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Edited Transcript of VARB.NS earnings conference call or presentation 4-Nov-19 10:30am GMT

Q3 2019 Varun Beverages Ltd Earnings Call

GURGAON Nov 15, 2019 (Thomson StreetEvents) -- Edited Transcript of Varun Beverages Ltd earnings conference call or presentation Monday, November 4, 2019 at 10:30:00am GMT

TEXT version of Transcript

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Corporate Participants

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* Raj Pal Gandhi

Varun Beverages Limited - Whole-Time Director

* Ravi Kant Jaipuria

Varun Beverages Limited - Non-Executive Chairman

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Conference Call Participants

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* Anand Kumar Shah

Axis Capital Limited, Research Division - SVP of Consumer

* Anand Trivedi;Nepean Capital LLP;Analyst

* Dipan Anil Mehta

Elixir Capital Limited - Chairman of the Board

* Percy Panthaki

IIFL Research - VP

* Pritesh Chheda

Lucky Investment Managers Private Limited - Analyst

* Rajiv Gupta

RBC Financial Services Private Limited - Director

* Vivek Maheshwari

CLSA Limited, Research Division - Research Analyst

* Yasmin R. Shah

Antique Stockbroking Limited - VP of Institutional Sales

* Anoop Poojari

Citigate Dewe Rogerson Ltd. - Client Manager

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Presentation

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Operator [1]

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Ladies and gentlemen, good day, and welcome to the Varun Beverages Limited Earnings Conference Call. (Operator Instructions). I would now like to hand the conference over to Ms. Anoop Poojari from CDR India. Thank you, and over to you, sir.

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Anoop Poojari, Citigate Dewe Rogerson Ltd. - Client Manager [2]

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Thank you. Good afternoon, everyone, and thank you for joining us on Varun Beverages Q3 2019 Earnings Conference Call.

We have with us Mr. Ravi Jaipuria, Chairman of the company; Mr. Varun Jaipuria, Whole-time Director; Mr. Raj Gandhi, Group CFO and Whole-time Director; Mr. Kapil Agarwal, CEO and Whole-time Director; and Mr. Vikas Bhatia, CFO of the company.

We will initiate the call with opening remarks from the management, following which we will have the forum opened for a question-and-answer session.

Before we begin, I would like to point out that some statements made in today's call may be forward-looking in nature, and a detailed statement in this regard is available in the results presentation shared with you earlier.

I will now request Mr. Ravi Jaipuria to make the opening remarks.

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Ravi Kant Jaipuria, Varun Beverages Limited - Non-Executive Chairman [3]

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Good afternoon, everyone, and thank you for joining the call. I hope all of you had the opportunity to go through the results presentation, which provides details of our operational and financial performance for the third quarter ended September 30, 2019. We are delighted to share that we have delivered a robust performance in quarter 3, 2019. We have recorded a strong top line growth of 49%, EBITDA growth of 54% and PAT growth of 84%.

This was on back of a solid volume growth of 60% driven by healthy offtake in the domestic markets, along with robust contribution from our international operations.

Encouragingly, our India business during the quarter delivered an organic volume growth of 17.5%, led by exceptional performance in unprecedented territories acquired in 2017 and in early 2018.

Furthermore, our international territories have registered 27% organic growth with key markets like Morocco, Zimbabwe, Nepal and Sri Lanka, reporting double-digit growth during the quarter.

This is also the first quarter that includes the full impact of South and West sub-territories acquisitions, which got consolidated from May 1, 2019.

I'm pleased to share that our team has done a tremendous job in seamlessly consolidating such a large region in a compressed time frame. This demonstrates our exceptional execution capabilities and the dedication within our team to deliver results. Over the last few years, we have focused on widening our portfolio mix with new product additions catering to varied demands of the fast-growing Indian beverage market.

In sync with this approach, the company during the quarter introduced ambient temperature and value-added daily beverages under the Cream Bell brand across 3 variants of Belgian Chocolate, Cold Coffee and Mango shake.

These beverages are priced at INR 30 for a 200 mL PET bottle, having a long shelf life of 180 days we will be leveraging our existing distribution network and chilling infrastructure to help expand volumes in this new segment and remain confident of the product's long-term growth prospectus.

In a key development during the quarter, the company successfully raised INR 9,000 million through fresh issue of 147 lakh equity shares.

We are glad with the confidence reports by marquee domestic and former investors in our business in a challenging market environment. This capital raise consistently strengthens our balance sheet and reduces our debt, providing room for sustained growth.

Our growth initiatives continue to be on track, including setting up a greenfield facility in Pathankot, acquisition of South and West India sub-territories and other investments to drive growth.

During the quarter, the company also acquired an additional 20% stake in Lunarmech Technologies, which makes and sells PET bottle caps and crown caps. This transition has increased VBL's total shareholding to 55% in Lunarmech.

Additionally, we have also concluded the acquisition of 2 production facilities, one situated in Dharwad, Karnataka and the total -- for a total consideration of INR 747 million. And second, situated at Tirunelveli, Tamil Nadu for a total consideration of INR 200 million.

These manufacturing facilities are strategically located close to target markets, which will reduce time to market, enable optimization of rates and logistics cost and aid in margin expansion.

Over the last 12 months, we have made significant investments to strengthen our leadership position in the beverage industry in India. We remain confident that these new investments once optimally utilized will further enhance the company's operations -- operational and financial performance, enabling us to improve cash flows and augment return ratios in the near future. On the whole, we have delivered an encouraging performance in Q3 2019.

Looking ahead, we continue to build upon our strong positioning in the beverage industries with presence in the fastest-growing markets. Solid infrastructure and well-entrenched distribution network across micro territories. We today have a diverse multi-category product portfolio and are constantly innovating and upgrading to tap various consumer preferences and emerging markets. We are confident of strengthening our market share across categories and drive volumes to sustain our growth momentum going forward.

Overall, we remain confident of delivering a healthy and sustained operational and financial performance going ahead.

