Soft drink bottlers set for growth; margins under pressure: Crisil

Crisil says soft drink bottlers may see revenue growth return to 15 per cent this financial year, but rising competition and higher crude-linked packaging costs could weigh on margins

Soft drink makers are expected to have a bumper season as the summer heat intensifies, but margins will remain under pressure as competition rises, said a report by CRISIL Ratings.

 

After subdued sales growth last financial year, soft drink bottlers are poised to see revenue rebound to their long-term average growth of 15 per cent this financial year. It would be driven by a more intense summer and deeper penetration into untapped domestic territories.

 

The summer months account for 40 per cent of overall sales.

 

“But with rising sales, competition is also on the rise with newer entrants launching products at popular price points. Incumbents, in a bid to protect their market share, are thereby expected to ramp up marketing and distribution spends while also expanding capacity and distribution infrastructure,” the research added.

 

“In addition to launching novel indigenous flavours, these newer entrants are targeting impulse purchases through popular price points such as ₹10 and ₹20 bottles. As a result, their market share increased to an estimated 6-7 per cent in FY25 from 2 per cent in FY24,” CRISIL stated.

 

Meanwhile, a sharp rise in crude prices due to the West Asia conflict has also driven up packaging costs.

 

These will negatively impact the industry’s profitability by up to 250 basis points (bps).

 

“However, the impact will be lower for bottlers with nationwide presence due to their higher pricing power and better economies of scale. Cash flows of the players will remain healthy, ensuring stable credit profiles,” the research added. It is based on an analysis of 13 bottlers in the non-alcoholic beverage industry.

 

The industry includes carbonated soft drinks (70 per cent), juices (12 per cent), and packaged water (18 per cent).

 

“Players have not only increased their bottling capacities by 30-35 per cent over the past two financial years, but also expanded their distribution network and cold chain infrastructure. This will drive a healthy double-digit volume growth. The higher volume, coupled with 2-4 per cent price, hike in a competitive environment, will help players revert to their long-term revenue growth trajectory,” said Shounak Chakravarty, director at CRISIL Ratings.

 

On an overall basis, cash flows are expected to remain healthy, allowing players to continue spending on expanding bottling capacities and increasing visi-coolers at outlets.

 

“The capex intensity — which had surged last financial year (FY) owing to acquisitions — will, however, be lower this FY.

 

Consequently, aggregate debt/earnings before interest, taxes, depreciation and amortisation (Ebitda) and interest coverage ratios of players may improve to 0.9-1.0 time and 10-11 times, respectively, this FY. It was 1.1 times and 9 times last FY,” the research added.

 

“Intense competition, leading to reduced pricing flexibility amid rising crude-linked packaging costs will cause a moderation in profitability this financial year. However, marginal price hikes and increasing focus on zero-sugar variants may limit the overall impact to 200-250 bps, keeping margins healthy at 15-16 per cent,” said Rucha Narkar, associate director, CRISIL Ratings.