Losing fizz: Soft drinks industry may not achieve pre-pandemic levels this fiscal, says Crisil Ratings

The second wave of the pandemic has adversely hit the soft drinks industry and the sector is unlikely to reach the pre-pandemic levels in FY22, according to a report by Crisil Ratings. This is the second year in a row the carbonated drinks industry is facing a washed out summer season due to restrictions on out-of-channel in the country.

The report said even though the restrictions are less stringent, the full year revenue may end up being 10 per cent lower than pre-pandemic levels seen in FY20.

Nitesh Jain, Director, Crisil Ratings Ltd, “Beverages sales volumes will be adversely impacted in the peak season once again due to the localised lockdowns and restrictions on movement to contain the second wave of the pandemic. This will affect out-of-home consumption (hotels, restaurants and café segments, constituting 20-25 per cent of overall sales) of beverages the most in the first quarter.”

Dominant players

Beverage major Coca-Cola and PepsiCo dominate the non-alcoholic beverage segment in the country with a combined market share of 80 per cent and manufacturing operations are either company-owned or run by third-party bottlers.

The estimates are based on an analysis of 13 Crisil-rated bottlers of Pepsi and Coca-Cola, that account for over 50 per cent of the market. “Last fiscal, a strict nationwide lockdown and subsequent restrictions over April-September severely affected peak season demand as summer months alone account for two-thirds of annual cola sales. A redux looms now,” the report pointed out. Credit profiles of players, however, remain resilient because of their cost-control measures, strong balance sheets, and ample liquidity, the report said.

Rohan Kulshrestha, Associate Director, Crisil Ratings Ltd, said, “Increased proportion of high-margin carbonated soft drinks and cost-cutting measures will restrict the decline in operating profit to only 7 per cent compared with the pre-pandemic level. Additionally, debt reduction in the absence of any large capex would help bottlers support their credit profiles with a comfortable debt-to-Ebitda ratio of 2.4 times and interest cover upwards of 4 times this fiscal.”

Recovery seen in Q2

The ratings firm added that the industry is expected to start witnessing recovery from the second quarter as the surge in Covid infection seems to have peaked and the pace of vaccination is now picking up.

However, the industry has lost a major part of the peak summer season volumes. The report also raised concerns about the spread of the pandemic in rural regions and said that its impact will need to be monitored.