I would now invite Mr. Gandhi to provide highlights on the operational and financial performance. Thank you.

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Raj Pal Gandhi, Varun Beverages Limited - Whole-Time Director [4]

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Thank you, Mr. Chairman. Good evening and a warm welcome to everyone for joining the investors call.

Let me provide an overview of the financial performance for the third quarter ended 30th, September 2019.

Revenue from operations grew 49.2% year-on-year in quarter 3 2019 to INR 13,397.3 million (sic) [INR 17,397.3 million]. This was driven by a robust volume growth of 60.4%. Total sales volumes during the quarter were 124.5 million cases as compared to 77.6 million cases in quarter 3 2018.

The growth was supported by a robust performance in India as well as in the international territories. Morocco, Zimbabwe, Nepal and Sri Lanka have all grown in double digits in the current quarter.

Organic growth in India stood at 17.5%, while in international territories it stood at a healthy 27%. This is the first quarter that includes the full impact of South and West sub-territories acquisition.

In terms of product mix, CSD constituted 69%, Juice equal to 6% and packaged drinking water 25% of the total sales volume in Q3 2019.

Realization per case was down by approximately 7% on account of change in product mix in India post the consolidation of South and West sub-territories, introduction of water in Morocco and lower sales realization in Zimbabwe in U.S. dollar terms.

The EBITDA stood at healthy INR 3,256.6 million in quarter 3 2019 from INR 2,112.4 million in Q3 2018, registering a growth of 54.2%.

EBITDA margins expanded 60 basis points to 18.7% on account of operating leverage. And gross margins improved by 223 basis points during the quarter led by lower PET prices in India. Lower sugar prices in Zimbabwe in USD terms and change in the product mix.

PAT grew by 83.7% to INR 811.2 million in quarter 3 2019 from INR 441.6 million in Q3 2018 on the back of robust volume growth. Depreciation increased by 27.5% during the quarter on account of capitalization of Pathankot plant and consolidation of South and West India sub-territories.

Finance cost increased by 83.9% as the purchase consideration for acquisition of South and West India sub-territories has been funded through debt initially.

As shared by the Chairman, during the quarter, we raised INR 9,000 million through fresh issue of 147 lakh equity shares of face value of INR 10, the entire proceeds of the QIP, net of the issue expenses of INR 164 million were utilized for repayment of debt during the quarter 3 2019.

In another key development, we are pleased to share that CRISIL has upgraded the credit rating for the -- for our long-term debt as CRISIL AA, which was previously AA minus, and has reaffirmed for our short-term debt as CRISIL A+ (sic) [CRISIL A1+] as it was earlier. A significant debt reduction along with the rating improvement should enable us to lower interest cost going forward.

To conclude, we have delivered a robust performance in the third quarter of 2019. We are excited to the potential of our winning product portfolio, well-entrenched distribution network, and our agile business model, and remain interested of the upcoming growth prospects.

We will be focusing on generating steady free cash flows over the coming years, leveraging upon the existing and the new investments. On the whole, we look forward to delivering a healthy and a sustainable operational and financial performance going ahead.

On that note, I come to an end of the operating -- opening remarks and would like to now ask the moderator to open the lines for the Q&A. Thank you.

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Questions and Answers

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Operator [1]

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(Operator Instructions). We take the first question from the line of Jithin John from CLSA.

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Vivek Maheshwari, CLSA Limited, Research Division - Research Analyst [2]

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This is Vivek. A few questions. First, on the India business volume growth. I mean we have seen company after company reporting or complaining about the macro slowdown and its impact on the overall category growth rates and company growth rate. How is it that in the case of aerated beverages?

And for your entire portfolio, the organic growth rate is still like 17%, 18%. So how do you read the entire situation given that everything else is, kind of, slowing down quite a bit?

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Ravi Kant Jaipuria, Varun Beverages Limited - Non-Executive Chairman [3]

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Well, I think Vivek, the main reason behind this has been the rural expansion for the beverage industry and especially for us. As initially, if you look at, for example, I'll give you a state like UP, which at one time, 2 years back, had no power in the rural for about 16 to 18 hours. Now we have power for about 16 to 18 hours coming, which has enabled us to expand our products in the rural markets because it was very difficult to sell a warm soft drink. And now we are expanding our chilling equipment going deeper into the rural market, and which is really showing huge improvements.

And this is not only in UP, it's in other states also, wherever power has become more accessible we are able to penetrate much more deeper, and the results are showing clearly in the performance.

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Vivek Maheshwari, CLSA Limited, Research Division - Research Analyst [4]

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Okay. And in your sense, would you have gained shares or the competition would have also call, let say, the market growth rate would also be similar?

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Ravi Kant Jaipuria, Varun Beverages Limited - Non-Executive Chairman [5]

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Well, I'm not 100% sure, but I think the market has grown. And we could have gained minor share or not, I don't know. But I think the overall category has grown, overall beverages have grown. And I think we've also grown with it.

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Raj Pal Gandhi, Varun Beverages Limited - Whole-Time Director [6]

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And Vivek, supplementary to this in this quarter, even the carbonated mix has gone up. This never used to happen in the past.

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Ravi Kant Jaipuria, Varun Beverages Limited - Non-Executive Chairman [7]

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So there used to be a feeling that even the sales of water is going up, which is not the case with us. And our carbonated beverage sales have gone up faster than the water sales, so -- which is the other improvement, which will help in our EBITDA.

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Vivek Maheshwari, CLSA Limited, Research Division - Research Analyst [8]

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Okay. And one more follow-up to this, if it is possible for you, but let's say, if you leave aside, let's say, rural expansion. Would you say that the existing territories, or, let's say, urban centers are seeing pressure or you are not seeing any kind of pressure in your markets pretty much across the board?

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Ravi Kant Jaipuria, Varun Beverages Limited - Non-Executive Chairman [9]

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The only thing I can tell you is with this 17%, 18% growth, I hope the pressure continues.

