India Consumer - Alcoholic Beverages

Consumer
India I Equities
Sector Report
18 April 2012
India Consumer – Alcoholic Beverages BSE FMCG: 4779
Holding the fort Nifty / Sensex: 5290/17358
Shirish Pardeshi
+9122 6626 6730
shirishpardeshi@rathi.com
Aniruddha Joshi
+9122 6626 6732
aniruddhajoshi1@rathi.com
Anand Rathi Share and Stock Brokers Limited, its affiliates and subsidiaries, do and seek to do business with companies covered in its research reports. Thus,
investors should be aware that the firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single
factor in making their investment decision. Disclosures and analyst certifications are located in Appendix 1.
Anand Rathi Research India Equities
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18 April 2012 India Consumer - Alcoholic Beverages – Holding the fort
Snapshot of liquor industry in India

Liquor industry break-up Indian-made foreign liquor (IMFL) industry break-up Beer industry break-up
Imported Rum Premium
Beer 20%
3% 1%
13%
Standard
Brandy 45%
Country liquor Whisky
16% Strong
48% 59%
IMFL 54%
36%
White spirits
5%
Per-capita consumption: IMFL Per-capita consumption: beer Market share: IMFL and country liquor
(ltr/p.a./person) (ltr/p.a./person) (%)
120 140 100
120
100
80
100
80
80 60
60
60
40 40
40
20 20 20
0 0
Denmark
India
New Zealand
China
Germany
Brazil
South Africa
Australia
Russia
Argentina
Mexico
Thailand
China
Taiwan
Hong Kong
Vietnam
Malaysia
India
Indonesia
Egypt
Philippines
FY04
FY05
FY06
FY07
FY08
FY09
FY10
FY11
IMFL Country liquor
Market share of IMFL companies Market share of beer companies Region-wise market structure: IMFL
Others Others North
13% 13% 12%
Mohan Meakins East
Mohan Meakins
6% 9%
9%
Tilak Nagar UB South

4% United Spirits 50% 49%
53%
Jagatjit
9%
SAB Miler
West
31%
Radico 30%
12%
Source: Companies, Anand Rathi Research
Anand Rathi Research

Consumer
India I Equities
Sector Report
18 April 2012
India Consumer – Alcoholic Beverages BSE FMCG: 4779
Holding the fort Nifty / Sensex: 5290/17358
Due to strong entry barriers and numerous taxes, existing liquor

manufacturers are likely to enjoy undiminished strength over the
medium to long term. Brands with a strong sub-segmentation strategy
(expansion of product categories by leveraging brand strength) are
expected to gain market share as, due to the ban on liquor ads, there
are few ways to build new brands. However, pricing power in the face
of volatile raw material costs is a concern, as state governments allow
price hikes only once a year. Top picks: Tilaknagar & Globus Spirits.
 Strong entry barriers protect incumbents. Several entry barriers exist

for new companies and new brands. These include the ban on liquor ads,
limited potential for stock-keeping units (SKUs), ‘import’ duties on inter-
state transfer of molasses and liquor, limited distribution networks due to
the various licenses required and stringent government controls.
 Sub-segmentation to offset limited brand-building and volatile income

trends. With limits on brand creation, companies are leveraging their existing
brands with a sub-segmentation strategy. This also caters to consumers who
are likely to change products to match volatile per capita income growth. We
expect brands that have products at all price points and segments to do well.
 Pricing power hit by volatile raw material cost & government curbs.
Pricing power is a concern for the sector. Most state governments permit
price hikes only once a year. The sector also faces progressive taxation, Shirish Pardeshi
which further dissuades price hikes, as this attracts higher taxes. A few +9122 6626 6730
companies are using a premiumization strategy to pass on the volatile
prices of molasses and glass, thereby improving realizations. Aniruddha Joshi
+9122 6626 6732
 Stock calls. We initiate coverage on Radico Khaitan, Tilaknagar aniruddhajoshi1@rathi.com
Industries and Globus Spirits with Buy ratings. Top picks: Tilaknagar
(strong IMFL franchisee) and Globus Spirits (healthy balance sheet).
Key Data Globus Radico Tilaknagar

Rating Buy Buy Buy
Current price (`) 102 122 59
Target price (`) 170 161 74
M.Cap (US$m) 45 311 136
Upside (%) 67 32 25
Target PE (x) FY13e 7.0 20.0 13.0
FY11-14e EPS CAGR (%) 21.0 22.2 28.4
FY13e RoE 18.5 13.2 12.7
FY13e RoCE 23.0 14.1 14.8
FY13e PE (x) 4.2 14.9 11.0
Source: Company, Anand Rathi Research
Anand Rathi Share and Stock Brokers Limited does and seeks to do business with companies covered in its research reports. Thus, investors should be aware that the firm
may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision.
Disclosures and analyst certifications are located in Appendix 1

18 April 2012 India Consumer – Alcoholic Beverages – Holding the fort
India Consumer – Alcoholic Beverages

Holding the fort
Investment Argument and Valuation................................................3

Strong Entry Barriers........................................................................6
Sub-segmentation a Key Strategy ...................................................9
Pricing Power to be Weaker...........................................................11
Company Section...........................................................................15
Globus Spirits ............................................................................................16
Radico Khaitan ..........................................................................................33
Tilaknagar Industries .................................................................................49
Un-rated Companies .....................................................................64
Empee Distilleries......................................................................................65
Imperial Spirits...........................................................................................66
Mohan Meakins .........................................................................................67
Som Distilleries..........................................................................................68
United Breweries .......................................................................................69
United Spirits .............................................................................................70
Anand Rathi Research 2

Investment Argument and Valuation

Due to strong entry barriers and numerous taxes, existing liquor
players are likely to maintain their strong position in the market.
Brands with a strong sub-segmentation strategy are likely to expand
categories and brand strength, as brand-building methods are
limited due to the ban on liquor advertisements. However, pricing
power is a concern in the face of volatile raw material costs, as state
governments allow price hikes only once a year. We initiate coverage
on Radico Khaitan, Tilaknagar Industries and Globus Spirits with
Buy ratings. Top picks: Tilaknagar (TP: `74; CMP: `59) due to its
strong IMFL franchisee and Globus Spirits (TP: `170; CMP: `102)
due to its healthy balance sheet.
The advertising ban has created Strong entry barriers protect incumbents
strong entry barriers in establishing The ban on liquor advertising in India has helped domestic brands
brands. This helps incumbents maintain market leadership. The ban has also helped regional players
maintain their market share maintain a unique identity. Liquor companies can promote brands only at
the point of sales. Many companies have got around the ban through
surrogate advertising – a tactical vehicle for brand recall – of products
such as mineral water, CDs and cassettes. However, brand creation
through advertising is limited. Foreign brands, even if launched in India,
are likely to have limited success, as brand creation is extremely
challenging.
Further, registering brands with the military Canteen Stores Department
(CSD), which accounts for 15% of overall liquor consumption, is a
difficult process that takes around nine months. In addition, interstate
transfer fees on molasses and liquor, and high state taxes are major hurdles
in the creation of brands. The stringent norms for distribution as well as
the restricted number of stock-keeping units are also effective entry
barriers.
Fig 1 – Market share of incumbents remains relatively intact due to strong entry barriers
2008 2011
Others
Others
13%
25%
Mohan Meakins
9%
United Spirits
48% Tilaknagar
Mohan Meakins 4% United Spirits
7% 53%
Jagatjit
Tilaknagar
9%
3%
Jagatjit
Radico Radico
7%
10% 12%
Source: Companies
Sub-segmentation to offset limited brand-building & volatile income

There are limited ways to create brands in India’s liquor segment, as
advertisements are banned. Restrictions on launching differentiated SKUs,
and difficulties in expanding the distribution network restrict the creation
of brands. Volatile per capita growth rates and inflation also result in
consumers up-trading or down-trading. In this situation, we believe sub-
segmentation is necessary to grow brand strength and attract consumers.

We expect brands with products at all price points and segments to do well.
A case in point is McDowell No.1, an established brand in whisky, which
has launched regular products as well as premium products such as Single
Malt and Platinum whisky. It has also launched Diet Mate for health
conscious consumers. Rum and brandy are also sold under the umbrella
branding of McDowell. Soda and packaged drinking water are also sold
under McDowell, which helps in the branding exercise.
Price hikes limited to once a year
Liquor prices are determined by state governments once a year. Liquor
companies can change prices once a year but are not permitted to alter
these in the course of the year, irrespective of changes in raw material
prices. The sector also faces progressive taxation, which dissuades price
hikes, as it attracts higher taxes. States in which the government controls
the liquor distribution networks account for 70% of liquor consumption
in India. As a result, the pricing power of liquor companies is weak.
Unlike other consumer companies, liquor companies do not enjoy the
advantage of correcting product prices based on raw material prices, media
inflation, new launches, probable re-launches and competitive pressure.
Further, mis-pricing in the case of liquor companies products cannot be
covered by offering freebies or by managing trade margins and discounts.
A few companies are overcoming the price hike issue by using a
premiumization strategy to pass on the volatile prices of molasses and
glass, thereby improving realizations.
As consumers are upgrading from country liquor to IMFL and from
regular to premium alcohol, we believe that brands with premiumization
strategies will continue to do well.
Fig 2 – Example of premiumization: United Spirits

Premium Mid-price Regular
Scotch Black Dog (12-yr) Black Dog (8-yr)
Whisky Royal Challenge, Signature, McDowell No.1, Bagpiper
Antiquity DSP Black
Vodka Red Romanov Romanov, White Mischief
Rum McDowell Celebration, Old Cask
Brandy McDowell No.1, Honey Bee
Gin Blue Riband
Source: United Spirits
Valuation
We value the sector based on the average one-year-forward PE multiple
over the past five years. Due to higher inflationary pressures and
expectations of a slowdown in consumption, stocks have significantly
underperformed the broader markets. As business fundamentals are
strong, we expect company valuation multiples to be re-rated in the next
one year.
Fig 3 – Sector valuation matrix

CAGR (FY11-13e)
Company Price (`) M.Cap ($m) RoE (%) RoCE (%) Revenue (%) EPS (%) PE(x) FY13e
Globus Spirits 102 45 18.5 23.0 19.8 18.3 4.2
Radico Khaitan 122 311 13.2 14.1 17.8 18.5 14.9
Tilaknagar Inds 59 136 12.7 14.8 16.6 25.1 11.0
Source: Bloomberg, Anand Rathi Research

Stock calls
Globus Spirits: (Buy; CMP: `102; Target Price: `170)
A large part of Globus Spirits’ revenue arises from country liquor, which
faces less competition and enjoys higher profitability. With the rural
economy doing well, we expect organized country liquor players such as
Globus Spirits to post strong earnings CAGR of 21% over FY11-14. We
initiate coverage with a Buy rating and a price target of `170. We value the
stock at a price target of `170, at a target PE of 7x FY13e earnings. Our
target PE is on par with the average PE of the past three years.
Radico Khaitan: (Buy; CMP: `122; Target Price: `161)
Radico Khaitan’s earnings are driven by the strong capability to launch
premium brands and support launches through its premiumization
strategy. We expect 22% earnings CAGR over FY11-14. The company has
a strong distribution network and has made inroads with the CSD in
creating and supporting fresh launches. We initiate coverage with a Buy
rating, and a price target of `161 at a target PE of 20x FY13e earnings.
Our target PE is at a 40% discount to the past average PE of 35x. In the
past three years, the stock has traded at an average PE of 21x.
Tilaknagar Industries: (Buy; CMP: `59; Target Price: `74)
With its focus on brandy, strong presence in the “government-controlled”
southern states and its ties with the CSD, Tilaknagar Industries has strong
profitability margins. We estimate 28% earnings CAGR over FY11-14,
following its nationwide expansion. We initiate coverage with a Buy rating
and a price target of `74. Our price target of `74 is based on a target PE
of 13x FY13e earnings. Our target PE of 13x is at +1 standard deviation
to the mean PE. Due to Tilaknagar’s aggressive investment in new
products and new areas and the improved outlook for the medium term,
we assign higher target multiples.
Key risks
 Higher raw material prices
 Entry of foreign players
Fig 4 – India liquor sector valuation matrix

M.Cap RoE (%) RoCE (%) Revenue EPS CAGR PE (x) Div Yield
Company Price (`) (US$m) FY11 FY12e FY13e FY11 FY12e FY13e CAGR FY11-13(%) FY11-13 (%) FY11 FY12e FY13e FY12e (%)
Globus Spirits 102 45 19.3 17.3 18.5 22.0 21.5 23.0 19.8 18.3 5.8 5.3 4.2 1.0
Radico Khaitan 122 311 10.3 11.6 13.2 11.3 12.3 14.1 17.8 18.5 20.9 18.8 14.9 0.6
Tilaknagar Inds 59 136 12.4 11.1 12.7 13.2 12.9 14.8 16.6 25.1 17.2 13.7 11.0 1.4

Strong Entry Barriers

Several entry barriers exist for new companies and brands. These
include the ban on liquor advertising, limited number of SKUs,
‘import’ duties on the inter-state transfer of molasses and liquor, and
stringent government norms regarding distribution networks. This
protects incumbents from intense competition.
Ban on advertising
Advertising of liquor products is banned in India. Liquor companies can
promote brands only at points of sale. Brand creation through advertising
is limited, though some companies advertise mineral water, CDs and
cassettes. The restriction on advertising has helped domestic brands
maintain market leadership. It has also helped regional players maintain
their unique identity. Foreign brands, even if launched in India, are likely
to have limited success, as brand creation is extremely challenging.
Fig 5 – Market share relatively intact
2008 2011
Others Others
25% 13%
Mohan Meakins
9%
United Spirits
48% Tilaknagar
Mohan Meakins
4% United Spirits
7%
53%
Tilaknagar Jagatjit
3% 9%
Jagatjit
7% Radico Radico
10% 12%
Source: Companies
Registering a brand with the CSD is difficult

Very high entry barriers have Almost 15% of liquor sales takes place in the military’s CSD. To sell
resulted in the market share of all brands through CSD outlets requires prior registration, a process that
incumbents staying constant takes close to nine months. Also, CSD outlets have stringent policies on
quality, supply chains and distribution fee structures. In our view, if a
company is not able to register a brand with the CSD, it would be unable
to attract a large number of consumers. CSD is crucial for driving growth
in south India, which accounts for 59% of liquor consumption in India.
Fig 6 – IMFL consumption: region-wise

East
11%
West
15%
South
59% North
15%
Source: Companies

Inter-state transfer fees on molasses, a key raw material

Molasses is the key raw material in manufacturing liquor in India.
Maharashtra and Uttar Pradesh account for over 50% of sugarcane
production in India. However, most states have levied taxes on “import”
of molasses. This results in far lower profitability for liquor manufacturers.
We believe this acts a key entry barrier, since giving licenses to
manufacture liquor is at the discretion of state governments.
Fig 7 – Sugarcane production across India

('000 tonnes)
400,000
350,000
300,000
250,000
200,000
150,000
100,000
50,000
0
1951
1957
1963
1969
1975
1981
1987
1993
1999
2005
2011
Source: Capitaline
Import duties on inter-state transfers

Selling liquor across states attracts higher excise duty. Liquor
manufactured and sold within a state attracts lower excise duty. The higher
excise duty on liquor from other states results in a higher price, which
leads to lower off-take. Also, these ‘imports’ are allowed only through a
quota system, which restricts the quantity being imported. As a result,
almost all liquor manufacturers are compelled to set up distilleries in every
state. Higher state taxes also result in higher prices.
Distribution is a key entry barrier
Distribution of liquor varies by state. In some states, such as Tamil Nadu,
Kerala and Delhi, the government acts as distributor and markets it
through its own shops. In Uttar Pradesh, Andhra Pradesh and Karnataka,
distribution is semi-controlled by state governments. Governments act as
distributors and the retail sector is not controlled. In other states, such as
Maharashtra and Goa, distribution is free, as with any other consumer
company such as Britannia Industries (biscuits), Colgate Palmolive India
(toothpastes) or HUL (soaps).
Four state governments (Gujarat, Nagaland, Manipur and Mizoram) have
banned the sale of liquor within their territories.

