Alcohol Industry

Anand Rathi Share and Stock Brokers Limited, its affiliates and subsidiaries, do and seek to do business with companies covered in its research reports. Thus, investors should be aware that the firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision. Disclosures and analyst certifications are located in Appendix 1. Anand Rathi Research India Equities

India I Equities Consumer

Sector Report

Shirish Pardeshi+9122 6626 6730

[email protected]

Aniruddha Joshi +9122 6626 6732

[email protected]

18 April 2012

India Consumer – Alcoholic Beverages

Holding the fort

BSE FMCG: 4779

Nifty / Sensex: 5290/17358

18 April 2012 India Consumer - Alcoholic Beverages – Holding the fort

Anand Rathi Research

Snapshot of liquor industry in India

Liquor industry break-up

Beer13%

IMFL36%

Country liquor48%

Imported3%

Indian-made foreign liquor (IMFL) industry break-up

Whisky59%

White spirits5%

Brandy16%

Rum20%

Beer industry break-up

Standard45%

Strong54%

Premium1%

Per-capita consumption: IMFL

0

20

40

60

80

100

120

Aust

ralia

Rus

sia

Sout

h Af

rica

Arge

ntin

a

Braz

il

Mex

ico

Thai

land

Chi

na

Taiw

an

Hon

g Ko

ng

Philip

pine

s

Viet

nam

Mal

aysi

a

Indi

a

Egyp

t

Indo

nesi

a

(ltr/p.a./person)

Per-capita consumption: beer

0

20

40

60

80

100

120

140

Indi

a

Ger

man

y

New

Zea

land

Den

mar

k

Chi

na

(ltr/p.a./person)

Market share: IMFL and country liquor

0

20

40

60

80

100

FY04

FY05

FY06

FY07

FY08

FY09

FY10

FY11

IMFL Country liquor

(%)

Market share of IMFL companies

United Spirits53%

Radico12%

Jagatjit9%

Tilak Nagar4%

Mohan Meakins9%

Others13%

Market share of beer companies

UB50%

SAB Miler31%

Mohan Meakins6%

Others13%

Region-wise market structure: IMFL North12%

East9%

West30%

South49%

Source: Companies, Anand Rathi Research

Anand Rathi Share and Stock Brokers Limited does and seeks to do business with companies covered in its research reports. Thus, investors should be aware that the firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision. Disclosures and analyst certifications are located in Appendix 1 Anand Rathi Research India Equities

Consumer

Sector Report India I Equities

Key Data Globus Radico Tilaknagar

Rating Buy Buy Buy

Current price (`) 102 122 59

Target price (`) 170 161 74

M.Cap (US$m) 45 311 136

Upside (%) 67 32 25

Target PE (x) FY13e 7.0 20.0 13.0

FY11-14e EPS CAGR (%) 21.0 22.2 28.4

FY13e RoE 18.5 13.2 12.7

FY13e RoCE 23.0 14.1 14.8

FY13e PE (x) 4.2 14.9 11.0

Source: Company, Anand Rathi Research

Shirish Pardeshi+9122 6626 6730

[email protected]


[email protected]

18 April 2012


Holding the fort

Due to strong entry barriers and numerous taxes, existing liquor manufacturers are likely to enjoy undiminished strength over the medium to long term. Brands with a strong sub-segmentation strategy (expansion of product categories by leveraging brand strength) are expected to gain market share as, due to the ban on liquor ads, there are few ways to build new brands. However, pricing power in the face of volatile raw material costs is a concern, as state governments allow price hikes only once a year. Top picks: Tilaknagar & Globus Spirits.

Strong entry barriers protect incumbents. Several entry barriers exist for new companies and new brands. These include the ban on liquor ads, limited potential for stock-keeping units (SKUs), ‘import’ duties on inter-state transfer of molasses and liquor, limited distribution networks due to the various licenses required and stringent government controls.

Sub-segmentation to offset limited brand-building and volatile income trends. With limits on brand creation, companies are leveraging their existing brands with a sub-segmentation strategy. This also caters to consumers who are likely to change products to match volatile per capita income growth. We expect brands that have products at all price points and segments to do well.

Pricing power hit by volatile raw material cost & government curbs. Pricing power is a concern for the sector. Most state governments permit price hikes only once a year. The sector also faces progressive taxation, which further dissuades price hikes, as this attracts higher taxes. A few companies are using a premiumization strategy to pass on the volatile prices of molasses and glass, thereby improving realizations.

Stock calls. We initiate coverage on Radico Khaitan, Tilaknagar Industries and Globus Spirits with Buy ratings. Top picks: Tilaknagar (strong IMFL franchisee) and Globus Spirits (healthy balance sheet).

BSE FMCG: 4779

Nifty / Sensex: 5290/17358

18 April 2012 India Consumer – Alcoholic Beverages – Holding the fort

Anand Rathi Research 2


Holding the fort

Investment Argument and Valuation................................................3

Strong Entry Barriers........................................................................6

Sub-segmentation a Key Strategy ...................................................9

Pricing Power to be Weaker...........................................................11

Company Section...........................................................................15

Globus Spirits ............................................................................................16

Radico Khaitan ..........................................................................................33

Tilaknagar Industries .................................................................................49

Un-rated Companies .....................................................................64

Empee Distilleries......................................................................................65

Imperial Spirits...........................................................................................66

Mohan Meakins .........................................................................................67

Som Distilleries..........................................................................................68

United Breweries .......................................................................................69

United Spirits .............................................................................................70



Investment Argument and Valuation Due to strong entry barriers and numerous taxes, existing liquor players are likely to maintain their strong position in the market. Brands with a strong sub-segmentation strategy are likely to expand categories and brand strength, as brand-building methods are limited due to the ban on liquor advertisements. However, pricing power is a concern in the face of volatile raw material costs, as state governments allow price hikes only once a year. We initiate coverage on Radico Khaitan, Tilaknagar Industries and Globus Spirits with Buy ratings. Top picks: Tilaknagar (TP: `74; CMP: `59) due to its strong IMFL franchisee and Globus Spirits (TP: `170; CMP: `102) due to its healthy balance sheet.

Strong entry barriers protect incumbents

The ban on liquor advertising in India has helped domestic brands maintain market leadership. The ban has also helped regional players maintain a unique identity. Liquor companies can promote brands only at the point of sales. Many companies have got around the ban through surrogate advertising – a tactical vehicle for brand recall – of products such as mineral water, CDs and cassettes. However, brand creation through advertising is limited. Foreign brands, even if launched in India, are likely to have limited success, as brand creation is extremely challenging.

Further, registering brands with the military Canteen Stores Department (CSD), which accounts for 15% of overall liquor consumption, is a difficult process that takes around nine months. In addition, interstate transfer fees on molasses and liquor, and high state taxes are major hurdles in the creation of brands. The stringent norms for distribution as well as the restricted number of stock-keeping units are also effective entry barriers.

Sub-segmentation to offset limited brand-building & volatile income

There are limited ways to create brands in India’s liquor segment, as advertisements are banned. Restrictions on launching differentiated SKUs, and difficulties in expanding the distribution network restrict the creation of brands. Volatile per capita growth rates and inflation also result in consumers up-trading or down-trading. In this situation, we believe sub-segmentation is necessary to grow brand strength and attract consumers.

The advertising ban has created strong entry barriers in establishing

brands. This helps incumbents maintain their market share

Fig 1 – Market share of incumbents remains relatively intact due to strong entry barriers 2008

United Spirits48%

Radico10%

Jagatjit7%

Tilaknagar3%

Mohan Meakins7%

Others25%

2011

United Spirits53%

Radico12%

Jagatjit9%

Tilaknagar4%

Mohan Meakins9%

Others13%

Source: Companies



We expect brands with products at all price points and segments to do well.

A case in point is McDowell No.1, an established brand in whisky, which has launched regular products as well as premium products such as Single Malt and Platinum whisky. It has also launched Diet Mate for health conscious consumers. Rum and brandy are also sold under the umbrella branding of McDowell. Soda and packaged drinking water are also sold under McDowell, which helps in the branding exercise.

Price hikes limited to once a year

Liquor prices are determined by state governments once a year. Liquor companies can change prices once a year but are not permitted to alter these in the course of the year, irrespective of changes in raw material prices. The sector also faces progressive taxation, which dissuades price hikes, as it attracts higher taxes. States in which the government controls the liquor distribution networks account for 70% of liquor consumption in India. As a result, the pricing power of liquor companies is weak.

Unlike other consumer companies, liquor companies do not enjoy the advantage of correcting product prices based on raw material prices, media inflation, new launches, probable re-launches and competitive pressure. Further, mis-pricing in the case of liquor companies products cannot be covered by offering freebies or by managing trade margins and discounts.

A few companies are overcoming the price hike issue by using a premiumization strategy to pass on the volatile prices of molasses and glass, thereby improving realizations.

As consumers are upgrading from country liquor to IMFL and from regular to premium alcohol, we believe that brands with premiumization strategies will continue to do well.

Fig 2 – Example of premiumization: United Spirits Premium Mid-price Regular

Scotch Black Dog (12-yr) Black Dog (8-yr)

Whisky Royal Challenge, Signature, Antiquity

McDowell No.1, DSP Black

Bagpiper

Vodka Red Romanov Romanov, White Mischief

Rum McDowell Celebration, Old Cask

Brandy McDowell No.1, Honey Bee

Gin Blue Riband

Source: United Spirits

Valuation

We value the sector based on the average one-year-forward PE multiple over the past five years. Due to higher inflationary pressures and expectations of a slowdown in consumption, stocks have significantly underperformed the broader markets. As business fundamentals are strong, we expect company valuation multiples to be re-rated in the next one year.

Fig 3 – Sector valuation matrix CAGR (FY11-13e)

Company Price (`) M.Cap ($m) RoE (%) RoCE (%) Revenue (%) EPS (%) PE(x) FY13e

Globus Spirits 102 45 18.5 23.0 19.8 18.3 4.2

Radico Khaitan 122 311 13.2 14.1 17.8 18.5 14.9

Tilaknagar Inds 59 136 12.7 14.8 16.6 25.1 11.0

Source: Bloomberg, Anand Rathi Research



Stock calls

Globus Spirits: (Buy; CMP: `102; Target Price: `170)

A large part of Globus Spirits’ revenue arises from country liquor, which faces less competition and enjoys higher profitability. With the rural economy doing well, we expect organized country liquor players such as Globus Spirits to post strong earnings CAGR of 21% over FY11-14. We initiate coverage with a Buy rating and a price target of `170. We value the stock at a price target of `170, at a target PE of 7x FY13e earnings. Our target PE is on par with the average PE of the past three years.

Radico Khaitan: (Buy; CMP: `122; Target Price: `161)

Radico Khaitan’s earnings are driven by the strong capability to launch premium brands and support launches through its premiumization strategy. We expect 22% earnings CAGR over FY11-14. The company has a strong distribution network and has made inroads with the CSD in creating and supporting fresh launches. We initiate coverage with a Buy rating, and a price target of `161 at a target PE of 20x FY13e earnings. Our target PE is at a 40% discount to the past average PE of 35x. In the past three years, the stock has traded at an average PE of 21x.

Tilaknagar Industries: (Buy; CMP: `59; Target Price: `74)

With its focus on brandy, strong presence in the “government-controlled” southern states and its ties with the CSD, Tilaknagar Industries has strong profitability margins. We estimate 28% earnings CAGR over FY11-14, following its nationwide expansion. We initiate coverage with a Buy rating and a price target of `74. Our price target of `74 is based on a target PE of 13x FY13e earnings. Our target PE of 13x is at +1 standard deviation to the mean PE. Due to Tilaknagar’s aggressive investment in new products and new areas and the improved outlook for the medium term, we assign higher target multiples.

Key risks

Higher raw material prices

Entry of foreign players

Fig 4 – India liquor sector valuation matrix M.Cap RoE (%) RoCE (%) Revenue EPS CAGR PE (x) Div Yield

Company Price (`) (US$m) FY11 FY12e FY13e FY11 FY12e FY13e CAGR FY11-13(%) FY11-13 (%) FY11 FY12e FY13e FY12e (%)

Globus Spirits 102 45 19.3 17.3 18.5 22.0 21.5 23.0 19.8 18.3 5.8 5.3 4.2 1.0

Radico Khaitan 122 311 10.3 11.6 13.2 11.3 12.3 14.1 17.8 18.5 20.9 18.8 14.9 0.6

Tilaknagar Inds 59 136 12.4 11.1 12.7 13.2 12.9 14.8 16.6 25.1 17.2 13.7 11.0 1.4




Strong Entry Barriers Several entry barriers exist for new companies and brands. These include the ban on liquor advertising, limited number of SKUs, ‘import’ duties on the inter-state transfer of molasses and liquor, and stringent government norms regarding distribution networks. This protects incumbents from intense competition.

Ban on advertising

Advertising of liquor products is banned in India. Liquor companies can promote brands only at points of sale. Brand creation through advertising is limited, though some companies advertise mineral water, CDs and cassettes. The restriction on advertising has helped domestic brands maintain market leadership. It has also helped regional players maintain their unique identity. Foreign brands, even if launched in India, are likely to have limited success, as brand creation is extremely challenging.

Registering a brand with the CSD is difficult

Almost 15% of liquor sales takes place in the military’s CSD. To sell brands through CSD outlets requires prior registration, a process that takes close to nine months. Also, CSD outlets have stringent policies on quality, supply chains and distribution fee structures. In our view, if a company is not able to register a brand with the CSD, it would be unable to attract a large number of consumers. CSD is crucial for driving growth in south India, which accounts for 59% of liquor consumption in India.

Fig 6 – IMFL consumption: region-wise East11%

West15%

North15%

South59%

Source: Companies

Very high entry barriers have resulted in the market share of all

incumbents staying constant

Fig 5 – Market share relatively intact 2008

United Spirits48%

Radico10%

Jagatjit7%

Tilaknagar3%

Mohan Meakins7%

Others25%

2011

United Spirits53%

Radico12%

Jagatjit9%

Tilaknagar4%

Mohan Meakins9%

Others13%

Source: Companies



Inter-state transfer fees on molasses, a key raw material

Molasses is the key raw material in manufacturing liquor in India. Maharashtra and Uttar Pradesh account for over 50% of sugarcane production in India. However, most states have levied taxes on “import” of molasses. This results in far lower profitability for liquor manufacturers. We believe this acts a key entry barrier, since giving licenses to manufacture liquor is at the discretion of state governments.

