Allied Blenders IPO review (Avoid)

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Review By Dilip Davda on June 22, 2024

•    ABDL is one of the leading Indian player in IMFL segment with a market share of around 11.8% in the Indian Whisky market (for FY23).
•    Its lower bottom line is attributed to higher prices of glass and other inputs post Covid-19. 
•    Based on annualized FY24 earnings, the issue appears aggressively priced. 
•    The management is hopeful of leveling the net profit margins with its listed peers within two years. 
•    Thus it's a pure long term story with its IPO price discounting all near term positives. 
•    There is no harm in skipping this exorbitantly priced bet. 

ABOUT COMPANY:
Allied Blenders & Distillers Ltd. (ABDL) is an Indian-owned Indian-made foreign liquor (IMFL) company having five main categories of IMFL i.e. whisky, brandy, rum, vodka and gin. It also sells packaged drinking water under our Officer's Choice, Officer's Choice Blue and Sterling Reserve brands. ABDL is the largest Indian-owned Indian-made foreign liquor ("IMFL") company and the third largest IMFL company in India, in terms of annual sales volumes between Fiscal 2014 and Fiscal 2022. (Source: Technopak Report). It is one of the only four spirits companies in India with a pan-India sales and distribution footprint, and a leading exporter of IMFL, and had an estimated market share (in terms of sales volume) of 11.8% in the Indian whisky market for Fiscal 2023. 

Its flagship brand, Officer's Choice Whisky was launched in 1988 with its entry into the mass premium whisky segment. Officer's Choice Whisky has been among the top selling whisky brands globally in terms of annual sales volumes between 2016 and 2019. (Source: Technopak Report). Over the years, it has expanded and introduced products across various categories and segments. As of December 31, 2023, its product portfolio comprised 16 major brands of IMFL across whisky, brandy, rum and vodka. Certain of its brands, such as, Officer's Choice Whisky, Sterling Reserve, Officer's Choice Blue and ICONiQ Whisky, are 'Millionaire Brands' or brands that have sold over a million 9-litre cases in one year. (Source: Technopak Report)

The company has over the years established market leadership in the alcoholic beverages market in India with a market share of 8.2% in IMFL market by sales volumes in Fiscal 2023 (Source: Technopak Report), with sales across 30 States and Union Territories, as of December 31, 2023. Over the years, it has developed an extensive pan-India sales footprint and as of December 31, 2023 the company has 12 sales support offices, and pan-India route-to-market capabilities covering all channels and alcohol permitted States and Union Territories. Its Pan-India distribution network has enabled the company to support the growth in annual sales volumes of products. As of March 31, 2023, its products were retailed across 79,329 retail outlets across 30 States and Union Territories in India (Source: Technopak Report). The company believes that its industry position, strength of brands, Pan-India sales footprint and logistics arrangements have further consolidated its position leading to significant business growth and financial performance. In addition, as of December 31, 2023, it exported products to 14 international markets, including countries in the Middle East, North America, Africa, Asia and Europe.

As of December 31, 2023, ABDL relied on 32 bottling facilities, including bottling facilities owned and operated by it and contract bottling facilities both on exclusive and non-exclusive basis, for bottling its products. As of December 31, 2023, it owned and operated nine bottling units, and had entered into arrangements with five third-party bottling facilities where the entire licensed capacity is utilized by ABDL. Over the years, it has developed relationships with third-party bottlers and as of December 31, 2023, the company has entered into 18 bottling agreements on a non-exclusive basis including one where it has entered into a royalty arrangement dated March 30, 2021 with a third-party manufacturer for a period of five years to manufacture, blend, bottle, process and package ABDL's products at their distillery under ABDL's brand name for which royalty is paid to the Company. As of December 31, 2023, it had 3627 employees on its payroll. 