Fig 8 – Distribution structure in India

Structure I: Distributor -- Government; Retail -- Government
Kerala
Tamil Nadu
Delhi
Structure II: Distributor – Government; Retail -- Free
Andhra Pradesh Orissa Uttar Pradesh
Bihar Rajasthan Karnataka
Chattisgarh Uttaranchal Bihar
Structure III: Distributor -- Free; Retail -- Free
Assam West Bengal
Daman Pondicherry
Goa Tripura
Jharkhand Maharashtra
States that have banned liquor
Gujarat
Manipur
Mizoram
Nagaland
Source: Companies
Limited SKUs result in slower distribution expansion

There are only five stock-keeping units (SKU) allowed in liquor. Market
creation can be done through offering different pack sizes. For instance,
smaller packs at affordable prices, smaller packs for new trials and to
attract fresh consumers to a category; larger packs for loyal customers.
Consumer companies can also launch gift packs as well as festival packs
such as for Diwali. The prohibition against the launch of different SKUs
has resulted in lower branding power.
Fig 9 – Limited SKUs allowed in liquor

1000ml Fourth-largest SKU
750ml Highest selling SKU
375ml Second-largest SKU
180ml Third-selling SKU
90ml Market creation – unsuccessful
Source: Companies

Sub-segmentation a Key Strategy

With limited ways to create brands, we believe those companies with
a strong sub-segmentation strategy are likely to enjoy stronger
market share. Uptrading and downtrading due to changing income
levels should result in consumers moving out of brands. We expect
brands across price points and segments to continue to do well.
Limited ways to create brands

As advertising is banned in the sector, the creation of a new brand is
difficult. The restriction on SKU sizes (limited to five SKU varieties) and
the limited number of retail stores also hampers brand building.
Liquor companies can only advertise at the point of purchase (i.e. hotels or
retail stores). Launching new brands also requires permission. The brand
needs to be registered in every state and with the CSD. Consequently, the
creation of new brands is difficult. Strong brand recall and building of
brands is also difficult.
Liquor companies resort to surrogate advertising, by brand building
through the launch of mineral water and soda. Some companies also
launch cassettes and CDs, while others offer coasters, bottle openers and
whisky glasses.
Due to the ban on advertising, the
creation of new brands is difficult. Fig 10 – Limitations on brand building
A sub-segmentation strategy of Ban on advertising
established brands is likely to drive Govt permission required to launch products & variants
growth Limited no. of SKUs
Brand registration required in every state as well as in the CSD
New pricing allowed only once in an year
No support possible through the distribution system (restricted distribution channels)
Source: Anand Rathi Research
Changing demographics to result in uptrading and downtrading

Changes in income levels are keeping the momentum of uptrading (as well
as downtrading) intact. Per capita GDP growth was as low as 6% in FY02
and FY03, but rose to ~15% in FY07 and FY08. It is expected to fall to
12% in FY12 and FY13. Inflation has also remained volatile, in the range
of -1% to 12% in the past four years. This results in volatile real income
growth rates which impact the consumption patterns.
We believe such steep changes in income growth rates as well as inflation
rates, should keep consumers uptrading – as well as downtrading. A range
of products across one brand helps to maintain consumer loyalties,
irrespective of changing income levels.

Fig 11 – Volatile per-capita income growth rates

(`) (%)
80,000 17
60,000 14
40,000 11
20,000 8
0 5
FY01
FY02
FY03
FY04
FY05
FY06
FY07
FY08
FY09
FY10
FY11
FY12e
FY13e
Per Capita GDP Growth (RHS)
Source: Government of India, Anand Rathi Research
Sub-segmentation necessary to create brands

The launches of products across low, mid and premium price points allow
companies to retain consumers by providing uptrading and downtrading
possibilities. These also help companies grow without facing direct
competitive pressures. Launches of products in niche segments or creation
of new sub-segments using price band/ brand strengths also drive growth.
Sub-segmentation helps rationalize price hikes. The launch of different
products across rural and urban areas is also possible with a sub-
segmentation strategy.
Example of McDowell No.1. McDowell No.1 is well-established in
whisky, soda, water, brandy and rum. It has four variants in whisky as well.
Fig 12 – McDowell No.1: sub-segmentation strategy

McDowell
Whisky Rum Brandy Other Drinks
Regular Single Malt Platinum Diet Mate Water Soda


Pricing Power to be Weaker

The pricing power of liquor companies is a concern for the sector.
Most state governments allow price changes only once yearly.
Progressive taxation also dissuades price hikes, since these would
attract higher taxes. Companies with a premiumization strategy
would be able to improve realizations when they pass on the volatile
prices of molasses and glass bottles.
Prices allowed to be changed once a year

Liquor prices are decided by most state governments once every year.
Once liquor companies decide prices, these cannot be altered in the course
of the year, irrespective of changes in raw material prices. As states in
which the government controls distribution account for 70% of the liquor
consumption in India, this weakens the pricing power of liquor companies.
In contrast to other consumer companies, liquor companies cannot alter
product prices in government-controlled markets based on raw material
prices, media inflation, new launches, probable re-launches and
competition. Further, mis-pricing cannot be covered by offering freebies
or by managing trade margins and discounts.
Higher taxes negate much of the price hikes
Liquor companies are faced with issues such as progressive taxation. A
product priced higher attracts a higher level of taxes.
We believe this dissuades companies from hiking prices aggressively as,
apart from price hikes, higher taxes result in much higher MRPs for
consumer companies. Different pricings according to SKU sizes are not
permitted.
Raw material price volatility is higher
Prices of both the major raw materials – glass (for bottling) and molasses –
are volatile. Molasses follow a yearly cyclical pattern in sync with the
sugarcane crop. Grain-based extra neutral alcohol (ENA) are increasing in
India, but are still in an infant stage and so not likely to make any impact.
The price of glass is also volatile due to the volatility of the price as well as
availability of silica. These changes in raw material prices make margins
volatile for liquor companies.
Fig 13 – Lower packaging material costs
HDPE (packaging material) WPI of glass bottles
(`/kg) 150
95
140
85
130
75
120
65 110
55 100
45 90
Apr-04
Aug-04
Jan-05
Jun-05
Oct-05
Mar-06
Aug-06
Dec-06
May-07
Oct-07
Feb-08
Jul-08
Nov-08
Apr-09
Sep-09
Jan-10
Jun-10
Nov-10
Apr-11
Aug-11
Jan-12
Aug-07
Dec-07
May-08
Sep-08
Feb-09
Jul-09
Nov-09
Apr-10
Sep-10
Jan-11
Jun-11
Nov-11
Mar-12
Source: RIL, RBI

Fig 14 – WPI of molasses

140
110
80
50
Jan-05
Jun-05
Jan-10
Jun-10
Jan-12
Apr-04
Aug-04
Oct-05
Mar-06
Aug-06
Dec-06
May-07
Oct-07
Feb-08
Nov-08
Apr-09
Sep-09
Nov-10
Apr-11
Aug-11
Jul-08
Source: RBI
Higher working-capital investment

Apart from weaker pricing power, consumer companies face the challenge
of working-capital investments. Debtor days are higher than that of other
consumer companies, as collections from governments take longer.
Payments from governments also depend on off-take from retail stores.
Hence, retailers enjoy better bargaining power with liquor companies.
Brand-building activities can be created only at the point of sale and
therefore the importance of retailers increases. Limited numbers of retail
shops result in higher promotional spending on each store in order to put
up merchandise to boost off-take.
Fig 15 – Higher working-capital investment

(%)
80
60
40
20
0
Radico Tilaknagar Globus
FY10 FY11
EBITDA margin hovering at around 14%

In the past decade, EBITDA margins of liquor companies have been
hovering at around 14%. We believe the pricing of products has been
done in a manner that allows such companies to maintain annual margins
of around 14%. Those companies with better capital structure and
efficient tax management do well, as there are limited triggers to drive
profitability beyond 14-15%.

Fig 16 – EBITDA margins of liquor companies

(%)
25
22
19
16
13
10
FY07
FY08
FY09
FY10
FY11
Radico Tilaknagar Globus
Source: Companies, Anand Rathi Research
Premiumization extremely necessary to improve realizations

Premiumization is extremely necessary, as raising prices regularly is
difficult. We believe companies with a strong premiumization strategy will
be able to raise realizations without resorting to price hikes.
Considering that consumers are upgrading from country liquor to IMFL
and from regular to premium alcohol, we believe brands with a
premiumization strategy will continue to do well.
Fig 17 – Example of premiumization

Premium Mid-price Regular
Scotch Black Dog (12-yr) Black Dog (8-yr)
Whisky Royal Challenge, Signature, McDowell No.1, Bagpiper
Antiquity DSP Black
Vodka Red Romanov Romanov, White Mischief
Rum McDowell Celebration, Old Cask
Brandy McDowell No.1, Honey Bee
Gin Blue Riband

Fig 18 – Liquor companies in India and major brands

Company Whisky Rum Vodka Brandy Beer Gin
Empee Distilleries Old Secret, Victoria, Napoleon
Sixer
Globus Spirits County club Hannibal Rum Le' Mans White Lace
Imperial Spirits Glen Special, Black Magic, Hatrick Black Magic, Imperial, Imperial Seagull London Dry
Gold Coast Malt Imperial Iceberg Exclusive VSOP
Premium
Mohan Meakins Summer Hall, Old Monk Triple Crown, Big Ben London
Colonel's special, Doctor's Reserve No.1
Golden Eagle
Radico Khaitan After Dark, 8PM Contessa Magic Moments Old Admiral,
Morpheus
Som Distilleries Black Fort Hunter, Woodpecker
Tilaknagar Inds. Mansion House, Madira XXX Rum Castle Club Mansion House Savoy Club
Senate Royale
United Breweries Kingfisher, Zingaro,
London Pilsner
United Spirits McDowell No.1, McDowell Celebrations, Red Romanov, McDowell No.1, Blue Riband
Bagpiper, Old Cask White Mischief Honey Bee
Royal Challenge
Source: Companies

Company section

Consumer
India I Equities
Initiating Coverage
18 April 2012
Globus Spirits Rating: Buy

Target Price: `170
Focus on high-growth country liquor, few organized peers; Buy Share Price: `102
The strong performance of the rural economy is likely to positively
impact Globus Spirits. A large part of the company’s revenue arises
from country liquor, which faces less competition and enjoys higher Key data GBSL IN / GLOS.BO
profitability. We estimate robust earnings CAGR of 21% over FY11-14 52-week high / low `158 / `87
Sensex / Nifty 17358 / 5290
and initiate coverage with a Buy rating and a price target of `170.
3-m average volume US$0.1m
Market cap `2.3bn / US$45m
 Niche play on country liquor. Globus Spirits is a niche play in the
Shares outstanding 23m
country liquor segment in India, which sees much lower competition than
the IMFL (Indian-made foreign liquor) segment. With no new
manufacturers entering this segment, we expect incumbents to maintain
steady growth rates and profitability. Most companies in this field are
Shareholding pattern (%) Dec ’11 Sep ’11 Jun ’11
local and do not have strong managements or financial bandwidth. This
Promoters 66.3* 59.9 59.9
makes it easier for organized players like Globus to gain market share. - of which, pledged 0.0 0.0 0.0
Free float 33.7 40.1 40.1
 Rising rural economy drives growth. The increase in the MSP - Foreign institutions 2.9 4.3 3.9
(minimum support price), greater allocations to the National Rural - Domestic institutions 14.1 16.6 16.8
Employee Guarantee (NREGA) scheme and two good monsoons have - Public 16.7 19.2 19.4
raised the income of rural consumers and boosted consumption. Globus *Acquisition of ADL’s liquor division- Issue of 3.24m shares
has a strong distribution network in rural areas and has placed its brands
in the military’s Canteen Stores Department (CSD) distribution network.
 Lower costs of country liquor protect profitability. The company’s Relative price performance
country liquor products require very little ad-spend, as competition is less 160
intense. Almost 75% of country liquor is sold in PET bottles. This 140 Sensex
reduces the cost of production as well as of distribution. As a result,
Globus reports higher profitability than several IMFL manufacturers. 120
100
 Valuation. We value the stock at a price target of `170, at a target PE of GBSL
7x FY13e earnings. Our target PE is on par with the average PE of the 80
Dec-11
Apr-11
Jun-11
Aug-11
Oct-11
Feb-12
Apr-12
past three years. Risks. Changes in taxation or ban on sale of country
liquor.
Source: Bloomberg
Key financials (YE Mar) FY10 FY11 FY12e FY13e FY14e

Sales (`m) 2,650 3,813 4,600 5,469 6,505
Net profit (`m) 173 399 443 559 707
EPS (`) 8.7 17.4 19.3 24.4 30.9
Growth (%) (17.2) 99.7 10.8 26.2 26.6
PE (x) 11.7 5.8 5.3 4.2 3.3
PBV (x) 1.1 1.0 0.8 0.7 0.6 Aniruddha Joshi
RoE (%) 23.4 19.3 17.3 18.5 19.5 +9122 6626 6732
RoCE (%) 23.2 22.0 21.5 23.0 24.3
Dividend yield (%) 1.0 1.0 1.0 1.0 1.0 Shirish Pardeshi
Net gearing (%) (3.8) 17.9 13.4 7.4 (0.1) +9122 6626 6730

18 April 2012 Globus Spirits – Focus on high-growth country liquor, few organized peers; Buy
Quick Glance – Financials and Valuations

Fig 1 – Income statement (`m) Fig 2 – Balance sheet (`m)
Year-end: Mar FY10 FY11 FY12e FY13e FY14e Year-end: Mar FY10 FY11 FY12e FY13e FY14e
Net revenues 2,650 3,813 4,600 5,469 6,505 Share capital 198 230 230 230 230
Revenue growth (%) 34.0 43.9 20.6 18.9 18.9 Reserves & surplus 1,416 1,855 2,271 2,804 3,484
- Op. expenses 2,281 3,219 3,834 4,523 5,342 Net worth 1,614 2,085 2,501 3,034 3,714
EBITDA 369 595 767 947 1,163 Minority interest - - - - -
EBITDA margin (%) 13.9 15.6 16.7 17.3 17.9 Total debt 137 484 484 484 484
- Interest expenses 14 28 44 44 44 Def. tax liab. (net) 184 260 260 260 260
- Depreciation 46 71 115 139 162 Capital employed 1,935 2,830 3,246 3,778 4,458
+ Other income 33 59 6 11 24 Net fixed assets 1,363 2,324 2,707 3,116 3,552
- Tax 170 155 172 217 275 Investments 0 1 1 1 1
Effective tax rate (%) 49.6 27.9 28.0 28.0 28.0 - of which, liquid 0 1 1 1 1
Reported cons. PAT 289 399 443 559 707 Net working capital 366 442 425 421 416
+/- Extraordinary items 117 - - - - Cash and bank balance 206 63 113 240 489
+/- Minority interest - - - - - Capital deployed 1,935 2,830 3,246 3,778 4,458
Adjusted cons. PAT 173 399 443 559 707 Net debt 115 680 631 504 254
FDEPS (`/share) 8.7 17.4 19.3 24.4 30.9 WC (%) 13.8 11.6 9.2 7.7 6.4
Adj. FDEPS growth (%) (17.2) 99.7 10.8 26.2 26.6 Book value (`/sh) 91.0 102.4 120.6 143.8 173.5
Source: Company, Anand Rathi Research Source: Company, Anand Rathi Research
Fig 3 – Cash-flow statement (`m) Fig 4 – Ratio analysis @ `102

