Dearer packaging trims Varun Beverages' margin even as drink volumes climb

Varun Beverages, which bottles and sells PepsiCo soft drinks, juices and packaged water in India, elsewhere in South Asia and in Africa, sold a great deal more in the September 2026 quarter, and kept less of each rupee. In its India standalone accounts, sales rose 24.7% from a year earlier while operating profit rose 16.6%, so the operating margin, operating profit as a share of sales, slipped to 24.0% from 25.7%. The company put the gap down to packaging: the plastic preforms that are blown into bottles, shrink film, caps and cans all became dearer after geopolitical disruption to supplies.

Demand is not what slipped. Volume grew 22.5% in India and 39.9% in the international business, which now includes the Twizza business it bought in South Africa. The change was on the cost side. Across the group, gross margin, what remains of revenue after materials, fell 334 basis points, and the company attributed about 300 of them to packaging; 100 basis points make one percentage point. The EBITDA margin, which measures earnings before interest, tax, depreciation and amortisation, fell by a smaller 140 basis points to 21.6%, because, the company said, the extra cases spread its fixed costs more thinly.

Why the margin fell now, rather than earlier in the year, is a matter of stock. When the disruption began, management told analysts it had bought enough packaging to be covered for the following three months, and the previous quarter's standalone margin came in slightly above the year before. That cover is now used up. Raj Gandhi, the company's president, said the materials being consumed now carry the higher oil-linked price in full.

Three months ago management said it could comfortably maintain its margins over the year, even with costs up internationally, while warning that the rest of the higher cost would reach the accounts in the quarter just reported. The group's EBITDA margin last quarter was lower than a year earlier; for the first nine months it was about 24.2%, calculated from the nine-month EBITDA and revenue the company reported, still above the 22%-23% a year that management cited in February as its guidance. The company's own defence is narrower: it said EBITDA margins in India were broadly stable over the first nine months of the year, helped by the strong first half.

What has not happened yet is a price increase. Varun Jaipuria, the vice chairman, said the company took no price and changed no pack size on its carbonated drinks last quarter; India realisation per case, revenue per case sold, rose only 0.5%, from richer mix, less discounting and pack changes. The one visible move is the energy drink Sting, cut from 300 ml to 250 ml. Jaipuria said there is talk across the industry, though not formally in its association, about what to do if prices stay high, and that changes to pack sizes and prices are slow to put through.

Timing makes that delay matter. Soft drinks are a summer business: in each of the last two calendar years, the first half of the calendar year earned about 70% of standalone operating profit. A cost that arrived in the off-season will, unless prices or packs change first, be carried through the months that decide the year.

There are reasons the bill could prove smaller than last quarter suggests. Peak quarters spread the company's fixed costs over far more cases than last quarter did, which cushions the EBITDA margin, though not the packaging cost on each case. Recycled PET makes up close to 25% of the mix, mostly made in-house, which the company said has helped offset the resin increase. Asked whether gross margin had touched bottom, Gandhi answered: "Based for the present price trends, we can broadly say yes." That answer rests on today's input prices holding, and it is a statement about the low point, not a forecast of where the margin settles when the summer season starts.