After subdued sales growth last fiscal, soft drink bottlers are poised to see revenue rebound to their long-term average growth of ~15% this fiscal, driven by hotter summers¹ - the summer months account for ~40% of overall sales-and deeper penetration into untapped domestic territories.

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. A sharp rise in crude prices due to the West Asia conflict has driven up packaging costs, too. 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.

Our analysis of 13 bottlers in the non-alcoholic beverage industry, which includes carbonated soft drinks (~70% of the market), juices (~12%) and packaged water (~18%), indicates as much.

Soft drink bottlers are poised for a strong volume rebound this fiscal driven by hotter summers and rising penetration. IMD predictions of above normal temperatures during summer along with possibility of El-Nino, which usually prolongs the summer months, is expected to boost consumption.

Says Shounak Chakravarty, Director, Crisil Ratings, "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 a healthy double-digit volume growth. The higher volume, coupled with 2-4% price hike in a competitive environment will help players revert to their long-term revenue growth trajectory."

The competitive landscape is also heating up as healthy, long-term prospects of the industry keeps attracting newer entrants. In addition to launching novel indigenous flavours, these newer entrants are targeting impulse purchases through popular price points such as Rs 10 and Rs 20 bottles. As a result, their market share has increased to an estimated 6-7% last fiscal, from ~2% in fiscal 2024.

Says Rucha Narkar, Associate Director, Crisil Ratings, "Intensifying competition, leading to reduced pricing flexibility amid rising crude-linked packaging costs (20-22% of overall cost), will cause a moderation in profitability this fiscal. 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%. 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."

Overall, cash flows will remain healthy for the players, allowing them to continue spending on expanding bottling capacities and increasing visi-coolers² at outlets, keeping capital expenditure (capex) intensity elevated. The capex intensity - which had surged last fiscal owing to acquisitions - will, however, be lower this fiscal. Consequently, aggregate debt/Ebitda³ and interest coverage ratios of players may improve to 0.9-1.0 time and 10-11 times, respectively, this fiscal, from 1.1 times and 9 times last fiscal.

In the road ahead, sustained elevated crude prices (which impact packaging costs) and adverse weather patterns will bear watching.

¹ The Indian Meteorological Department (IMD) has forecasted above-normal temperatures this summer, along with the possibility of El-Niño, which usually prolongs the summer months.
² Visi-cooler is a glass-door refrigerated display unit used in stores to showcase and keep beverages cold
³ Earnings before interest tax depreciation and amortisation