Liquor

02 Jun

Royalty payments to accrue over the next 5 years – UNSP

Update on the Indian Equity Market:

On Thursday, NIFTY closed in the green at 16,628 (0.6%), led by RELIANCE (+3.6%), BAJAJFINSV (+3.4%), and SUNPHARMA (+2.7%). APOLLOHOSP (-5.0%), HEROMOTOCO (-3.5%), and EICHERMOT (-1.7%) were few of the laggards. Among the sectoral indices, OIL & GAS (+2.3%), IT (+1.8%), and METAL (+1.1%) led the gainers, and AUTO (-0.6%) and FINANCIAL SERVICES (-0.3%) led the losers.

Excerpts of an interview with Ms. Hina Nagarajan, MD & CEO, Diageo India with CNBC-TV18 on  30th May 2022:

  • UNSP has sold 32 popular brands which include Haywards and White Mischief for Rs 820 crores to Inbrew. The deal is expected to close in 3-4 months by 30th September 2022. The surplus will be invested prudently in the short term. The deal is ROCE accretive. This accelerates UNSP’s journey towards dividend distribution.
  • Ideally, the company would have liked to do a full slump sale in one go and take the money upfront. As part of the contract, the company has signed a 5-year franchise deal with Inbrew limited for Rs 12,930 mn, company has paid all the underlying interest. Royalty payments will accrue over the next 5 years and they will be higher in later years.
  • UNSP to focus on premium brands.
  • The company has reiterated guidance of sustained double-digit revenue growth with mid to high teen margins. The company has also cautioned about EBITDA margin pressures due to inflation and other short-term supply pressures which would be mitigated by productivity initiatives and product mix by including premium brands in the mix thus improving the pricing mix.
  • The company has stepped up advocacy with states on price increases. Assam which contributes about 7-8% of the business, MP, and Rajasthan have given some price increases.
  • UK- India FTA is being negotiated concerning the customs duty reduction on scotch imports. The company is optimistic that the deal will come through. However, it’s uncertain how much benefit the company will get, as the quantum and the timing are not known. If the import duty were to come down depending on the quantum, the range of momentum the brands could get would be between 7-15% and consumer prices would be reduced, thus increasing volumes.

Asset Multiplier Comments

  • This deal is a step forward to the UNSP’s premiumization strategy as the company sees potential in the premium/luxury segment. This will help the company to focus on the Prestige and Above segment where the core competencies of the company lie.
  • We remain positive on the premiumization trend in the liquor industry, however, state-wise pricing actions and portfolio reshuffle benefits will remain the key monitorable in the near term.

Consensus Estimates: (Source: market screener website)

  • The closing price of UNSP was ₹ 801/- as of 02-June-2022.  It traded at 53x/ 45x the consensus earnings estimate of ₹ 15/ 18 – for FY23E/FY24E respectively.
  • The consensus target price of ₹ 918 /- implies a P/E Multiple of 51x on the FY24E EPS estimate of ₹ 18/-.

Disclaimer: “The views expressed are for information purposes only. The information provided herein should not be considered as investment advice or research recommendation. The users should rely on their own research and analysis and should consult their own investment advisors to determine the merit, risks, and suitability of the information provided.”

 

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22 Jun

45% of sales from consumer segment helped margin expansion – Globus Spirits

Update on the Indian Equity Market:

Following global peers, the Indian indices opened higher on Tuesday. The gains were erased by afternoon and NIFTY closed at 15,773, below the intraday high of 15,896. Within the index, MARUTI (+5.2%), UPL (+3.9%), and SHREECEM (+3.3%) ended higher while ASIANPAINT (-1.8%), BAJFINANCE (-1.6%), and NESTLEIND (-1.2%) ended lower. Among the sectoral indices, AUTO (+1.3%), IT (+0.6%), and METAL (+0.3%) ended with gains while REALTY (-0.7%), BANK (-0.4%), and PRIVATE BANK (-0.4%) were the laggards.

Excerpts of an interview with Mr. Shekhar Swarup, Joint MD, Globus Spirits (GLOBUSSPR) with CNBC-TV 18 on 21st June 2021:

  • They have been undergoing a structural change in the organisation in the last 18 months. There has been a higher demand for alcohol from Oil Marketing Companies (OMCs) in ethanol. That has helped increase margins for GLOBUSSPR.
  • There has been a structural change in the consumer segment. In FY21, 45% of the sales came from this segment, vs 35% in FY20. The increased sales from the consumer segment have also helped increase margins.
  • The lockdowns in April-May 21 have impacted volumes. In Rajasthan and Haryana, there haven’t been widespread lockdowns for alcohol sales. In West Bengal, there were lockdowns for some time. The impact hasn’t been as severe as the same time last year.
  • He believes they are in a position to grow the volumes in 1QFY22E.
  • As the share of consumer business is increasing, margins are growing. The cost escalation has been passed onto the consumers and he expects margin enhancement in the future.
  • They have an expansion project which is expected to be ready for operation in 3QFY22E. This is a 100 percent increase to capacities in West Bengal, which translates to about a third increase in their total capacities. Once these capacities come on stream, ethanol and ENA volumes are expected to grow further.
  • Manufacturing (distillery segment) margins were growing in the last 18months and have stabilised in the last 3months.
  • The premium segment is a new one for them and there be an investment into it for future growth.
  • The majority of the consumer business comes from the value segment. The Indian Made India Liquor (IMIL) and medium liquor segment has done well in FY21. Some new products are expected to be launched in this segment in FY22.