Fig 7 – Sugarcane production across India

0

50,000

100,000

150,000

200,000

250,000

300,000

350,000

400,000

1951

1957

1963

1969

1975

1981

1987

1993

1999

2005

2011

('000 tonnes)

Source: Capitaline

Import duties on inter-state transfers

Selling liquor across states attracts higher excise duty. Liquor manufactured and sold within a state attracts lower excise duty. The higher excise duty on liquor from other states results in a higher price, which leads to lower off-take. Also, these ‘imports’ are allowed only through a quota system, which restricts the quantity being imported. As a result, almost all liquor manufacturers are compelled to set up distilleries in every state. Higher state taxes also result in higher prices.

Distribution is a key entry barrier

Distribution of liquor varies by state. In some states, such as Tamil Nadu, Kerala and Delhi, the government acts as distributor and markets it through its own shops. In Uttar Pradesh, Andhra Pradesh and Karnataka, distribution is semi-controlled by state governments. Governments act as distributors and the retail sector is not controlled. In other states, such as Maharashtra and Goa, distribution is free, as with any other consumer company such as Britannia Industries (biscuits), Colgate Palmolive India (toothpastes) or HUL (soaps).

Four state governments (Gujarat, Nagaland, Manipur and Mizoram) have banned the sale of liquor within their territories.



Fig 8 – Distribution structure in India Structure I: Distributor -- Government; Retail -- Government

Kerala

Tamil Nadu

Delhi

Structure II: Distributor – Government; Retail -- Free

Andhra Pradesh Orissa Uttar Pradesh

Bihar Rajasthan Karnataka

Chattisgarh Uttaranchal Bihar

Structure III: Distributor -- Free; Retail -- Free

Assam West Bengal

Daman Pondicherry

Goa Tripura

Jharkhand Maharashtra

States that have banned liquor

Gujarat

Manipur

Mizoram

Nagaland

Source: Companies

Limited SKUs result in slower distribution expansion

There are only five stock-keeping units (SKU) allowed in liquor. Market creation can be done through offering different pack sizes. For instance, smaller packs at affordable prices, smaller packs for new trials and to attract fresh consumers to a category; larger packs for loyal customers. Consumer companies can also launch gift packs as well as festival packs such as for Diwali. The prohibition against the launch of different SKUs has resulted in lower branding power.

Fig 9 – Limited SKUs allowed in liquor 1000ml Fourth-largest SKU

750ml Highest selling SKU

375ml Second-largest SKU

180ml Third-selling SKU

90ml Market creation – unsuccessful

Source: Companies



Sub-segmentation a Key Strategy With limited ways to create brands, we believe those companies with a strong sub-segmentation strategy are likely to enjoy stronger market share. Uptrading and downtrading due to changing income levels should result in consumers moving out of brands. We expect brands across price points and segments to continue to do well.

Limited ways to create brands

As advertising is banned in the sector, the creation of a new brand is difficult. The restriction on SKU sizes (limited to five SKU varieties) and the limited number of retail stores also hampers brand building.

Liquor companies can only advertise at the point of purchase (i.e. hotels or retail stores). Launching new brands also requires permission. The brand needs to be registered in every state and with the CSD. Consequently, the creation of new brands is difficult. Strong brand recall and building of brands is also difficult.

Liquor companies resort to surrogate advertising, by brand building through the launch of mineral water and soda. Some companies also launch cassettes and CDs, while others offer coasters, bottle openers and whisky glasses.

Fig 10 – Limitations on brand building Ban on advertising

Govt permission required to launch products & variants

Limited no. of SKUs

Brand registration required in every state as well as in the CSD

New pricing allowed only once in an year

No support possible through the distribution system (restricted distribution channels)

Source: Anand Rathi Research

Changing demographics to result in uptrading and downtrading

Changes in income levels are keeping the momentum of uptrading (as well as downtrading) intact. Per capita GDP growth was as low as 6% in FY02 and FY03, but rose to ~15% in FY07 and FY08. It is expected to fall to 12% in FY12 and FY13. Inflation has also remained volatile, in the range of -1% to 12% in the past four years. This results in volatile real income growth rates which impact the consumption patterns.

We believe such steep changes in income growth rates as well as inflation rates, should keep consumers uptrading – as well as downtrading. A range of products across one brand helps to maintain consumer loyalties, irrespective of changing income levels.

Due to the ban on advertising, the creation of new brands is difficult.

A sub-segmentation strategy of established brands is likely to drive

growth



Fig 11 – Volatile per-capita income growth rates

0

20,000

40,000

60,000

80,000

FY01

FY02

FY03

FY04

FY05

FY06

FY07

FY08

FY09

FY10

FY11

FY12

e

FY13

e

5

8

11

14

17

Per Capita GDP Growth (RHS)

(`) (%)

Source: Government of India, Anand Rathi Research

Sub-segmentation necessary to create brands

The launches of products across low, mid and premium price points allow companies to retain consumers by providing uptrading and downtrading possibilities. These also help companies grow without facing direct competitive pressures. Launches of products in niche segments or creation of new sub-segments using price band/ brand strengths also drive growth. Sub-segmentation helps rationalize price hikes. The launch of different products across rural and urban areas is also possible with a sub-segmentation strategy.

Example of McDowell No.1. McDowell No.1 is well-established in whisky, soda, water, brandy and rum. It has four variants in whisky as well.

Fig 12 – McDowell No.1: sub-segmentation strategy McDowell

Regular

Rum Brandy Other DrinksWhisky

Single Malt Platinum Diet Mate Water Soda Source: United Spirits



Pricing Power to be Weaker The pricing power of liquor companies is a concern for the sector. Most state governments allow price changes only once yearly. Progressive taxation also dissuades price hikes, since these would attract higher taxes. Companies with a premiumization strategy would be able to improve realizations when they pass on the volatile prices of molasses and glass bottles.

Prices allowed to be changed once a year

Liquor prices are decided by most state governments once every year. Once liquor companies decide prices, these cannot be altered in the course of the year, irrespective of changes in raw material prices. As states in which the government controls distribution account for 70% of the liquor consumption in India, this weakens the pricing power of liquor companies.

In contrast to other consumer companies, liquor companies cannot alter product prices in government-controlled markets based on raw material prices, media inflation, new launches, probable re-launches and competition. Further, mis-pricing cannot be covered by offering freebies or by managing trade margins and discounts.

Higher taxes negate much of the price hikes

Liquor companies are faced with issues such as progressive taxation. A product priced higher attracts a higher level of taxes.

We believe this dissuades companies from hiking prices aggressively as, apart from price hikes, higher taxes result in much higher MRPs for consumer companies. Different pricings according to SKU sizes are not permitted.

Raw material price volatility is higher

Prices of both the major raw materials – glass (for bottling) and molasses –are volatile. Molasses follow a yearly cyclical pattern in sync with the sugarcane crop. Grain-based extra neutral alcohol (ENA) are increasing in India, but are still in an infant stage and so not likely to make any impact. The price of glass is also volatile due to the volatility of the price as well as availability of silica. These changes in raw material prices make margins volatile for liquor companies.

Fig 13 – Lower packaging material costs HDPE (packaging material)

45

55

65

75

85

95

Aug-

07

Dec

-07

May

-08

Sep-

08

Feb-

09

Jul-0

9

Nov

-09

Apr-1

0

Sep-

10

Jan-

11

Jun-

11

Nov

-11

Mar

-12

(`/kg)

WPI of glass bottles

90

100

110

120

130

140

150

Apr-0

4

Aug-

04

Jan-

05

Jun-

05

Oct

-05

Mar

-06

Aug-

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Dec

-06

May

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Oct

-07

Feb-

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Jul-0

8

Nov

-08

Apr-0

9

Sep-

09

Jan-

10

Jun-

10

Nov

-10

Apr-1

1

Aug-

11

Jan-

12

Source: RIL, RBI



Fig 14 – WPI of molasses

50

80

110

140

Apr-0

4

Aug-

04

Jan-

05

Jun-

05

Oct

-05

Mar

-06

Aug-

06

Dec

-06

May

-07

Oct

-07

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Jul-0

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Nov

-08

Apr-0

9

Sep-

09

Jan-

10

Jun-

10

Nov

-10

Apr-1

1

Aug-

11

Jan-

12

Source: RBI

Higher working-capital investment

Apart from weaker pricing power, consumer companies face the challenge of working-capital investments. Debtor days are higher than that of other consumer companies, as collections from governments take longer. Payments from governments also depend on off-take from retail stores. Hence, retailers enjoy better bargaining power with liquor companies.

Brand-building activities can be created only at the point of sale and therefore the importance of retailers increases. Limited numbers of retail shops result in higher promotional spending on each store in order to put up merchandise to boost off-take.

Fig 15 – Higher working-capital investment

0

20

40

60

80

Radico Tilaknagar Globus

FY10 FY11

(%)


EBITDA margin hovering at around 14%

In the past decade, EBITDA margins of liquor companies have been hovering at around 14%. We believe the pricing of products has been done in a manner that allows such companies to maintain annual margins of around 14%. Those companies with better capital structure and efficient tax management do well, as there are limited triggers to drive profitability beyond 14-15%.



Fig 16 – EBITDA margins of liquor companies

7

10

13

16

19

22

25

FY07

FY08

FY09

FY10

FY11

Radico Tilaknagar Globus

(%)

Source: Companies, Anand Rathi Research

Premiumization extremely necessary to improve realizations

Premiumization is extremely necessary, as raising prices regularly is difficult. We believe companies with a strong premiumization strategy will be able to raise realizations without resorting to price hikes.

Considering that consumers are upgrading from country liquor to IMFL and from regular to premium alcohol, we believe brands with a premiumization strategy will continue to do well.

Fig 17 – Example of premiumization Premium Mid-price Regular

Scotch Black Dog (12-yr) Black Dog (8-yr)

Whisky Royal Challenge, Signature, Antiquity

McDowell No.1, DSP Black

Bagpiper

Vodka Red Romanov Romanov, White Mischief

Rum McDowell Celebration, Old Cask

Brandy McDowell No.1, Honey Bee

Gin Blue Riband

Source: United Spirits



Fig 18 – Liquor companies in India and major brands Company Whisky Rum Vodka Brandy Beer Gin

Empee Distilleries Old Secret, Victoria, Sixer

Napoleon

Globus Spirits County club Hannibal Rum Le' Mans White Lace

Imperial Spirits Glen Special, Gold Coast Malt

Black Magic, Hatrick Black Magic, Imperial Iceberg Premium

Imperial, Imperial Exclusive VSOP

Seagull London Dry

Mohan Meakins Summer Hall, Colonel's special, Golden Eagle

Old Monk Triple Crown, Doctor's Reserve No.1

Big Ben London

Radico Khaitan After Dark, 8PM Contessa Magic Moments Old Admiral, Morpheus

Som Distilleries Black Fort Hunter, Woodpecker

Tilaknagar Inds. Mansion House, Senate Royale

Madira XXX Rum Castle Club Mansion House Savoy Club

United Breweries Kingfisher, Zingaro, London Pilsner

United Spirits McDowell No.1, Bagpiper, Royal Challenge

McDowell Celebrations, Old Cask

Red Romanov, White Mischief

McDowell No.1, Honey Bee

Blue Riband

Source: Companies



Company section


Key financials (YE Mar) FY10 FY11 FY12e FY13e FY14e

Sales (`m) 2,650 3,813 4,600 5,469 6,505

Net profit (`m) 173 399 443 559 707

EPS (`) 8.7 17.4 19.3 24.4 30.9

Growth (%) (17.2) 99.7 10.8 26.2 26.6

PE (x) 11.7 5.8 5.3 4.2 3.3

PBV (x) 1.1 1.0 0.8 0.7 0.6

RoE (%) 23.4 19.3 17.3 18.5 19.5

RoCE (%) 23.2 22.0 21.5 23.0 24.3

Dividend yield (%) 1.0 1.0 1.0 1.0 1.0

Net gearing (%) (3.8) 17.9 13.4 7.4 (0.1)


Consumer

Initiating CoverageIndia I Equities


[email protected]

Shirish Pardeshi +9122 6626 6730

[email protected]

18 April 2012

Globus Spirits

Focus on high-growth country liquor, few organized peers; Buy

The strong performance of the rural economy is likely to positively impact Globus Spirits. A large part of the company’s revenue arises from country liquor, which faces less competition and enjoys higher profitability. We estimate robust earnings CAGR of 21% over FY11-14 and initiate coverage with a Buy rating and a price target of `170.

Niche play on country liquor. Globus Spirits is a niche play in the country liquor segment in India, which sees much lower competition than the IMFL (Indian-made foreign liquor) segment. With no new manufacturers entering this segment, we expect incumbents to maintain steady growth rates and profitability. Most companies in this field are local and do not have strong managements or financial bandwidth. This makes it easier for organized players like Globus to gain market share.

Rising rural economy drives growth. The increase in the MSP (minimum support price), greater allocations to the National Rural Employee Guarantee (NREGA) scheme and two good monsoons have raised the income of rural consumers and boosted consumption. Globus has a strong distribution network in rural areas and has placed its brands in the military’s Canteen Stores Department (CSD) distribution network.

Lower costs of country liquor protect profitability. The company’s country liquor products require very little ad-spend, as competition is less intense. Almost 75% of country liquor is sold in PET bottles. This reduces the cost of production as well as of distribution. As a result, Globus reports higher profitability than several IMFL manufacturers.

Valuation. We value the stock at a price target of `170, at a target PE of 7x FY13e earnings. Our target PE is on par with the average PE of the past three years. Risks. Changes in taxation or ban on sale of country liquor.

