Globus Spirits IPO - Invest

Investors can consider participating in the Globus Spirits’ initial public offering, given reasonable growth prospects, the company’s track record and locational advantages.

The company plans to use the proceeds of this Rs 75 crore IPO (at the higher end of the price band) to ramp up its alcohol production capacity by 73 per cent through expansion at its existing Haryana and Rajasthan facilities.

In addition, it plans to enter 10 new states with its product line of Indian Made Foreign Liquor (IMFL) and acquire companies which supply to military canteens.

At the higher end of the price band (Rs 90-100), the offer is priced at 10 times trailing earnings on pre-issue capital (15 times 2008-09 earnings) while industry peers such as Tilaknagar Industries and GM Breweries are priced between 6 times and 11 times earnings.
Business

The company’s present product portfolio includes rectified spirit, used in industrial applications and country spirits, extra-neutral ethanol (ENA) — used in whisky, rum and white spirits.

While the ENA is supplied to breweries such as United Spirits and Seagrams India. The company has its own IMFL brands such as Officers Choice whisky.

In the country liquor segment, the company holds between 17 and 22 percent in Rajasthan, Delhi and Haryana respectively.

Globus Spirits has posted an average net sales growth of 31.5 per cent and net profit growth of per cent over the past three years.

Net sales for 2008-09 grew at 25.6 per cent. Net profit margin for 2008-09 stood at 6.5 per cent. Operating profit margins have averaged at 8.3 per cent over this period, in line with the rest of the industry.

Operating profits saw a two percentage point drop due to higher raw material costs.

Input prices pressures may remain high over the next six months, given poor cane and paddy output. However, with the expansion expected to be commissioned by March 2010 and cane output expected to see an improvement next year, these may not persist over the medium term.

The company’s operational flexibility to switch from molasses to grain-based ethanol production, may allow it to manage input costs. Capacity additions on a national level may also make for a challenging operating environment. The company has managed a 76 per cent utilisation for the last three years.

Besides, the company appears to have locational advantages on several counts. First, the company operates in Rajasthan and Haryana where ethanol production is limited and trade barriers towards imports exist. It also enjoys ready access to grain and molasses.

The IMFL market is growing at 10 per cent per annum and country liquor at 7 per cent. Certain IMFL products such as white spirits are growing at 40 percent.

Considering the company is targeting high volume, low margin products, barriers to entry are considerably eased compared to premium segment.

Investors however, should look to a strategy of booking profits on a targeted return on this stock. At Rs 100, the offer price offers limited margin of safety, given the low valuations ascribed to the industry by the market.
Offer details

The company plans to spend Rs 89 crore on expanding production and bottling facilities and foraying into new markets, of which 26 crore is through borrowing and accruals.