Consolidated PAT 289 399 443 559 707 P/E (x) 11.7 5.8 5.3 4.2 3.3
+ Non-cash items 46 71 115 139 162 P/B (x) 1.1 1.0 0.8 0.7 0.6
Cash profit 387 657 558 697 869 EV/sales (x) 0.9 0.7 0.6 0.5 0.4
- Incr./(decr.) in WC (199) (217) 16 4 5 EV/EBITDA (x) 6.4 4.6 3.6 2.9 2.4
Operating cash flow 188 440 574 702 874 RoAE (%) 23.4 19.3 17.3 18.5 19.5
- Capex (722) (1,030) (498) (548) (598) RoACE (%) 23.2 22.0 21.5 23.0 24.3
Free cash-flow (534) (590) 76 154 276 Dividend yield (%) 1.0 1.0 1.0 1.0 1.0
- Dividend - - (27) (27) (27) Dividend payout (%) 11.5 5.7 5.2 4.1 3.2
+ Equity raised 750 - - - - RM to sales (%) 61.1 58.2 57.2 56.6 56.0
+ Debt raised (36) 446 - - - Admin exps to sales (%) 7.5 6.7 6.7 6.7 6.7
- Investments - (1) - - - EBITDA growth (%) 41.1 61.2 29.0 23.4 22.9
- Misc. items - - - - - EPS growth (%) (17.2) 99.7 10.8 26.2 26.6
Net cash-flow 180 (145) 49 127 249 PAT margin (%) 6.5 10.5 9.6 10.2 10.9
+ Op. cash & bank bal. 24 204 63 113 240 Volume growth (%) - - - - -
Cl. Cash & bank bal. 204 58 113 240 489 Realization growth (%) - - - - -
Fig 5 – Valuation chart (PE band) Fig 6 – Revenue breakdown (FY11)
(`)
350
Other sales Branded IMFL
300 6% 8%
12x
Bulk alcohol
250 10x 15%
200 8x
150 6x
100 4x Country liquor

IMFL franchisee 47%
50 24%
0
May-10
Nov-09
Jan-10
Oct-10
Dec-10
Apr-11
Apr-12
Sep-09
Mar-10
Aug-10
Feb-11
Jun-11
Oct-11
Dec-11
Aug-11
Feb-12
Source: Bloomberg, Anand Rathi Research Source: Company


A large part of Globus Spirits’ revenue arises from country liquor, a
segment that sees less competition and higher profitability. With the
rural economy doing well, we expect organized country-liquor
manufacturers such as Globus Spirits to post strong earnings CAGR
of 21% over FY11-14. We initiate coverage with a Buy rating and a
price target of `170.
Niche play on country liquor

There are no organized players in the country liquor segment in India.
Strong liquor companies such as United Spirits or United Breweries focus
on IMFL or beer. No multinationals are into country liquor. We believe
that, as local manufacturers are small and regional, they lack the financial
muscle or management bandwidth to create strong brands. This allows
organized players such as Globus Spirits to gain from the low competitive
pressure.
Developing brands in country liquor is extremely difficult for any new
player, as setting up the distribution network and establishing relations
Low competition is helping the
with vendors is not easy. The lack of proper advertisement channels also
company grow steadily while at the
results in lower brand-building activities.
same time maintain profit margins
Fig 7 – Liquor companies and sub-segments
Players Imported liquor IMFL Beer Country liquor
Globus Spirits No Yes No Yes
United Spirits Yes Yes No No
United Breweries No No Yes No
Pernod Ricard Yes No No No
Radico Khaitan No Yes No Yes
Tilaknagar No Yes No No
Tiger Beer No No Yes No
Source: Companies
Growing rural economy

The rising per capita income of rural consumers is driving consumption
levels. In India, per capita income has grown 13.5% over FY07-11, against
10.3% over FY01-07. Rising disposable income is driving growth of
consumer products, including liquor. A good monsoon and an increase in
government expenditure in rural areas would maintain the higher income
levels and help sustain the growth in consumption.
Higher allocations to NREGA and the increase in minimum support
prices are also driving the income levels of consumers.

Fig 8 – Higher per-capita income of consumers

(`) (%)
80,000 19.0
64,000 16.0
48,000 13.0
32,000 10.0
16,000 7.0
0 4.0
FY01
FY02
FY03
FY04
FY05
FY06
FY07
FY08
FY09
FY10
FY11
FY12e
FY13e
Per capita income Growth (RHS)
Source: RBI, Anand Rathi Research
Focus on low cost of operations

Globus focuses on low-cost production and distribution. The lower prices
of raw materials, as well as of packaging, helps keep costs in check.
Further, the lower expenditure on distribution, as well as limited brand-
building activity, helps Globus maintain profit margins comparable to that
of IMFL manufacturers, though at much lower realizations.
Fig 9 – Comparable EBITDA margins of IMFL players

(%)
30
25
20
15
10
0
FY07
FY08
FY09
FY10
FY11
Radico Tilaknagar Globus United Spirits

Source: Companies
Valuations
We initiate coverage on Globus Spirits with a Buy rating and a price target
of `170, valuing the stock at the mean PE of the past three years. The
stock has quoted at the mean PE of 7x in the past three years and quotes
at 5.3x now. We expect strong return ratios as well as robust 21% earnings
CAGR over FY11-14. As a result, we expect the stock to be re-rated to
the mean PE. At our target price and FY13e earnings, the stock would
trade at a PE of 7x.

Fig 10 – Mean PE and standard deviation

11
+2SD
10
9
+1SD
8
7 Mean
6
-1SD
5
Sep-09
Oct-10
Oct-11
Nov-09
Jan-10
Mar-10
May-10
Aug-10
Dec-10
Feb-11
Apr-11
Jun-11
Aug-11
Dec-11
Feb-12
Apr-12
Risks
 Increased competitive pressure
 Change in taxes or ban on sale of country liquor.

Niche Play on Country Liquor

Globus Spirits is a niche play on the country liquor segment in
India, where competition is much lower than in IMFL. With no new
manufacturers entering this segment, we expect incumbents to
maintain steady growth rates and profitability. Most players in this
segment are local and do not have strong management or financial
bandwidth. This makes it easier for organized companies like
Globus Spirits to gain market share.
Few organized players in country liquor

There are few regulated manufacturers in the country liquor segment in
India. Strong liquor manufacturers such as United Spirits or United
Breweries focus on IMFL or beer. No multinational company is into
country liquor. We believe that, as local liquor companies are small and
regional, they lack the financial muscle or management bandwidth to
develop strong brands. This allows organized players such as Globus
Spirits to gain from the lower competitive pressure.
Few organized manufacturers of Fig 11 – Liquor companies within segments

country liquor in India; MNCs are Players Imported liquor IMFL Beer Country liquor
Globus Spirits No Yes No Yes
not interested in the country liquor
United Spirits Yes Yes No No
sub-segment
United Breweries No No Yes No
Pernod Ricard Yes No No No
Radico Khaitan No Yes No Yes
Tilaknagar No Yes No No
Tiger Beer No No Yes No
Source: Companies
Difficult for competition to develop new brands

We believe that, as country liquor is sold mainly in rural areas, it is difficult
to develop a new brand. Lack of proper advertising channels and the lower
possibility of surrogate advertising in rural areas limit the development of
new brands. Those with established brands are likely to continue to do
well in rural areas. We believe that Globus has developed strong brands in
this segment and will continue to enjoy market leadership.
Fig 12 – Difficulties in creating brands in rural areas

Lack of proper advertising channels
Lower possibility of surrogate advertising
Limited no. of shopkeepers makes it necessary to maintain strong ties with individual vendors/ shopkeepers
Separate branding required to cater to rural areas
Source: Company
Strong distribution network in country liquor

As country liquor products are marketed in rural areas, they require more
investment in the distribution set-up. The lack of scale advantage also
limits the scope for expansion in distribution network, as limited stocks
are sold in a village. The combination of bumpy rural roads and glass
bottles also result in higher losses. Establishing a distribution network for
any new player would be difficult.

Fig 13 – Entry barriers to building a distribution network in rural areas

High investment in logistics
Lack of scale advantages due to sparse population in rural areas
Bumpy roads and “normal” loss in transit
High investment in working capital
Source: Company
Expansion of IMFL brands to rural areas easier for Globus

With established brands and a distribution network, we believe it is easier
for Globus Spirits to create IMFL franchisees in rural areas. As consumers
are already aware of the company’s products and brands, up-trading is
likely to be easier.
Globus started the IMFL business division in 1999. The company has also
launched four brands – County Club, Le’ Mans, Hannibal and White Lace.
It plans to leverage its distribution network in rural areas to grow the
IMFL business.
Fig 14 – Strong country liquor brands
Source: Company

Growing rural economy

The increase in minimum support price (MSP), greater allocations
to the national rural employment guarantee scheme (NREGA) and
two good monsoons have raised the income of rural consumers. We
believe that this will boost consumption. Further, Globus has a
strong rural distribution network, and has registered its brands with
the CSD.
Higher per-capita income

Higher per-capita income in rural The rise in per capita income of rural consumers is driving the growth in
areas, higher allocations for the overall rural consumption levels. Per-capita income has grown 13.5% over
NREGA and rising disposal FY07-11, against 10.3% over FY01-07. We believe a good monsoon and a
incomes are expected to drive rise in government expenditure will maintain income levels at higher levels
consumption in rural areas and continue to drive growth in consumer products, including liquor.
Fig 15 – Higher per-capita income of consumers

(`) (%)
80,000 19.0
64,000 16.0
48,000 13.0
32,000 10.0
16,000 7.0
0 4.0
FY01
FY02
FY03
FY04
FY05
FY06
FY07
FY08
FY09
FY10
FY11
FY12e
FY13e
Per capita income Growth (RHS)
Increase in NREGA allocations

The greater allocation for NREGA schemes is raising the income levels of
low-income rural consumers. NREGA allocations also act as a floor for
remuneration to agricultural workers. We believe this is driving the income
levels of agricultural workers and thereby rural consumption levels.
Fig 16 – Greater allocations for the NREGA

(`m) (%)
450,000 130
360,000 100
270,000 70
180,000 40
90,000 10
0 -20
FY07
FY08
FY09
FY10
FY11
FY12e
FY13e
NREGA Allocations Growth (RHS)


Rising minimum support prices

Rising MSPs are driving up the prices of food-grains, but have also
contributed to raising the income levels of rural consumers. Rice MSP has
registered 11.7% CAGR over FY07-11, against 2.2% over FY01-06. Wheat
MSP registered CAGR of 8.6% over FY07-11, against 2.8% over FY01-06.
Even as MSPs move up to higher levels, they have resulted in rising
income levels and should help fuel further consumption.
Fig 17 – Rising minimum support prices

(`/quintal)
3,500
3,000
2,500
2,000
1,500
1,000
500
0
FY98
FY99
FY00
FY01
FY02
FY03
FY04
FY05
FY06
FY07
FY08
FY09
FY10
FY11
FY12
Rice Wheat Arhar
Improving infrastructure in rural areas

Improved infrastructure in rural areas is aiding the distribution of
consumer products. In addition to road transport, we believe investment
in cold chains by hoteliers and retail stores will fuel the availability of
alcoholic beverages. The wider reach of the mass media too constantly
pushes up aspiration levels and is a major reason behind brand awareness.

Lower Costs Protect Profitability

Globus’ country liquor products require very little ad-spend as
competition is less intense. Almost 75% of country liquor is sold in
PET bottles. This reduces the cost of production as well as of
distribution. As a result, Globus reports higher profitability than
several IMFL manufacturers.
Focus on low cost of production

Globus Spirits focuses on low-cost production and distribution. Use of
lower cost raw materials as well as packaging materials has helped hold
costs in check. In addition, lower expenditure on distribution as well as
The focus on low cost of production fewer brand-building activities help Globus maintain profit margins
and packaging material is expected comparable to that of IMFL manufacturers, though at much lower
to protect profit margins realizations.
Fig 18 – EBITDA margins comparable with IMFL players

(%)
30
25
20
15
10
0
FY07
FY08
FY09
FY10
FY11
Radico Tilaknagar Globus United Spirits
Source: Companies
Lower cost of packaging materials

The cost of packaging for country liquor is lower than for IMFL. Country
liquor is sold in PET bottles, IMFL in glass bottles. Plastic bottles are
cheaper than glass and easier to distribute. The lower cost of packaging
material helps the company maintain lower selling prices and still hold on
to healthy profit margins.
Fig 19 – The price of glass is growing at a faster rate than that of packaging material HDPE
HDPE (Packaging material) WPI of glass bottles
(`/kg) 150
95
140
85
130
75
120
65 110
55 100
45 90
Apr-04
Aug-04
Jan-05
Jun-05
Oct-05
Mar-06
Aug-06
Dec-06
May-07
Oct-07
Feb-08
Jul-08
Nov-08
Apr-09
Sep-09
Jan-10
Jun-10
Nov-10
Apr-11
Aug-11
Jan-12
Aug-07
Dec-07
May-08
Sep-08
Feb-09
Jul-09
Nov-09
Apr-10
Sep-10
Jan-11
Jun-11
Nov-11
Mar-12
Source: RIL, RBI

Lower brand-building expenditure

As competition is lower in country liquor, ad-spend too is lower. Country
liquor brands do not require celebrity endorsements. We believe the ad-
spend at the ‘point of sale’ is also much less for country liquor than for
IMFL manufacturers. The need for surrogate advertising is also much
lower for country liquor brands.
Fig 20 – Brand-building expenditure as % of net sales (FY11)

(%)
14
12
10
0
Globus Tilaknagar Radico United spirits
Source: Companies

Financials
We expect Globus Spirits to report 19.5% revenue CAGR over FY11-
14, with an EBITDA margin of around 17%. Due to the company’s
strong operational performance, we estimate net profit CAGR of 21%
over FY11-14. With its lower capex and working-capital
requirements, we expect return ratios to improve.
Strong revenue growth ahead

We expect Globus Spirits to report revenue CAGR of 19.5% over FY11-
14e, driven by the launch of products and brand extensions. We also
expect geographical expansion and the sharper focus on IMFL to sustain
the revenue growth momentum.
Fig 21 – Strong revenue growth likely

(`m) (%)
7,000 45
6,000 40
5,000 35
Geographical expansion, launch of 4,000 30
brands and extensions are expected
3,000 25
to drive growth
2,000 20
1,000 15
0 10
FY05
FY06
FY07
FY08
FY09
FY10
FY11
FY12e
FY13e
FY14e
Revenues Growth (RHS)
EBIDTA margins to improve