Rating: Buy Target Price: `170 Share Price: `102

Relative price performance

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Sensex

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Key data GBSL IN / GLOS.BO52-week high / low `158 / `87Sensex / Nifty 17358 / 52903-m average volume US$0.1m Market cap `2.3bn / US$45mShares outstanding 23m

Shareholding pattern (%) Dec ’11 Sep ’11 Jun ’11

Promoters 66.3* 59.9 59.9 - of which, pledged 0.0 0.0 0.0Free float 33.7 40.1 40.1 - Foreign institutions 2.9 4.3 3.9 - Domestic institutions 14.1 16.6 16.8 - Public 16.7 19.2 19.4*Acquisition of ADL’s liquor division- Issue of 3.24m shares

18 April 2012 Globus Spirits – Focus on high-growth country liquor, few organized peers; Buy


Quick Glance – Financials and Valuations Fig 1 – Income statement (`m) Year-end: Mar FY10 FY11 FY12e FY13e FY14e

Net revenues 2,650 3,813 4,600 5,469 6,505 Revenue growth (%) 34.0 43.9 20.6 18.9 18.9 - Op. expenses 2,281 3,219 3,834 4,523 5,342 EBITDA 369 595 767 947 1,163 EBITDA margin (%) 13.9 15.6 16.7 17.3 17.9 - Interest expenses 14 28 44 44 44 - Depreciation 46 71 115 139 162 + Other income 33 59 6 11 24 - Tax 170 155 172 217 275 Effective tax rate (%) 49.6 27.9 28.0 28.0 28.0 Reported cons. PAT 289 399 443 559 707 +/- Extraordinary items 117 - - - -+/- Minority interest - - - - -Adjusted cons. PAT 173 399 443 559 707 FDEPS (`/share) 8.7 17.4 19.3 24.4 30.9 Adj. FDEPS growth (%) (17.2) 99.7 10.8 26.2 26.6 Source: Company, Anand Rathi Research

Fig 3 – Cash-flow statement (`m) Year-end: Mar FY10 FY11 FY12e FY13e FY14e

Consolidated PAT 289 399 443 559 707 + Non-cash items 46 71 115 139 162 Cash profit 387 657 558 697 869 - Incr./(decr.) in WC (199) (217) 16 4 5 Operating cash flow 188 440 574 702 874 - Capex (722) (1,030) (498) (548) (598)Free cash-flow (534) (590) 76 154 276 - Dividend - - (27) (27) (27)+ Equity raised 750 - - - -+ Debt raised (36) 446 - - -- Investments - (1) - - -- Misc. items - - - - -Net cash-flow 180 (145) 49 127 249 + Op. cash & bank bal. 24 204 63 113 240 Cl. Cash & bank bal. 204 58 113 240 489 Source: Company, Anand Rathi Research

Fig 5 – Valuation chart (PE band)

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Fig 2 – Balance sheet (`m) Year-end: Mar FY10 FY11 FY12e FY13e FY14e

Share capital 198 230 230 230 230 Reserves & surplus 1,416 1,855 2,271 2,804 3,484 Net worth 1,614 2,085 2,501 3,034 3,714 Minority interest - - - - -Total debt 137 484 484 484 484 Def. tax liab. (net) 184 260 260 260 260 Capital employed 1,935 2,830 3,246 3,778 4,458 Net fixed assets 1,363 2,324 2,707 3,116 3,552 Investments 0 1 1 1 1 - of which, liquid 0 1 1 1 1 Net working capital 366 442 425 421 416 Cash and bank balance 206 63 113 240 489 Capital deployed 1,935 2,830 3,246 3,778 4,458 Net debt 115 680 631 504 254 WC (%) 13.8 11.6 9.2 7.7 6.4 Book value (`/sh) 91.0 102.4 120.6 143.8 173.5 Source: Company, Anand Rathi Research

Fig 4 – Ratio analysis @ `102 Year-end: Mar FY10 FY11 FY12e FY13e FY14e

P/E (x) 11.7 5.8 5.3 4.2 3.3 P/B (x) 1.1 1.0 0.8 0.7 0.6 EV/sales (x) 0.9 0.7 0.6 0.5 0.4 EV/EBITDA (x) 6.4 4.6 3.6 2.9 2.4 RoAE (%) 23.4 19.3 17.3 18.5 19.5 RoACE (%) 23.2 22.0 21.5 23.0 24.3 Dividend yield (%) 1.0 1.0 1.0 1.0 1.0 Dividend payout (%) 11.5 5.7 5.2 4.1 3.2 RM to sales (%) 61.1 58.2 57.2 56.6 56.0 Admin exps to sales (%) 7.5 6.7 6.7 6.7 6.7 EBITDA growth (%) 41.1 61.2 29.0 23.4 22.9 EPS growth (%) (17.2) 99.7 10.8 26.2 26.6 PAT margin (%) 6.5 10.5 9.6 10.2 10.9 Volume growth (%) - - - - -Realization growth (%) - - - - -Source: Company, Anand Rathi Research

Fig 6 – Revenue breakdown (FY11)

Country liquor47%IMFL franchisee

24%

Bulk alcohol15%

Branded IMFL8%

Other sales6%

Source: Company



Investment Argument and Valuation A large part of Globus Spirits’ revenue arises from country liquor, a segment that sees less competition and higher profitability. With the rural economy doing well, we expect organized country-liquor manufacturers such as Globus Spirits to post strong earnings CAGR of 21% over FY11-14. We initiate coverage with a Buy rating and a price target of `170.

Niche play on country liquor

There are no organized players in the country liquor segment in India. Strong liquor companies such as United Spirits or United Breweries focus on IMFL or beer. No multinationals are into country liquor. We believe that, as local manufacturers are small and regional, they lack the financial muscle or management bandwidth to create strong brands. This allows organized players such as Globus Spirits to gain from the low competitive pressure.

Developing brands in country liquor is extremely difficult for any new player, as setting up the distribution network and establishing relations with vendors is not easy. The lack of proper advertisement channels also results in lower brand-building activities.

Fig 7 – Liquor companies and sub-segments Players Imported liquor IMFL Beer Country liquor

Globus Spirits No Yes No Yes

United Spirits Yes Yes No No

United Breweries No No Yes No

Pernod Ricard Yes No No No

Radico Khaitan No Yes No Yes

Tilaknagar No Yes No No

Tiger Beer No No Yes No

Source: Companies

Growing rural economy

The rising per capita income of rural consumers is driving consumption levels. In India, per capita income has grown 13.5% over FY07-11, against 10.3% over FY01-07. Rising disposable income is driving growth of consumer products, including liquor. A good monsoon and an increase in government expenditure in rural areas would maintain the higher income levels and help sustain the growth in consumption.

Higher allocations to NREGA and the increase in minimum support prices are also driving the income levels of consumers.

Low competition is helping the company grow steadily while at the same time maintain profit margins



Fig 8 – Higher per-capita income of consumers

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Focus on low cost of operations

Globus focuses on low-cost production and distribution. The lower prices of raw materials, as well as of packaging, helps keep costs in check. Further, the lower expenditure on distribution, as well as limited brand-building activity, helps Globus maintain profit margins comparable to that of IMFL manufacturers, though at much lower realizations.

Fig 9 – Comparable EBITDA margins of IMFL players

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Radico Tilaknagar Globus United Spirits

(%)

Source: Companies

Valuations

We initiate coverage on Globus Spirits with a Buy rating and a price target of `170, valuing the stock at the mean PE of the past three years. The stock has quoted at the mean PE of 7x in the past three years and quotes at 5.3x now. We expect strong return ratios as well as robust 21% earnings CAGR over FY11-14. As a result, we expect the stock to be re-rated to the mean PE. At our target price and FY13e earnings, the stock would trade at a PE of 7x.



Fig 10 – Mean PE and standard deviation

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Risks


Increased competitive pressure

Change in taxes or ban on sale of country liquor.



Niche Play on Country Liquor Globus Spirits is a niche play on the country liquor segment in India, where competition is much lower than in IMFL. With no new manufacturers entering this segment, we expect incumbents to maintain steady growth rates and profitability. Most players in this segment are local and do not have strong management or financial bandwidth. This makes it easier for organized companies like Globus Spirits to gain market share.

Few organized players in country liquor

There are few regulated manufacturers in the country liquor segment in India. Strong liquor manufacturers such as United Spirits or United Breweries focus on IMFL or beer. No multinational company is into country liquor. We believe that, as local liquor companies are small and regional, they lack the financial muscle or management bandwidth to develop strong brands. This allows organized players such as Globus Spirits to gain from the lower competitive pressure.

Fig 11 – Liquor companies within segments Players Imported liquor IMFL Beer Country liquor

Globus Spirits No Yes No Yes

United Spirits Yes Yes No No

United Breweries No No Yes No

Pernod Ricard Yes No No No

Radico Khaitan No Yes No Yes

Tilaknagar No Yes No No

Tiger Beer No No Yes No

Source: Companies

Difficult for competition to develop new brands

We believe that, as country liquor is sold mainly in rural areas, it is difficult to develop a new brand. Lack of proper advertising channels and the lower possibility of surrogate advertising in rural areas limit the development of new brands. Those with established brands are likely to continue to do well in rural areas. We believe that Globus has developed strong brands in this segment and will continue to enjoy market leadership.

Fig 12 – Difficulties in creating brands in rural areas Lack of proper advertising channels

Lower possibility of surrogate advertising

Limited no. of shopkeepers makes it necessary to maintain strong ties with individual vendors/ shopkeepers

Separate branding required to cater to rural areas

Source: Company

Strong distribution network in country liquor

As country liquor products are marketed in rural areas, they require more investment in the distribution set-up. The lack of scale advantage also limits the scope for expansion in distribution network, as limited stocks are sold in a village. The combination of bumpy rural roads and glass bottles also result in higher losses. Establishing a distribution network for any new player would be difficult.

Few organized manufacturers of country liquor in India; MNCs are

not interested in the country liquor sub-segment



Fig 13 – Entry barriers to building a distribution network in rural areas High investment in logistics

Lack of scale advantages due to sparse population in rural areas

Bumpy roads and “normal” loss in transit

High investment in working capital

Source: Company

Expansion of IMFL brands to rural areas easier for Globus

With established brands and a distribution network, we believe it is easier for Globus Spirits to create IMFL franchisees in rural areas. As consumers are already aware of the company’s products and brands, up-trading is likely to be easier.

Globus started the IMFL business division in 1999. The company has also launched four brands – County Club, Le’ Mans, Hannibal and White Lace. It plans to leverage its distribution network in rural areas to grow the IMFL business.

Fig 14 – Strong country liquor brands

Source: Company



Growing rural economy The increase in minimum support price (MSP), greater allocations to the national rural employment guarantee scheme (NREGA) and two good monsoons have raised the income of rural consumers. We believe that this will boost consumption. Further, Globus has a strong rural distribution network, and has registered its brands with the CSD.

Higher per-capita income

The rise in per capita income of rural consumers is driving the growth in overall rural consumption levels. Per-capita income has grown 13.5% over FY07-11, against 10.3% over FY01-07. We believe a good monsoon and a rise in government expenditure will maintain income levels at higher levels and continue to drive growth in consumer products, including liquor.

Fig 15 – Higher per-capita income of consumers

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Increase in NREGA allocations

The greater allocation for NREGA schemes is raising the income levels of low-income rural consumers. NREGA allocations also act as a floor for remuneration to agricultural workers. We believe this is driving the income levels of agricultural workers and thereby rural consumption levels.

Fig 16 – Greater allocations for the NREGA

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Higher per-capita income in rural areas, higher allocations for the NREGA and rising disposal

incomes are expected to drive consumption in rural areas



Rising minimum support prices

Rising MSPs are driving up the prices of food-grains, but have also contributed to raising the income levels of rural consumers. Rice MSP has registered 11.7% CAGR over FY07-11, against 2.2% over FY01-06. Wheat MSP registered CAGR of 8.6% over FY07-11, against 2.8% over FY01-06. Even as MSPs move up to higher levels, they have resulted in rising income levels and should help fuel further consumption.

Fig 17 – Rising minimum support prices

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Improving infrastructure in rural areas

Improved infrastructure in rural areas is aiding the distribution of consumer products. In addition to road transport, we believe investment in cold chains by hoteliers and retail stores will fuel the availability of alcoholic beverages. The wider reach of the mass media too constantly pushes up aspiration levels and is a major reason behind brand awareness.



Lower Costs Protect Profitability Globus’ country liquor products require very little ad-spend as competition is less intense. Almost 75% of country liquor is sold in PET bottles. This reduces the cost of production as well as of distribution. As a result, Globus reports higher profitability than several IMFL manufacturers.

Focus on low cost of production

Globus Spirits focuses on low-cost production and distribution. Use of lower cost raw materials as well as packaging materials has helped hold costs in check. In addition, lower expenditure on distribution as well as fewer brand-building activities help Globus maintain profit margins comparable to that of IMFL manufacturers, though at much lower realizations.

Fig 18 – EBITDA margins comparable with IMFL players

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Radico Tilaknagar Globus United Spirits

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Lower cost of packaging materials

The cost of packaging for country liquor is lower than for IMFL. Country liquor is sold in PET bottles, IMFL in glass bottles. Plastic bottles are cheaper than glass and easier to distribute. The lower cost of packaging material helps the company maintain lower selling prices and still hold on to healthy profit margins.

The focus on low cost of production and packaging material is expected

to protect profit margins

Fig 19 – The price of glass is growing at a faster rate than that of packaging material HDPE HDPE (Packaging material)

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Lower brand-building expenditure

As competition is lower in country liquor, ad-spend too is lower. Country liquor brands do not require celebrity endorsements. We believe the ad-spend at the ‘point of sale’ is also much less for country liquor than for IMFL manufacturers. The need for surrogate advertising is also much lower for country liquor brands.

Fig 20 – Brand-building expenditure as % of net sales (FY11)

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Globus Tilaknagar Radico United spirits

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Source: Companies



Financials We expect Globus Spirits to report 19.5% revenue CAGR over FY11-14, with an EBITDA margin of around 17%. Due to the company’s strong operational performance, we estimate net profit CAGR of 21% over FY11-14. With its lower capex and working-capital requirements, we expect return ratios to improve.

Strong revenue growth ahead

We expect Globus Spirits to report revenue CAGR of 19.5% over FY11-14e, driven by the launch of products and brand extensions. We also expect geographical expansion and the sharper focus on IMFL to sustain the revenue growth momentum.

Fig 21 – Strong revenue growth likely

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EBIDTA margins to improve

We expect Globus to report an EBITDA margin of ~17% in the next three years, with a slight upward trend. We expect the company to manage any increase in costs through price hikes as well as a better revenue-mix. The rising revenue share of IMFL is expected to drive margins up in the long term.