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Vivek Maheshwari, CLSA Limited, Research Division - Research Analyst [10]

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That's interesting. Okay. Second, on the gross margins. When I reduce consolidated stand-alone numbers or gross profits from consolidated, I get to Others or subsidiary profitability. So on a stand-alone basis, your gross margins are going up by 90 basis points, but at a consol level, it is changing by 640 basis points. And probably there may be some base rate issue. I'm not sure about it. But could you just highlight on -- give some insights into that, on the subsidiary performance.

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Raj Pal Gandhi, Varun Beverages Limited - Whole-Time Director [11]

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Vivek, as stated, this quarter the cost of sugar and PAT, both were lower. But those also have helped in increase in the margins. And the -- another reason, which in the opening remarks, which we have given, the mix shift change, the mix of water with the West and South has gone up.

Secondly, the water also has been introduced in Morocco, which has enabled us to have a 50% overall growth in that territory. So with water mix going up, the gross margin is looking to be higher.

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Vivek Maheshwari, CLSA Limited, Research Division - Research Analyst [12]

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Okay. And 2 questions quickly on the balance sheet, cash flows. First, how much will be the CapEx in 9 months and full year number now?

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Raj Pal Gandhi, Varun Beverages Limited - Whole-Time Director [13]

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Our CapEx numbers impact, last quarter, we had given. This quarter, there were only 2 things. One, a co-packer of the PepsiCo, which we have added for INR 20 crores in Tirunelveli, which is about 500-plus kilometer away from Chennai towards the South, which can cater to both -- to the lower part of Tamil Nadu and Kerala, and another is Dharwad. We, last time, as we announced that we had done the deal for the territory plant because they needed certain approvals, and those approvals are coming, and we are close to the acquisition of that plant also.

In this quarter, these 2 CapEx has happened. Rest, the CapEx, with a couple, Vivek, I can tell you, already last reported.

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Vivek Maheshwari, CLSA Limited, Research Division - Research Analyst [14]

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Okay. And lastly, the latest debt number, gross debt?

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Raj Pal Gandhi, Varun Beverages Limited - Whole-Time Director [15]

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It's INR 2,911 crores.

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Operator [16]

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Next question is from the line of Sameer Gupta from India Infoline.

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Percy Panthaki, IIFL Research - VP [17]

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This is Percy Panthaki here. Sir, congrats on good performance. Just wanted to understand for the South and West territories that you've acquired. Can you give some details in terms of the initiatives or the inputs you have put into the business post acquisition? I mean we can see the numbers and the results speak for themselves. But what exactly have you done to improve the performance in terms of top line as well as margins?

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Ravi Kant Jaipuria, Varun Beverages Limited - Non-Executive Chairman [18]

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Well, a key initial initiative, which we have taken is our GTM has been improved. Our go-to-market has drastically being improved. We've hired more people, which were required. And we have increased our number of routes, which were needed. So initially, in the first 3, 4 months, that is the best we could have done and that is what we have done.

And going forward, we are further correcting our distribution system and our go-to market. And that is what is giving us the initial results, and we hope, going forward, it should be much better.

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Percy Panthaki, IIFL Research - VP [19]

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Okay. So sir, anything you can share in terms of whether you have increased the number of outlets reached? Or any such data points, which will give us a flavor?

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Ravi Kant Jaipuria, Varun Beverages Limited - Non-Executive Chairman [20]

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That is what I am saying, the number of outlets we were going through was much lesser than what was needed to be where we had to go. And that is what we are expanding by increasing the number of routes, number of people and increasing the number of outlets. The exact number, I don't have handy here.

But maybe we will prepare it and give it to you. I don't have it ready with me, but it's an ongoing process, and it will continue, actually, for the next 6 months to a year because there was such a gap, which was created by PepsiCo that we are covering that now. And hopefully, this will give us the growth, which are needed in the coming year.

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Percy Panthaki, IIFL Research - VP [21]

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Understood, sir. And any specific measures we have taken to counter competition from low-cost players, such as Bovonto, et cetera?

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Ravi Kant Jaipuria, Varun Beverages Limited - Non-Executive Chairman [22]

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So I think our key issue was we were not able to reach the market. I think first, we need to resolve that before taking any other steps.

So I think the key step which we have taken initially. And again, as I said, would take another year for us to start combating the whole thing, would be to reach to the number of outlets.

We are practically doubling the number of outlets we were going to.

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Percy Panthaki, IIFL Research - VP [23]

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Okay, sir. And secondly, on international business. Could you give us the growth rates for each individual geography?

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Raj Pal Gandhi, Varun Beverages Limited - Whole-Time Director [24]

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Actually, average is 27%, major here has been Morocco and Zimbabwe, we're seeing such thing in the vicinity of about 50%. And Sri Lanka, Nepal were on the lower side. Nepal had been 12% and Sri Lanka 11.2%, and Zambia is minus 10%.

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Percy Panthaki, IIFL Research - VP [25]

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Okay, sir. And last question from my side. I think in India, your capacity utilization for the month of May is now approximately 70%. Just correct me if I'm wrong, or just give me the exact figure on that. And if you continue growing at this, kind of, double-digit, kind of pace, you will run out of capacity in about 2 years or so.

So do you think we should sort of factor in some CapEx into CY '21 or CY '22 when we make your models? And if so, can you give us some guidance on the same?

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Ravi Kant Jaipuria, Varun Beverages Limited - Non-Executive Chairman [26]

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If we keep growing at mid-double-digits growth I think the business can afford every type of CapEx. And if we are at 70%, we are looking at, at least another 2, 2.5 years. This will -- we will require more CapEx.

So definitely to grow another 30% on the business, we will require some CapEx, but it will be no greenfield plant. It will be mostly brownfield, which is adding one more line to each front. Because of GST, now we don't have to go to -- go and have greenfield plant. So our CapEx will be much smaller in net capacity compared to what we used to have.