We expect Globus to report an EBITDA margin of ~17% in the next
three years, with a slight upward trend. We expect the company to manage
any increase in costs through price hikes as well as a better revenue-mix.
The rising revenue share of IMFL is expected to drive margins up in the
long term.
Fig 22 – Improving EBITDA margin

(%)
18
15
12
0
FY12e
FY13e
FY14e
FY05
FY06
FY07
FY08
FY09
FY10
FY11

Steady net profit growth over FY11-14e

We expect 21% earnings CAGR over FY11-14. A strong operational
performance should help the company maintain robust profit margins.
Lower capex and working capital needs are likely to result in higher free
cash flow generation as well as higher ‘other income’.
Fig 23 – Net profit and margins

(`m) (%)
800 12
600 9
400 6
200 3
0 0
FY05
FY06
FY07
FY08
FY09
FY10
FY11
FY12e
FY13e
FY14e
Net profit Net profit margin (RHS)
Return ratios to improve with lower capex

We expect the company to report a slight improvement in return ratios
over FY11-14, due to lower investment in working capital and capex.
However, as we do not anticipate any increase in dividend payouts, we
expect the rising cash on its balance sheet to marginally reduce return
ratios.
Fig 24 – Improving return ratios

(%)
45
40
35
30
25
20
15
10
5
0
FY05
FY06
FY07
FY08
FY09
FY10
FY11
FY12e
FY13e
FY14e
RoE RoCE

Fig 25 – Income statement (`m)

Year-end: Mar FY10 FY11 FY12e FY13e FY14e
Gross sales 3,843 5,216 6,292 7,481 8,897
Less: excise duty 1,193 1,402 1,692 2,011 2,392
Net sales 2,650 3,813 4,600 5,469 6,505
Growth (%) 34.0 43.9 20.6 18.9 18.9
Expenditure
Cost of goods sold 1,620 2,220 2,633 3,095 3,644
Staff cost 45 67 83 98 117
Manufacturing expenses 416 674 810 963 1,145
Admin & selling exps 200 256 308 366 436
EBITDA 369 595 767 947 1,163
EBITDA margin (%) 13.9 15.6 16.7 17.3 17.9
Growth (%) 41.1 61.2 29.0 23.4 22.9
Depreciation 46 71 115 139 162
EBIT 323 523 652 808 1,002
Interest expense & bank exps 14 28 44 44 44
Other income 33 59 6 11 24
Profit before tax 342 554 615 776 982
Income taxes 170 155 172 217 275
Income tax rate (%) 49.6 27.9 28.0 28.0 28.0
Profit after tax 173 399 443 559 707
Share of profit from associates - - - - -
Pref. dividends/minority interest - - - - -
Profit before X/O 173 399 443 559 707
PAT margin (%) 6.5 10.5 9.6 10.2 10.9
Growth (%) 33.4 131.5 10.8 26.2 26.6
Extraordinary Items 117 - - - -
Profit for shareholders 289 399 443 559 707
Number of shares (m) 20 23 23 23 23

Earnings per share bef X/O (`) 8.7 17.4 19.3 24.4 30.9
Earnings per share aft X/O (`) 14.6 17.4 19.3 24.4 30.9

Fig 26 – Balance sheet (`m)

Sources of funds
Share capital 198 230 230 230 230
Reserves and surplus 1,416 1,855 2,271 2,804 3,484
Deferred tax liability 184 260 260 260 260
Net worth 1,798 2,346 2,762 3,294 3,974
Net worth net of rev. reserve 1,798 2,346 2,762 3,294 3,974
Secured loans 55 481 481 481 481
Unsecured loans 82 3 3 3 3
Total loans 137 484 484 484 484
Total 1,935 2,830 3,246 3,778 4,458
Application of funds
Fixed assets
Gross block 1,120 2,565 3,191 3,739 4,337
Less: depreciation 226 370 485 623 785
Net block 894 2,195 2,707 3,116 3,552
Capital WIP 469 129 - - -
Gross block-brand value 1,120 2,565 3,191 3,739 4,337
Goodwill - - - - -
Liquid investments 0 1 1 1 1
Other investments - - - - -
Current assets 1,133 1,265 1,458 1,755 2,206
Inventories 272 333 391 465 553
Sundry debtors 280 421 506 602 716
Cash & bank balances 206 63 113 240 489
Loans & advances 375 448 448 448 448
Current liabilities 561 760 920 1,094 1,301
Liabilities 561 760 920 1,094 1,301
Provisions - - - - -
Net current assets 571 505 538 661 905
Total 1,935 2,830 3,246 3,778 4,458
Fig 27 – Cash-flow statement (`m)

OCF before W/C changes 387 657 558 697 869
W/c changes (199) (217) 16 4 5
OCF after W/C changes 188 440 574 702 874
Cash flow from investing - - - - -
Capital expenditure (724) (1,032) (500) (550) (600)
Disposal 2 2 2 2 2
Investments - (1) - - -
Acquisitions - - - - -
Net cash used in investing (722) (1,031) (498) (548) (598)
Cash flow from financing - - - - -
Changes in share capital 750 - - - -
Changes in loans (36) 446 - - -
Dividends - - (27) (27) (27)
Net cash used in financing 714 446 (27) (27) (27)
Extraordinary items - - - - -
Changes in cash & equivalents 180 (145) 49 127 249
Opening cash & equivalents 24 204 63 113 240
Closing cash & equivalents 204 58 113 240 489
Free cash flow (534) (590) 76 154 276

Fig 28 – Ratio analysis @ `102

Profitability ratios (%)
EBITDA margin 13.9 15.6 16.7 17.3 17.9
EBIT margin 12.2 13.7 14.2 14.8 15.4
PBT margin 12.9 14.5 13.4 14.2 15.1
PAT margin 6.5 10.5 9.6 10.2 10.9
Income tax rate 49.6 27.9 28.0 28.0 28.0
Excise duty rate 45.0 36.8 36.8 36.8 36.8
RoE 23.4 19.3 17.3 18.5 19.5
RoCE 23.2 22.0 21.5 23.0 24.3
Major costs as % of net sales

Cost of goods sold 61.1 58.2 57.2 56.6 56.0
Staff cost 1.7 1.8 1.8 1.8 1.8
Manufacturing expenses 15.7 17.7 17.6 17.6 17.6
Admin & selling exps 7.5 6.7 6.7 6.7 6.7
Per share data (`)

Earnings per share 8.7 17.4 19.3 24.4 30.9
Growth (%) (17.2) 99.7 10.8 26.2 26.6
Book value per share 91.0 102.4 120.6 143.8 173.5
Growth (%) 65.5 12.6 17.7 19.3 20.7
Dividend per share 1.0 1.0 1.0 1.0 1.0
Growth (%) n/a - - - -
Sales per share 134.1 166.5 200.9 238.8 284.0
Growth (%) (16.9) 24.2 20.6 18.9 18.9
Turnover ratios
Debtors turnover ratio 10.6 11.0 11.0 11.0 11.0
Current liabilities turnover ratio 21.2 19.9 20.0 20.0 20.0
Inventory turnover ratio 10.3 8.7 8.5 8.5 8.5
Fixed assets turnover ratio 51.4 60.9 58.8 57.0 54.6
Valuation ratios (x)

Price earnings 11.7 5.8 5.3 4.2 3.3
Price/book value 1.1 1.0 0.8 0.7 0.6
EV/sales 0.9 0.7 0.6 0.5 0.4
EV/EBITDA 6.4 4.6 3.6 2.9 2.4
Dividend yield (%) 1.0 1.0 1.0 1.0 1.0
Other ratios (%)

Net debt/equity (3.8) 17.9 13.4 7.4 (0.1)
FCF/EPS (309.8) (147.8) 17.1 27.5 39.0
OCF/sales 7.1 11.5 12.5 12.8 13.4
WC as % of net sales 13.8 11.6 9.2 7.7 6.4
Div payout ratio 11.5 5.7 5.2 4.1 3.2

Company Background & Management

Established in 1993, Globus Spirits focuses on country liquor. Its
main brands include Nimboo, Narangee, Ghoomar and Heer
Ranjha. It recently entered the IMFL sub-segment.
Background
Established in 1993, Globus Spirits focuses on country liquor and IMFL.
It is a market leader in three north Indian states (Rajasthan, Haryana and
Delhi) in country liquor. Its major brands in country liquor are Nimboo,
Narangee, Ghoomar and Heer Ranjha. It is also the contract manufacturer
for the Officer’s Choice brand of Jagatjit Industries.
The company has recently begun focusing on IMFL. Its key IMFL brands
Globus Spirits focuses on country are County Club whisky and Hannibal rum.
liquor – but is now expanding its
IMFL franchise Fig 29 – Revenue break-up (FY11)
Other sales Branded IMFL
6% 8%
Bulk alcohol
15%
Country liquor
IMFL franchisee 47%
24%
Source: Company
Management background
Founder and managing director Ajaykumar Swarup is an IIM graduate,
and has long experience in setting up liquor companies. He had earlier co-
promoted Associated Distilleries. Another promoter, Shekhar Swarup, a
Bradford University management graduate, with five years’ experience
building brands in IMFL, is vice-president of the IMFL sub-segment.
Bhaskar Roy, a chartered accountant with a Ph.D. in commerce, is chief
financial officer.
Fig 30 – Key management

Person Designation Role
Ajay Kumar Swarup Managing director Overall business operations
Shekhar Swarup Promoter IMFL division
Bhaskar Roy CFO Finance & secretarial
Source: Company

Consumer
India I Equities
Initiating Coverage
18 April 2012
Radico Khaitan Rating: Buy

Target Price: `161
Strong premiumization strategy, successful brand launches; Buy Share Price: `122
Radico Khaitan has the second-largest distribution network in India
and has made inroads into the military’s Canteen, Stores & Department
to create and support its product launches. The company’s earnings are Key data RDCK IN / RADC.BO
driven by its capability to launch new products/brands with a strong 52-week high / low `148 / `108
premiumization strategy. We estimate EPS CAGR of 22% over FY11-14.
We initiate coverage with a Buy rating and a price target of `161. Market cap `16.2bn / US$311m
 Effective branding capability. Innovative packaging, celebrity
endorsements and an effective communication strategy have helped
Radico launch and build premium brands. The erstwhile country liquor
company has launched successful brands such as 8PM, Old Admiral &
Shareholding pattern (%) Dec’11 Sep ’11 Jun ’11
Contessa.
Promoters 39.9 39.9 39.9
- of which, pledged 45.4 42.3 41.0
 Strong distribution network. Radico has the second-largest distribution
Free float 60.1 60.1 60.1
network in India, after United Spirits. It sells through ~35,000 retail - Foreign institutions 24.4 25.4 26.7
outlets that cater to almost 80% of India’s liquor consuming areas. It has - Domestic institutions 14.0 15.3 14.8
also made inroads into the Canteen Stores Department (CSD). - Public 21.7 19.4 18.6
Considering the difficulty involved in establishing a distribution network
that is quasi-controlled by the government, this forms a strong entry
barrier to potential competition.
 Strong range of brands. Radico has developed a range of strong brands Relative price performance
across price points and SKUs. This allows it to tap consumers across 150
income levels. The company has products across all types of liquor, 140
Sensex
except for beers and wines. It is also strong in the country liquor and 130
industrial alcohol segments. 120
110
 Valuation. We value the stock at a price target of `161, a target PE of RDCK
20x FY13e earnings. Our target PE is at a 40% discount to the past 100
Dec-11
Apr-11
Jun-11
Aug-11
Oct-11
Feb-12
Apr-12
average PE of 35x. In the past three years the stock has traded at an
average PE of 21x. Risk. Higher prices of molasses.
Source: Bloomberg

Sales (`m) 7,988 9,464 11,127 13,137 15,512
Net profit (`m) 415 773 858 1,086 1,411
EPS (`) 3.2 5.8 6.5 8.2 10.6
Growth (%) 127.4 85.1 11.0 26.4 29.9
PE (x) 38.7 20.9 18.8 14.9 11.5
RoE (%) 9.2 10.3 11.6 13.2 15.1 +9122 6626 6732
RoCE (%) 10.5 11.3 12.3 14.1 16.4
Net gearing (%) 50.4 58.6 57.2 53.0 46.0 +9122 6626 6730

18 April 2012 Radico Khaitan – Strong premiumization strategy, successful brand launches; Buy

Net revenues 7,988 9,464 11,127 13,137 15,512 Share capital 264 265 265 265 265
EBITDA 1,334 1,559 1,833 2,256 2,797 Minority interest - - - - -
EBITDA margin (%) 16.7 16.5 16.5 17.2 18.0 Total debt 4,461 4,912 5,012 5,112 5,112
- Tax 84 267 334 443 605 Investments 894 709 509 409 409
Reported cons. PAT 415 694 858 1,086 1,411 Net working capital 4,982 6,217 6,696 7,273 7,955
+/- Extraordinary items - (79) - - - Cash and bank balance 332 94 71 82 103
Adjusted cons. PAT 415 773 858 1,086 1,411 Net debt 3,699 4,607 4,929 5,118 5,098
FDEPS (`/share) 3.2 5.8 6.5 8.2 10.6 WC (%) 62.4 65.7 60.2 55.4 51.3
Adj. FDEPS growth (%) 127.4 85.1 11.0 26.4 29.9 Book value (`/sh) 48.7 52.9 58.5 65.8 75.4
Fig 3 – Cash-flow statement (`m) Fig 4 – Ratio analysis @`122

Consolidated PAT 415 694 858 1,086 1,411 P/E (x) 38.7 20.9 18.8 14.9 11.5
Cash profit 760 1,125 1,172 1,461 1,833 EV/sales (x) 2.5 2.1 1.8 1.5 1.3
- Incr./(decr.) in WC (881) (1,007) (479) (577) (682) EV/EBITDA (x) 15.1 13.0 11.1 9.0 7.3
Operating cash-flow (121) 118 693 884 1,151 RoAE (%) 9.2 10.3 11.6 13.2 15.1
- Capex (280) (540) (900) (950) (1,000) RoACE (%) 10.5 11.3 12.3 14.1 16.4
Free cash-flow (401) (421) (207) (66) 151 Dividend yield (%) 0.5 0.6 0.6 0.7 0.7
- Dividend (36) (92) (115) (123) (131) Dividend payout (%) 19.0 12.0 11.6 9.8 8.0
+ Equity raised 3,330 60 - - - RM to sales (%) 49.2 47.5 47.6 46.9 46.0
+ Debt raised (2,542) 450 100 100 - Admin exps to sales (%) 21.9 22.5 22.5 22.5 22.5
- Investments (568) (246) 200 100 - EBITDA growth (%) 135.9 16.9 17.5 23.1 24.0
- Misc. items 129 11 - - - EPS growth (%) 127.4 85.1 11.0 26.4 29.9
Net cash-flow (87) (238) (23) 11 20 PAT margin (%) 5.2 8.2 7.7 8.3 9.1
Cl. Cash & bank bal. 332 94 71 82 103 Realization growth (%) - - - - -
Fig 5 – Valuation chart (PE band) Fig 6 – Revenue breakdown (FY11)
(`) Others
Pet bottles Rectified spirits
350 3%
3% 2%
300 36x
Grain spirit
250 30x 4%
Silent spirits
200 24x 6%
150 18x
Subsidiary sales IMFL
12x 8% 50%
100
50
0 Country liquor
Apr-06
Oct-06
Apr-07
Oct-07
Apr-08
Oct-08
Apr-09
Oct-09
Apr-10
Oct-10
Apr-11
Oct-11
Apr-12
24%


Its strong capability to launch premium brands and support
launches with its premiumization strategy drives Radico Khaitan’s
earnings. We expect 22% earnings CAGR over FY11-14. The
company has a strong distribution network and has made inroads
into the CSD to create and support fresh launches. We initiate
coverage with a Buy, and a price target of `161, at a target PE of 20x
FY13e earnings. Our target PE is at a 40% discount to the past
average PE of 35x. In the past three years the stock has traded at an
average PE of 21x.
Effective branding capability

Over the past 15 years, the company has showcased its ability to launch
premium brands. In FY97 it launched its first brand, 8PM whisky, which
became one of the fastest “millionaire” (Millionaire = 1m cases = 9m litre
liquor) brands in India. It has also developed a strong presence in sub-
segments such as rum and vodka. Its strong distribution network, inroads
into the CSD, innovative packaging and effective usage of celebrity
The company has been able to create endorsements have helped it create strong brands. The company also
strong brands across segments spends more on brand-building activities than its competitors.
Over the past 10 years, the company has created strong brands like Old
Admiral brandy, Contessa rum, Morpheus brandy and Magic Moments
vodka.
Fig 7 – Strong liquor portfolio

Radico Khaitan
Country IMFL Industrial

liquor Whisky liquor
Rum
Brandy
Vodka
Source: Company
Strong distribution network

Radico Khaitan enjoys a wide distribution network across India. It has a
strong presence in north and east India and it is also present in west and
south India. It operates through 35,000 retail outlets and almost 5,000
bars. After United Spirits, it has the widest network in India.
Range across segments
The company has a range of products across all types of liquor, except for
beers and wines. It has regular and premium whiskies and has launched
brandy, vodka and rum brands. It also operates in the country liquor and
industrial liquor segments. The company sells molasses-based as well as
grain-based liquors. The large range of brands across segments has helped
it attract consumers across regions and income levels.

