Hotter summer to lift India soft drink bottlers’ growth to nearly 15%, margins under pressure: Crisil Ratings

India’s soft drink bottlers are set to post a strong revenue rebound of around 15% this fiscal year, driven by a hotter summer and deeper penetration into untapped markets, Crisil Ratings said on Tuesday.

The rising competition and packaging costs, however, are expected to weigh on margins.

After a subdued performance last fiscal, the industry is likely to revert to its long-term growth trajectory, as forecasts of above-normal heat and the possibility of an El Niño event are expected to further boost demand for beverages., the report said.

An analysis of 13 bottlers across the non-alcoholic beverage segment indicates a recovery in volumes supported by capacity expansion and wider distribution networks.

“Players have not only increased their bottling capacities by 30-35% over the past two fiscals but also expanded their distribution network and cold chain infrastructure. This will drive healthy double-digit volume growth,” said Shounak Chakravarty, Director, Crisil Ratings.

“The higher volume, coupled with 2-4% price hike in a competitive environment will help players revert to their long-term revenue growth trajectory,” he added.

However, intensifying competition from new entrants is likely to limit pricing flexibility.

New players, including those offering indigenous flavours, have increased their market share to an estimated 6-7% last fiscal from about 2% in FY24.

At the same time, a sharp rise in crude oil prices due to the West Asia conflict has pushed up packaging costs, which account for roughly one-fifth of total expenses. As a result, industry profitability may decline by 200-250 basis points this fiscal.

“Further, bottlers with pan-India presence are expected to negotiate better pricing terms with suppliers and distributors through bulk raw material purchases and high-volume offtake respectively, thereby partially offsetting the impact on profitability,” said Rucha Narkar, Associate Director at Crisil Ratings.

The sector’s credit profiles are expected to remain stable, supported by healthy cash flows. This will enable continued investments in capacity expansion and distribution infrastructure, including visi-coolers at retail outlets.

Capital expenditure intensity, which rose sharply last fiscal due to acquisitions, is expected to moderate this year. As a result, leverage metrics are likely to improve, with debt-to-Ebitda ratios seen easing to 0.9–1.0 times from 1.1 times, and interest coverage rising to 10–11 times from around 9 times.