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Percy Panthaki, IIFL Research - VP [27]

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Right. So if you could just give some guidance. So brownfield, I think your asset turnover will be high. So let's say, you do a brownfield CapEx of, let's say, INR 200 crores. What kind of sales you can generate on that CapEx?

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Ravi Kant Jaipuria, Varun Beverages Limited - Non-Executive Chairman [28]

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About double (inaudible) on a 200 CapEx it would be INR 400 crores minimum and going up.

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Operator [29]

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We take the next question from the line of Anand Trivedi from Nepean Capital.

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Anand Trivedi;Nepean Capital LLP;Analyst, [30]

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My question is actually more on this proposed plastic ban we keep hearing out in the papers.

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Operator [31]

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Mr. Trivedi, this is the operator, I am so sorry to interrupt, requesting you to please use the handset more while speaking?

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Anand Trivedi;Nepean Capital LLP;Analyst, [32]

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Yes, sure. My question is more on the potential of plastic ban that we keep hearing out in the papers? And what -- how much of a concern or risk is that for you? And is there anything that you can do to mitigate that in the future?

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Ravi Kant Jaipuria, Varun Beverages Limited - Non-Executive Chairman [33]

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Well, I think the key issue here is that the government is keen on plastic -- single-use plastic. Whereas what we are telling the government and which the government is reasonably accepting is that our PET is completely recyclable. And we are giving them a model by which we will be collecting all our PET which we produce. So there will be -- in the next 2 years, there will be no negativity as far as we're concerned. If we produce 10,000 tons of plastic, we will be collecting 10,000 tons of plastic, which will be recyclable.

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Anand Trivedi;Nepean Capital LLP;Analyst, [34]

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Okay. So as far as you're concerned, you don't see that as much of a risk for the time being?

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Ravi Kant Jaipuria, Varun Beverages Limited - Non-Executive Chairman [35]

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So no. Even for the time being, we are not polluting the environment, and if we are collecting 100% there's no question of any pollution of the environment.

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Operator [36]

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Next question is from the line of Anand Shah from Axis Capital.

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Anand Kumar Shah, Axis Capital Limited, Research Division - SVP of Consumer [37]

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Just a few questions. So firstly, can you break this up 124.5 million cases into India and international business in terms of volumes?

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Unidentified Company Representative, [38]

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Yes, the growth, et cetera, (inaudible).

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Anand Kumar Shah, Axis Capital Limited, Research Division - SVP of Consumer [39]

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Growth areas, sir.

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Ravi Kant Jaipuria, Varun Beverages Limited - Non-Executive Chairman [40]

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What is the breakup you want?

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Anand Kumar Shah, Axis Capital Limited, Research Division - SVP of Consumer [41]

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The 124 million cases consolidated, how much was India out of that?

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Unidentified Company Representative, [42]

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Yes, India out of 124 million cases is 98.06 million cases. And the international in this is 68...

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Ravi Kant Jaipuria, Varun Beverages Limited - Non-Executive Chairman [43]

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No, 25 million cases.

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Unidentified Company Representative, [44]

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Sorry, 26.41 million cases.

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Ravi Kant Jaipuria, Varun Beverages Limited - Non-Executive Chairman [45]

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Yes.

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Unidentified Company Representative, [46]

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You want further breakout of this?

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Anand Kumar Shah, Axis Capital Limited, Research Division - SVP of Consumer [47]

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No. Of this 98.6 million cases I just want to know how much was from the newly acquired territories that we would have in this...

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Unidentified Company Representative, [48]

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Approximately 31.36 million cases.

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Anand Kumar Shah, Axis Capital Limited, Research Division - SVP of Consumer [49]

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31.6 million cases, so roughly 32 million cases of what you roughly will have in-house. Okay.

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Ravi Kant Jaipuria, Varun Beverages Limited - Non-Executive Chairman [50]

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See in this quarter, the international market becomes more skewed because the seasonality starts there. Whereas seasonality is finishing in the Indian market.

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Anand Kumar Shah, Axis Capital Limited, Research Division - SVP of Consumer [51]

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Right. Okay. Okay. This is on this side, okay. So -- okay. Sir, second question I had is on your tax rate, I mean, well there has been corporate tax rate cuts and you were on the higher side. You haven't availed of this benefit? Or it's not shown up in your numbers yet?

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Raj Pal Gandhi, Varun Beverages Limited - Whole-Time Director [52]

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Anand, we are evaluating this impact. Firstly, we have used our MAT tax credit available with us. We want to use that. Secondly, this year, we have put up a new plant at Pathankot and additional depreciation on that is available. We want to use that.

In the light of these 2 factors, we want to continue, at least for another roughly, roughly for 2 years on the earlier tax rates before switching over to the concessional tax rates announced by the Finance Minister.

And however, having said that, the advantage of 3.5% on the MAT tax rate reduction on the cash flow is already started available to the company, and you must have seen on the stand-alone accounts the tax effect for India is not there. It is -- there is no tax liability, which is coming because of the additional provision already carried out.

However, we are evaluating, I think next quarter, we will have a specific answer. Also in the light of the recommendation of the Institute of Chartered Accountants, where even if you are switching over after a period of 2 years, and the pro rata liability, deferred tax liability, if it can be deferred, and if so, how? So we are evaluating.

And I think by next quarter, we'll have specific answer that we will be able to provide you some more details.

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Anand Kumar Shah, Axis Capital Limited, Research Division - SVP of Consumer [53]

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Okay, okay. So for now, we should assume that the service rate continues to reflect on the P&L side.

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Raj Pal Gandhi, Varun Beverages Limited - Whole-Time Director [54]

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With 3.5% plus surcharge advantage and the cash flow. And in there, if we go by the issues guiding, after -- in the next quarter, let's wait till then, we will have definite answers.

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Anand Kumar Shah, Axis Capital Limited, Research Division - SVP of Consumer [55]

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Okay, okay. Perfect. And sir, one more thing on this subsidiary financial. I was looking at the other expenses, if you reduce that consol minus stand-alone as Vivek was suggesting on the gross. So on the other expenses, it has gone up by almost 40-odd-percent. So anything there to read into?