Fig 8 – Strong presence across all liquor segments

Product Brand Segment
8PM Regular
Whisky Whytehall Premium
After Dark Premium
Vodka Magic moments Premium
Old Admiral Regular
Brandy
Morpheus Premium
Rum Contessa Regular
Source: Company
Valuation
We initiate coverage with a Buy rating, and a price target of `161, valuing
the stock at the mean PE of the past three years. The stock has quoted at a
mean PE of 20x in the past three years and quotes at 14x on FY13e
earnings. As we expect strong return ratios and robust earnings CAGR of
22% over FY11-14, we expect the stock to be re-rated to the mean PE. At
our target price and FY13e earnings, the stock would trade at a PE of 20x.

100
90
80
+2SD
70
60
+1SD
50
40
Mean
30
20
-1SD
10
0
Oct-06
Oct-07
Oct-08
Oct-09
Oct-10
Oct-11
Apr-06
Apr-07
Apr-08
Apr-09
Apr-10
Apr-11
Apr-12
Key risks
 Higher competitive pressures

Effective Branding Capability

Innovative packaging, celebrity endorsements and an effective
communication strategy have helped Radico build premium brands.
An erstwhile country liquor company, it has now launched strong
brands such as 8PM, Old Admiral and Contessa.
Range of strong brands

Over the past 15 years, the company has showcased its ability to launch
premium brands. In FY97, it launched its first brand, 8PM, which was the
fastest brand to acquire ‘millionaire’ status in India. It is also strong in sub-
segments such as rum and vodka. A strong distribution network, inroads
into the CSD, innovative packaging and an effective use of celebrity
endorsements are factors that have helped the company create strong
brands.
Fig 10 – Strong brands created over the past 10 years

Product Brand Segment Year of launch
8PM Regular 1998
The company has created a strong Whisky Whytehall Premium 2004
range of brands across all segments After Dark Premium 2010

Vodka Magic Moments Premium 2006
Old Admiral Regular 2002
Brandy
Morpheus Premium 2009
Source: Company
Fig 11 – Innovative packaging
Innovative packaging
The company has an innovative packaging strategy. It has launched
products in bottles that have a completely different shape from that of
competitors. We believe this strategy crucially differentiates the company’s
products in the minds of consumers. The innovative packaging also works
at the point of purchase. As liquor advertising is banned, product
differentiation at the point of purchase is important.
Effective use of celebrity endorsements
The company has used celebrity endorsements to create brands. It has
used “surrogate advertising” such as of water, soda, CDs or cassettes to
create brands. The use of celebrity endorsements has proved to be more
effective for Radico Khaitan than for its competition.
In a segment like liquor, the use of celebrity endorsements works well in
attracting consumer attention, as the use of advertisements is banned.
Fig 12 – Brands and celebrities

Brand Segment Celebrity
8PM Whisky Mallika Sherawat
Magic Moments Vodka Hrithik Roshan
Contessa Rum Arjun Rampal
Source: Company
Source: Company

Higher investments to create premium brands

Radico’s current focus is on creating premium brands. Its recent launches
(‘After Dark’ whisky and ‘Magic Moments’ vodka) are in the premium
category. The company is also investing aggressively in the distribution of
its brands. It has secured brand registration with the CSD, and has roped
in leading celebrities to endorse these brands.
Radico is also investing heavily in vodka, as competition here is lower and
the vodka sub-segment is growing faster than other liquor sub-segments.

Strong Distribution Network

After United Spirits, Radico Khaitan has the second-largest
distribution network in India. It sells in ~35,000 retail outlets
catering to almost 80% of liquor consumers in India. It has also
registered with the CSD. Considering the difficulty involved in
establishing a distribution network that is quasi-controlled by the
government, this is a considerable entry barrier to potential new
competition.
Second-largest network in India

Radico Khaitan has a strong distribution network across India. It has a
strong presence in north and east India, and is also present in west and
south India. It operates through 35,000 retail outlets and almost 5,000
bars. After United Spirits, it has the widest distribution network in India.
Established distribution in quasi-government-controlled markets
Radico Khaitan uses its own field
force to ensure brand building, In India, much of the distribution is controlled by the government. Selling
marketing and selling. It also invests products through specified retail stores is difficult. As every village may
in in-shop promotions. These have have just one or two liquor shops, establishing relationships is difficult.
helped Radico gain market share Radico Khaitan uses its own field force to ensure brand building,
over the years and establish strong marketing and selling. It also invests in in-shop promotions. These have
brands helped Radico gain market share over the years and establish strong
brands.
Strong presence with the CSD as well
The CSD for defence forces accounts for ~15% of liquor consumption in
India. Enrolling a brand with the CSD is a tedious process. It takes
roughly 9-10 months to register brands with the CSD. Hiking prices,
launching variants and newer designs of bottles also require various
approvals. Radico Khaitan has been successful in registering all its brands
with the CSD. Its strong ties with the CSD allow it to register variants as
well as fresh launches.
Distribution network in India
The distribution network in India is controlled by the government. As it is
extremely difficult for any entrant to establish a distribution network, we
believe players, like Radico Khaitan, that have established networks will do
better. The structure of the distribution network is given in Fig.13.

Fig 13 – Distribution structure in India

Structure I: Distributor – Government; Retail – Government
Kerala
Tamil Nadu
Delhi
Structure II: Distributor – Government; Retail - Free
Andhra Pradesh Orissa Uttar Pradesh
Bihar Rajasthan Karnataka
Chattisgarh Uttaranchal Bihar
Structure III: Distributor – Free; Retail- Free
Assam West Bengal
Daman Pondicherry
Goa Tripura
Jharkhand Maharashtra
States that have banned liquor
Gujarat
Manipur
Mizoram
Nagaland
Source: Company

Strong Range of Brands

Radico has developed a strong range of brands across price points
and SKUs. It has products in all types of liquor except beers and
wines. It is also strong in the country liquor and industrial alcohol
segments. Its operations in several sub-segments allow it to tap
consumers across income levels.
Range across segments

Radico has a range of products across all types of liquor, except for beers
and wines. It has regular and premium whiskies and has launched brandy,
vodka and rum products. It also operates in the country liquor as well as
industrial alcohol segments. The company sells molasses- and grain-based
liquors. Its large range of brands across segments helps attract consumers
across regions and income levels.
Fig 14 – Presence across segments of alcoholic beverages

Radico Khaitan
Country IMFL Industrial

liquor Whisky liquor
Rum
Brandy
Vodka
Source: Company
Products across all varieties of liquors

The company operates in all varieties of liquor. Its flagship brand is 8PM
whisky and it has launched Contessa rum, Magic Moments vodka and
Morpheus brandy. It also recently entered the premium whisky sub-
segment through its ‘After Dark’ whisky launch. We believe its operations
in all types of liquors help it target consumers across segments.
Fig 15 – Across all forms of liquor

Product Brand Segment
8PM Regular
Whisky Whytehall Premium
After Dark Premium
Vodka Magic Moments Premium
Old Admiral Regular
Brandy
Morpheus Premium
Rum Contessa Regular
Source: Company
Strong presence in country and industrial alcohols

Twenty-four percent of Radico’s Twenty-four percent of Radico’s revenues arise from country liquor,
revenues arise from country liquor, which helps it tap low-income consumers and those in rural India. It has
which helps it tap low-income and had a strong presence in country liquor for more than 30 years. This has
rural consumers helped it build up a strong distribution network. Further, ~12% of its
revenue is from industrial alcohol. This absorbs excess capacity.

Focus on regular and premium sub-segments

The company’s focus has been on products in the regular and premium
sub-segments, which enjoy higher realizations than other sub-segments. It
is now investing in brand building in these segments. We believe that more
investment in these segments would help it target premium consumers and
help gain market share at those premium levels.
Range of products of competitors
Radico’s range of brands is larger than that of most competitors. Some of
the latter do not have premium liquors; others do not have country liquor
or industrial alcohol. Radico Khaitan has a wide and diversified range
across liquors and brands.
Fig 16 – Stronger and weaker segments of competitors

Company Strong areas Weaker areas
United Spirits Whisky, vodka Country liquor
Tilaknagar Brandy Country liquor
Globus Spirits Country liquor IMFL
Source: Companies

Financials
Radico is likely to report 18% revenue CAGR over FY11-14, led by
strong volume growth. We expect stable EBITDA margin for the
next two years, as a steep rise in the prices of raw materials is not
likely. We estimate 22.2% net profit growth over FY11-14 and expect
return ratios to improve due to better working-capital management.
Strong revenue growth likely

We estimate 18% revenue CAGR over FY11-14, driven by product
launches and brand extensions. Geographical expansion and the sharper
focus on IMFL is likely to sustain Radico’s revenue growth momentum.

(`m) (%)
16,000 60
12,000 40
We expect robust earnings growth 8,000 20

momentum due to strong revenue
growth and improving margins 4,000 0
0 -20
FY04
FY05
FY06
FY07
FY08
FY09
FY10
FY11
FY12e
FY13e
FY14e
EBIDTA margin to improve slightly

EBITDA margin is likely to be steady at ~17% over the next three years.
We expect the company to manage any rise in raw material costs through
price hikes and a better revenue mix. The rising revenue share of IMFL is
expected to improve long-term margins.
Fig 18 – Stable EBITDA margins

(%)
20
16
12
0
FY12e
FY13e
FY14e
FY04
FY05
FY06
FY07
FY08
FY09
FY10
FY11

Steady net profit growth expected

We expect Radico to register 22.2% earnings CAGR over FY11-14. Its
strong operational performance should help maintain strong profit
margins. Lower capex and working capital requirements are likely to result
in higher free cash-flow generation as well as higher ‘other income’.
Fig 19 – Net profit and growth

(`m) (%)
1,500 210
1,125 140
750 70
375 0
0 -70
FY04
FY05
FY06
FY07
FY08
FY09
FY10
FY11
FY12e
FY13e
FY14e
Net profit Growth (RHS)
Return ratios to be in high teens

We expect slightly improving return ratios over FY11-14. Lower
investment in working capital and capex should result in better return
ratios. However, as we do not expect an increase in dividend payouts,
Radico’s mounting cash on its balance sheet is likely to marginally reduce
its return ratios.

(%)
35
28
21
14
0
FY04
FY05
FY06
FY07
FY08
FY09
FY10
FY11
FY12e
FY13e
FY14e
RoE RoCE


Gross sales 14,813 17,423 20,485 24,184 28,556
Less: excise duty 6,457 7,459 8,769 10,353 12,225
Less: sales tax 368 500 588 695 820
Net sales 7,988 9,464 11,127 13,137 15,512
Growth (%) 18.0 18.5 17.6 18.1 18.1
Expenditure
Staff cost 540 620 729 860 1,016
Power & fuel 218 345 401 473 558
Carriage & freight 222 312 367 434 512
Advt & sales promotion 947 1,259 1,480 1,747 2,063
Other expenses 800 875 1,024 1,209 1,427
EBITDA 1,334 1,559 1,833 2,256 2,797
EBITDA margin (%) 16.7 16.5 16.5 17.2 18.0
Growth (%) 136 17 18 23 24
Depreciation 256 271 314 375 422
EBIT 1,078 1,288 1,519 1,881 2,375
Other income 167 111 70 53 49
Profit before tax 499 1,040 1,192 1,529 2,015
Income taxes 84 267 334 443 605
Income tax rate (%) 16.8 25.6 28.0 29.0 30.0
Profit after tax 415 773 858 1,086 1,411
Profit before X/O 415 773 858 1,086 1,411
PAT margin (%) 5.2 8.2 7.7 8.3 9.1
Growth (%) 192.6 86.2 11.0 26.4 29.9
Extraordinary items - (79) - - -
Profit for shareholders 415 694 858 1,086 1,411



Sources of funds
Share capital 264 265 265 265 265
Net worth 6,416 7,012 7,755 8,717 9,997
Secured loans 2,449 3,398 3,398 3,498 3,498
Unsecured loans 2,012 1,514 1,614 1,614 1,614
Total loans 4,461 4,912 5,012 5,112 5,112
Total 10,877 11,923 12,767 13,829 15,109
Fixed assets
Gross block 5,505 5,728 7,343 8,293 9,293
Less: depreciation 1,366 1,539 1,853 2,228 2,650
Net block 4,139 4,189 5,490 6,065 6,643
Capital WIP 530 715 - - -
Gross block- brand value 5,505 5,728 7,343 8,293 9,293
Goodwill - - - - -
Current assets 6,770 8,063 8,826 9,786 10,927
Inventories 1,230 1,275 1,502 1,773 2,094
Sundry debtors 2,356 3,191 3,750 4,427 5,227
Loans & advances 2,851 3,503 3,503 3,503 3,503
Current liabilities 1,455 1,752 2,059 2,430 2,870
Liabilities 976 1,153 1,358 1,603 1,892
Provisions 479 598 701 828 977
Net current assets 5,315 6,311 6,768 7,356 8,057
Total 10,877 11,923 12,767 13,829 15,109
Fig 23 – Cash-flow statement (`m)

