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Our Take:

Incorporated in 1993, over the years, Globus Spirits Ltd. (GSL) has successfully got transformed from a grain-based bulk alcohol manufacturer to a 360° alcohol beverage player. The company covers the entire value chain of alcohol manufacturing, undertaking an array of operating activities from manufacturing extra neutral alcohol (ENA) to contract bottling to marketing and selling Indian made Indian liquor (IMIL, also called as country liquor)) and Indian made foreign liquor (IMFL).

GSL’s vertically integrated business can be bifurcated into; manufacturing (57% of FY21 revs.) and consumer (43%). The manufacturing division (bulk alcohol) is the backbone of its 360° business model, ensuring sustained competitive advantage and, providing strong earnings and cashflows visibility.

Consumer segment (IMIL and IMFL) on the other hand will be key driver of its profitability. GSL, which is the largest and most efficient grain-based distillery in India, is one of the biggest beneficiaries of the government’s Ethanol Blended Petrol (EBP) Programme. In order to achieve the government’s ambitious target of 20% blending by 2025, the supply of grainedbased ethanol needs to increase by 12x from current levelsfor which India needs to add additional ~482 Cr litres capacity of just grain-based ethanol over next 4 years. In an environment of such a massive supply-deficit, the prices of Ethanol could remain elevated to distillers’ benefit.

GSL is already on the path to double its existing capacity to 33 Cr Litre/p.a. by FY24E to leverage the ethanol opportunity. While currently 5 Cr litre capacity (from total 16 Cr litre currently) is fungible between ENA and Ethanol, the entire incremental capacity of ~16 Cr litre would be fully fungible, allowing GSL to opportunistically shift between ENA and Ethanol to earn better margins.

GSL, one of the largest manufacturer and marketer of country liquor, is now ‘redefining’ country liquor in India, by creating new category called ‘premium country liquor’ or medium liquor, with the launch of India’s 1st ENA based country liquor brand – Nimboo. We believe medium liquor can be a game-changer going ahead. Besides, the company is also exploring opportunities for geographical expansion to achieve higher growth rate. Additionally, GSL has forayed into premium IMFL through its owned portfolio (under Unibev). Unibev is an assetlight model focusing on high margin, low volume fast growing premium segment.

While the company’s manufacturing business (Ethanol/ENA) is likely to drive the growth in near term given huge tailwinds, the management’s primary focus is to expand its consumer business’ footprint, which we also believe is crucial for long-term success and stock re-rating beyond a point. With aggressive launch of products and widening geographical presence coupled with experienced management team, we believe GSL is well placed to ride on the rise in consumption of alcoholic beverages in India, driven by the underlying demographic advantage and the change in perception towards alcohol.

Valuation & Recommendation:

Net revenues/ EBITDA/ PAT have grown at a CAGR of 15%/40%/94% over last 5 years with EBITDA/PAT margin expanding from 9.5%/1.4% to 20.7%/11.4%. In fact the company has reported EBITDA margin expansion over past 6 consecutive quarters, with it reaching a high of 26.5% in Q1FY22. Stable working capital, lower cash outlay for tax due to availability of MAT credit and a reduction interest cost led CFO to improve to Rs 148.4 Cr in FY21 from Rs. 30.6 Cr in FY19.

The company strengthened its balance sheet by reducing debt of Rs. 75 Cr despite ongoing capex. Robust cashflow generation will further aid debt reduction. Going ahead, we expect GSL’s Net Revenues/EBITDA/ PAT to witness strong CAGR growth of 21%/23%/28% over FY21-24E driven by capacity expansion in bulk alcohol and faster growth in IMIL business, led by increasing pricing gap vs. IMFL players in key states and the emergence of the ‘premium country liquor’ (medium liquor), which in our opinion is a game changer.

Medium liquor realisations are ~50% higher than the value segment and offer strong growth and uptrading opportunities across company’s key markets. While its foray in premium IMFL (highly margin accretive) through Unibev is at nascent stage, a successful ramp up here can drive the profitability. Govt’s aim of 20% blending target to 2025 has created sheer supply-deficit of Ethanol (details inside) and has led to diversion of ENA towards ethanol, creating structural support for ENA prices.

While GSL may witness some moderation in margins (from 26.5% in Q1FY22), we expect the company to maintain 20%+ over near to mid-term, driven by higher realizations for bulk alcohol and benign input costs. Robust sales growth and improvement in profitability coupled with stable working capital is likely to aid higher cashflow generation in the coming years. We expect GSL to generate strong cumulative cashflows of ~Rs. 900 Cr to be utilised for its ongoing and future capex programmes and, debt reduction.

Though the stock has rallied ~4x over past 6 months, we believe there’s still upside to this rally, with the caveat that the Government maintains its supportive stance on ethanol blending. We think the base case fair value of the stock is Rs 1,619 (17x Sept’23E EPS) and the bull case fair value of is Rs 1,761 (18.5x Sept’23E E EPS). Investors can buy the in stock Rs 1,454-1,482 band (15.5x Sept’23E EPS) and add more on dips to Rs 1,273-1,297 band (13.5x Sept’23E EPS). At LTP of Rs 1,469, it quotes at 15.4x Sept’23E EPS.

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