Fig 22 – Improving EBITDA margin

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Steady net profit growth over FY11-14e

We expect 21% earnings CAGR over FY11-14. A strong operational performance should help the company maintain robust profit margins. Lower capex and working capital needs are likely to result in higher free cash flow generation as well as higher ‘other income’.

Fig 23 – Net profit and margins

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Return ratios to improve with lower capex

We expect the company to report a slight improvement in return ratios over FY11-14, due to lower investment in working capital and capex. However, as we do not anticipate any increase in dividend payouts, we expect the rising cash on its balance sheet to marginally reduce return ratios.

Fig 24 – Improving return ratios

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Fig 25 – Income statement (`m) Year-end: Mar FY10 FY11 FY12e FY13e FY14e

Gross sales 3,843 5,216 6,292 7,481 8,897

Less: excise duty 1,193 1,402 1,692 2,011 2,392

Net sales 2,650 3,813 4,600 5,469 6,505

Growth (%) 34.0 43.9 20.6 18.9 18.9

Expenditure

Cost of goods sold 1,620 2,220 2,633 3,095 3,644

Staff cost 45 67 83 98 117

Manufacturing expenses 416 674 810 963 1,145

Admin & selling exps 200 256 308 366 436

EBITDA 369 595 767 947 1,163

EBITDA margin (%) 13.9 15.6 16.7 17.3 17.9

Growth (%) 41.1 61.2 29.0 23.4 22.9

Depreciation 46 71 115 139 162

EBIT 323 523 652 808 1,002

Interest expense & bank exps 14 28 44 44 44

Other income 33 59 6 11 24

Profit before tax 342 554 615 776 982

Income taxes 170 155 172 217 275

Income tax rate (%) 49.6 27.9 28.0 28.0 28.0

Profit after tax 173 399 443 559 707

Share of profit from associates - - - - -

Pref. dividends/minority interest - - - - -

Profit before X/O 173 399 443 559 707

PAT margin (%) 6.5 10.5 9.6 10.2 10.9

Growth (%) 33.4 131.5 10.8 26.2 26.6

Extraordinary Items 117 - - - -

Profit for shareholders 289 399 443 559 707

Number of shares (m) 20 23 23 23 23

Earnings per share bef X/O (`) 8.7 17.4 19.3 24.4 30.9

Earnings per share aft X/O (`) 14.6 17.4 19.3 24.4 30.9





Sources of funds

Share capital 198 230 230 230 230

Reserves and surplus 1,416 1,855 2,271 2,804 3,484

Deferred tax liability 184 260 260 260 260

Net worth 1,798 2,346 2,762 3,294 3,974

Net worth net of rev. reserve 1,798 2,346 2,762 3,294 3,974

Secured loans 55 481 481 481 481

Unsecured loans 82 3 3 3 3

Total loans 137 484 484 484 484

Total 1,935 2,830 3,246 3,778 4,458

Application of funds

Fixed assets

Gross block 1,120 2,565 3,191 3,739 4,337

Less: depreciation 226 370 485 623 785

Net block 894 2,195 2,707 3,116 3,552

Capital WIP 469 129 - - -

Gross block-brand value 1,120 2,565 3,191 3,739 4,337

Goodwill - - - - -

Liquid investments 0 1 1 1 1

Other investments - - - - -

Current assets 1,133 1,265 1,458 1,755 2,206

Inventories 272 333 391 465 553

Sundry debtors 280 421 506 602 716

Cash & bank balances 206 63 113 240 489

Loans & advances 375 448 448 448 448

Current liabilities 561 760 920 1,094 1,301

Liabilities 561 760 920 1,094 1,301

Provisions - - - - -

Net current assets 571 505 538 661 905

Total 1,935 2,830 3,246 3,778 4,458



OCF before W/C changes 387 657 558 697 869

W/c changes (199) (217) 16 4 5

OCF after W/C changes 188 440 574 702 874

Cash flow from investing - - - - -

Capital expenditure (724) (1,032) (500) (550) (600)

Disposal 2 2 2 2 2

Investments - (1) - - -

Acquisitions - - - - -

Net cash used in investing (722) (1,031) (498) (548) (598)

Cash flow from financing - - - - -

Changes in share capital 750 - - - -

Changes in loans (36) 446 - - -

Dividends - - (27) (27) (27)

Net cash used in financing 714 446 (27) (27) (27)

Extraordinary items - - - - -

Changes in cash & equivalents 180 (145) 49 127 249

Opening cash & equivalents 24 204 63 113 240

Closing cash & equivalents 204 58 113 240 489

Free cash flow (534) (590) 76 154 276





Profitability ratios (%)

EBITDA margin 13.9 15.6 16.7 17.3 17.9

EBIT margin 12.2 13.7 14.2 14.8 15.4

PBT margin 12.9 14.5 13.4 14.2 15.1

PAT margin 6.5 10.5 9.6 10.2 10.9

Income tax rate 49.6 27.9 28.0 28.0 28.0

Excise duty rate 45.0 36.8 36.8 36.8 36.8

RoE 23.4 19.3 17.3 18.5 19.5

RoCE 23.2 22.0 21.5 23.0 24.3

Major costs as % of net sales

Cost of goods sold 61.1 58.2 57.2 56.6 56.0

Staff cost 1.7 1.8 1.8 1.8 1.8

Manufacturing expenses 15.7 17.7 17.6 17.6 17.6

Admin & selling exps 7.5 6.7 6.7 6.7 6.7

Per share data (`)

Earnings per share 8.7 17.4 19.3 24.4 30.9

Growth (%) (17.2) 99.7 10.8 26.2 26.6

Book value per share 91.0 102.4 120.6 143.8 173.5

Growth (%) 65.5 12.6 17.7 19.3 20.7

Dividend per share 1.0 1.0 1.0 1.0 1.0

Growth (%) n/a - - - -

Sales per share 134.1 166.5 200.9 238.8 284.0

Growth (%) (16.9) 24.2 20.6 18.9 18.9

Turnover ratios

Debtors turnover ratio 10.6 11.0 11.0 11.0 11.0

Current liabilities turnover ratio 21.2 19.9 20.0 20.0 20.0

Inventory turnover ratio 10.3 8.7 8.5 8.5 8.5

Fixed assets turnover ratio 51.4 60.9 58.8 57.0 54.6

Valuation ratios (x)

Price earnings 11.7 5.8 5.3 4.2 3.3

Price/book value 1.1 1.0 0.8 0.7 0.6

EV/sales 0.9 0.7 0.6 0.5 0.4

EV/EBITDA 6.4 4.6 3.6 2.9 2.4

Dividend yield (%) 1.0 1.0 1.0 1.0 1.0

Other ratios (%)

Net debt/equity (3.8) 17.9 13.4 7.4 (0.1)

FCF/EPS (309.8) (147.8) 17.1 27.5 39.0

OCF/sales 7.1 11.5 12.5 12.8 13.4

WC as % of net sales 13.8 11.6 9.2 7.7 6.4

Div payout ratio 11.5 5.7 5.2 4.1 3.2




Company Background & Management Established in 1993, Globus Spirits focuses on country liquor. Its main brands include Nimboo, Narangee, Ghoomar and Heer Ranjha. It recently entered the IMFL sub-segment.

Background

Established in 1993, Globus Spirits focuses on country liquor and IMFL. It is a market leader in three north Indian states (Rajasthan, Haryana and Delhi) in country liquor. Its major brands in country liquor are Nimboo, Narangee, Ghoomar and Heer Ranjha. It is also the contract manufacturer for the Officer’s Choice brand of Jagatjit Industries.

The company has recently begun focusing on IMFL. Its key IMFL brands are County Club whisky and Hannibal rum.

Fig 29 – Revenue break-up (FY11)

Country liquor47%IMFL franchisee

24%

Bulk alcohol15%

Branded IMFL8%

Other sales6%

Source: Company

Management background

Founder and managing director Ajaykumar Swarup is an IIM graduate, and has long experience in setting up liquor companies. He had earlier co-promoted Associated Distilleries. Another promoter, Shekhar Swarup, a Bradford University management graduate, with five years’ experience building brands in IMFL, is vice-president of the IMFL sub-segment. Bhaskar Roy, a chartered accountant with a Ph.D. in commerce, is chief financial officer.

Fig 30 – Key management Person Designation Role

Ajay Kumar Swarup Managing director Overall business operations

Shekhar Swarup Promoter IMFL division

Bhaskar Roy CFO Finance & secretarial

Source: Company

Globus Spirits focuses on country liquor – but is now expanding its

IMFL franchise



Sales (`m) 7,988 9,464 11,127 13,137 15,512

Net profit (`m) 415 773 858 1,086 1,411

EPS (`) 3.2 5.8 6.5 8.2 10.6

Growth (%) 127.4 85.1 11.0 26.4 29.9

PE (x) 38.7 20.9 18.8 14.9 11.5

PBV (x) 2.5 2.3 2.1 1.9 1.6

RoE (%) 9.2 10.3 11.6 13.2 15.1

RoCE (%) 10.5 11.3 12.3 14.1 16.4

Dividend yield (%) 0.5 0.6 0.6 0.7 0.7

Net gearing (%) 50.4 58.6 57.2 53.0 46.0


Consumer



[email protected]


[email protected]

18 April 2012

Radico Khaitan

Strong premiumization strategy, successful brand launches; Buy

Radico Khaitan has the second-largest distribution network in India and has made inroads into the military’s Canteen, Stores & Department to create and support its product launches. The company’s earnings are driven by its capability to launch new products/brands with a strong premiumization strategy. We estimate EPS CAGR of 22% over FY11-14. We initiate coverage with a Buy rating and a price target of `161.

Effective branding capability. Innovative packaging, celebrity endorsements and an effective communication strategy have helped Radico launch and build premium brands. The erstwhile country liquor company has launched successful brands such as 8PM, Old Admiral & Contessa.

Strong distribution network. Radico has the second-largest distribution network in India, after United Spirits. It sells through ~35,000 retail outlets that cater to almost 80% of India’s liquor consuming areas. It has also made inroads into the Canteen Stores Department (CSD). Considering the difficulty involved in establishing a distribution network that is quasi-controlled by the government, this forms a strong entry barrier to potential competition.

Strong range of brands. Radico has developed a range of strong brands across price points and SKUs. This allows it to tap consumers across income levels. The company has products across all types of liquor, except for beers and wines. It is also strong in the country liquor and industrial alcohol segments.

Valuation. We value the stock at a price target of `161, a target PE of 20x FY13e earnings. Our target PE is at a 40% discount to the past average PE of 35x. In the past three years the stock has traded at an average PE of 21x. Risk. Higher prices of molasses.



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Key data RDCK IN / RADC.BO52-week high / low `148 / `108Sensex / Nifty 17358 / 52903-m average volume US$0.9m Market cap `16.2bn / US$311mShares outstanding 133m

Shareholding pattern (%) Dec’11 Sep ’11 Jun ’11

Promoters 39.9 39.9 39.9 - of which, pledged 45.4 42.3 41.0Free float 60.1 60.1 60.1 - Foreign institutions 24.4 25.4 26.7 - Domestic institutions 14.0 15.3 14.8 - Public 21.7 19.4 18.6

18 April 2012 Radico Khaitan – Strong premiumization strategy, successful brand launches; Buy



Net revenues 7,988 9,464 11,127 13,137 15,512 Revenue growth (%) 18.0 18.5 17.6 18.1 18.1 - Op. expenses 6,654 7,905 9,294 10,881 12,715 EBITDA 1,334 1,559 1,833 2,256 2,797 EBITDA margin (%) 16.7 16.5 16.5 17.2 18.0 - Interest expenses 745 359 397 405 409 - Depreciation 256 271 314 375 422 + Other income 167 111 70 53 49 - Tax 84 267 334 443 605 Effective tax rate (%) 16.8 25.6 28.0 29.0 30.0 Reported cons. PAT 415 694 858 1,086 1,411 +/- Extraordinary items - (79) - - -+/- Minority interest - - - - -Adjusted cons. PAT 415 773 858 1,086 1,411 FDEPS (`/share) 3.2 5.8 6.5 8.2 10.6 Adj. FDEPS growth (%) 127.4 85.1 11.0 26.4 29.9 Source: Company, Anand Rathi Research


Consolidated PAT 415 694 858 1,086 1,411 + Non-cash items 256 271 314 375 422 Cash profit 760 1,125 1,172 1,461 1,833 - Incr./(decr.) in WC (881) (1,007) (479) (577) (682)Operating cash-flow (121) 118 693 884 1,151 - Capex (280) (540) (900) (950) (1,000)Free cash-flow (401) (421) (207) (66) 151 - Dividend (36) (92) (115) (123) (131)+ Equity raised 3,330 60 - - -+ Debt raised (2,542) 450 100 100 -- Investments (568) (246) 200 100 -- Misc. items 129 11 - - -Net cash-flow (87) (238) (23) 11 20 + Op. cash & bank bal. 420 332 94 71 82 Cl. Cash & bank bal. 332 94 71 82 103 Source: Company, Anand Rathi Research


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Share capital 264 265 265 265 265 Reserves & surplus 5,689 6,249 6,992 7,955 9,234 Net worth 5,952 6,514 7,257 8,220 9,500 Minority interest - - - - -Total debt 4,461 4,912 5,012 5,112 5,112 Def. tax liab. (net) 464 498 498 498 498 Capital employed 10,877 11,923 12,767 13,829 15,109 Net fixed assets 4,669 4,904 5,490 6,065 6,643 Investments 894 709 509 409 409 - of which, liquid 894 709 509 409 409 Net working capital 4,982 6,217 6,696 7,273 7,955 Cash and bank balance 332 94 71 82 103 Capital deployed 10,877 11,923 12,767 13,829 15,109 Net debt 3,699 4,607 4,929 5,118 5,098 WC (%) 62.4 65.7 60.2 55.4 51.3 Book value (`/sh) 48.7 52.9 58.5 65.8 75.4 Source: Company, Anand Rathi Research

Fig 4 – Ratio analysis @`122 Year-end: Mar FY10 FY11 FY12e FY13e FY14e

P/E (x) 38.7 20.9 18.8 14.9 11.5 P/B (x) 2.5 2.3 2.1 1.9 1.6 EV/sales (x) 2.5 2.1 1.8 1.5 1.3 EV/EBITDA (x) 15.1 13.0 11.1 9.0 7.3 RoAE (%) 9.2 10.3 11.6 13.2 15.1 RoACE (%) 10.5 11.3 12.3 14.1 16.4 Dividend yield (%) 0.5 0.6 0.6 0.7 0.7 Dividend payout (%) 19.0 12.0 11.6 9.8 8.0 RM to sales (%) 49.2 47.5 47.6 46.9 46.0 Admin exps to sales (%) 21.9 22.5 22.5 22.5 22.5 EBITDA growth (%) 135.9 16.9 17.5 23.1 24.0 EPS growth (%) 127.4 85.1 11.0 26.4 29.9 PAT margin (%) 5.2 8.2 7.7 8.3 9.1 Volume growth (%) - - - - -Realization growth (%) - - - - -Source: Company, Anand Rathi Research


IMFL50%

Country liquor24%

Subsidiary sales8%

Grain spirit4%

Pet bottles3%

Others3%

Silent spirits6%

Rectified spirits2%

Source: Company



Investment Argument and Valuation Its strong capability to launch premium brands and support launches with its premiumization strategy drives Radico Khaitan’s earnings. We expect 22% earnings CAGR over FY11-14. The company has a strong distribution network and has made inroads into the CSD to create and support fresh launches. We initiate coverage with a Buy, and a price target of `161, at a target PE of 20x FY13e earnings. Our target PE is at a 40% discount to the past average PE of 35x. In the past three years the stock has traded at an average PE of 21x.