OCF before W/C changes 760 1,125 1,172 1,461 1,833
W/c changes (881) (1,007) (479) (577) (682)
OCF after W/C changes (121) 118 693 884 1,151
Capital expenditure (283) (627) (900) (950) (1,000)
Disposal 3 87 - - -
Investments (568) (246) 200 100 -
Net cash used in investing (847) (786) (700) (850) (1,000)
Changes in share capital 3,330 60 - - -
Changes in loans (2,542) 450 100 100 -
Dividends (36) (92) (115) (123) (131)
Net cash used in financing 752 418 (15) (23) (131)
Extraordinary items 129 11 - - -
Changes in cash & equivalents (87) (238) (23) 11 20
Free cash flow (401) (421) (207) (66) 151

Fig 24 – Ratio analysis @`122

EBITDA margin 16.7 16.5 16.5 17.2 18.0
EBIT margin 13.5 13.6 13.7 14.3 15.3
PBT margin 6.3 11.0 10.7 11.6 13.0
PAT margin 5.2 8.2 7.7 8.3 9.1
Income tax rate 16.8 25.6 28.0 29.0 30.0
Excise duty rate 80.8 78.8 78.8 78.8 78.8
Sales tax rate 4.6 5.3 5.3 5.3 5.3
RoE 9.2 10.3 11.6 13.2 15.1
RoCE 10.5 11.3 12.3 14.1 16.4

Staff cost 6.8 6.5 6.6 6.6 6.6
Power & fuel 2.7 3.6 3.6 3.6 3.6
Carriage & freight 2.8 3.3 3.3 3.3 3.3
Advt & sales promotion 11.9 13.3 13.3 13.3 13.3
Other expenses 10.0 9.2 9.2 9.2 9.2
Per share data (`)

Growth (%) 127.4 85.1 11.0 26.4 29.9
Growth (%) 87.6 8.7 10.6 12.4 14.7
Growth (%) 100.0 16.7 7.1 6.7 6.3
Sales per share 60.6 71.4 83.9 99.1 117.0
Growth (%) (8.3) 17.8 17.6 18.1 18.1
Turnover ratios (%)

Valuation ratios (%)

Price earnings 38.7 20.9 18.8 14.9 11.5
Price/book value 2.5 2.3 2.1 1.9 1.6
EV/sales 2.5 2.1 1.8 1.5 1.3
EV/EBITDA 15.1 13.0 11.1 9.0 7.3
Dividend yield (%) 0.5 0.6 0.6 0.7 0.7
Other ratios (%)

Net debt/equity 50.4 58.6 57.2 53.0 46.0
FCF/EPS (96.5) (54.5) (24.2) (6.1) 10.7
OCF/sales (1.5) 1.2 6.2 6.7 7.4
W/C as % of net sales 62.4 65.7 60.2 55.4 51.3
Div payout ratio 19.0 12.0 11.6 9.8 8.0


Radico Khaitan is one of the oldest liquor companies in India, and
operates in country liquor, IMFL and industrial alcohols, while also
launching premium liquor products. Chairman and managing
director Dr Lalit Khaitan looks after the overall business. Managing
director Abhishek Khaitan handles the IMFL division.
Background
Established in 1943, Radico Khaitan is India’s oldest alcoholic beverage
company. It had entered the IMFL segment in 1999 with the launch of its
flagship brand, 8PM. After 8PM brand, it has launched successful brands
such as Old Admiral, Contessa rum, After Dark whisky, Morpheus brandy
Radico Khaitan is one of the oldest and Magic Moments vodka. It plans to be a major player in IMFL and
companies in liquor in India and is focuses on premium products.
strongly represented across segments
Fig 25 – Revenue break-up (FY11)
Others
Pet bottles Rectified spirits
3%
3% 2%
Grain spirit
4%
Silent spirits
6%
Subsidiary sales IMFL

8% 50%
Country liquor
24%
Source: Company
Management
Chairman and managing director Dr Lalit Khaitan looks after the overall
administration. He has five decades of experience in the Indian liquor
industry. Managing director Abhishek Khaitan handles the IMFL division.
He was instrumental in creating it and in launching fresh brands and
products. A chartered accountant by profession, Dilip Banthiya is the
CFO. Director K.P. Singh looks after production.

Lalit Khaitan Chairman & managing director Overall business management
Abhishek Khaitan Managing director IMFL division
Dilip Banthiya CFO Finance and secretarial
K P Singh Director Production activities
Source: Company

Consumer
India I Equities
Initiating Coverage
18 April 2012
Tilaknagar Industries Rating: Buy

Target Price: `74
Strong position in the south, expansion into north & east; Buy Share Price: `59
Well established within the military’s Canteen Stores Department
(CSD) and in the southern states where distribution is government-
controlled, Tilaknagar Industries commands strong profit margins. Key data TLNGR IN / TILK.BO
The company plans to leverage its strong position in the south to 52-week high / low `69 / `28
expand nationwide. We expect 28% earnings CAGR over FY11-14 and
initiate coverage with a Buy rating and a price target of `74. Market cap `7.1bn / US$136m
 The brandy focus. Tilaknagar focuses on brandy in south India, with a
market share of between 40% to 97% across the southern Indian states.
It has a strong sub-segmenting strategy in its major brand, Mansion
House, which pulls in consumers across price points.
Shareholding pattern (%) Dec ’11 Sep’11 Jun ’11
 Nationwide expansion. With ~80% of its revenue generated in south Promoters 54.3 54.3 54.2
India, Tilaknagar now plans to expand nationwide in order to dilute its
Free float 45.7 45.7 45.8
concentration risk. Aggressive brand launches, leased units and tie-ups are
- Foreign institutions 17.9 18.6 18.3
targeted to help the company acquire marketshare nationally. Further, its - Domestic institutions 3.3 3.4 4.6
acquisition of infra consulting firms is expected to drive internal - Public 24.5 23.7 22.9
expansion capabilities.
 Cost-cutting measures raise profitability. The company has initiated

cost-cutting steps such as recycling 40% of bottles (to rise to 60% in
three years). In addition, distribution costs and media spend are lower in Relative price performance
the south, since a large part of distribution is state government controlled 70
Sensex
and Tilaknagar’s brands are well entrenched. 60
50
 Valuation. Our price target of `74 is based on a target PE of 13x FY13e
40
earnings. Our target PE is at +1 standard deviation to the mean PE. Due
30
to Tilaknagar’s aggressive investment in new products and newer areas TLNGR
and the improved outlook for the medium term, we assign higher target 20
Dec-11
Apr-11
Jun-11
Aug-11
Oct-11
Feb-12
Apr-12
multiples to the stock. Risk. Higher molasses prices.
Source: Bloomberg

Sales (`m) 3,808 4,623 5,386 6,288 7,343
Net profit (`m) 349 396 496 645 877
EPS (`) 3.6 3.4 4.3 5.4 7.3
Growth (%) (6.3) (4.6) 25.3 24.9 36.0
PE (x) 16.4 17.2 13.7 11.0 8.1
RoE (%) 19.2 12.4 11.1 12.7 14.8 +9122 6626 6732
RoCE (%) 15.5 13.2 12.9 14.8 17.3
Net gearing (%) 196.9 97.7 81.5 53.2 35.5 +9122 6626 6730

18 April 2012 Tilaknagar Industries – Strong position in the south, expansion into north & east; Buy

Net revenues 3,808 4,623 5,386 6,288 7,343 Share capital 326 1,250 1,250 1,298 1,298
EBITDA 800 1,136 1,291 1,507 1,753 Minority interest - - - - -
EBITDA margin (%) 21.0 24.6 24.0 24.0 23.9 Total debt 4,494 4,333 3,933 3,533 2,533
- Tax 190 248 267 347 472 Investments 3 3 3 3 3
Reported cons. PAT 349 396 496 645 877 Net working capital 2,627 3,710 3,810 3,952 4,119
+/- Extraordinary items - - - - - Cash and bank balance 266 166 140 587 293
Adjusted cons. PAT 349 396 496 645 877 Net debt 4,345 4,363 3,989 3,142 2,436
FDEPS (`/share) 3.6 3.4 4.3 5.4 7.3 WC (%) 69.0 80.2 70.7 62.9 56.1
Adj. FDEPS growth (%) (6.3) (4.6) 25.3 24.9 36.0 Book value (`/sh) 22.1 37.0 40.3 46.1 52.5
Fig 3 – Cash-flow statement (`m) Fig 4 – Ratio analysis @ `59

Consolidated PAT 349 396 496 645 877 P/E (x) 16.4 17.2 13.7 11.0 8.1
Cash profit 48 62 681 848 1,085 EV/Sales (x) 2.4 2.4 2.0 1.8 1.6
- Incr./(decr.) in WC (177) (108) (100) (142) (167) EV/EBITDA (x) 11.5 9.7 8.5 7.6 6.5
Operating cash-flow (129) (46) 581 706 918 RoAE (%) 19.2 12.4 11.1 12.7 14.8
- Capex (205) (107) (100) (100) (100) RoACE (%) 15.5 13.2 12.9 14.8 17.3
Free cash-flow (334) (153) 481 606 818 Dividend yield (%) 1.4 1.4 1.4 1.4 1.4
- Dividend (10) (11) (107) (111) (111) Dividend payout (%) 23.1 23.3 18.6 14.9 10.9
+ Equity raised 38 172 - 352 - RM to sales (%) 39.7 34.7 34.8 34.8 35.0
+ Debt raised 328 (17) (400) (400) (1,000) Admin exps to sales (%) 24.8 24.5 24.8 24.8 24.7
- Investments (0) (1) - - - EBITDA growth (%) 87.1 41.9 13.7 16.7 16.3
- Misc. items - - - - - EPS growth (%) (6.3) (4.6) 25.3 24.9 36.0
Net cash-flow 22 (10) (26) 447 (294) PAT margin (%) 9.2 8.6 9.2 10.3 11.9
Cl. cash & bank bal. 27 17 140 587 293 Realization growth (%) - - - - -
Fig 5 – Valuation chart (PE band) Fig 6 – Revenue break-up (FY11)
(`)
160 Industrial alcohol,
26x 3%
140 IMFL - own unit,
11%
120
21x
100 Subsidiary sales,
16x 37%
80
60 IMFL lease units,

10x
24%
40
20 4x
0
Apr-06
Oct-06
Apr-07
Oct-07
Apr-08
Oct-08
Apr-09
Oct-09
Apr-10
Oct-10
Apr-11
Oct-11
Apr-12
Tie up units, 25%


Well established within the military’s Canteen Stores Department
(CSD) and in the southern states where distribution is government
controlled, Tilaknagar Industries commands strong profit margins.
On its nationwide expansion, we expect 28% earnings CAGR over
FY11-14. We initiate coverage with a Buy and a price target of `74.
Strong franchise in brandy

The company has a strong focus on brandy. This sub-segment has very
little organized competition, as there are few manufacturers here. Other
major brands are McDowell and Honey Bee, the latter at lower prices than
Tilaknagar’s key brand, Mansion House. This gives Mansion House the
potential to gain market share in this sub-segment and generate strong
free-cash-flows in the medium to long term.
Fig 7 – Market share in brandy in south India (FY11)

(%)
100
The company enjoys a strong

80
franchise in brandy in south India
60
40
20
0
Tamil Nadu Kerala Andhra Pradesh Karnataka
Source: Company
Expansion plans across India

Nearly 80% of the company’s revenue arises from four states in south
India – Tamil Nadu, Kerala, Andhra Pradesh and Karnataka – as south
India is a major brandy market and the company’s key offering is brandy.
Going forward, it plans to launch products and brands in other parts of
India. In eastern and northern India, its focus is on whisky. Tilaknagar has
also acquired two companies recently to develop internal capabilities for
setting up new units.
Fig 8 – Strategy for whisky launches

Segment Focus areas/strategy
Senate Royal Whisky Orissa, West Bengal
Classic Whisky Delhi, Rajasthan
Production units Leased and tie-up units

Acquisition of infra consulting firms Enhancing of in-house expansion capabilities
Source: Company
Cost-cutting measures improve profitability

The company has initiated various cost-cutting measures such as re-using
bottles. At present, it recycles 40% of bottles and expects this to touch
60% in the next three years. It also needs to spend less on distribution, as

a large part of distribution in south India is state-government-controlled.

Since Tilaknagar’s brands are well entrenched in south India, and with less
competition in brandy, media spend is lower. These factors are driving
profitability.
Fig 9 – Cost-cutting measures to improve profitability

Measures Impact on cost
Re-use of bottles Reduction in packaging costs
Established govt. distribution network in south India Lower distribution costs
Strong focus on less-competitive brandy business Lower media spends
Source: Company
Valuation
We initiate coverage of Tilaknagar Industries, with a Buy rating and a price
target of `74, valuing the stock at the mean PE of the past three years. It
has quoted at a mean PE of 13x in the past three years and now quotes at
11.0x FY13e earnings. As we expect strong return rations and robust
28.6% earnings CAGR over FY11-14, we expect the stock to be re-rated
to the mean PE. At our target price and FY13e earnings, it would trade at
a PE of 13x.

30
25
20
+2SD
15
+1SD
10
Mean
5
-1SD
0
Apr-06
Apr-07
Apr-08
Apr-09
Apr-10
Apr-11
Apr-12
Oct-06
Oct-07
Oct-08
Oct-09
Oct-10
Oct-11
Key risks
 Higher competitive pressures

Focus on brandy
Tilaknagar focuses on brandy in south India and its market share
ranges from 40% to 97% across the southern states of India. It has a
strong sub-segmentation strategy for its major brand, Mansion
House, which is drawing in consumers across price points.
Strong brand in brandy

The company’s main focus is on the brandy segment in India, where there
is little organized competition. Other major brandy brands are McDowell
and Honey Bee, the latter at lower prices than Mansion House. Mansion
House brandy continues to gain market share in this segment and
generates strong medium to long-term free cash-flows.
Fig 11 – Tilaknagar’s market share in brandy (FY11)

(%)
100
80
Strong focus on brandy in south

60
India
40
20
0
Tamil Nadu Kerala Andhra Pradesh Karnataka
Source: Company
Strong focus in the south – one of India’s largest brandy markets

Nearly 80% of the company’s revenues arise from south India, one of the
largest brandy markets in India. Other alcoholic beverages have not been
as successful here as brandy. Due to its strong market share in south India
and its well-established brands, Tilaknagar is in a good position to launch
other products in liquor industry, leveraging its distribution network in
south India.
Fig 12 – Key benefits in launching products in south India

Strong presence
Established distribution network
Established and popular brands
Source: Companies
Sub-segmentation of the Mansion House brand

The company plans to further leverage its Mansion House brand. Its sub-
segmentation strategy implies launching products at various prices,
selectively hiking prices and entering other sub-segments. The company
has launched a premium brandy under Mansion House and has begun
marketing whiskies.

