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In growth phase with eye on state diversification

We were recently hosted by the management team of SOM Distilleries & Breweries Ltd (SDBL) at their Bhopal facility for a plant visit and management interaction. Key highlights are as follows: - 

Market share gains strong; should improve or atleast hold up 

SDBL has dominant market share of 45% in Madhya Pradesh beer market. In around 4 years of operations, it has garnered ~19% share in Karnataka (aim of 25-30% over the next few years) and has a respectable ~14% share in Odisha. SDBL believes market share improvement shows product/brand acceptance. This along with pricing and sales & distribution strategies should help them focus on enhancing market share in its key markets of Bhopal, Karnataka and Odisha while increasing presence in high growth markets like Rajasthan, UP, Jharkhand and Delhi.

Growing presence should help maintain growth delta over peers

SDBL grew by ~59% in FY24 and ~33% in 1QFY25, way ahead of the market largely due to the capacity additions and the improved market presence. Point of sales covered have more than doubled from pre-Covid levels. In Karnataka market, SDBL is already reaching ~7k outlets out of the 9k outlet universe in short duration. It is still only covering 40% of beer market in India. Apart from capacity addition in Odisha plant (expected by 1QFY26), it is looking at acquisition opportunities in states where it wants to enter or might even look at a Greenfield over the next 2 years.

Building stronger team for the expanding business

Employee strength for SDBL stands at ~500 employees with approx. 200 sales team members and ~15 in the marketing team. Over the last few quarters, company has also added team members in the mid-management with strong experience. While Bhopal is SDBL's first market of operations, Karnataka is a big market for the industry. So, company has decided that their marketing team will now be based out of Karnataka instead of Bhopal. Even the Sales head is now based out of Karnataka.

Near-term guidance maintained

Demand environment remains unchanged in the ongoing quarter. Company’s aim is to atleast deliver the guided Rs15bn topline for FY25. If things go as per plan, it can even see the higher band of guidance i.e., Rs16bn. Management internally is aiming at 25- 30% growth over the next 2-3 years. EBITDA margin will stay at 12-13% as operating leverage benefits will be offset by higher new bottle costs (new bottle costs ~50% higher than old bottles) along with spends to scale in newer states.

Don’t see any major change in debt profile in the short to medium-term

Management believes the company has already seen significant reduction in debt levels from peak levels and current debt position stands at Rs1.56bn (Gross) and Rs1.4bn (Net) as on 30th June 2024. Company has already announced capacity expansion for the Odisha plant from 6mn cases to 9mn cases with capex of ~Rs300-400mn. Debt likely to stay at current levels over the next couple of years due to capex requirement as well working capital to improve presence in newer states which are largely duty-paid states unlike MP.

Other highlights

(1) Mass/Strong beer segment still contributes ~85% of industry sales, while the rest is towards the premium segment (2) SDBL’s glass bottle mix stands at 75%-80%, rest is cans. (3) Off-trade sales forms ~85% of the business. (4) CSD forms 1-2% of sales. (5) Exports to certain markets in UAE, US, Africa, Europe forms <1% of turnover. (6) Conversion of promoter warrants would lead to their shareholding increasing to 38- 39% from current 35.6%. (7) Maintenance capex: ~Rs60-70mn on an annual basis.

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