Asset Multiplier Comments

  • The company has a presence in 2 segments: Consumer business, marketing, and selling of IMIL and Indian-made Foreign Liquor (IMFL), and bulk manufacturing business of selling ethanol to OMCs and franchise bottling for brands.
  • GLOBUSSPR is expected to be one of the beneficiaries of the changing ethanol policy, leading to a growth in revenues and margin expansion. The focus on the consumer segment by addition of new products and distribution network expansion is expected to aid margin expansion.

Consensus Estimate: (Source: NSE website)

  • The closing price of GLOBUSSPR was ₹ 595/- as of 22-June-2021. The company reported an EPS of ₹ 48.9/- for FY21.
  • The consensus earnings estimate and price target estimates are not available.

Disclaimer: “The views expressed are for information purposes only. The information provided herein should not be considered as investment advice or research recommendation. The users should rely on their own research and analysis and should consult their own investment advisors to determine the merit, risks, and suitability of the information provided.”

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20 Aug

Home-delivery of alcohol will take time to build scale – United Breweries

Update on the Indian Equity Market:
On Wednesday, Nifty ended 0.2%, higher than the previous close at 11,408. The top gainers for Nifty 50 were Zee (+14.1%), GAIL (+5.0%), and Tech M (+2.2%) while the losing stocks were Bajaj Auto (-1.2%), ONGC (-1.2%), and Nestle (-1.0%). The sectoral gainers for the day were Media (+5.4%), PSU Bank (+2.4%) and Realty (+1.3%) while the losers were FMCG (-0.4%), Pharma (-0.4%), and IT (-0.3%).

Edited excerpts of an interview with Mr Rishi Pardal, MD & CEO, and Mr Debabrata Mukherjee, CMO, United Breweries Ltd; dated 17th August 2020 from Mint:

• The quarter that went by (April-June) was very unusual, impacted by the pandemic and lockdowns. For more than 50% of the quarter, the Company was physically shut. At the beginning of the pandemic, large increases in taxation also impacted demand.
• In quarter two, the story is mirroring the progression of the pandemic. As governments are easing restrictions they are starting to see a similar thing come into the business. But it’s a long road ahead. There are a lot of starts and stops. A sudden spike in local cases can shut the market for a few days, so it’s too early to talk of recovery right now, as per Mr Pardal.
• The Company’s focus is on managing costs. All discretionary expenses that can be avoided such marketing spends, which may be specifically driven towards either particular innovations or events that are not happening, are avoided. At the same time, they are a consumer products company, so they need to make sure that they cannot be silent or absent in the mind of the consumer.
• Beer is seeing a latent demand for United Breweries. If there is a physical fulfilment opportunity where a consumer can access the outlets, or the Company can encourage online order and home delivery, or look at reviving consumption in bars – the latent demand is there. The problem is more of a supply-side issue.
• Alcohol is a highly restricted category, with a lot of stringent rules. So the fact that a few state governments are now beginning to sort of consider the online sales and home delivery is really positive development for the Company.
• United Breweries is partnering with the online aggregators, with delivery services and people engaged in the space. But this will take time. This is a nascent opportunity. Over a period of time, more states will follow suit and the channel will build scale.
• 60% of channels have opened up.
• The Company is working with IPL teams to figure out how best they can leverage the change in venue opportunity. It will be using a sporting event of this nature to connect with their consumer. So the money outlay is based on that brand strategy requirement.

Consensus Estimate: (Source: market screener website)
• The closing price of United Breweries India was ₹ 1,016/- as of 19-August-2020. It traded at 423x/42x/37x the consensus EPS estimates of ₹ 2/24/28 for FY21E/FY22E/23E respectively.
• The consensus target price of ₹ 1,056/- implies a PE multiple of 38x on FY23E EPS of ₹ 27.7/-.
Disclaimer: “The views expressed are for information purposes only. The information provided herein should not be considered as investment advice or research recommendation. The users should rely on their own research and analysis and should consult their own investment advisors to determine the merit, risks, and suitability of the information provided.”