Fig 13 – Sub-segmentation strategy used for Mansion House brandy

Mansion House
Brandy Whisky
Mansion House MS VSOP
Source: Company
Low competition likely to generate strong free-cash-flows

Low competitive pressure in brandy is resulting in strong profitability and
free cash flows. The segment has much less competition as there are very
few entrants and the current incumbents are focussed on whiskies and
beers. This allows for less ad-spend and fewer brand-building activities.
Smoother price hikes and less investment in working capital result in
strong free cash flow.
Fig 14 – Various brands in brandy

Company Brandy brands
Tilaknagar Mansion House, Courrier Napoleon
Radico Khaitan Morpheus
Mohan Meakin Triple Crown, Doctor's Reserve No.1
United Spirits McDowell, Honey Bee
Source: Companies

Nationwide Expansion
As ~80% of its revenue arises from South India, Tilaknagar is now
going national in order to dilute the location risk. Aggressive brand
launches, leased units and tie-ups are likely to help the company
command a strong market share, nationally.
Current revenues concentrated in south India

Nearly 80% of its revenue arises from four states in south India – Tamil
Nadu, Kerala, Andhra Pradesh and Karnataka. As its focus has always
been brandy, and as south India is a major brandy market, a large part of
the company’s revenue is generated here.
Fig 15 – Revenue breakdown: region-wise (FY11)

Exports
Rest of India
1%
14%
CSD
5%
Nationwide expansion will reduce

the concentration risk involved in
being a single region company
South
80%
Source: Company
Aggressive pan-India expansion

The company’s strategy involves expanding into eastern and northern
India through the launch of whiskies. It is focussing aggressively on Orissa
and West Bengal with its Senate Royal Whisky and in Rajasthan and Delhi
with its Classic Whisky.
Growth is likely to be driven by the launch of products and expansion of
its distribution network in other regions of India. Rather than investing in
production capacities in new areas, the company is growing its business
through leased units and tie-ups.
Fig 16 – Growth strategy for new regions in India

Segment Focus areas / strategy
Senate Royal Whisky Orissa, West Bengal
Classic Whisky Delhi, Rajasthan
Production units Leased units and tie-ups

Acquisition of infra consulting firms Enhancing in-house expansion capabilities
Source: Company
Acquisition of companies to build new plants

The company recently acquired two companies in the infrastructure
consulting space – Mykingdom Ventures and Studd Projects. This will
help develop internal capabilities for building new plants, including
Greenfield grain-based plants. The total consideration was for `30-40m.

Cost-cutting Steps Raise Profits

Tilaknagar is looking to reduce costs through various measures such
as recycling ~40% of its old bottles through re-distribution. Lower
distribution costs, production units in each state and a clearer focus
on branding are fuelling off-take and margins.
Use of re-cycled bottles

Tilaknagar has initiated the use of re-cycled bottles. This helps it
considerably reduce packaging costs. Glass bottles make up ~22% of net
sales. The use of old bottles has reduced dependence on the supply of new
glass bottles. This has also helped retain consumers who receive a discount
on return of empty bottles. As retailers return empty bottles, they are given
a discount for new bottles filled with liquor. This results in a strong case
for repeat purchases.
The re-use of bottles has resulted in lower costs. Though the company is
passing on some benefits to end-consumers, this step has reduced
packaging material costs and expanded profit margins. At present, 40% of
Tilaknagar’s bottles are re-cycled. The company expects this figure to
Re-using bottles helps reduce costs
move up to 60% in three years.
and maintain customer loyalty
Fig 17 – Packaging cost as per cent of net sales
(%)
29
27
25
23
21
19
17
15
FY04
FY05
FY06
FY07
FY08
FY09
FY10
FY11
FY12e
FY13e
FY14e
Packaging cost
Source: Company, Anand Rathi Research.
Lower distribution costs due to government-controlled market

As most of the company’s sales are in south India and the CSD,
distribution costs are far lower than in other regions. Southern state
governments control distribution networks and sell liquor products on
their own. The companies indirectly support retailers. This drastically
reduces the cost of distribution.
Selling prices to government-controlled markets are decided after adjusting
for the savings in distribution cost. This reduces the level of hassle for the
company and allows it to focus more sharply on branding.

Cost-cutting measures improve gross margins

Cost-cutting and economies of scale have helped Tilaknagar reduce costs
and expand profits. The company has reduced various costs such as of
packaging material, distribution and staff. Over time, it has also reduced
costs of power and fuel, as well as of ad-spend. Due to the lower turnover
earlier, it was spending as much as 28% of net sales on brand-building.
Fig 18 – Improving gross margins of Tilaknagar Industries

(%)
70
60
50
40
30
20
10
0
FY04
FY05
FY06
FY07
FY08
FY09
FY10
FY11
FY12e
FY13e
FY14e
Gross margins
Acquisition of companies for backward integration

Tilaknagar has acquired three companies for backward acquisition –
Shivprabha Sugars, which holds regulatory approvals for setting up 2,500
TCD sugar plants, a 30 KLPD distillery and a 12MW co-gen power plant.
The company is in the process of finding a strategic partner to develop the
unit. This unit will serve as a backward integration for Tilaknagar for the
supply of extra neutral alcohol (ENA).
The company has also acquired PP Caps, which manufactures caps and
containers. This will help it reduce the cost involved in buying caps from
the market. It has also acquired Srirampur Grains, which sells agricultural
products. This will serve as backward integration for Tilaknagar’s grain-
based projects.

Financials
We expect Tilaknagar to report 16.7% revenue CAGR over FY11-14,
led by strong volume growth. However, we expect stable EBITDA
margin. We estimate 28.4% earnings CAGR over FY11-14 and an
increase in return ratios over FY11-14.
Strong revenue growth likely

We estimate 16.7% revenue CAGR over FY11-14, driven by the launch of
products and brand extensions. We also expect geographical expansion to
sustain revenue growth momentum.

(`m) (%)
8,000 70
7,000 60
6,000 50
5,000 40
4,000 30
We expect the EBITDA margin in 3,000 20
the next three years to be ~15% 2,000 10
1,000 0
0 -10
FY04
FY05
FY06
FY07
FY08
FY09
FY10
FY11
FY12e
FY13e
FY14e
EBIDTA margins to remain stable

The company is likely to report a steady EBITDA margin of ~24% in the
next three years. We expect it to counter the increase in costs through
price hikes as well as a better revenue mix.
Fig 20 – Stable EBITDA margin

(%)
30
25
20
15
10
0
FY04
FY05
FY06
FY07
FY08
FY09
FY10
FY11
FY12e
FY13e
FY14e
EBITDA Margin
Steady net profit growth likely

We estimate 28.6% earnings CAGR over FY11-14. Strong operational
performance is likely to maintain strong profit margins. Lower capex and
working capital needs should result in higher free-cash-flow generation, as
well as higher ‘other income’.

Fig 21 – Net profit and growth

(`m) (%)
1,000 630
800 490
600 350
400 210
200 70
0 -70
FY04
FY05
FY06
FY07
FY08
FY09
FY10
FY11
FY12e
FY13e
FY14e
Net profit Growth (RHS)
Return ratios to be in the high teens

We expect slightly better return ratios over FY11-14. Lower investment in
working capital and capex is also likely to result in better return ratios.
However, as an increase in dividend payouts is unlikely, we expect the
mounting cash in its balance sheet to have a marginal negative impact on
return ratios.

(%)
50
40
30
20
10
FY04
FY05
FY06
FY07
FY08
FY09
FY10
FY11
FY12e
FY13e
FY14e
RoE RoCE


Gross sales 5,480 6,496 7,568 8,835 10,318
Less: excise duty 1,636 1,812 2,111 2,465 2,879
Less: sales tax 36 60 70 82 96
Net sales 3,808 4,623 5,386 6,288 7,343
Growth (%) 57.2 21.4 16.5 16.7 16.8
Expenditure
Staff cost 201 209 242 283 330
Power & fuel 23 39 48 57 66
Carriage & freight 330 503 592 692 808
Advt & sales promotion 488 613 722 843 977
Other expenses 455 521 614 717 837
EBITDA 800 1,136 1,291 1,507 1,753
EBITDA margin (%) 21.0 24.6 24.0 24.0 23.9
Growth (%) 87.1 41.9 13.7 16.7 16.3
Depreciation 71 131 185 204 208
EBIT 729 1,005 1,106 1,303 1,545
Other income 46 26 20 17 71
Profit before tax 539 643 763 992 1,349
Income taxes 190 248 267 347 472
Income tax rate (%) 35.2 38.5 35.0 35.0 35.0
Profit after tax 349 396 496 645 877
Profit before X/O 349 396 496 645 877
PAT margin (%) 9.2 8.6 9.2 10.3 11.9
Growth (%) 76.3 13.4 25.3 30.0 36.0
Profit for shareholders 349 396 496 645 877



Sources of funds
Share capital 326 1,250 1,250 1,298 1,298
Net worth 2,146 4,260 4,649 5,534 6,300
Secured loans 2,721 4,310 3,910 3,510 2,510
Unsecured loans 1,773 23 23 23 23
Total loans 4,494 4,333 3,933 3,533 2,533
Total 6,641 8,593 8,582 9,067 8,833
Fixed assets
Gross block 2,351 4,326 5,173 5,273 5,373
Less: depreciation 281 445 630 834 1,041
Net block 2,070 3,881 4,543 4,439 4,331
Capital WIP 1,636 747 - - -
Gross block-brand value 2,351 4,326 5,173 5,273 5,373
Goodwill 39 86 86 86 86
Current assets 4,080 4,905 5,146 5,935 6,043
Inventories 843 813 916 1,069 1,248
Sundry debtors 820 966 1,131 1,320 1,542
Loans & advances 2,151 2,959 2,959 2,959 2,959
Current liabilities 1,187 1,029 1,196 1,396 1,630
Liabilities 928 797 926 1,082 1,263
Provisions 260 232 269 314 367
Net current assets 2,893 3,876 3,950 4,539 4,413
Total 6,641 8,593 8,582 9,067 8,833
Fig 25 – Cash flow statement (`m)

OCF before W/C changes 48 62 681 848 1,085
W/c changes (177) (108) (100) (142) (167)
OCF after W/C changes (129) (46) 581 706 918
Capital expenditure (205) (111) (100) (100) (100)
Disposal 0 4 - - -
Investments (0) (1) - - -
Net cash used in investing (205) (109) (100) (100) (100)
Changes in share capital 38 172 - 352 -
Changes in loans 328 (17) (400) (400) (1,000)
Dividends (10) (11) (107) (111) (111)
Net cash used in financing 356 145 (507) (159) (1,111)
Changes in cash & equivalents 22 (10) (26) 447 (294)
Free cash flow (334) (153) 481 606 818

Fig 26 – Ratio analysis @`59

EBITDA margin 21.0 24.6 24.0 24.0 23.9
EBIT margin 19.1 21.7 20.5 20.7 21.0
PBT margin 14.1 13.9 14.2 15.8 18.4
PAT margin 9.2 8.6 9.2 10.3 11.9
Income tax rate 35.2 38.5 35.0 35.0 35.0
Excise duty rate 43.0 39.2 39.2 39.2 39.2
Sales tax rate 0.9 1.3 1.3 1.3 1.3
RoE 19.2 12.4 11.1 12.7 14.8
RoCE 15.5 13.2 12.9 14.8 17.3

Staff cost 5.3 4.5 4.5 4.5 4.5
Power & fuel 0.6 0.8 0.9 0.9 0.9
Carriage & freight 8.7 10.9 11.0 11.0 11.0
Advt & sales promotion 12.8 13.3 13.4 13.4 13.3
Other expenses 12.0 11.3 11.4 11.4 11.4
Per-share data (`)

Growth (%) (6.3) (4.6) 25.3 24.9 36.0
Growth (%) (23.3) 66.9 9.1 14.3 13.8
Growth (%) - (4.0) - - -
Sales per share 39.3 40.1 46.7 52.4 61.2
Growth (%) (16.4) 2.1 16.5 12.1 16.8
Turnover ratios (%)

Valuation ratios (%)

Price earnings 16.4 17.2 13.7 11.0 8.1
Price/book value 2.7 1.6 1.5 1.3 1.1
EV/sales 2.4 2.4 2.0 1.8 1.6
EV/EBITDA 11.5 9.7 8.5 7.6 6.5
Dividend yield 1.4 1.4 1.4 1.4 1.4
Other ratios (%)

Net debt/equity 196.9 97.7 81.5 53.2 35.5
FCF/EPS (95.8) (38.6) 97.0 94.0 93.3
OCF/sales (3.4) (1.0) 10.8 11.2 12.5
WC as % of net sales 69.0 80.2 70.7 62.9 56.1
Div payout ratio 23.1 23.3 18.6 14.9 10.9


Established in 1933, Tilaknagar Industries is one of the oldest liquor
companies in India and focuses on the sale of brandy in South India.
It is managed by the Dahanukar family, which holds 59% stake.
Background
Established in 1933 as The Maharashtra Sugar Mills, the company altered
its name in a mark of respect to freedom fighter Lokmanya Tilak. It
focusses on IMFL, industrial alcohol and sugar cubes. The Dahanukar
An 80-year-old company focusing on family has run the company since inception. Today, the company is well-
IMFL in India established in the brandy sub-segment in south India and is focusing on
establishing brands in other parts of India. Its key brands are Mansion
House and Courrier Napoleon.
Fig 27 – Revenue breakdown (FY11)

Industrial alcohol,
3%
IMFL - own unit,
11%
Subsidiary sales,
37%
IMFL lease units,

24%
Tie up units, 25%
Source: Company
Management
Chairman and managing director Amit Dahanukar joined the company on
completion of his Masters in Engineering from the US. Executive director
Shivani Dahanukar is a law graduate from the University of Mumbai and
had completed her MBA in the US. Chartered accountant Lalit Sethi is the
CFO.

Amit Dahanukar Chairman and managing director Overall management, marketing
Shivani Dahanukar Executive director Day-to-day operations
Lalit Sethi CFO Finance, secretarial
Source: Company

Un-rated Companies

Consumer
India I Equities
18 April 2012
Empee Distilleries Rating: Not Rated

Target Price: NA
Healthy growth but profitability margins capped Share Price: `68
Empee Distilleries is a leading liquor manufacturer company with a
focus on south India. The company has established strong brands,
such as Napoleon brandy and Old Secret rum, over the past two Key data EDIS IN / EMDI.BO
decades. 52-week high / low `122 / `52
 Business. Headquartered in Chennai, the two-decade-old company 3-m average volume US$0.1m
focuses on the IMFL sector in south India and has a strong presence in
Tamil Nadu. Key brands include Napoleon brandy, Old Secret rum,
Victoria rum and Sixer rum.
 Management. The company is part of the Empee Group managed by

the Purushothaman family. The group also has interests in the sugar Shareholding pattern (%) Dec’11 Sep ’11 Jun ’11
business. M.P. Purushottaman is the chairman of the company and Promoters 71.1 72.2 72.1
overlooks administrative operations. Shaji Purushottaman is the
Free float 28.9 27.8 27.9
managing director and R. Anand is the CFO and company secretary. - Foreign institutions 0.0 0.0 0.0
- Domestic institutions 0.1 0.3 0.1
 Growth outlook. As the company operates in government-controlled - Public 28.8 27.5 27.8
distribution markets, it expects to see profitability margins capped,
despite its anticipation of a healthy ~10% volume growth for the liquor
business in India. It sees strong growth potential in south India. The
company is also expanding the distribution network in the western and
eastern part of India. Relative price performance
130
 Valuation. At the ruling price of `68 and annualized earnings of FY12e, Sensex
110
the stock trades at a PE of 7.4x. Risks. Higher raw material prices and
delay in distribution network expansion in the western and eastern 90
regions. 70
EDIS
50
Dec-11
Apr-11
Jun-11
Aug-11
Oct-11
Feb-12
Apr-12
Source: Bloomberg
Key financials (YE Mar) FY07 FY08 FY09 FY10 FY11