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Raj Pal Gandhi, Varun Beverages Limited - Whole-Time Director [56]

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This is basically ForEx reason for Zimbabwe on the $12 million impact. We have a dollar exposure of $42 million in Zimbabwe. Out of which $30 million deferred, Bank of Zimbabwe has undertaken and signed an agreement to undertake that. And no provision is made. The balance is the foreign exchange provision.

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Anand Kumar Shah, Axis Capital Limited, Research Division - SVP of Consumer [57]

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Okay, okay, okay. So that continues. Okay. And then lastly, sir, on this employee expenses, we've seen a sharp jump both in Y-o-Y and Q-on-Q. So can you highlight this?

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Raj Pal Gandhi, Varun Beverages Limited - Whole-Time Director [58]

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This is because of the new territories South and West and new plants of Pathankot and at Dharwad.

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Anand Kumar Shah, Axis Capital Limited, Research Division - SVP of Consumer [59]

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So this is the most sustainable level of run rate we should take?

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Raj Pal Gandhi, Varun Beverages Limited - Whole-Time Director [60]

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Yes, yes.

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Operator [61]

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Next question is from the line of Pritesh Chheda from Lucky Investment.

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Pritesh Chheda, Lucky Investment Managers Private Limited - Analyst [62]

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What would be the annualized volumes for Pepsi in CY '19 in the acquired territories?

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Raj Pal Gandhi, Varun Beverages Limited - Whole-Time Director [63]

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Basically, broadly, if you see India volume grew, 1/3, is the old territory versus new territory (inaudible).

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Pritesh Chheda, Lucky Investment Managers Private Limited - Analyst [64]

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Okay. But since you have consolidated for -- will be consolidating for only 3 quarters, could you help us quickly annualize volumes for Pepsi on that front?

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Raj Pal Gandhi, Varun Beverages Limited - Whole-Time Director [65]

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In fact, in the first year, there will be 60% of the PepsiCo because in the last call we have stated that PepsiCo volume was 135 million cases. And this year pro rata of that is about 60 percentage, which would become a big growth whatever [90], say 60% of that. And whatever -- for the growth we register on that will be added to...

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Pritesh Chheda, Lucky Investment Managers Private Limited - Analyst [66]

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For 130 million Pepsi -- will be 135 million cases annualized CY '19?

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Raj Pal Gandhi, Varun Beverages Limited - Whole-Time Director [67]

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The annualized is 135 million cases.

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Pritesh Chheda, Lucky Investment Managers Private Limited - Analyst [68]

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Right. And you would have...

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Raj Pal Gandhi, Varun Beverages Limited - Whole-Time Director [69]

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60% of that.

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Pritesh Chheda, Lucky Investment Managers Private Limited - Analyst [70]

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60% of that would have flowed in, so about 80, 100...

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Raj Pal Gandhi, Varun Beverages Limited - Whole-Time Director [71]

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Plus growth.

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Pritesh Chheda, Lucky Investment Managers Private Limited - Analyst [72]

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Yes. Secondly, on your growth outlook, organic basis for India. This year, you also highlighted about penetration -- sorry, distribution-led growth. Is it fair to assume that you'll continue to grow high double digits for couple of more years, considering the argument that you shared for CY '19 about distribution network?

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Ravi Kant Jaipuria, Varun Beverages Limited - Non-Executive Chairman [73]

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Well, we hope. But of course, we cannot commit, depending a lot of factors are here and other effects. But hopefully if things go well there's no reason, we've been showing consistent double-digit growth. We should continue in the same way.

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Pritesh Chheda, Lucky Investment Managers Private Limited - Analyst [74]

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Okay. And when we calculate the EBITDA per case this quarter, is it fair to assume that because of lower volumes seasonally, the EBITDA per case always was lower for the quarter versus the full year?

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Raj Pal Gandhi, Varun Beverages Limited - Whole-Time Director [75]

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This quarter is always lower than the main quarter, but it is higher than the last year.

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Pritesh Chheda, Lucky Investment Managers Private Limited - Analyst [76]

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There is nothing of realization, lower realization to play into the EBITDA number, right?

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Raj Pal Gandhi, Varun Beverages Limited - Whole-Time Director [77]

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See, EBITDA percentage does not change. The only thing is, over the last year, it does not change.

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Pritesh Chheda, Lucky Investment Managers Private Limited - Analyst [78]

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Lastly, I wanted to know the cash flow bridge for the calendar year '19. What is the CapEx that we would have incurred? What is the acquisition amount that you would have paid? What is the cash flow you would have generated? And the equity money, I know, is about INR 900 crores that you've raised.

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Raj Pal Gandhi, Varun Beverages Limited - Whole-Time Director [79]

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Yes, it's about INR 2,200 crores, including the PepsiCo's territory, net of INR 200 crores, which we got intact, about INR 1,600 crores here. Then Pathankot plant with the bottling (inaudible).

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Pritesh Chheda, Lucky Investment Managers Private Limited - Analyst [80]

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Sorry, sorry, sorry. INR 2,200 crores includes Pepsi plus the Aqua...

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Raj Pal Gandhi, Varun Beverages Limited - Whole-Time Director [81]

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Everything.

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Ravi Kant Jaipuria, Varun Beverages Limited - Non-Executive Chairman [82]

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That's the CapEx.

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Pritesh Chheda, Lucky Investment Managers Private Limited - Analyst [83]

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Pepsi plus the CapEx.

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Raj Pal Gandhi, Varun Beverages Limited - Whole-Time Director [84]

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Pepsi CapEx and Dharwad plant and Dharwad territory. Nagpur territory, and the one co-packer.

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Pritesh Chheda, Lucky Investment Managers Private Limited - Analyst [85]

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Sorry? One co-packer.

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Raj Pal Gandhi, Varun Beverages Limited - Whole-Time Director [86]

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Yes. So the (inaudible).

