Empee Distilleries, part of the Empee Group promoted by M P Purushothaman and his family members, is manufacturing Indian-made foreign liquor (IMFL) since 1984 and sells it under own brands or through tie-ups with other companies. Its distillery located at Kanchipuram in Tamil Nadu has an installed capacity of 38.33 lakh cases per annum. Another distillery is at Palakkad in Kerala, with an installed capacity of 21.60 lakh cases per annum. The company is one of the major suppliers of IMFL products to the Tamil Nadu State Marketing Corporation (TASMAC) and one of the top ten selling brands in the IMFL 180-ml pack segment. The 2-MW windmill energy plant in the Coimbatore district of Tamil Nadu exports surplus power to the Tamil Nadu State Electricity Board.
The present public issue is to raise Rs 168 crore at the lower band (Rs 350) and Rs 192 crore at the upper band (Rs 400). The proceeds will be utilised to set up a 60-kilo litres per day (klpd) grain-based distillery in Andhra Pradesh to cater to the medium and premium categories, a 0.70-lakh cases per month bottling plant in Andhra Pradesh, and a 7.5-MW biomass-based power plant in Tamil Nadu.
Also on cards is expansion of the Tamil Nadu unit’s existing extra-neutral alcohol capacity from 20 klpd to 70 klpd and bottling capacity from 3.2 lakh cases per month to five lakh cases per month, and relocating and expanding the existing capacity of the distillery in Karnataka from 0.5 lakh cases per month to one lakh cases per month. Out of the surplus land available, there are plans to develop two lakh square feet of residential apartments in the Kanchipuram district in Tamil Nadu.
With these expansions will be used to enter new markets of Andhra Pradesh and Karnataka and strengthen existing position in Tamil Nadu. The total fund requirement for the expansion projects is estimated at Rs182 crore. A term loan of Rs 22 crore, internal accruals of Rs 9.50 crore, and the proposed IPO of Rs 192/168 crore, depending on price band of Rs 400-Rs 350 per share will be the sources of funds.
Strengths
- In past, the Tamil Nadu government had not permitted any new entrants other than the existing six licensees to manufacture and market IMFL products. Even the national operators have to route their bottling operations through existing operators. Due to the entry barriers in the state, competition will not be severe. Also, opportunity to bag manufacturing contracts from national players.
- The surplus land of 16.97 acres of the 20.88 acres in the Kanchipuram district in Tamil Nadu is to be utilised for development of 12.23-lakh sq ft of residential space. The project, approved by the directorate of town planning (DTCP)), is to be developed in three phases and is eligible for tax exemption under Section 80-IB of Income-Tax Act, 1961. Two-lakh sq ft of residential space is to be developed in phase I, expected to be completed by March 2009.
- Apart from distillery revenue from the existing as well as upcoming plants, additional revenue stream will come from the proposed 7.5-MW biomass-based power plant in Tamil Nadu, likely to come on stream end November 2007. About 2% of the power generated will be for internal consumption and the balance sold to the Tamil Nadu State Electricity Board.
Weaknesses
- Prices of liquor products are negotiated and fixed by the distributor agencies, controlled by the state government. It may not consider hike in prices to reflect increase in input costs in the same proportion. The government of Andhra Pradesh, where the grain-based distillery is to be started, has not approved rise in prices for the past many years. Similarly, Kerala State Beverages Corporation has not raised the prices of IMFL products, specially in the cheaper segment, despite the increase in prices of basic raw material such as extra-neutral alcohol by 70%. As a result, production of non-economical products had to be curtailed at the Kerala unit.
Further, the IMFL industry is politically sensitive, dependent on ideologies of the party ruling in the state and also prone to frequent changes in government policies on taxes, levies, and state excise duty. Any material changes in the duty structure might adversely impact financials.
- The existing distilleries use molasses-based spirit as the basic raw material. Considering the 5% mandatory and 10% optional ethanol blending (in petrol) program, a demand-supply mismatch may push up cost and hit supply of the raw material.
- Legal proceedings and pending claims in India amount to Rs 39.95 crore. An unfavorable outcome may dent profit and the finances. There are also related-party transactions of Rs 32.12 crore.
Valuation
On the annualised EPS of Rs 11.5 for the nine months ended June 2007 on post-issue equity capital, the P/E works out to 30.4 – 34.7 at the price band of Rs 350–400. The trailing 12-month (TTM) P/E of other listed IMFL players such as Radico Khaitan, Jagatjit Industries, Shaw Wallace and United Breweries is 63.9, 27.4, 43.2 and 117.4, respectively. Considering its regional presence, Empee Distilleries would trade at discount to players with leadership and national presence.