Sales (`m) 4,554 4,159 4,850 6,192 5,882
Net profit (`m) 136 121 111 154 212
EPS (`) 9.6 7.3 6.6 7.1 10.3
Growth (%) (43.3) (23.3) (9.5) 6.9 45.6
PE (x) 7.1 9.3 10.3 9.6 6.6
RoE (%) 22.2 10.2 6.0 6.2 8.5 +9122 6626 6732
RoCE (%) 20.8 14.5 9.3 6.7 7.3
Dividend yield (%) - 7.4 7.4 8.8 8.8 Shirish Pardeshi
Net gearing (%) 1.5 0.7 0.6 1.4 1.4 +9122 6626 6730
Source: Company

Consumer
India I Equities
18 April 2012
Imperial Spirits
Unlisted
Consolidation and expansion in the south and west markets
Headquartered in Coimbatore, Imperial Spirits has strong brands in all

liquor segments and operates mainly in Goa, Karnataka and Kerala.
The company’s key focus is on IMFL brands. Its growth strategy
includes expansion into the Andhra Pradesh and Tamil Nadu markets.
 Business. Imperial Spirits is an IMFL manufacturer with key operations

in Goa, Karnataka and Kerala. The company has products across all
liquor segments. Its major brands are Glen Special whisky, Gold Coast
malt whisky, Imperial, Black Magic, Hatrick and Amazon.
 Management. T. Rajkumar is the chairman and managing director of the

company and handles overall administration. K. Dhanakumar, joint
managing director, looks after production and operations. T.K.
Dhanashekhar oversees purchase and marketing. N. Sankaren is the
CFO.
 Growth plans. Imperial Spirits plans to focus on the western and

southern parts of India before expanding into other parts of India. The
company intends to aggressively expand its current presence in Kerala,
Karnataka and Goa. It also plans to set up units in Andhra Pradesh and
Tamil Nadu. Aggressive brand-building efforts and expansion of
distribution network are targeted to drive the company’s growth plans.
Key brands of Imperial Spirits

Type of liquor Segment Brand
Regular Glen Special
Whisky
Premium Gold Coast Malt
Regular Imperial XO premium
Brandy
Special Imperial exclusive VSOP
Regular Black Magic
Rum Regular Hatrick
Premium Amazon white Aniruddha Joshi
Spirit Whisky Premium Gentlemen imported +9122 6626 6732
Regular Black Magic
Vodka
Premium Imperial Iceberg Premium Shirish Pardeshi
Gin Regular Seagull London dry +9122 6626 6730
Source: Company

Consumer
India I Equities
18 April 2012
Mohan Meakin
Unlisted
Aggressive expansion into new geographies and segments
A 150-year-old company focussed on beer and alcoholic beverages,

Mohan Meakin mainly operates in north and east India. Owned and
managed by the Mohan family, the company plans aggressive growth
with an expansion of its distribution network into west and south India
and with the launch of breakfast cereals and fruit juices.
 Business. An Uttar Pradesh-based company focussed on beer and

alcoholic beverages in India, Mohan Meakin’s major brands are Golden
Eagle, Lion and Meakins in beer. Its Old Monk is a strong brand in rum.
The company’s range of offerings also includes whiskies and brandies. Its
major areas of operations are north and east India.
 Management. The Mohan family manages the business, with managing

director Kapil Mohan looking after overall operations and with Vinay
Mohan as deputy managing director. Overall finance and secretarial
responsibilities are handled by P.D. Goswami.
Key brands and products
 Growth plans. The company plans to aggressively grow its Old Monk Type of liquor Brand
and beer brands and to expand its distribution network to south and west Whisky Summer Hall, Colonel's Special,
India. In addition, Mohan Meakin is entering into non-alcoholic fruit Golden Eagle, Top Brass, Blue Bull
Brandy Triple crown, Doctor's reserve
juices and breakfast cereals as well as the vinegar and mineral water No.1, D.M., MMB
segments. Gin Big Ben London
Beer Golden Eagle, Gold Lager, Solan
No.1, Lion, Old Monk
Rum Old Monk
Other products Brand
Juices Mohun's Gold coin
Vinegars Mohun's brewed
Mineral water Golden Eagle, Mohun's
Breakfast food Mohun's Porridge, Mohun's corn
flakes
Source: Company
Sales (`m) 2,648 2,695 2,842 3,006 3,165
Net profit (`m) 11 5 4 (31) 83
EPS (`) 1 0 0 - 10
Growth (%) 85 (61) (13) nmf nmf
PE (x) - - - - -
PBV (x) - - - - - Aniruddha Joshi
RoE (%) 3 1 (31) (0) (14) +9122 6626 6732
RoCE (%) 7 8 (3) 6 1
Dividend yield (%) - - - - - Shirish Pardeshi
Debt/ equity (%) 155 167 190 228 226 +9122 6626 6730
Source: Company

Consumer
India I Equities
18 April 2012
Som Distilleries Rating: Not Rated

Target Price: NA
Progressive deregulation, young consumers to drive growth Share Price: `164
With a focus on beer and IMFL in the central, northern and eastern
parts of India, Som Distilleries’ major brand is Hunter beer. The
company sees strong opportunities in India in alcoholic beverages, as Key data SDB IN / SDB.BO
per capita consumption is lower than the global average. 52-week high / low `230 / `117
 Business. With its registered office in New Delhi, Som Distilleries has a 3-m average volume US$0.1m
strong focus on beer and IMFL in India. Its major areas of operations are
Shares outstanding 27.5m
Madhya Pradesh and north India, with its major beer brands being
Hunter and Woodpecker. In rum its main brand is Black Fort.
 Management. Chairman and managing director Surjeet Lal looks after

overall operations. Other directors include Shailendra Sangar, Deenanath Shareholding pattern (%) Dec’11 Sep ’11 Jun ’11
Singh and Guru Darshan Arora. Promoters 13.7 13.7 13.6

 Growth plans. Som Distilleries plans to expand its manufacturing Free float 86.3 86.3 86.4
capacities in beer as well as IMFL. It recently commenced installing a
40,000kl beer plant, which is expected to start production from 1QFY13. - Public 86.3 86.3 86.4
The company sees a strong opportunity to grow revenue in beer and
IMFL by tapping young consumers. It also expects progressive
deregulation in the Indian beer and IMFL sub-segments to drive growth.
 Valuation. At the ruling price of `164 and annualized earnings of FY12e, Relative price performance
the stock trades at a PE of 28.2x. Risks. Higher raw material prices and 230
the aggressive focus of MNCs on Indian markets. 210 SDB
190
170 Sensex
150
130
Dec-11
Apr-11
Jun-11
Aug-11
Oct-11
Feb-12
Apr-12
Source: Bloomberg

Sales (`m) 523 543 729 1,048 1,830
Net profit (`m) (5) 58 65 83 151
EPS (`) - 3.2 3.6 3.0 5.5
Growth (%) nmf nmf 12.5 (15.8) 81.5
PE (x) - 51.3 45.6 54.1 29.8
RoE (%) - 27.4 19.1 16.9 24.4 +9122 6626 6732
RoCE (%) - 16.0 13.7 13.7 19.7
Dividend yield (%) - - - 0.3 0.5 Shirish Pardeshi
Net gearing (%) 266.0 124.0 75.0 59.0 31.1 +9122 6626 6730
Source: Company

Consumer
India I Equities
18 April 2012
United Breweries Rating: Not Rated

Target Price: NA
Low penetration, growing popularity to drive growth in beer Share Price: `510
India’s largest beer manufacturer, with a 48% market share, United
Breweries is owned and managed by the UB Group and Scottish &
Newcastle. It sees strong growth prospects, as per-capita beer Key data UBBL IN / UBBW.BO
consumption in India is lower than the world average. It also expects 52-week high / low `644 / `340
premiumization of its brands to be a strong growth driver.
Market cap `135bn / US$2.6bn
 Business. Focused on beer in India, United Breweries (UB) has 48%
market share. The company’s strongest beer brand is Kingfisher. Its other
brands include London Pilsner, Zingaro, UB Export, Black Label, Bullet
and Guru. UB’s business operations and production units cover most
states in India.
Shareholding pattern (%) Dec’11 Sep ’11 Jun ’11
 Management. Scottish & Newcastle (40.4% stake) and the UB Group Promoters 74.8 74.1 74.1
(34.4% stake) jointly hold the company. Managed by the UB Group, Dr
Free float 25.2 25.9 25.9
Vijay Mallya is the chairman, Kalyan Ganguly is managing director and - Foreign institutions 17.4 17.5 14.9
Guido Do Boer is CFO. - Domestic institutions 0.8 0.9 1.1
- Public 7.0 7.5 9.9
 Growth plans. The company plans to aggressively grow its beer business.
Currently, per-capita beer consumption in India is the lowest in the
world, which leaves much scope for expansion. The company sees the
growing acceptance of alcohol in India as a key growth driver. It also sees
the growth of premium products such as draught beer, strong beer, and Relative price performance
Kingfisher Blue as driving value growth. 650
UBBL
 Valuation. At the ruling price of `510 and annualized earnings of FY12e, 550
the stock trades at a PE of 86x. Risks. Higher raw material prices and
delay in expanding the distribution network in the western and eastern 450
regions. Sensex
350
Dec-11
Apr-11
Jun-11
Aug-11
Oct-11
Feb-12
Apr-12
Source: Bloomberg

Sales (`m) 11,968 15,590 19,295 22,755 30,132
Net profit (`m) 550 542 456 896 1,475
EPS (`) 2.1 2.1 1.5 3.3 5.4
Growth (%) nmf (0.5) (29.4) 122.1 61.6
PE (x) 240.6 241.7 342.3 154.1 95.3
RoE (%) 16.7 14.6 7.0 10.2 14.8 +9122 6626 6732
RoCE (%) 12.0 11.4 12.2 11.4 15.2
Dividend yield (%) 0.0 - 0.1 0.1 0.1 Shirish Pardeshi
Net gearing (%) 101.0 115.0 87.0 71.0 65.0 +9122 6626 6730
Source: Company

Consumer
India I Equities
18 April 2012
United Spirits Rating: Not Rated

Target Price: NA
High-end brand building to grow premium products Share Price: `700
The world’s largest spirits company by volume, United Spirits
generates almost its entire revenue in India. Its offerings include
premium whisky and Scotch brands. The company plans to expand by Key data UNSP IN / UNSP.BO
raising per-capita consumption and premiumizing its product range. 52-week high / low `1123 / `450
 Business. The largest company in the world by volume, United Spirits 3-m average volume US$24.5m
Market cap `91.7bn / US$1.8bn
sold 114m cases in FY11. It boasts 21 “millionaire” brands in India and
enjoys a ~59% market share. Its major brands are McDowell No.1,
Bagpiper, Royal Challenge, Signature, Honey Bee, Green Label, White
Mischief and Romanov.
 Management. Chairman Vijay Mallya looks after overall business Shareholding pattern (%) Dec’11 Sep ’11 Jun ’11
operations. S.R. Gupte is vice-chairman and Ashok Capoor is the Promoters 28.0 28.0 28.0
managing director. Ravi Nedungadi looks after overall finance operations.
Free float 72.0 72.0 72.0
 Growth plans. United Spirits plans to tap the vast potential of the rising
Indian economy and the growing consumerism. It sees opportunities in - Public 16.6 16.5 17.7
the increasing per-capita consumption of liquor in India and in driving
premiumization towards Scotch and whisky. The company is growing its
brands through surrogate advertising such as sponsoring the Royal
Challengers cricket team and other high-end brand-building activities.
Relative price performance
 Valuation. At the ruling price of `700 and annualized earnings of FY12e, 1,200
the stock trades at a PE of 20.6x. Risks. Higher raw material prices and UNSP
1,000
the aggressive focus of MNCs on Indian markets.
800
600
Sensex
400
Dec-11
Apr-11
Jun-11
Aug-11
Oct-11
Feb-12
Apr-12
Source: Bloomberg

Sales (`m) 29,823 45,902 54,681 63,623 73,762
Net profit (`m) 6,107 3,012 (4,085) (232) 5,683
EPS (`) 73.1 33.7 - - 44.7
Growth (%) 987.5 (53.9) nmf nmf nmf
PE (x) 9.6 20.8 - - 15.7
RoE (%) 26.2 15.8 (17.5) (0.0) 14.3 +9122 6626 6732
RoCE (%) 18.6 19.6 4.4 7.3 13.6
Net gearing (%) 120.0 212.0 309.0 221.0 157.0 +9122 6626 6730
Source: Company

Appendix 1
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compensation of the research analyst(s) was, is, or will be directly or indirectly related to the specific recommendations or views expressed by the research
analyst(s) in this report.
The research analysts, strategists, or research associates principally responsible for the preparation of Anand Rathi Research have received compensation based
upon various factors, including quality of research, investor client feedback, stock picking, competitive factors, firm revenues and overall investment banking
revenues.
Anand Rathi Ratings Definitions
Analysts’ ratings and the corresponding expected returns take into account our definitions of Large Caps (>US$1bn) and Mid/Small Caps (<US$1bn) as described
in the Ratings Table below.
Ratings Guide
Buy Hold Sell
Large Caps (>US$1bn) >20% 5-20% <5%
Mid/Small Caps (<US$1bn) >30% 10-30% <10%
Anand Rathi Research Ratings Distribution (as of 10 April 2012)

Buy Hold Sell
Anand Rathi Research stock coverage (146) 75% 13% 12%
% who are investment banking clients 6% 5% 0%
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Consumer

India Consumer – Alcoholic Beverages BSE FMCG: 4779

Holding the fort Nifty / Sensex: 5290/17358

Anand Rathi Research India Equities

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Snapshot of liquor industry in India

Tilak Nagar UB South

Source: Companies, Anand Rathi Research

Anand Rathi Research

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India Consumer – Alcoholic Beverages BSE FMCG: 4779

Holding the fort Nifty / Sensex: 5290/17358

Due to strong entry barriers and numerous taxes, existing liquor

 Strong entry barriers protect incumbents. Several entry barriers exist

 Sub-segmentation to offset limited brand-building and volatile income

Key Data Globus Radico Tilaknagar

Anand Rathi Research India Equities

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India Consumer – Alcoholic Beverages

Investment Argument and Valuation................................................3

Anand Rathi Research 2

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Investment Argument and Valuation

Sub-segmentation to offset limited brand-building & volatile income

Anand Rathi Research 3

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Fig 2 – Example of premiumization: United Spirits

Fig 3 – Sector valuation matrix

Anand Rathi Research 4

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Fig 4 – India liquor sector valuation matrix

Anand Rathi Research 5

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Strong Entry Barriers

Registering a brand with the CSD is difficult

Fig 6 – IMFL consumption: region-wise

Anand Rathi Research 6

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Inter-state transfer fees on molasses, a key raw material

Fig 7 – Sugarcane production across India

Import duties on inter-state transfers

Anand Rathi Research 7

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Fig 8 – Distribution structure in India

Limited SKUs result in slower distribution expansion

Fig 9 – Limited SKUs allowed in liquor

Anand Rathi Research 8

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Sub-segmentation a Key Strategy

Limited ways to create brands

Changing demographics to result in uptrading and downtrading

Anand Rathi Research 9

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Fig 11 – Volatile per-capita income growth rates

Sub-segmentation necessary to create brands

Fig 12 – McDowell No.1: sub-segmentation strategy

Whisky Rum Brandy Other Drinks

Regular Single Malt Platinum Diet Mate Water Soda

Anand Rathi Research 10

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Pricing Power to be Weaker

Prices allowed to be changed once a year

Source: RIL, RBI