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New capacities planned, margins continue to expand

For FY21, Globus Spirits (GSL) reported strong profit generation, led by its niche positioning in the IMIL segment (higher volumes, realisation). Bulk segment, on the other hand, saw a largely flat performance, due to higher volatility in liquor sales during the year (weak H1). Overall, net revenues during the year grew 5% YoY to | 1231 crore, led by 24% growth in IMIL segment (44% of net revenues). EBITDA doubled YoY to | 255 crore mainly due to strong expansion in EBITDA margin (clocked highest ever EBITDA margin of 24.7% in Q4, 20.7% in FY21, led by higher gross margins, lower fuel, freight & power cost). Subsequently, PAT nearly tripled to | 141 crore.

Higher operating leverage expected to keep margins elevated

While FY21 saw overall muted utilisation levels (86% vs. 91% in FY20), resumption of business in H2 again saw utilisation peaking to 90%+ levels. Also, while the company’s 140 klpd West Bengal plant is on track (completion by Q2 end), the management is planning to embark on further expansion of the plant (completion by next year) by another 140 klpd (280 klpd in total) and would require investment of | 110 crore (via internal accruals). The management also plans to construct two other plants in Jharkhand and Bihar (220 klpd in total) by FY23, at an outlay of | 225 crore (via internal accruals). All newer capacities would be fungible in nature (produce both ENA, ethanol). Long term ethanol procurement by Government of India is expected to keep ENA realisation stronger while newer product launches along with downtrading of liquor brands and enforcement of law on illicit liquor trading is expected to help the IMIL segment. The management expects to maintain margins, use cashflows to lower debt and fund capex programmes in the near to medium term.

Well placed to capture extreme ends of liquor industry

GSL has a product range across the two ends of the liquor segment (hour glass shaped consumption), including manufacturing extra neutral alcohol (ENA) to contract bottling of Indian made foreign liquor (IMFL), to marketing, selling IMIL, several by-products. The company’s JV Unibev launched three IMFL liquor brands in the Prestige & above category in a few states and is gradually ramping up its presence in more states. The management has been slowly building up the franchise across key territories.

Valuation & Outlook

GSL has been a beneficiary of the changing dynamics in the liquor space. The management has been at the forefront in capturing the opportunities. On the IMIL front, GSL expects more premium price points in the value segment led by higher strengths (>40%) in IMIL space (e.g. Rajasthan medium liquor) while on the ENA front, the management continues to expand its facilities in deficit states (to gain higher realisation and utilisation levels). Hence, with higher revenues and elevated margins, FCF yield is expected to remain high. We maintain BUY rating on the stock with a target price of | 690 (earlier | 400), valuing the business at ~8x FY23E EPS.

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