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Pritesh Chheda, Lucky Investment Managers Private Limited - Analyst [87]

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What would be the replacement CapEx in this? About INR 200 crores within this?

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Raj Pal Gandhi, Varun Beverages Limited - Whole-Time Director [88]

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Our replacement, basically, you are saying on the existing definitely, it should be around that.

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Pritesh Chheda, Lucky Investment Managers Private Limited - Analyst [89]

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Yes, Yes. And what is your cash flow that you would have generated from the operations in the 9 months?

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Raj Pal Gandhi, Varun Beverages Limited - Whole-Time Director [90]

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Last...

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Ravi Kant Jaipuria, Varun Beverages Limited - Non-Executive Chairman [91]

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9 months he is saying.

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Raj Pal Gandhi, Varun Beverages Limited - Whole-Time Director [92]

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Yes. Half yearly we gave it. And what you can see is that our debt has not gone up by INR 100 crores -- it's gone up just by INR 100 crores, and we have declared dividend on the enhanced capital also. Only INR 900 crores is out of the QIP, rest is from the internal approvals.

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Pritesh Chheda, Lucky Investment Managers Private Limited - Analyst [93]

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INR 900 crores minus INR 2,200 crores.

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Raj Pal Gandhi, Varun Beverages Limited - Whole-Time Director [94]

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INR 2,200 crores. It's INR 1,300.

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Pritesh Chheda, Lucky Investment Managers Private Limited - Analyst [95]

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INR 1,300 crores. Whatever was your EBITDA is your cash flow.

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Raj Pal Gandhi, Varun Beverages Limited - Whole-Time Director [96]

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It's coming to -- we have also declared dividend also. Paid the dividend also. In fact the tax payment comes basically in the Q4.

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Pritesh Chheda, Lucky Investment Managers Private Limited - Analyst [97]

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Okay, okay. So lastly, when you were giving your comments on the tax part, lower tax rate, you said that this year, you don't know. Next year, there can be...

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Raj Pal Gandhi, Varun Beverages Limited - Whole-Time Director [98]

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This also we don't know.

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Pritesh Chheda, Lucky Investment Managers Private Limited - Analyst [99]

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Sorry?

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Raj Pal Gandhi, Varun Beverages Limited - Whole-Time Director [100]

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Because we are evaluating in this quarter. And our year-end till the December. So at the time of December accounts, we would have evaluated all the guidelines of the institute and otherwise, and we will be forming up whether this excessive deferred tax liability of 9.61% because of the reduced tax rate, how we should treat it now, the P&L.

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Pritesh Chheda, Lucky Investment Managers Private Limited - Analyst [101]

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Okay. And you said that 3.5% benefit is possible. That's what you said, right?

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Raj Pal Gandhi, Varun Beverages Limited - Whole-Time Director [102]

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For that we have already started availing the cash flows. However, the deferred tax liability of that is already created by us.

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Pritesh Chheda, Lucky Investment Managers Private Limited - Analyst [103]

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Okay. Okay. And all your CapEx incrementally will be brownfield? Or there can be a...

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Raj Pal Gandhi, Varun Beverages Limited - Whole-Time Director [104]

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Most of them, yes.

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Pritesh Chheda, Lucky Investment Managers Private Limited - Analyst [105]

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Most of it will be brownfield.

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Raj Pal Gandhi, Varun Beverages Limited - Whole-Time Director [106]

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Yes, right. Because we have excess capacity. Even with 70% we are utilizing, so 70 -- 40% increase, 98%, [48 of 70]. So 40% we can grow at least 2, 2.5 years we have the capacity available with us.

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Pritesh Chheda, Lucky Investment Managers Private Limited - Analyst [107]

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And after that, you will have brownfield right in the same plants? See you said 2 years, you have the capacity available to grow. After that whatever capacity you need incrementally will be all brownfield at the same locations. That's how...

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Raj Pal Gandhi, Varun Beverages Limited - Whole-Time Director [108]

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Most of that...

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Ravi Kant Jaipuria, Varun Beverages Limited - Non-Executive Chairman [109]

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Most of it, yes. Most of it will be brownfield.

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Raj Pal Gandhi, Varun Beverages Limited - Whole-Time Director [110]

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In fact there will be various factors to be considered, nearness to the market, which particular, like, for example, Tropicana has been recently launched and let's say, in Pathankot, if it grows faster in south and trade is coming higher ahead of time, we may think of, at least, to match that. So there may be lot of factors on overall basis but even if we do this capacity, whatever we have, it may take one more year.

So this was capacity available, which is the given fact. So whether we do something somewhere ahead of time, go on by other local factors, but we will have to take a call once we reach near the time.

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Operator [111]

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We take the next question from the line of Dipan Mehta from Elixir Equities.

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Dipan Anil Mehta, Elixir Capital Limited - Chairman of the Board [112]

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This is Dipan Mehta from Elixir Equities. It's more of a macro question sir that has it ever been a situation where Coke or Pepsi have discontinued with a bottler anywhere globally? And what are the general terms and conditions under which such a disconnect or disassociation would take place?

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Raj Pal Gandhi, Varun Beverages Limited - Whole-Time Director [113]

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In fact in the last call, we all celebrated that for the first time in the world they have increased our existing bottling agreement for a period of 20 years, and also they rewarded us by transferring their own existing plants to us. And at least I can say about us, we don't carry any such risk, at least in the recent future.

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Dipan Anil Mehta, Elixir Capital Limited - Chairman of the Board [114]

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But globally, has there been a situation? If you can just give us some -- because the 20-year agreement, obviously, there'll be some sort of escape clause for them in case they want to...

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Ravi Kant Jaipuria, Varun Beverages Limited - Non-Executive Chairman [115]

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Dipan, there are escape clauses, in case I start doing competition business or start doing -- start preparing a product, which is not fit for the market, so those clauses are there. But otherwise, it is nowhere practically we have seen that they have really canceled the agreement, unless until somebody has really behaved contrary to the total agreement.

