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Expansion driven growth to enable earnings acceleration

Associated Alcohols & Breweries Ltd (AABL) is one of the most undervalued stocks in the listed alcohol beverage industry. Its 5-year revenue CAGR of 9.5%, net earnings CAGR of 32.3% & FCFF CAGR of 31.8% CAGR notwithstanding the pandemic has been nothing but spectacular. This, coupled with its prudent capital allocation, has resulted in the RoIC expanding to an enviable 41.2% (+1,705 bps since FY16). We expect the momentum to gather further steam with revenues/ net earnings/FCF growing at 18.8%/14.6%/19.1% CAGR over FY21-24 while sustaining the high RoIC.

The key drivers of this sustainable growth are:

* capex of INR 110 cr for a new 30 mn litres per annum ethanol plant in MP.

* improving revenue share of the high margin IMFL (proprietary as well as USL licensed brands) & outsourced manufacturing that will reduce low value merchant ENA with better margin contribution.

* sustenance of margins at elevated levels due to the change in mix.

Given the compelling growth story, we believe that the stock is due for a re-rating. We initiate coverage on AABL with a BUY for a price target of INR 870 (18xFY24E EPS, ~20% discount to GSL’s current valuation) representing an upside of 105% over the next 24 months from the CMP of INR 425. The market currently is not factoring in the multifold growth to 1.8 mn cases in its owned brands and the outsourced manufacturing deal with USL (for the latter’s popular brands in the state of MP). The management expects to double the sale of its own brands over the next 5 years. Further, we expect enhanced deal making with USL to deepen the long term relationship. All these factors are potentially value accretive.

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