Effective branding capability

Over the past 15 years, the company has showcased its ability to launch premium brands. In FY97 it launched its first brand, 8PM whisky, which became one of the fastest “millionaire” (Millionaire = 1m cases = 9m litre liquor) brands in India. It has also developed a strong presence in sub-segments such as rum and vodka. Its strong distribution network, inroads into the CSD, innovative packaging and effective usage of celebrity endorsements have helped it create strong brands. The company also spends more on brand-building activities than its competitors.

Over the past 10 years, the company has created strong brands like Old Admiral brandy, Contessa rum, Morpheus brandy and Magic Moments vodka.

Fig 7 – Strong liquor portfolio

Radico Khaitan

Country liquor

IMFL Industrial liquorWhisky

Rum

Brandy

Vodka Source: Company

Strong distribution network

Radico Khaitan enjoys a wide distribution network across India. It has a strong presence in north and east India and it is also present in west and south India. It operates through 35,000 retail outlets and almost 5,000 bars. After United Spirits, it has the widest network in India.

Range across segments

The company has a range of products across all types of liquor, except for beers and wines. It has regular and premium whiskies and has launched brandy, vodka and rum brands. It also operates in the country liquor and industrial liquor segments. The company sells molasses-based as well as grain-based liquors. The large range of brands across segments has helped it attract consumers across regions and income levels.

The company has been able to create strong brands across segments



Fig 8 – Strong presence across all liquor segments Product Brand Segment

8PM Regular

Whytehall Premium Whisky

After Dark Premium

Vodka Magic moments Premium

Old Admiral Regular Brandy

Morpheus Premium

Rum Contessa Regular

Source: Company

Valuation

We initiate coverage with a Buy rating, and a price target of `161, valuing the stock at the mean PE of the past three years. The stock has quoted at a mean PE of 20x in the past three years and quotes at 14x on FY13e earnings. As we expect strong return ratios and robust earnings CAGR of 22% over FY11-14, we expect the stock to be re-rated to the mean PE. At our target price and FY13e earnings, the stock would trade at a PE of 20x.


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Higher competitive pressures



Effective Branding Capability Innovative packaging, celebrity endorsements and an effective communication strategy have helped Radico build premium brands. An erstwhile country liquor company, it has now launched strong brands such as 8PM, Old Admiral and Contessa.

Range of strong brands

Over the past 15 years, the company has showcased its ability to launch premium brands. In FY97, it launched its first brand, 8PM, which was the fastest brand to acquire ‘millionaire’ status in India. It is also strong in sub-segments such as rum and vodka. A strong distribution network, inroads into the CSD, innovative packaging and an effective use of celebrity endorsements are factors that have helped the company create strong brands.

Fig 10 – Strong brands created over the past 10 years Product Brand Segment Year of launch

8PM Regular 1998

Whytehall Premium 2004Whisky

After Dark Premium 2010

Vodka Magic Moments Premium 2006

Old Admiral Regular 2002Brandy

Morpheus Premium 2009

Source: Company

Innovative packaging

The company has an innovative packaging strategy. It has launched products in bottles that have a completely different shape from that of competitors. We believe this strategy crucially differentiates the company’s products in the minds of consumers. The innovative packaging also works at the point of purchase. As liquor advertising is banned, product differentiation at the point of purchase is important.

Effective use of celebrity endorsements

The company has used celebrity endorsements to create brands. It has used “surrogate advertising” such as of water, soda, CDs or cassettes to create brands. The use of celebrity endorsements has proved to be more effective for Radico Khaitan than for its competition.

In a segment like liquor, the use of celebrity endorsements works well in attracting consumer attention, as the use of advertisements is banned.

Fig 12 – Brands and celebrities Brand Segment Celebrity

8PM Whisky Mallika Sherawat

Magic Moments Vodka Hrithik Roshan

Contessa Rum Arjun Rampal

Source: Company

The company has created a strong range of brands across all segments

Fig 11 – Innovative packaging

Source: Company



Higher investments to create premium brands

Radico’s current focus is on creating premium brands. Its recent launches (‘After Dark’ whisky and ‘Magic Moments’ vodka) are in the premium category. The company is also investing aggressively in the distribution of its brands. It has secured brand registration with the CSD, and has roped in leading celebrities to endorse these brands.

Radico is also investing heavily in vodka, as competition here is lower and the vodka sub-segment is growing faster than other liquor sub-segments.



Strong Distribution Network After United Spirits, Radico Khaitan has the second-largest distribution network in India. It sells in ~35,000 retail outlets catering to almost 80% of liquor consumers in India. It has also registered with the CSD. Considering the difficulty involved in establishing a distribution network that is quasi-controlled by the government, this is a considerable entry barrier to potential new competition.

Second-largest network in India

Radico Khaitan has a strong distribution network across India. It has a strong presence in north and east India, and is also present in west and south India. It operates through 35,000 retail outlets and almost 5,000 bars. After United Spirits, it has the widest distribution network in India.

Established distribution in quasi-government-controlled markets

In India, much of the distribution is controlled by the government. Selling products through specified retail stores is difficult. As every village may have just one or two liquor shops, establishing relationships is difficult. Radico Khaitan uses its own field force to ensure brand building, marketing and selling. It also invests in in-shop promotions. These have helped Radico gain market share over the years and establish strong brands.

Strong presence with the CSD as well

The CSD for defence forces accounts for ~15% of liquor consumption in India. Enrolling a brand with the CSD is a tedious process. It takes roughly 9-10 months to register brands with the CSD. Hiking prices, launching variants and newer designs of bottles also require various approvals. Radico Khaitan has been successful in registering all its brands with the CSD. Its strong ties with the CSD allow it to register variants as well as fresh launches.

Distribution network in India

The distribution network in India is controlled by the government. As it is extremely difficult for any entrant to establish a distribution network, we believe players, like Radico Khaitan, that have established networks will do better. The structure of the distribution network is given in Fig.13.

Radico Khaitan uses its own field force to ensure brand building,

marketing and selling. It also invests in in-shop promotions. These have helped Radico gain market share

over the years and establish strong brands



Fig 13 – Distribution structure in India Structure I: Distributor – Government; Retail – Government

Kerala

Tamil Nadu

Delhi

Structure II: Distributor – Government; Retail - Free

Andhra Pradesh Orissa Uttar Pradesh

Bihar Rajasthan Karnataka

Chattisgarh Uttaranchal Bihar

Structure III: Distributor – Free; Retail- Free

Assam West Bengal

Daman Pondicherry

Goa Tripura

Jharkhand Maharashtra

States that have banned liquor

Gujarat

Manipur

Mizoram

Nagaland

Source: Company



Strong Range of Brands Radico has developed a strong range of brands across price points and SKUs. It has products in all types of liquor except beers and wines. It is also strong in the country liquor and industrial alcohol segments. Its operations in several sub-segments allow it to tap consumers across income levels.

Range across segments

Radico has a range of products across all types of liquor, except for beers and wines. It has regular and premium whiskies and has launched brandy, vodka and rum products. It also operates in the country liquor as well as industrial alcohol segments. The company sells molasses- and grain-based liquors. Its large range of brands across segments helps attract consumers across regions and income levels.

Fig 14 – Presence across segments of alcoholic beverages

Radico Khaitan

Country liquor

IMFL Industrial liquorWhisky

Rum

Brandy

Vodka Source: Company

Products across all varieties of liquors

The company operates in all varieties of liquor. Its flagship brand is 8PM whisky and it has launched Contessa rum, Magic Moments vodka and Morpheus brandy. It also recently entered the premium whisky sub-segment through its ‘After Dark’ whisky launch. We believe its operations in all types of liquors help it target consumers across segments.

Fig 15 – Across all forms of liquor Product Brand Segment

8PM Regular

Whytehall Premium Whisky

After Dark Premium

Vodka Magic Moments Premium

Old Admiral Regular Brandy

Morpheus Premium

Rum Contessa Regular

Source: Company

Strong presence in country and industrial alcohols

Twenty-four percent of Radico’s revenues arise from country liquor, which helps it tap low-income consumers and those in rural India. It has had a strong presence in country liquor for more than 30 years. This has helped it build up a strong distribution network. Further, ~12% of its revenue is from industrial alcohol. This absorbs excess capacity.

Twenty-four percent of Radico’s revenues arise from country liquor, which helps it tap low-income and

rural consumers



Focus on regular and premium sub-segments

The company’s focus has been on products in the regular and premium sub-segments, which enjoy higher realizations than other sub-segments. It is now investing in brand building in these segments. We believe that more investment in these segments would help it target premium consumers and help gain market share at those premium levels.

Range of products of competitors

Radico’s range of brands is larger than that of most competitors. Some of the latter do not have premium liquors; others do not have country liquor or industrial alcohol. Radico Khaitan has a wide and diversified range across liquors and brands.

Fig 16 – Stronger and weaker segments of competitors Company Strong areas Weaker areas

United Spirits Whisky, vodka Country liquor

Tilaknagar Brandy Country liquor

Globus Spirits Country liquor IMFL

Source: Companies



Financials Radico is likely to report 18% revenue CAGR over FY11-14, led by strong volume growth. We expect stable EBITDA margin for the next two years, as a steep rise in the prices of raw materials is not likely. We estimate 22.2% net profit growth over FY11-14 and expect return ratios to improve due to better working-capital management.

Strong revenue growth likely

We estimate 18% revenue CAGR over FY11-14, driven by product launches and brand extensions. Geographical expansion and the sharper focus on IMFL is likely to sustain Radico’s revenue growth momentum.


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EBITDA margin is likely to be steady at ~17% over the next three years. We expect the company to manage any rise in raw material costs through price hikes and a better revenue mix. The rising revenue share of IMFL is expected to improve long-term margins.

Fig 18 – Stable EBITDA margins

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Steady net profit growth expected

We expect Radico to register 22.2% earnings CAGR over FY11-14. Its strong operational performance should help maintain strong profit margins. Lower capex and working capital requirements are likely to result in higher free cash-flow generation as well as higher ‘other income’.

Fig 19 – Net profit and growth

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Gross sales 14,813 17,423 20,485 24,184 28,556

Less: excise duty 6,457 7,459 8,769 10,353 12,225

Less: sales tax 368 500 588 695 820

Net sales 7,988 9,464 11,127 13,137 15,512

Growth (%) 18.0 18.5 17.6 18.1 18.1

Expenditure


Staff cost 540 620 729 860 1,016

Power & fuel 218 345 401 473 558

Carriage & freight 222 312 367 434 512

Advt & sales promotion 947 1,259 1,480 1,747 2,063

Other expenses 800 875 1,024 1,209 1,427

EBITDA 1,334 1,559 1,833 2,256 2,797

EBITDA margin (%) 16.7 16.5 16.5 17.2 18.0

Growth (%) 136 17 18 23 24

Depreciation 256 271 314 375 422

EBIT 1,078 1,288 1,519 1,881 2,375


Other income 167 111 70 53 49

Profit before tax 499 1,040 1,192 1,529 2,015

Income taxes 84 267 334 443 605

Income tax rate (%) 16.8 25.6 28.0 29.0 30.0

Profit after tax 415 773 858 1,086 1,411



Profit before X/O 415 773 858 1,086 1,411

PAT margin (%) 5.2 8.2 7.7 8.3 9.1

Growth (%) 192.6 86.2 11.0 26.4 29.9

Extraordinary items - (79) - - -

Profit for shareholders 415 694 858 1,086 1,411








Sources of funds

Share capital 264 265 265 265 265



Net worth 6,416 7,012 7,755 8,717 9,997


Secured loans 2,449 3,398 3,398 3,498 3,498

Unsecured loans 2,012 1,514 1,614 1,614 1,614

Total loans 4,461 4,912 5,012 5,112 5,112

Total 10,877 11,923 12,767 13,829 15,109


Fixed assets

Gross block 5,505 5,728 7,343 8,293 9,293

Less: depreciation 1,366 1,539 1,853 2,228 2,650

Net block 4,139 4,189 5,490 6,065 6,643

Capital WIP 530 715 - - -

Gross block- brand value 5,505 5,728 7,343 8,293 9,293

Goodwill - - - - -



Current assets 6,770 8,063 8,826 9,786 10,927

Inventories 1,230 1,275 1,502 1,773 2,094

Sundry debtors 2,356 3,191 3,750 4,427 5,227


Loans & advances 2,851 3,503 3,503 3,503 3,503

Current liabilities 1,455 1,752 2,059 2,430 2,870

Liabilities 976 1,153 1,358 1,603 1,892

Provisions 479 598 701 828 977

Net current assets 5,315 6,311 6,768 7,356 8,057

Total 10,877 11,923 12,767 13,829 15,109



OCF before W/C changes 760 1,125 1,172 1,461 1,833

W/c changes (881) (1,007) (479) (577) (682)