ISSUE DETAILS/CAPITAL HISTORY:
The company is coming out with its maiden/combo IPO of fresh equity shares issue worth Rs. 1000 cr. (approx. 35587188 shares at the upper cap), and an Offer for Sale (OFS) worth Rs. 500.00 cr. (approx. 17793594 shares at the upper cap). The company has announced a price band of Rs. 267 - Rs. 281 per equity shares of Rs. 2 each. The overall size of the issue will be approx. 53380782 shares worth Rs. 1500.00 cr. The issue opens for subscription on June 25, 2024, and will close on June 27, 2024. The minimum application to be made is for 53 shares and in multiples thereon, thereafter. Post allotment, shares will be listed on BSE and NSE. The issue constitutes 19.09% of the post-IPO paid-up equity capital. From the net proceeds of the fresh equity issue, the company will utilize Rs. 720.00 cr. for repayment/prepayment of certain borrowings, and the rest for general corporate purposes. 

The company has reserved equity shares worth Rs. 3.00 cr. for its eligible employees and offering them a discount of Rs. 26 per share. From the rest, it has allocated not more than 50% for QIBs, not less than 15% for HNIs and not less than 35% for Retail investors.

The joint Book Running Lead Managers (BRLMs) to this issue are ICICI Securities Ltd., Nuvama Wealth Management Ltd., and ITI Capital Ltd., while Link Intime India Pvt. Ltd. is the registrar to the issue. 

Having issued/based on Rs. 2 FV), between December 2010 and June 2022. The average cost of acquisition of shares by the promoters/selling stakeholders is Rs. NIL, Rs. 0.03, Rs. 0.05, Rs. 2.00, Rs. 2.02, Rs. 109.74, and Rs. 750.00 per share. 

Post-IPO, its current paid-up equity capital of Rs. 48.82 cr. will stand enhanced to Rs. 55.94 cr. Based on the upper cap of the IPO price band, the company is looking for a market cap of Rs. 7859.59 cr. 

FINANCIAL PERFORMANCE:
On the financial performance front, for the last three fiscals, the company has (on a consolidated basis) posted a total income/net profit of Rs. 6397.81 cr. / Rs. 2.51 cr. (FY21), Rs. 7208.17 cr. / Rs. 1.48 cr. (FY22), and Rs. 7116.75 cr. / Rs. 1.60 cr. (FY23). For 9M of FY24 ended on December 31, 2023, it earned a net profit of Rs. 4.23 cr. on a total income of Rs. 5914.98 cr. 

For the last three fiscals, the company has posted an average EPS of Rs. 0.07 and an average RoNW of 0.43%. The issue is priced at a P/BV of 16.77 based on its NAV of Rs. 16.76 as of December 31, 2023, and at a P/BV of 5.78 based on its post-IPO NAV of Rs. 50.38 per share (at the upper cap). 

If we attribute FY24 annualized earnings to its post-IPO fully diluted paid-up equity capital, then the asking price is at a P/E of 1394.54. Based on FY23 earnings, the P/E stands at 4929.82. Thus the issue is exorbitantly priced. Its net debt of 1.88 times to its equity capital is a major concern. 

However, the company is planning to reduce its debt to a great extent from the IPO funds. According to the management, it hopes to be at par with listed peers as far as net profit margins are concerned as it will become debt free company by then, saving more on interest costs. Its low net profits for the reported periods were on account of spiraling glass and other commodity prices post Covid-19. Management justified the valuation based on its EBITDA margins, but when it comes to net earnings post all accounting provisions, its having a thin margin compared to listed peers.

The company reported PAT margins of 0.11% (FY21), 0.05% (FY22), 0.05% (FY23), 0.17% (9M-FY24), and RoCE margins of 26.45%, 25.13%, 25.87%, 24.35% for the referred periods, respectively. 

DIVIDEND POLICY:
The company has not paid any dividends for the reported periods of the offer document.  It has already adopted a dividend policy in June 2022, based on its financial performance and future prospects.

COMPARISON WITH LISTED PEERS:
As per the offer document, the company has shown United Spirits, Radico Khaitan, and Globus Spirits, as their listed peers. They are trading at a P/E of 64.5, 93.1, and 23.5 (as of June 21, 2024). However, they are not comparable on an apple-to-apple basis. 

MERCHANT BANKER'S TRACK RECORD:
The three BRLMs associated with the offer have handled 51 pubic issues in the past three fiscals, out of which 14 issues closed below the offer price on the listing date. 

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