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Dipan Anil Mehta, Elixir Capital Limited - Chairman of the Board [116]

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So there are default...

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Ravi Kant Jaipuria, Varun Beverages Limited - Non-Executive Chairman [117]

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Especially with us, when their dependence is so high, especially in a country like India and 7 more countries -- 6 more countries, very difficult unless until you do something really stupid or something totally contradictory.

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Operator [118]

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Next question is from the line of [Tushar Chandrani] from Edelweiss.

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Unidentified Analyst, [119]

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All my questions have been answered.

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Operator [120]

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We take the next question from the line of Rajiv Gupta from RBC Financial.

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Rajiv Gupta, RBC Financial Services Private Limited - Director [121]

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Yes. I have 2 questions. One is the newspaper reports that your competition is selling bottling plants and distributorships to its franchises. What do you think will be the effect on margins and pricing, if this was to happen in the near future?

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Ravi Kant Jaipuria, Varun Beverages Limited - Non-Executive Chairman [122]

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I think for us, instead of competing with the parent company, we'll be competing with the bottlers. So it won't be much different. I think the rest -- it depends what policy and how they come up with once they have done the transaction.

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Rajiv Gupta, RBC Financial Services Private Limited - Director [123]

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Okay. My second question was, this provision on FX has been made? And I've asked this question on previous calls also in the past 2, 3 quarters in Zimbabwe. What is the cumulative -- and will somebody throw a little more light on what is this provision? What are we hedging against? Has there -- what is the total amount to the cumulative provision today? Are we -- has there actually been a mark-to-market loss, which is being moved from the provision to the P&L account? Just explain this provision.

And also if you go back a little to the past maybe 1 or 2 quarters you've been creating this provision, right -- if I -- my memory serves me right, this provision amount is probably cumulative $25 million or $30 million now. It's a large amount, what is it that we're doing? Or is it just conservative accounting?

And that's the question I'm asking.

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Raj Pal Gandhi, Varun Beverages Limited - Whole-Time Director [124]

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Yes. Mr. Gupta, I will explain this from the beginning. Total dollar exposure in that company is about USD 41 million, USD 42 million out of which USD 11 million, USD 12 million is, which is mark-to-market, which is against the current assets liabilities, et cetera, the difference of that, which is going to be P&L, and it's getting absorbed. And this quarter, the provision is (inaudible).

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Rajiv Gupta, RBC Financial Services Private Limited - Director [125]

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Sorry?

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Raj Pal Gandhi, Varun Beverages Limited - Whole-Time Director [126]

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This quarter, provision figure, which you are seeing, that the P&L debit you are seeing, this is adjustment of that foreign share, which is mark-to-market.

Yes. There is a second part to this, which is about USD 29 million, USD 30 million, which is the amount outstanding to the bank, which is a term liability.

And on this term liability, in the light of the Reserve Bank of Zimbabwe hedging the stake to us through an agreement at the original rate at which we had come in, now INR 137 crores provision, which we had made till June 2019 is not required. But we don't want to take it to P&L till this loan liability is fully discharged in the light of very much shortage in that country with the government.

So -- whatever provision we had done in the past, we have not touched upon that. We may not be requiring those? Yes. We may require that. But today, we are not sure because of the foreign currency situation in that country.

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Rajiv Gupta, RBC Financial Services Private Limited - Director [127]

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Got you. So if I may articulate that, what you're saying is that there is risk. Foreign exchange is volatile. And while your mark-to-market doesn't require you to provide that provision today as of the current exchange rate, you may need it because of the -- it's a volatile market. And therefore, you're not reversing it and putting it back into the P&L account?

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Raj Pal Gandhi, Varun Beverages Limited - Whole-Time Director [128]

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Very rightly understood.

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Rajiv Gupta, RBC Financial Services Private Limited - Director [129]

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And what is this quantum? Is it INR 137 crores.

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Raj Pal Gandhi, Varun Beverages Limited - Whole-Time Director [130]

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This is INR 137 crores. Right.

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Rajiv Gupta, RBC Financial Services Private Limited - Director [131]

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So if the foreign currency remains stable till the maturity of this obligation, then INR 137 crores would come back to the P&L account?

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Raj Pal Gandhi, Varun Beverages Limited - Whole-Time Director [132]

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Yes, we have about 2.5 years maturity for this. So we will start observing it after a year or so, once we find the reverse strength. We will be crediting this to P&L, if that required.

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Operator [133]

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We take the next question from the line of [Amish] from Joindre Capital.

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Unidentified Analyst, [134]

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Am I audible?

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Ravi Kant Jaipuria, Varun Beverages Limited - Non-Executive Chairman [135]

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Yes.

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Unidentified Analyst, [136]

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So my question is that we haven't seen a fall in realization in this quarter also. So is this -- can you see a increment from the realization in coming quarters? Or do we see a fall in realization or no?

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Raj Pal Gandhi, Varun Beverages Limited - Whole-Time Director [137]

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This should slightly go up as Tropicana, which was launched in whole of the country and the realization per case is higher as the mix of Tropicana goes up.

Secondly, the ambient temperature milk-based beverages, which have been launched, there, also, realization is higher, and they should slightly help increase in the realization per case higher.

As far as the water mix of the South and West is concerned, one more quarter till we complete the 1 complete year and make the base, you may see some realization for another 1 or 2 quarters.

So after that, we will steadily see the purchase realization going up on the one side.

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Unidentified Analyst, [138]

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Okay. And what would be the capacity for the new plant and production facilities that we have acquired during this quarter?

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Raj Pal Gandhi, Varun Beverages Limited - Whole-Time Director [139]

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This quarter, one is in (inaudible) that has only the water facility for the South, Tamil Nadu and Kerala.

Another is Karnataka and about 13, 14 places of Karnataka which we had acquired this year. This was acquired on 14th February this year.