OCF after W/C changes (121) 118 693 884 1,151


Capital expenditure (283) (627) (900) (950) (1,000)

Disposal 3 87 - - -

Investments (568) (246) 200 100 -


Net cash used in investing (847) (786) (700) (850) (1,000)


Changes in share capital 3,330 60 - - -

Changes in loans (2,542) 450 100 100 -

Dividends (36) (92) (115) (123) (131)

Net cash used in financing 752 418 (15) (23) (131)

Extraordinary items 129 11 - - -

Changes in cash & equivalents (87) (238) (23) 11 20



Free cash flow (401) (421) (207) (66) 151






EBITDA margin 16.7 16.5 16.5 17.2 18.0

EBIT margin 13.5 13.6 13.7 14.3 15.3

PBT margin 6.3 11.0 10.7 11.6 13.0

PAT margin 5.2 8.2 7.7 8.3 9.1

Income tax rate 16.8 25.6 28.0 29.0 30.0

Excise duty rate 80.8 78.8 78.8 78.8 78.8

Sales tax rate 4.6 5.3 5.3 5.3 5.3

RoE 9.2 10.3 11.6 13.2 15.1

RoCE 10.5 11.3 12.3 14.1 16.4



Staff cost 6.8 6.5 6.6 6.6 6.6

Power & fuel 2.7 3.6 3.6 3.6 3.6

Carriage & freight 2.8 3.3 3.3 3.3 3.3

Advt & sales promotion 11.9 13.3 13.3 13.3 13.3

Other expenses 10.0 9.2 9.2 9.2 9.2

Per share data (`)


Growth (%) 127.4 85.1 11.0 26.4 29.9


Growth (%) 87.6 8.7 10.6 12.4 14.7


Growth (%) 100.0 16.7 7.1 6.7 6.3

Sales per share 60.6 71.4 83.9 99.1 117.0

Growth (%) (8.3) 17.8 17.6 18.1 18.1

Turnover ratios (%)





Valuation ratios (%)

Price earnings 38.7 20.9 18.8 14.9 11.5

Price/book value 2.5 2.3 2.1 1.9 1.6

EV/sales 2.5 2.1 1.8 1.5 1.3

EV/EBITDA 15.1 13.0 11.1 9.0 7.3

Dividend yield (%) 0.5 0.6 0.6 0.7 0.7

Other ratios (%)

Net debt/equity 50.4 58.6 57.2 53.0 46.0

FCF/EPS (96.5) (54.5) (24.2) (6.1) 10.7

OCF/sales (1.5) 1.2 6.2 6.7 7.4

W/C as % of net sales 62.4 65.7 60.2 55.4 51.3

Div payout ratio 19.0 12.0 11.6 9.8 8.0




Company Background & Management Radico Khaitan is one of the oldest liquor companies in India, and operates in country liquor, IMFL and industrial alcohols, while also launching premium liquor products. Chairman and managing director Dr Lalit Khaitan looks after the overall business. Managing director Abhishek Khaitan handles the IMFL division.

Background

Established in 1943, Radico Khaitan is India’s oldest alcoholic beverage company. It had entered the IMFL segment in 1999 with the launch of its flagship brand, 8PM. After 8PM brand, it has launched successful brands such as Old Admiral, Contessa rum, After Dark whisky, Morpheus brandy and Magic Moments vodka. It plans to be a major player in IMFL and focuses on premium products.


IMFL50%

Country liquor24%

Subsidiary sales8%

Grain spirit4%

Pet bottles3%

Others3%

Silent spirits6%

Rectified spirits2%

Source: Company

Management

Chairman and managing director Dr Lalit Khaitan looks after the overall administration. He has five decades of experience in the Indian liquor industry. Managing director Abhishek Khaitan handles the IMFL division. He was instrumental in creating it and in launching fresh brands and products. A chartered accountant by profession, Dilip Banthiya is the CFO. Director K.P. Singh looks after production.


Lalit Khaitan Chairman & managing director Overall business management

Abhishek Khaitan Managing director IMFL division

Dilip Banthiya CFO Finance and secretarial

K P Singh Director Production activities

Source: Company

Radico Khaitan is one of the oldest companies in liquor in India and is strongly represented across segments



Sales (`m) 3,808 4,623 5,386 6,288 7,343

Net profit (`m) 349 396 496 645 877

EPS (`) 3.6 3.4 4.3 5.4 7.3

Growth (%) (6.3) (4.6) 25.3 24.9 36.0

PE (x) 16.4 17.2 13.7 11.0 8.1

PBV (x) 2.7 1.6 1.5 1.3 1.1

RoE (%) 19.2 12.4 11.1 12.7 14.8

RoCE (%) 15.5 13.2 12.9 14.8 17.3

Dividend yield (%) 1.4 1.4 1.4 1.4 1.4

Net gearing (%) 196.9 97.7 81.5 53.2 35.5


Consumer



[email protected]


[email protected]

18 April 2012

Tilaknagar Industries

Strong position in the south, expansion into north & east; Buy

Well established within the military’s Canteen Stores Department (CSD) and in the southern states where distribution is government-controlled, Tilaknagar Industries commands strong profit margins. The company plans to leverage its strong position in the south to expand nationwide. We expect 28% earnings CAGR over FY11-14 and initiate coverage with a Buy rating and a price target of `74.

The brandy focus. Tilaknagar focuses on brandy in south India, with a market share of between 40% to 97% across the southern Indian states. It has a strong sub-segmenting strategy in its major brand, Mansion House, which pulls in consumers across price points.

Nationwide expansion. With ~80% of its revenue generated in south India, Tilaknagar now plans to expand nationwide in order to dilute its concentration risk. Aggressive brand launches, leased units and tie-ups are targeted to help the company acquire marketshare nationally. Further, its acquisition of infra consulting firms is expected to drive internal expansion capabilities.

Cost-cutting measures raise profitability. The company has initiated cost-cutting steps such as recycling 40% of bottles (to rise to 60% in three years). In addition, distribution costs and media spend are lower in the south, since a large part of distribution is state government controlled and Tilaknagar’s brands are well entrenched.

Valuation. Our price target of `74 is based on a target PE of 13x FY13e earnings. Our target PE is at +1 standard deviation to the mean PE. Due to Tilaknagar’s aggressive investment in new products and newer areas and the improved outlook for the medium term, we assign higher target multiples to the stock. Risk. Higher molasses prices.



TLNGR

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Source: Bloomberg

Key data TLNGR IN / TILK.BO52-week high / low `69 / `28Sensex / Nifty 17358 / 52903-m average volume US$0.9m Market cap `7.1bn / US$136mShares outstanding 120m

Shareholding pattern (%) Dec ’11 Sep’11 Jun ’11


18 April 2012 Tilaknagar Industries – Strong position in the south, expansion into north & east; Buy



Net revenues 3,808 4,623 5,386 6,288 7,343 Revenue growth (%) 57.2 21.4 16.5 16.7 16.8 - Op. expenses 3,008 3,487 4,095 4,781 5,590 EBITDA 800 1,136 1,291 1,507 1,753 EBITDA margin (%) 21.0 24.6 24.0 24.0 23.9 - Interest expenses 236 388 364 329 267 - Depreciation 71 131 185 204 208 + Other income 46 26 20 17 71 - Tax 190 248 267 347 472 Effective tax rate (%) 35.2 38.5 35.0 35.0 35.0 Reported cons. PAT 349 396 496 645 877 +/- Extraordinary items - - - - -+/- Minority interest - - - - -Adjusted cons. PAT 349 396 496 645 877 FDEPS (`/share) 3.6 3.4 4.3 5.4 7.3 Adj. FDEPS growth (%) (6.3) (4.6) 25.3 24.9 36.0 Source: Company, Anand Rathi Research


Consolidated PAT 349 396 496 645 877 + Non-cash items 71 131 185 204 208 Cash profit 48 62 681 848 1,085 - Incr./(decr.) in WC (177) (108) (100) (142) (167)Operating cash-flow (129) (46) 581 706 918 - Capex (205) (107) (100) (100) (100)Free cash-flow (334) (153) 481 606 818 - Dividend (10) (11) (107) (111) (111)+ Equity raised 38 172 - 352 -+ Debt raised 328 (17) (400) (400) (1,000)- Investments (0) (1) - - -- Misc. items - - - - -Net cash-flow 22 (10) (26) 447 (294)+ Op. cash & bank bal. 5 27 166 140 587 Cl. cash & bank bal. 27 17 140 587 293 Source: Company, Anand Rathi Research


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Share capital 326 1,250 1,250 1,298 1,298 Reserves & surplus 1,701 2,811 3,199 4,037 4,802 Net worth 2,027 4,061 4,449 5,335 6,100 Minority interest - - - - -Total debt 4,494 4,333 3,933 3,533 2,533 Def. tax liab. (net) 120 199 199 199 199 Capital employed 6,641 8,593 8,582 9,067 8,833 Net fixed assets 3,745 4,714 4,628 4,525 4,417 Investments 3 3 3 3 3 - of which, liquid 3 3 3 3 3 Net working capital 2,627 3,710 3,810 3,952 4,119 Cash and bank balance 266 166 140 587 293 Capital deployed 6,641 8,593 8,582 9,067 8,833 Net debt 4,345 4,363 3,989 3,142 2,436 WC (%) 69.0 80.2 70.7 62.9 56.1 Book value (`/sh) 22.1 37.0 40.3 46.1 52.5 Source: Company, Anand Rathi Research


P/E (x) 16.4 17.2 13.7 11.0 8.1 P/B (x) 2.7 1.6 1.5 1.3 1.1 EV/Sales (x) 2.4 2.4 2.0 1.8 1.6 EV/EBITDA (x) 11.5 9.7 8.5 7.6 6.5 RoAE (%) 19.2 12.4 11.1 12.7 14.8 RoACE (%) 15.5 13.2 12.9 14.8 17.3 Dividend yield (%) 1.4 1.4 1.4 1.4 1.4 Dividend payout (%) 23.1 23.3 18.6 14.9 10.9 RM to sales (%) 39.7 34.7 34.8 34.8 35.0 Admin exps to sales (%) 24.8 24.5 24.8 24.8 24.7 EBITDA growth (%) 87.1 41.9 13.7 16.7 16.3 EPS growth (%) (6.3) (4.6) 25.3 24.9 36.0 PAT margin (%) 9.2 8.6 9.2 10.3 11.9 Volume growth (%) - - - - -Realization growth (%) - - - - -Source: Company, Anand Rathi Research


Subsidiary sales, 37%

Tie up units, 25%

IMFL lease units, 24%

IMFL - own unit, 11%

Industrial alcohol, 3%

Source: Company



Investment Argument and Valuation Well established within the military’s Canteen Stores Department (CSD) and in the southern states where distribution is government controlled, Tilaknagar Industries commands strong profit margins. On its nationwide expansion, we expect 28% earnings CAGR over FY11-14. We initiate coverage with a Buy and a price target of `74.

Strong franchise in brandy

The company has a strong focus on brandy. This sub-segment has very little organized competition, as there are few manufacturers here. Other major brands are McDowell and Honey Bee, the latter at lower prices than Tilaknagar’s key brand, Mansion House. This gives Mansion House the potential to gain market share in this sub-segment and generate strong free-cash-flows in the medium to long term.

Fig 7 – Market share in brandy in south India (FY11)

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Expansion plans across India

Nearly 80% of the company’s revenue arises from four states in south India – Tamil Nadu, Kerala, Andhra Pradesh and Karnataka – as south India is a major brandy market and the company’s key offering is brandy.

Going forward, it plans to launch products and brands in other parts of India. In eastern and northern India, its focus is on whisky. Tilaknagar has also acquired two companies recently to develop internal capabilities for setting up new units.

Fig 8 – Strategy for whisky launches Segment Focus areas/strategy

Senate Royal Whisky Orissa, West Bengal

Classic Whisky Delhi, Rajasthan

Production units Leased and tie-up units

Acquisition of infra consulting firms Enhancing of in-house expansion capabilities

Source: Company

Cost-cutting measures improve profitability

The company has initiated various cost-cutting measures such as re-using bottles. At present, it recycles 40% of bottles and expects this to touch 60% in the next three years. It also needs to spend less on distribution, as

The company enjoys a strong franchise in brandy in south India



a large part of distribution in south India is state-government-controlled. Since Tilaknagar’s brands are well entrenched in south India, and with less competition in brandy, media spend is lower. These factors are driving profitability.

Fig 9 – Cost-cutting measures to improve profitability Measures Impact on cost

Re-use of bottles Reduction in packaging costs

Established govt. distribution network in south India Lower distribution costs

Strong focus on less-competitive brandy business Lower media spends

Source: Company

Valuation

We initiate coverage of Tilaknagar Industries, with a Buy rating and a price target of `74, valuing the stock at the mean PE of the past three years. It has quoted at a mean PE of 13x in the past three years and now quotes at 11.0x FY13e earnings. As we expect strong return rations and robust 28.6% earnings CAGR over FY11-14, we expect the stock to be re-rated to the mean PE. At our target price and FY13e earnings, it would trade at a PE of 13x.


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Key risks


Higher competitive pressures



Focus on brandy Tilaknagar focuses on brandy in south India and its market share ranges from 40% to 97% across the southern states of India. It has a strong sub-segmentation strategy for its major brand, Mansion House, which is drawing in consumers across price points.

Strong brand in brandy

The company’s main focus is on the brandy segment in India, where there is little organized competition. Other major brandy brands are McDowell and Honey Bee, the latter at lower prices than Mansion House. Mansion House brandy continues to gain market share in this segment and generates strong medium to long-term free cash-flows.

Fig 11 – Tilaknagar’s market share in brandy (FY11)

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Strong focus in the south – one of India’s largest brandy markets

Nearly 80% of the company’s revenues arise from south India, one of the largest brandy markets in India. Other alcoholic beverages have not been as successful here as brandy. Due to its strong market share in south India and its well-established brands, Tilaknagar is in a good position to launch other products in liquor industry, leveraging its distribution network in south India.

