which looks expensive," analyst Shrikant Akolkar of Angel Broking had said in his note, recommending the IPO as "NEUTRAL."

Varun Beverages had approached the primary market with a public issue of 2.5 crore equity shares, of which one crore shares comprised of offer for sale (OFS) by promoters Ravi Jaipuria and his son Varun Jaipuria. The price band was fixed at Rs 440-445 per share.

At the upper end of the price band, Varun Beverages would end up raising Rs 1,100 crore. The lukewarm response could well point to a modest listing of the shares on the stock exchanges.

The global coordinators and book running lead managers were Kotak Mahindra Capital Company, Axis Capital and CLSA India. The book running lead manager as YES Securities (India) Ltd.

Varun Beverages produces and sells PepsiCo's soft drinks that comprise Pepsi, Diet Pepsi, Seven-Up, Mirinda Orange, Mirinda Lemon, Mountain Dew, Seven-Up Nimbooz Masala Soda, Seven-Up Revive, Evervess Soda.

It also makes and sells juice brands such as Tropicana Slice, Tropicana Frutz (Lychee, Apple and Mango) and Seven-Up Nimbooz as well as packaged drinking water under the brand Aquafina.

Varun Beverages Limited, or VBL, at a glance (source Angel Broking)

The company has total 21 manufacturing facilities in India and a few other countries. Indian operations account for 82 percent of its total revenues while rest comes from other countries.

VBL is one of the largest bottling franchisees of PepsiCo and accounts for 44 percent of PepsiCo India's revenues.

The company's net profit in the calendar year 2015 was Rs 84 crore on turnover of Rs 3,394 crore.

Promoters will come down to 73.7 percent stake in the company from 86.3 percent, after the public issue.

VBL's financial performance has remained lacklustre in the last four years with losses reported in CY2013 and CY2014. Overall profitability has remained inconsistent, which does not give a strong sense of VBL being a strongly profitable franchisee.

The numbers reported by the company indicate that in CY2015, the beverage volumes from existing territories declined by 7 percent, which indicates de-growth in existing business.