IGI Logo

Alcobev: ENA inflation likely to be moderate; volume growth can surprise

* We remain bullish on the alcobev space and expect margin outlook for IMFL to be positive. In our view, increased ethanol blending targets should not result in inflationary pressures as historical trends indicate crop prices are key drivers of ENA/Ethanol prices. Given high grain production and steady prices of sugarcane/maize/rice, ENA inflation should be low.

* Companies have worked on initiatives that would secure adequate supplies of ENA and mitigate inflationary pressures, if any. UNSP and RDK have secured ~50% of their ENA requirement with captive distillation or exclusive third-party tie-ups (no capex required).

* Similar to H1FY21, IMFL has done better than beer during the lockdown. Volume data in key states such as Karnataka and Telangana indicate IMFL volumes in Apr-May’21 being close to pre-Covid FY20 levels which can drive upsides to our estimates.

* We expect a strong earnings recovery; improved balance sheets and cash flows from lower WC in FY21 are big positives. Raise UNSP’s TP to Rs750 from Rs680, with rollover to Sept-23E EPS and factoring in the value of treasury stock/IPL franchise. We increase RDCK’s TP to Rs830 from Rs720, valuing it at 28x Sept-23E EPS (25x Jun-23E earlier).

* ENA inflation concerns should moderate; crop prices are key drivers not EBP:

Historical analysis indicate that prices of key crops, sugarcane/rice/maize, are key drivers of ENA/ethanol prices than the increase in ethanol blending. Government’s increased ethanol blending target of 20% by 2025 from ~8% currently would require doubling of production capacities, but surplus foodgrain production will likely meet this requirement without resulting in much inflation.

Ethanol blending has increased from 2% in 2015 to close to 8% now. Against this, ENA/Ethanol prices have increased by 2.8%/2.2% (5-year CAGR). Crop prices have been stable with moderate FRP/MSP increases. Except for the ENA spike of 25% in FY20 driven by 30% rise in maize prices, inflation has been low.

* Captive distillation and long-term exclusive contracts to secure ENA supplies:

Our interactions indicate that UNSP/RDCK are securing ENA through captive distillation / third party tie-ups which will limit inflationary pressures ahead, if any. RDCK has captive capacity that meets ~50% of its ENA requirement. UNSP does not have captive capacities and has worked on securing ENA supplies though exclusive arrangements with third-party distillers (no capex required). Grain ENA is key RM for both and contributes 65-75% of ENA requirement. India’s high foodgrain production with modest inflation (rice/maize – 5- year CAGR of 0-3%) should absorb the increase in ethanol production.

* Q1 volume impact to be lesser than expected; drive upsides to estimates:

Similar to H1FY21, IMFL has done better than beer across states during the lockdown. Volume data in some key markets, particularly Karnataka and Telangana, indicate IMFL volumes in April-May’21 to be closer to FY20 levels despite the lockdowns as against the beer category which witnessed a ~30%+ decline. This could result in better-than-forecasted Q1 performance by UNSP/RDCK with possible upsides to our FY22/23 estimates.

* Raise UNP/RDCK TPs by 10-15%; maintain Buy:

We expect a strong earnings recovery with possible upsides from higher volumes and margins. Improved balance sheets and cash flows from lower WC in FY21 are big positives. We raise UNSP’s TP to Rs750 from Rs680, rolling forward to Sept-23E EPS and including the value of treasury stock (Rs15/share) and IPL franchise (Rs30/share). We also raise RDCK’s TP to Rs830, now valuing it at 28x Sept-23E EPS (25x Jun-23E earlier). Consistent outperformance, market share gains and improving balance sheet and cash flows justify higher multiples.

* Upside triggers:

Benefits of Delhi policy change; online sales across states are yet to play out; reversal of steep tax increase in WB/AP/Telangana could be positive.

To Read Complete Report & Disclaimer Click Here

For More  Emkay Global Financial Services Ltd Disclaimer http://www.emkayglobal.com/Uploads/disclaimer.pdf & SEBI Registration number is INH000000354

Above views are of the author and not of the website kindly read disclaimer