Fig 12 – Key benefits in launching products in south India Strong presence Established distribution network Established and popular brands

Source: Companies

Sub-segmentation of the Mansion House brand

The company plans to further leverage its Mansion House brand. Its sub-segmentation strategy implies launching products at various prices, selectively hiking prices and entering other sub-segments. The company has launched a premium brandy under Mansion House and has begun marketing whiskies.

Strong focus on brandy in south India



Fig 13 – Sub-segmentation strategy used for Mansion House brandy

Mansion House

WhiskyBrandy

Mansion House MS VSOP

Source: Company

Low competition likely to generate strong free-cash-flows

Low competitive pressure in brandy is resulting in strong profitability and free cash flows. The segment has much less competition as there are very few entrants and the current incumbents are focussed on whiskies and beers. This allows for less ad-spend and fewer brand-building activities. Smoother price hikes and less investment in working capital result in strong free cash flow.

Fig 14 – Various brands in brandy Company Brandy brands

Tilaknagar Mansion House, Courrier Napoleon

Radico Khaitan Morpheus

Mohan Meakin Triple Crown, Doctor's Reserve No.1

United Spirits McDowell, Honey Bee

Source: Companies



Nationwide Expansion As ~80% of its revenue arises from South India, Tilaknagar is now going national in order to dilute the location risk. Aggressive brand launches, leased units and tie-ups are likely to help the company command a strong market share, nationally.

Current revenues concentrated in south India

Nearly 80% of its revenue arises from four states in south India – Tamil Nadu, Kerala, Andhra Pradesh and Karnataka. As its focus has always been brandy, and as south India is a major brandy market, a large part of the company’s revenue is generated here.

Fig 15 – Revenue breakdown: region-wise (FY11)

Rest of India14%

South80%

Exports1%

CSD5%

Source: Company

Aggressive pan-India expansion

The company’s strategy involves expanding into eastern and northern India through the launch of whiskies. It is focussing aggressively on Orissa and West Bengal with its Senate Royal Whisky and in Rajasthan and Delhi with its Classic Whisky.

Growth is likely to be driven by the launch of products and expansion of its distribution network in other regions of India. Rather than investing in production capacities in new areas, the company is growing its business through leased units and tie-ups.

Fig 16 – Growth strategy for new regions in India Segment Focus areas / strategy

Senate Royal Whisky Orissa, West Bengal

Classic Whisky Delhi, Rajasthan

Production units Leased units and tie-ups

Acquisition of infra consulting firms Enhancing in-house expansion capabilities

Source: Company

Acquisition of companies to build new plants

The company recently acquired two companies in the infrastructure consulting space – Mykingdom Ventures and Studd Projects. This will help develop internal capabilities for building new plants, including Greenfield grain-based plants. The total consideration was for `30-40m.

Nationwide expansion will reduce the concentration risk involved in

being a single region company



Cost-cutting Steps Raise Profits Tilaknagar is looking to reduce costs through various measures such as recycling ~40% of its old bottles through re-distribution. Lower distribution costs, production units in each state and a clearer focus on branding are fuelling off-take and margins.

Use of re-cycled bottles

Tilaknagar has initiated the use of re-cycled bottles. This helps it considerably reduce packaging costs. Glass bottles make up ~22% of net sales. The use of old bottles has reduced dependence on the supply of new glass bottles. This has also helped retain consumers who receive a discount on return of empty bottles. As retailers return empty bottles, they are given a discount for new bottles filled with liquor. This results in a strong case for repeat purchases.

The re-use of bottles has resulted in lower costs. Though the company is passing on some benefits to end-consumers, this step has reduced packaging material costs and expanded profit margins. At present, 40% of Tilaknagar’s bottles are re-cycled. The company expects this figure to move up to 60% in three years.

Fig 17 – Packaging cost as per cent of net sales

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Lower distribution costs due to government-controlled market

As most of the company’s sales are in south India and the CSD, distribution costs are far lower than in other regions. Southern state governments control distribution networks and sell liquor products on their own. The companies indirectly support retailers. This drastically reduces the cost of distribution.

Selling prices to government-controlled markets are decided after adjusting for the savings in distribution cost. This reduces the level of hassle for the company and allows it to focus more sharply on branding.

Re-using bottles helps reduce costs and maintain customer loyalty



Cost-cutting measures improve gross margins

Cost-cutting and economies of scale have helped Tilaknagar reduce costs and expand profits. The company has reduced various costs such as of packaging material, distribution and staff. Over time, it has also reduced costs of power and fuel, as well as of ad-spend. Due to the lower turnover earlier, it was spending as much as 28% of net sales on brand-building.

Fig 18 – Improving gross margins of Tilaknagar Industries

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Acquisition of companies for backward integration

Tilaknagar has acquired three companies for backward acquisition – Shivprabha Sugars, which holds regulatory approvals for setting up 2,500 TCD sugar plants, a 30 KLPD distillery and a 12MW co-gen power plant. The company is in the process of finding a strategic partner to develop the unit. This unit will serve as a backward integration for Tilaknagar for the supply of extra neutral alcohol (ENA).

The company has also acquired PP Caps, which manufactures caps and containers. This will help it reduce the cost involved in buying caps from the market. It has also acquired Srirampur Grains, which sells agricultural products. This will serve as backward integration for Tilaknagar’s grain-based projects.



Financials We expect Tilaknagar to report 16.7% revenue CAGR over FY11-14, led by strong volume growth. However, we expect stable EBITDA margin. We estimate 28.4% earnings CAGR over FY11-14 and an increase in return ratios over FY11-14.

Strong revenue growth likely

We estimate 16.7% revenue CAGR over FY11-14, driven by the launch of products and brand extensions. We also expect geographical expansion to sustain revenue growth momentum.


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EBIDTA margins to remain stable

The company is likely to report a steady EBITDA margin of ~24% in the next three years. We expect it to counter the increase in costs through price hikes as well as a better revenue mix.

Fig 20 – Stable EBITDA margin

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Steady net profit growth likely

We estimate 28.6% earnings CAGR over FY11-14. Strong operational performance is likely to maintain strong profit margins. Lower capex and working capital needs should result in higher free-cash-flow generation, as well as higher ‘other income’.

We expect the EBITDA margin in the next three years to be ~15%



Fig 21 – Net profit and growth

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Return ratios to be in the high teens

We expect slightly better return ratios over FY11-14. Lower investment in working capital and capex is also likely to result in better return ratios. However, as an increase in dividend payouts is unlikely, we expect the mounting cash in its balance sheet to have a marginal negative impact on return ratios.


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Gross sales 5,480 6,496 7,568 8,835 10,318

Less: excise duty 1,636 1,812 2,111 2,465 2,879

Less: sales tax 36 60 70 82 96

Net sales 3,808 4,623 5,386 6,288 7,343

Growth (%) 57.2 21.4 16.5 16.7 16.8

Expenditure


Staff cost 201 209 242 283 330

Power & fuel 23 39 48 57 66

Carriage & freight 330 503 592 692 808

Advt & sales promotion 488 613 722 843 977

Other expenses 455 521 614 717 837

EBITDA 800 1,136 1,291 1,507 1,753

EBITDA margin (%) 21.0 24.6 24.0 24.0 23.9

Growth (%) 87.1 41.9 13.7 16.7 16.3

Depreciation 71 131 185 204 208

EBIT 729 1,005 1,106 1,303 1,545


Other income 46 26 20 17 71

Profit before tax 539 643 763 992 1,349

Income taxes 190 248 267 347 472

Income tax rate (%) 35.2 38.5 35.0 35.0 35.0

Profit after tax 349 396 496 645 877



Profit before X/O 349 396 496 645 877

PAT margin (%) 9.2 8.6 9.2 10.3 11.9

Growth (%) 76.3 13.4 25.3 30.0 36.0


Profit for shareholders 349 396 496 645 877








Sources of funds

Share capital 326 1,250 1,250 1,298 1,298



Net worth 2,146 4,260 4,649 5,534 6,300


Secured loans 2,721 4,310 3,910 3,510 2,510

Unsecured loans 1,773 23 23 23 23

Total loans 4,494 4,333 3,933 3,533 2,533

Total 6,641 8,593 8,582 9,067 8,833


Fixed assets

Gross block 2,351 4,326 5,173 5,273 5,373

Less: depreciation 281 445 630 834 1,041

Net block 2,070 3,881 4,543 4,439 4,331

Capital WIP 1,636 747 - - -

Gross block-brand value 2,351 4,326 5,173 5,273 5,373

Goodwill 39 86 86 86 86



Current assets 4,080 4,905 5,146 5,935 6,043

Inventories 843 813 916 1,069 1,248

Sundry debtors 820 966 1,131 1,320 1,542


Loans & advances 2,151 2,959 2,959 2,959 2,959

Current liabilities 1,187 1,029 1,196 1,396 1,630

Liabilities 928 797 926 1,082 1,263

Provisions 260 232 269 314 367

Net current assets 2,893 3,876 3,950 4,539 4,413

Total 6,641 8,593 8,582 9,067 8,833


Fig 25 – Cash flow statement (`m) Year-end: Mar FY10 FY11 FY12e FY13e FY14e

OCF before W/C changes 48 62 681 848 1,085

W/c changes (177) (108) (100) (142) (167)

OCF after W/C changes (129) (46) 581 706 918


Capital expenditure (205) (111) (100) (100) (100)

Disposal 0 4 - - -

Investments (0) (1) - - -


Net cash used in investing (205) (109) (100) (100) (100)


Changes in share capital 38 172 - 352 -

Changes in loans 328 (17) (400) (400) (1,000)

Dividends (10) (11) (107) (111) (111)

Net cash used in financing 356 145 (507) (159) (1,111)


Changes in cash & equivalents 22 (10) (26) 447 (294)



Free cash flow (334) (153) 481 606 818






EBITDA margin 21.0 24.6 24.0 24.0 23.9

EBIT margin 19.1 21.7 20.5 20.7 21.0

PBT margin 14.1 13.9 14.2 15.8 18.4

PAT margin 9.2 8.6 9.2 10.3 11.9

Income tax rate 35.2 38.5 35.0 35.0 35.0

Excise duty rate 43.0 39.2 39.2 39.2 39.2

Sales tax rate 0.9 1.3 1.3 1.3 1.3

RoE 19.2 12.4 11.1 12.7 14.8

RoCE 15.5 13.2 12.9 14.8 17.3



Staff cost 5.3 4.5 4.5 4.5 4.5

Power & fuel 0.6 0.8 0.9 0.9 0.9

Carriage & freight 8.7 10.9 11.0 11.0 11.0

Advt & sales promotion 12.8 13.3 13.4 13.4 13.3

Other expenses 12.0 11.3 11.4 11.4 11.4

Per-share data (`)


Growth (%) (6.3) (4.6) 25.3 24.9 36.0


Growth (%) (23.3) 66.9 9.1 14.3 13.8


Growth (%) - (4.0) - - -

Sales per share 39.3 40.1 46.7 52.4 61.2

Growth (%) (16.4) 2.1 16.5 12.1 16.8

Turnover ratios (%)





Valuation ratios (%)

Price earnings 16.4 17.2 13.7 11.0 8.1

Price/book value 2.7 1.6 1.5 1.3 1.1

EV/sales 2.4 2.4 2.0 1.8 1.6

EV/EBITDA 11.5 9.7 8.5 7.6 6.5

Dividend yield 1.4 1.4 1.4 1.4 1.4

Other ratios (%)

Net debt/equity 196.9 97.7 81.5 53.2 35.5

FCF/EPS (95.8) (38.6) 97.0 94.0 93.3

OCF/sales (3.4) (1.0) 10.8 11.2 12.5

WC as % of net sales 69.0 80.2 70.7 62.9 56.1

Div payout ratio 23.1 23.3 18.6 14.9 10.9




Company Background & Management Established in 1933, Tilaknagar Industries is one of the oldest liquor companies in India and focuses on the sale of brandy in South India. It is managed by the Dahanukar family, which holds 59% stake.

Background

Established in 1933 as The Maharashtra Sugar Mills, the company altered its name in a mark of respect to freedom fighter Lokmanya Tilak. It focusses on IMFL, industrial alcohol and sugar cubes. The Dahanukar family has run the company since inception. Today, the company is well-established in the brandy sub-segment in south India and is focusing on establishing brands in other parts of India. Its key brands are Mansion House and Courrier Napoleon.


Subsidiary sales, 37%

Tie up units, 25%

IMFL lease units, 24%

IMFL - own unit, 11%

Industrial alcohol, 3%

Source: Company

Management

Chairman and managing director Amit Dahanukar joined the company on completion of his Masters in Engineering from the US. Executive director Shivani Dahanukar is a law graduate from the University of Mumbai and had completed her MBA in the US. Chartered accountant Lalit Sethi is the CFO.


Amit Dahanukar Chairman and managing director Overall management, marketing

Shivani Dahanukar Executive director Day-to-day operations

Lalit Sethi CFO Finance, secretarial

Source: Company

An 80-year-old company focusing on IMFL in India



Un-rated Companies


Key financials (YE Mar) FY07 FY08 FY09 FY10 FY11

Sales (`m) 4,554 4,159 4,850 6,192 5,882

Net profit (`m) 136 121 111 154 212

EPS (`) 9.6 7.3 6.6 7.1 10.3

Growth (%) (43.3) (23.3) (9.5) 6.9 45.6

PE (x) 7.1 9.3 10.3 9.6 6.6

PBV (x) 1.6 0.5 0.5 0.5 0.5

RoE (%) 22.2 10.2 6.0 6.2 8.5

RoCE (%) 20.8 14.5 9.3 6.7 7.3

Dividend yield (%) - 7.4 7.4 8.8 8.8

Net gearing (%) 1.5 0.7 0.6 1.4 1.4

Source: Company

ConsumerIndia I Equities


[email protected]


[email protected]

18 April 2012

Empee Distilleries

Healthy growth but profitability margins capped

Empee Distilleries is a leading liquor manufacturer company with a focus on south India. The company has established strong brands, such as Napoleon brandy and Old Secret rum, over the past two decades.

Business. Headquartered in Chennai, the two-decade-old company focuses on the IMFL sector in south India and has a strong presence in Tamil Nadu. Key brands include Napoleon brandy, Old Secret rum, Victoria rum and Sixer rum.