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17 Sep

United Breweries: Mid to higher single-digit growth rate expected for the beer industry

Update on the Indian market: On Friday, NIFTY went up 0.85% to 11,076. NIFTY traded in the positive on the back of favourable macro data. The Consumer Price Index (CPI) for August 2019 rose six basis points to 3.2 per cent YoY, within the range given by RBI. Core inflation for August 2019 remained broadly flat at 4.4 per cent MoM. The July Index of Industrial Production (IIP) data reported a 4.3 per cent YoY growth. In the Sectorial Nifty Indices, the Realty (+1.5%), Metal (+1.4%), Auto (+1.1%), Private Banks (+1.0%) and PSU Bank (+1.0%) were top gainers while Pharma (-0.9%) was the worst performer. Amongst the NSE 50, top gainers were BPCL (+6.4%), IOC (+4.8%), Titan (+3.5%) while the worst performers were Indiabulls HFC (-2.6%), Sun Pharma (-1.4%) and Dr Reddy’s (-1.4%).

Key takeaways from the interview of Mr Shekhar Ramamurthy, MD, United Breweries (UBL); dated 04 September 2019 with ET Now

  • 1Q tends to be a strong quarter of the year. 1QFY20 was impacted by closures of outlets, restrictions in hours of production and dispatch due to elections.  UBL reported decent performance with a secondary sales growth of ~7% in volumes.
  •  UBL expects a demand pickup in 2Q and 3Q, subject to the monsoon. Severe monsoons tend to impact the demand negatively. The beer industry is likely to grow at ~6-8% in the next 12-24 months.
  • FY19 reported higher growth on a lower base of FY18 which was impacted due to the highway ban, extreme duty hikes in several states.
  • The beer industry is facing margin pressures in the form of an increase in the price of glass bottles, barley, etc. ~65% of the industry supplies are to the state corporations, who control the prices. The state corporations are very reluctant to raise prices despite increases in the duties.
  • UBL is experiencing a revival in the Bengal and UP markets v/s the slump in FY19 in these states. In Bengal, it witnessed double-digit growth. In the UP market, UBL is working on its capacity constraint to meet the growing demand.
  • The market is very competitive but UBL is comfortably placed. The new launches cater to suit consumer preferences. UBL’s product portfolio include Heineken and Ultra (premium mild beers), Kingfisher Storm and Amstel (premium strong beers), Kingfisher Radler and Heineken Zero (non-alcoholic beers). It plans to add the imported portfolio brands from the Heineken portfolio. It will soon launch a version of wheat beer. The core brands, Kingfisher Premium and Kingfisher Strong continue to have a larger share of the revenues and allow UBL to introduce new brands.

Consensus Estimate (Source: market screener website)

  • The closing price of UBL was Rs 1,277/- as of 13-September-19. It traded at 53x / 43x / 38x the consensus EPS for FY20E/ FY21E/ FY22E of Rs 24.0 / 29.7 / 33.8 respectively.
  • Consensus target price of Rs 1,409/- implies a PE multiple of 42x on FY22E EPS of Rs 33.8/-
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13 Aug

Radico Khaitan (RDCK) – 1QFY20 – Cost pressure curbs high spirits

Dated :- 9th August 2019

1QFY20 Results

  • Radico Khaitan’s (RDCK) revenues grew by 20.8% YoY to Rs 623 Mn driven by 12% YoY volume growth in Indian Made Foreign Liquor (IMFL).
  • The higher margin Prestige & Above volumes increased by 16% YoY to 2.0 mn cases and the Regular & Other brands volumes reported an increase of 10.2% YoY to 4.3 mn cases.
  • EBITDA improved by 9.3% YoY to Rs 989 Mn. The EBITDA margins declined by ~170 bps to 15.9% impacted by increase in raw material costs.
  • PAT grew by 15.6% YoY to Rs 548 Mn driven by reduction in finance cost.

Management Commentary

  • The margins in 1QFY20 were lower 18% YoY on account of increase in Extra Neutral Alcohol (ENA) prices and ~15% YoY increase in glass bottles. The restriction on operations at the molasses plant by the Central Pollution Control Board during 1QFY20, led to additional costs of Rs 65mn.
  • Rampur Indian Single Malt and Jaisalmer Indian Craft Gin continue to see strong traction in the Indian as well as international markets. RDCK has tripled the manufacturing capacity of Rampur Indian Single Malt which will benefit company in the long run.
  • The management guided for ~9% volume growth in IMFL for FY20E led by ~14% YoY in the Prestige & Above category and ~6% YoY growth in the Regular & Other Brands category.
  • Raw material price pressure will keep the gross margins at ~47% and the EBITDA margins in the range of 16%-16.5% for FY20E.
  • RDCK is expected to be a debt free company within next 18 months.

Consensus Estimate (Source: www.marketscreener.com)

  • The closing price of RDCK was Rs 322/- on 09-Aug-19. It traded at 22x / 20x / 16x the consensus EPS for 20E /21E /22E EPS of Rs 14.1/ 15.5 /20.1 respectively.
  • Consensus target price of Rs 454/- implies a PE of 23x on FY21E EPS of Rs 20.1.
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