Rich spirits

Increased capacities and foray into under-penetrated markets could sustain growth for Globus Spirits, but valuations aren’t cheap

Globus Spirits, which manufactures and sells industrial alcohol (rectified spirit and extra-neutral alcohol), country liquor and Indian-made foreign liquor (IMFL), was less impacted than its peers during the downturn. A diversified revenue portfolio (35-40 per cent revenues from country liquor) and its flexibility to shift between raw materials (molasses and grain) in the production process helped. The company has been operating at higher capacities, and thus the need for an IPO, amongst other things. It plans to expand its capacities by 73 per cent to 500 lakh bulk litres. While the project cost of Rs 89.3 crore also includes setting up power generation capacity and modernisation of IMFL bottling plants, all these are likely to go on stream by March 2010.

Expansion plans
The company plans to expand its alcohol manufacturing capacities at its two distilleries at Samalkha (Haryana) and Behror (Rajasthan). IMFL sales, though constitute around 6-7 per cent of overall production volumes, are considered more profitable. From the expanded capacities, Globus plans to increase IMFL’s share to around 20 per cent over three years.

The company’s brand portfolio in the country-liquor segment includes Rana and Rajasthan No.1. In the IMFL segments, it has 20-20 Premium Whisky and Hannibal Legendry Rum. The company has allocated a third of the IPO proceeds towards brand and distribution development for its own IMFL brands, which indicates its intention to improve visibility and reach. Globus also does job work for IMFL brands such as Officer’s Choice Whisky (Prestige, Classic) and Officer’s Choice XXX Rum.

Margin cushion
The company’s production facilities can utilise either molasses or grain or both, thus mitigating the dependence on any specific raw material. This would enable it to manage margins in a scenario of rising input prices, given that raw materials account for over 60 per cent of costs. Better sourcing has also helped maintain EBITDA margins at around 13 per cent, on average of the last three years, however it is lower than some peers. Going ahead, Globus’ increasing focus towards IMFL would also provide cushion to margins.
 

ON A HIGH
in Rs crore	FY09	FY10E	FY11E
Net sales	197.1	252.4	347.8
EBITDA	26.0	36.6	50.4
Net profit	12.9	22.4	33.2
EPS (Rs)	10.6	11.2	16.6
PE (x) @ Rs 90	8.5	8.0	5.4
PE (x) @ Rs 100	9.4	8.9	6.0
E: Estimates

Conclusion
The negatives for the sector are the excessive regulation by the different state governments. Among positives, increasing disposable incomes, favourable demographics and lower penetration of alcohol in the country offers opportunities for players in the sector. Globus clocked about 35 per cent growth both in the bottom line and top line on an average in the last five years, albeit on a smaller base. This robust performance is expected to continue in the next two years also, though the near-term concerns include the uptick in raw material prices. Also, how successfully the company is able to break into new markets and establish presence of its own brands will reflect on the numbers.

Regarding valuations, Globus’ PE works out to 8.9 times its estimated 2009-10 earnings at the upper band, which is expensive as compared to its peers like Tilaknagar (PE of around six times trailing 12 months EPS). While the growth story of Globus looks good, immediate gains are ruled out as the IPO pricing is high.