Management. The company is part of the Empee Group managed by the Purushothaman family. The group also has interests in the sugar business. M.P. Purushottaman is the chairman of the company and overlooks administrative operations. Shaji Purushottaman is the managing director and R. Anand is the CFO and company secretary.

Growth outlook. As the company operates in government-controlled distribution markets, it expects to see profitability margins capped, despite its anticipation of a healthy ~10% volume growth for the liquor business in India. It sees strong growth potential in south India. The company is also expanding the distribution network in the western and eastern part of India.

Valuation. At the ruling price of `68 and annualized earnings of FY12e, the stock trades at a PE of 7.4x. Risks. Higher raw material prices and delay in distribution network expansion in the western and eastern regions.


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Dec

-11

Feb-

12

Apr-1

2

Source: Bloomberg

Key data EDIS IN / EMDI.BO52-week high / low `122 / `52Sensex / Nifty 17358 / 52903-m average volume US$0.1m Market cap `1.3bn / US$25mShares outstanding 19m



Rating: Not Rated Target Price: NA Share Price: `68



Key brands of Imperial Spirits Type of liquor Segment Brand

Regular Glen Special Whisky

Premium Gold Coast Malt

Regular Imperial XO premium Brandy

Special Imperial exclusive VSOP

Regular Black Magic

Regular Hatrick Rum

Premium Amazon white

Spirit Whisky Premium Gentlemen imported

Regular Black Magic Vodka

Premium Imperial Iceberg Premium

Gin Regular Seagull London dry

Source: Company


[email protected]


[email protected]

18 April 2012

Imperial Spirits

Consolidation and expansion in the south and west markets

Headquartered in Coimbatore, Imperial Spirits has strong brands in all liquor segments and operates mainly in Goa, Karnataka and Kerala. The company’s key focus is on IMFL brands. Its growth strategy includes expansion into the Andhra Pradesh and Tamil Nadu markets.

Business. Imperial Spirits is an IMFL manufacturer with key operations in Goa, Karnataka and Kerala. The company has products across all liquor segments. Its major brands are Glen Special whisky, Gold Coast malt whisky, Imperial, Black Magic, Hatrick and Amazon.

Management. T. Rajkumar is the chairman and managing director of the company and handles overall administration. K. Dhanakumar, joint managing director, looks after production and operations. T.K. Dhanashekhar oversees purchase and marketing. N. Sankaren is the CFO.

Growth plans. Imperial Spirits plans to focus on the western and southern parts of India before expanding into other parts of India. The company intends to aggressively expand its current presence in Kerala, Karnataka and Goa. It also plans to set up units in Andhra Pradesh and Tamil Nadu. Aggressive brand-building efforts and expansion of distribution network are targeted to drive the company’s growth plans.

Unlisted



Sales (`m) 2,648 2,695 2,842 3,006 3,165

Net profit (`m) 11 5 4 (31) 83

EPS (`) 1 0 0 - 10

Growth (%) 85 (61) (13) nmf nmf

PE (x) - - - - -

PBV (x) - - - - -

RoE (%) 3 1 (31) (0) (14)

RoCE (%) 7 8 (3) 6 1

Dividend yield (%) - - - - -

Debt/ equity (%) 155 167 190 228 226

Source: Company



[email protected]


[email protected]

18 April 2012

Mohan Meakin

Aggressive expansion into new geographies and segments

A 150-year-old company focussed on beer and alcoholic beverages, Mohan Meakin mainly operates in north and east India. Owned and managed by the Mohan family, the company plans aggressive growth with an expansion of its distribution network into west and south India and with the launch of breakfast cereals and fruit juices.

Business. An Uttar Pradesh-based company focussed on beer and alcoholic beverages in India, Mohan Meakin’s major brands are Golden Eagle, Lion and Meakins in beer. Its Old Monk is a strong brand in rum. The company’s range of offerings also includes whiskies and brandies. Its major areas of operations are north and east India.

Management. The Mohan family manages the business, with managing director Kapil Mohan looking after overall operations and with Vinay Mohan as deputy managing director. Overall finance and secretarial responsibilities are handled by P.D. Goswami.

Growth plans. The company plans to aggressively grow its Old Monk and beer brands and to expand its distribution network to south and west India. In addition, Mohan Meakin is entering into non-alcoholic fruit juices and breakfast cereals as well as the vinegar and mineral water segments.

Unlisted

Key brands and products

Type of liquor Brand Whisky Summer Hall, Colonel's Special,

Golden Eagle, Top Brass, Blue BullBrandy Triple crown, Doctor's reserve

No.1, D.M., MMB Gin Big Ben London

Beer Golden Eagle, Gold Lager, Solan No.1, Lion, Old Monk

Rum Old Monk

Other products Brand

Juices Mohun's Gold coin

Vinegars Mohun's brewed

Mineral water Golden Eagle, Mohun's

Breakfast food Mohun's Porridge, Mohun's corn flakes

Source: Company



Sales (`m) 523 543 729 1,048 1,830

Net profit (`m) (5) 58 65 83 151

EPS (`) - 3.2 3.6 3.0 5.5

Growth (%) nmf nmf 12.5 (15.8) 81.5

PE (x) - 51.3 45.6 54.1 29.8

PBV (x) 19.1 13.9 10.5 7.9 7.3

RoE (%) - 27.4 19.1 16.9 24.4

RoCE (%) - 16.0 13.7 13.7 19.7

Dividend yield (%) - - - 0.3 0.5

Net gearing (%) 266.0 124.0 75.0 59.0 31.1

Source: Company



[email protected]


[email protected]

18 April 2012

Som Distilleries

Progressive deregulation, young consumers to drive growth

With a focus on beer and IMFL in the central, northern and eastern parts of India, Som Distilleries’ major brand is Hunter beer. The company sees strong opportunities in India in alcoholic beverages, as per capita consumption is lower than the global average.

Business. With its registered office in New Delhi, Som Distilleries has a strong focus on beer and IMFL in India. Its major areas of operations are Madhya Pradesh and north India, with its major beer brands being Hunter and Woodpecker. In rum its main brand is Black Fort.

Management. Chairman and managing director Surjeet Lal looks after overall operations. Other directors include Shailendra Sangar, Deenanath Singh and Guru Darshan Arora.

Growth plans. Som Distilleries plans to expand its manufacturing capacities in beer as well as IMFL. It recently commenced installing a 40,000kl beer plant, which is expected to start production from 1QFY13. The company sees a strong opportunity to grow revenue in beer and IMFL by tapping young consumers. It also expects progressive deregulation in the Indian beer and IMFL sub-segments to drive growth.

Valuation. At the ruling price of `164 and annualized earnings of FY12e, the stock trades at a PE of 28.2x. Risks. Higher raw material prices and the aggressive focus of MNCs on Indian markets.


SDB

Sensex

130

150

170

190

210

230

Apr-1

1

Jun-

11

Aug-

11

Oct

-11

Dec

-11

Feb-

12

Apr-1

2

Source: Bloomberg

Key data SDB IN / SDB.BO52-week high / low `230 / `117Sensex / Nifty 17358 / 52903-m average volume US$0.1m Market cap `4.6bn / US$94mShares outstanding 27.5m



Rating: Not Rated Target Price: NA

Share Price: `164



Sales (`m) 11,968 15,590 19,295 22,755 30,132

Net profit (`m) 550 542 456 896 1,475

EPS (`) 2.1 2.1 1.5 3.3 5.4

Growth (%) nmf (0.5) (29.4) 122.1 61.6

PE (x) 240.6 241.7 342.3 154.1 95.3

PBV (x) 38.4 35.0 15.9 14.6 12.4

RoE (%) 16.7 14.6 7.0 10.2 14.8

RoCE (%) 12.0 11.4 12.2 11.4 15.2

Dividend yield (%) 0.0 - 0.1 0.1 0.1

Net gearing (%) 101.0 115.0 87.0 71.0 65.0

Source: Company



[email protected]


[email protected]

18 April 2012

United Breweries

Low penetration, growing popularity to drive growth in beer

India’s largest beer manufacturer, with a 48% market share, United Breweries is owned and managed by the UB Group and Scottish & Newcastle. It sees strong growth prospects, as per-capita beer consumption in India is lower than the world average. It also expects premiumization of its brands to be a strong growth driver.

Business. Focused on beer in India, United Breweries (UB) has 48% market share. The company’s strongest beer brand is Kingfisher. Its other brands include London Pilsner, Zingaro, UB Export, Black Label, Bullet and Guru. UB’s business operations and production units cover most states in India.

Management. Scottish & Newcastle (40.4% stake) and the UB Group (34.4% stake) jointly hold the company. Managed by the UB Group, Dr Vijay Mallya is the chairman, Kalyan Ganguly is managing director and Guido Do Boer is CFO.

Growth plans. The company plans to aggressively grow its beer business. Currently, per-capita beer consumption in India is the lowest in the world, which leaves much scope for expansion. The company sees the growing acceptance of alcohol in India as a key growth driver. It also sees the growth of premium products such as draught beer, strong beer, and Kingfisher Blue as driving value growth.

Valuation. At the ruling price of `510 and annualized earnings of FY12e, the stock trades at a PE of 86x. Risks. Higher raw material prices and delay in expanding the distribution network in the western and eastern regions.


UBBL

Sensex

350

450

550

650

Apr-1

1

Jun-

11

Aug-

11

Oct

-11

Dec

-11

Feb-

12

Apr-1

2

Source: Bloomberg

Key data UBBL IN / UBBW.BO52-week high / low `644 / `340Sensex / Nifty 17358 / 52903-m average volume US$4.5m Market cap `135bn / US$2.6bnShares outstanding 264m




Share Price: `510



Sales (`m) 29,823 45,902 54,681 63,623 73,762

Net profit (`m) 6,107 3,012 (4,085) (232) 5,683

EPS (`) 73.1 33.7 - - 44.7

Growth (%) 987.5 (53.9) nmf nmf nmf

PE (x) 9.6 20.8 - - 15.7

PBV (x) 4.2 3.0 2.9 2.2 2.1

RoE (%) 26.2 15.8 (17.5) (0.0) 14.3

RoCE (%) 18.6 19.6 4.4 7.3 13.6

Dividend yield (%) 0.1 0.2 0.3 0.4 0.4

Net gearing (%) 120.0 212.0 309.0 221.0 157.0

Source: Company



[email protected]


[email protected]

18 April 2012

United Spirits

High-end brand building to grow premium products

The world’s largest spirits company by volume, United Spirits generates almost its entire revenue in India. Its offerings include premium whisky and Scotch brands. The company plans to expand by raising per-capita consumption and premiumizing its product range.

Business. The largest company in the world by volume, United Spirits sold 114m cases in FY11. It boasts 21 “millionaire” brands in India and enjoys a ~59% market share. Its major brands are McDowell No.1, Bagpiper, Royal Challenge, Signature, Honey Bee, Green Label, White Mischief and Romanov.

Management. Chairman Vijay Mallya looks after overall business operations. S.R. Gupte is vice-chairman and Ashok Capoor is the managing director. Ravi Nedungadi looks after overall finance operations.

Growth plans. United Spirits plans to tap the vast potential of the rising Indian economy and the growing consumerism. It sees opportunities in the increasing per-capita consumption of liquor in India and in driving premiumization towards Scotch and whisky. The company is growing its brands through surrogate advertising such as sponsoring the Royal Challengers cricket team and other high-end brand-building activities.

Valuation. At the ruling price of `700 and annualized earnings of FY12e, the stock trades at a PE of 20.6x. Risks. Higher raw material prices and the aggressive focus of MNCs on Indian markets.


UNSP

Sensex

400

600

800

1,000

1,200

Apr-1

1

Jun-

11

Aug-

11

Oct

-11

Dec

-11

Feb-

12

Apr-1

2

Source: Bloomberg

Key data UNSP IN / UNSP.BO52-week high / low `1123 / `450Sensex / Nifty 17358 / 52903-m average volume US$24.5m Market cap `91.7bn / US$1.8bnShares outstanding 131m




Share Price: `700

Appendix 1 Analyst Certification The views expressed in this research report accurately reflect the personal views of the analyst(s) about the subject securities or issuers and no part of the compensation of the research analyst(s) was, is, or will be directly or indirectly related to the specific recommendations or views expressed by the research analyst(s) in this report. The research analysts, strategists, or research associates principally responsible for the preparation of Anand Rathi Research have received compensation based upon various factors, including quality of research, investor client feedback, stock picking, competitive factors, firm revenues and overall investment banking revenues.

Anand Rathi Ratings Definitions

Analysts’ ratings and the corresponding expected returns take into account our definitions of Large Caps (>US$1bn) and Mid/Small Caps (<US$1bn) as described in the Ratings Table below.

Ratings Guide Buy Hold Sell Large Caps (>US$1bn) >20% 5-20% <5% Mid/Small Caps (<US$1bn) >30% 10-30% <10%

Anand Rathi Research Ratings Distribution (as of 10 April 2012) Buy Hold Sell Anand Rathi Research stock coverage (146) 75% 13% 12% % who are investment banking clients 6% 5% 0% Other Disclosures This report has been issued by Anand Rathi Share & Stock Brokers Limited (ARSSBL), which is regulated by SEBI.

The information herein was obtained from various sources; we do not guarantee its accuracy or completeness. Neither the information nor any opinion expressed constitutes an offer, or an invitation to make an offer, to buy or sell any securities or any options, futures or other derivatives related to such securities ("related investments"). ARFSL and its affiliates may trade for their own accounts as market maker / jobber and/or arbitrageur in any securities of this issuer(s) or in related investments, and may be on the opposite side of public orders. ARSSBL, its affiliates, directors, officers, and employees may have a long or short position in any securities of this issuer(s) or in related investments. ARSSBL or its affiliates may from time to time perform investment banking or other services for, or solicit investment banking or other business from, any entity mentioned in this report. This research report is prepared for private circulation. It does not have regard to the specific investment objectives, financial situation and the particular needs of any specific person who may receive this report. Investors should seek financial advice regarding the appropriateness of investing in any securities or investment strategies discussed or recommended in this report and should understand that statements regarding future prospects may not be realized. Investors should note that income from such securities, if any, may fluctuate and that each security's price or value may rise or fall. Past performance is not necessarily a guide to future performance. Foreign currency rates of exchange may adversely affect the value, price or income of any security or related investment mentioned in this report.

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