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Buy Globus Spirits Ltd For Target Rs.1750

Optimal asset allocation driving profitability

About the stock: Globus Spirits (GSL) is the largest grain based ENA manufacturer in India with a capacity of 160 million litre. The company is also a supplier of Indian made Indian liquor (IMIL) and premium IMFL in India.

* IMIL segment comprised ~42% of consolidated revenues, with the rest contributed by bulk alcohol (45%) and others (botting and by-products)

* Total 80% of IMIL sales occurs in Rajasthan (32-33% market share)

Key triggers for future price performance:

* GSL’s capacity is expected to more than double from 16 crore litre in FY21 to ~33 crore litre in two years. The management’s strategy of setting up capacities in ENA deficit states (WB, Bihar, Jharkhand, etc) would enable quicker utilisation at higher realisation, once commercialised

* Post commercialisation of capacities, the management intends to build its consumer business in the states (~50% of FY21 revenues), by providing products at different price points and upgrading its range of offerings to cater to different tastes. Consumerisation of its ENA capacity improves the asset turnover as well as realisation of per unit volume, thereby providing positive thrust to return ratios (we expect 30%+ RoCE in FY23E)

* The government expedited 20% blending target to 2025, leading to higher diversion of ENA towards ethanol and creating structural support for ENA prices, by drying up surplus capacities

* Optimal capital allocation: GSL has been a beneficiary of changing dynamics in the liquor sector and has seen strong FCF inflow (upwards of 6-7% FCF yield). However, in spite of the record yield, the management has resorted to allocating the incremental capital towards its core strength of building newer ENA capacities and slowly building its consumer portfolio and has not been swayed by ambitions of allocating greater capital to premium portfolio (capex spend limited to just | 15-20 crore)

What should investors do?

Globus Spirits has been a beneficiary of the changing dynamics in the liquor space (inflation in ENA prices and growth in IMIL space due to better quality, higher strength and attractive product positioning). The management has been at the forefront in capturing the opportunities

* We remain positive on the stock and maintain our BUY recommendation

Target Price & Valuation: We value the stock at | 1750 i.e. 17x P/E on FY23E EPS

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