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Rajasthan policy change, Haryana market share loss impacts mix

About the stock: Globus Spirits (GSL) is the largest grain based ENA manufacturer in India with a capacity of 250 million litre. The company is also a supplier of Indian made Indian liquor (IMIL) and premium IMFL in India.

* Consumer segment comprised ~34% of consolidated revenues, with the rest contributed by bulk alcohol (66%)

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

Q2FY23 Results: Higher power and fuel costs negatively impacted margins.

* Net revenues remained flattish QoQ at | 480 crore

* EBITDA fell 35% QoQ to | 45 crore with margins at 9.4% (13.4% in Q1FY23)

* Subsequently, PAT de-grew 58% QoQ to | 22 crore

What should investors do? Margins are expected to improve, going forward, led by higher rice procurement from FCI (40% in Q2), better product mix (IMIL is expected to claw its lost MS). However, higher usage of rice straw as power source and availability of coal at better prices remain key monitorables on margins front.

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

Target Price & Valuation: We value the stock at | 1000 i.e. 11x P/E on FY24E EPS.

Key triggers for future price performance: With doubling of the current capacity by FY24 to ~900 KLPD, GSL plans to capitalise the changing dynamics in the liquor space. Further, growing opportunities in IMIL space (better price points and growing aspirations) would lead to higher asset turnover and return ratios in the long run.

* Capturing premium price points in IMIL space via higher strength liquor

* The government expedited 20% blending target to 2025, leading to higher diversion of ENA towards ethanol

* Net debt expected to decline with return ratios reaching 30%+ levels

Alternate Stock Idea: Apart from GSL, we remain positive on United Spirits (USL).

* USL is India’s leading alcoholic beverage company and subsidiary of global leader Diageo plc. It manufactures, sells premium liquor brands such as Johnnie Walker, Black Dog, Black & White, Vat 69, Antiquity, Signature, Royal Challenge, McDowell’s No 1, Smirnoff and Captain Morgan

* We have a BUY rating on the stock, with a target price of | 1050

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