Globus Spirits, a Delhi-based liquor manufacturer, is raising funds from the primary equity market to fund its expansion plans and market own liquor brands. Post issue, shareholding of promoter and promoter group will come down from the current 96.4% to 59.8%.
Business:
Globus Spirits, established in 1993, has three lines of business — industrial alcohol (rectified spirit and extra neutral alcohol), country liquor, and Indian made foreign liquor (IMFL). Industrial alcohol comprises 17% of total revenue of Globus, while country liquor contributes 36%. The rest comes from IMFL segment wherein Globus carries out contract manufacturing for other established IMFL players including Jagatjit Industries and Allied Distillers and Blenders and also manufactures its own brands. Prices of country liquor are fixed by state governments and are revised once in a year. Globus sells its country liquor brands in Delhi, Haryana, Rajasthan, Utter Pradesh, and Chandigarh. It commands 20% market share in Delhi and 15% in Chandigarh.
Globus sells its own IMFL brands in Haryana, Rajasthan, Chandigarh, Uttar Pradesh, Kerala, Andhra Pradesh, and Karnataka. It plans to launch its brands in Punjab, Uttaranchal, and Pondicherry by March 2010. The company is currently operating at full capacity of 28.8 million bulk litres from its two plants located in Haryana and Rajasthan. Both the plants have swing capacities , which can be used to distill either molasses or grain.
This offers flexibility of raw materials depending on their price fluctuations. Globus plans to use half of the IPO proceeds to increase its capacity to 49.8 million bulk litres. It would use another Rs 28.5 crore to market and create awareness of its IMFL brands. Financials: Globus has seen sustained growth over last four years. Sales grew at a three-year compounded annual growth rate (CAGR) of 32% whereas net profit rose by 35.2%. Its profit before interest, tax and depreciation rose by 46% during the said period.
Compared to its listed peers such as United Spirits, Radico Khaitan, Jagatjit Industries and Empee Distilleries, Globus is a relatively small player with net sales of Rs 197 crore in FY’ 09. Its net margin has been under pressure in recent periods due to increase in interest costs. This is on account of higher working capital requirement.
Valuations:
At the higher end of the price band, Globus seeks a P/E of 15.3 on post dilution basis. This is much higher than P/E of 5 commanded by Tilaknagar Industries, the Rs 389 crore Maharashtra-based distiller, which also has own brands. Tamil Nadu-based Rs 558 crore Empee Distilleries, which floated its IPO in 2007, trades at a P/E of 13.
Globus appears less expensive when compared with the valuations of industry leaders. Radico Khaitan with FY ’09 net sales of Rs 700 crore is trading at 102 times its trailing twelve month P/E whereas Rs 4,000 crore Unites Spirits is valued at a P/E of 33. Other bigger peers including Khoday India and Jagatjit Industries have reported losses in FY ’09.
Risks:
While the company is well placed in its country liquor business, its foray into own IMFL brands seems to be a bit ambitious. At one end, Globus will gain access to higher profitability business if it succeeds in branded IMFL business (it enjoys operating margin of 20% on its branded IMFL business compared with 7% on contract manufacturing , and 15% each on country liquor and industrial alcohol).
The company’s IMFL distillation capacity is less than 1% of the industry capacity. It faces stiff competition from established brands in the states in which it has launched its brands. Grabbing the mind share of consumers in an established liquor market is tough, given the ban on advertisements. Also, the company has not yet registered its IMFL brands as trademarks, which means it is yet to protect its intellectual rights.
Globus’s country liquor business looks promising. However, expansion into IMFL calls for caution as the company’s small-scale of operations may make the transition difficult. Given these factors and a comparatively steep pricing, only investors with high risk appetite should consider the IPO.
----The Economic Times....
Zerodha (Trading Account)
RHP