We would be supplying from the same plant, but we were getting is co-packaged from the [East Royal Seller] but now we have acquired, and we don't have to pay the conversion fee on that plant.

And the capacity, this was more or less at a good facility, above 90% capacity utilization was being used in the peak month.

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Operator [140]

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We take the next question from the line of Yasmin Shah from Antique Stockbroking.

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Yasmin R. Shah, Antique Stockbroking Limited - VP of Institutional Sales [141]

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My question pertains to demand for Colas, if I'm not mistaken, you said it has gone up for you guys in this quarter. Could you elaborate more on that?

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Ravi Kant Jaipuria, Varun Beverages Limited - Non-Executive Chairman [142]

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So we have said that the growth which we are getting in the Indian subcontinent now, there were always a feeling that water sales are going up, which is not the case. Our carbonated beverages sales have shown a better growth than our water sales. So -- and we are seeing a 17% growth. Our carbonated beverages have grown at the same pace or better.

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Raj Pal Gandhi, Varun Beverages Limited - Whole-Time Director [143]

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So the blended this quarter growth over last year, [at 50, seems the same] organic has been 17.5%, while for the carbonated it is 19.3%.

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Yasmin R. Shah, Antique Stockbroking Limited - VP of Institutional Sales [144]

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And could you make -- elaborate in terms of what is driving this? I mean is it...

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Raj Pal Gandhi, Varun Beverages Limited - Whole-Time Director [145]

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This is basically because the new sub-territories of Odisha, Chhattisgarh, Jharkhand, Bihar, et cetera, which we have acquired, they are under-penetrated and they are in the rural.

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Ravi Kant Jaipuria, Varun Beverages Limited - Non-Executive Chairman [146]

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And also the rural expansion, which I have said in the rural markets where we are penetrating and going deeper with the power situation improving, has initially when power situation was bad as soon as the rain started, the markets used to shut down because there was no ice available and hot soft drink is very difficult to sell.

So that's some of the things which we are expanding and helping us grow the rural market.

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Yasmin R. Shah, Antique Stockbroking Limited - VP of Institutional Sales [147]

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Right. And do you -- I mean, do you foresee a similar trend going ahead, I mean, in terms of growth?

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Ravi Kant Jaipuria, Varun Beverages Limited - Non-Executive Chairman [148]

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Well, I hope so. I think the past situation in this country is going to keep on improving. And we are going to keep on penetrating deeper into the rural market.

So like we've had a -- we will have a good crop this year also. So there will be enough money in the rural market. So hopefully, we expect a good year next year.

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Yasmin R. Shah, Antique Stockbroking Limited - VP of Institutional Sales [149]

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Right. And like, if I have to compare in your existing territories, what would be the growth rates? I mean not adding any of the new territories, but in the existing markets alone, what could be the growth rate?

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Ravi Kant Jaipuria, Varun Beverages Limited - Non-Executive Chairman [150]

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We are growing approximately the same. So there has not been any major because each territory becomes our own territory. Because last year, what we acquired becomes our core territory now.

So it's only May 1, when we acquired the South and West, the rest has become our core directory.

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Yasmin R. Shah, Antique Stockbroking Limited - VP of Institutional Sales [151]

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And my last question pertains to international market. So these contracts are for how -- what's the duration? And like -- and how -- what are the terms in terms of pricing, et cetera?

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Ravi Kant Jaipuria, Varun Beverages Limited - Non-Executive Chairman [152]

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That each country has a different pricing, different number of years. So it's -- but fundamentally, the same. Once we have a long-term agreement with us for India, which is our base, the rest automatically fall in the line with that.

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Yasmin R. Shah, Antique Stockbroking Limited - VP of Institutional Sales [153]

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So if I have to see like next 5, 7 years down the line, how much of the India's contribution? Or how much do you see international going up for yours?

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Ravi Kant Jaipuria, Varun Beverages Limited - Non-Executive Chairman [154]

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Right now, both territories are growing reasonably at the same pace, slightly more or less. I mean this year, international has grown a little faster because of our adding Aquafina in Morocco.

But otherwise, the growth are about the same. So we are growing both territories in double digits.

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Yasmin R. Shah, Antique Stockbroking Limited - VP of Institutional Sales [155]

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No, in terms of breakup, 80-20...

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Raj Pal Gandhi, Varun Beverages Limited - Whole-Time Director [156]

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Should -- broadly, it should stay the same, with a couple of percentiles making small difference because some growing faster.

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Ravi Kant Jaipuria, Varun Beverages Limited - Non-Executive Chairman [157]

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But approximately around 80-20 would be the same breakup.

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Operator [158]

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We take the next question from the line of [Amish] from Joindre Capital.

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Unidentified Analyst, [159]

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So my question is that you do have a gross debt of INR 2,900 crores on the books. And do you have any plans to reduce the debt? Or do we see these levels maintaining in coming years.

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Raj Pal Gandhi, Varun Beverages Limited - Whole-Time Director [160]

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In fact, we have already taken steps and brought it to the last year's level while our EBITDA from INR 1,000 crores is already INR 1,300-plus crore and one quarter is still left.

So percentage-wise, we have already reduced, debt equity is less than 0.9. So I think for the time being we feel it's okay and healthier mix to -- because my ROC also has gone up this year.

So it will add to the shareholders' profits. So no point -- no plans at this moment for reduction of debt anymore by diluting.

Of course, there will be internal approvals in the coming years. And compared, definitely, it could come down.

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Operator [161]

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Ladies and gentlemen, that was the last question. I would now like to hand the floor back to the management for closing comments. Over to you.

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Raj Pal Gandhi, Varun Beverages Limited - Whole-Time Director [162]

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Thank you once again for your interest and support. We will continue to stay engaged, please be in touch with our Investor Relations team for any further details or discussions. Look forward to interacting with you all soon. Thank you very much. Thanks for participating.

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Operator [163]

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Thank you on behalf of Varun Beverages Limited we conclude today's conference. Thank you for joining. You may disconnect your lines now.