Globus Spirits IPO Note

Globus Spirits IPO Note

Pidilite Industries, Punj Lloyd, Globus Spirits

Pidilite Industries, Punj Lloyd, Globus Spirits

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.

Globus Spirits IPO Analysis

Globus Spirits, promoted by Ajay Kumar Swarup and family, manufactures, markets and sells industrial alcohol comprising rectified spirit and extra-neutral alcohol, country liquor, and Indian-made foreign liquor (IMFL). With steady growth and production of good quality liquor, the company has established its identity in the country liquor and IMFL business. Its brand portfolio in the country-liquor segment includes Rana, Rajasthan No.1, Ghoomar, Samalkha No.1, Samalkha Ki Saunfi, and Kinnu. In the IMFL segments, its brands comprise White Lace Duet Gin, Samurai Premium Whisky, 20-20 Premium Whisky, GR 8 Times Whisky, and Hannibal Legendry Rum. Globus Spirits also caters to reputed Indian brands in the IMFL segment such as Officer's Choice Prestige Whisky, Officer's Choice Classic Whisky, Officer's Choice No.1 Brandy and Officer's Choice XXX Rum. The company has launched its own IMFL brands in Haryana, Rajasthan, Chandigarh, Uttar Pradesh, Andhra Pradesh, Kerala and Karnataka. It proposes to launch the brands in two states and Union territory in north India and one state and Union territory in south India.

The two distilleries of Globus Spirits at Behror in Rajasthan and at Samalkha in Haryana are capable of manufacturing alcohol from molasses as well as grain. The total licensed and installed capacity of both the units stand is at 144 lakh bulk litres (BL) per annum each. The distilleries have modern bottling facilities equipped with bottling machines and cater to jn-house country liquor and IMFL brands. Also, the company has tie-ups and separate arrangements for bottling IMFL products for other brand owners.

To lower the cost of production while continuing to produce high quality spirit, Globus Spirits is modernising and expanding its production facilities, and setting up latest facilities in utility management. The company intends to enter the IMFL market by developing its own brands and/or acquiring existing brands and marketing them across India. It proposes to implement greenhouse gas abatement project by utilising biomass and biogas for steam and power generation to reduce emission of greenhouse gases (GHG) from fossil fuel combustions for equivalent energy generation. This will help in getting the potential benefits of the GHG abatement project under the clean development mechanism of the Kyoto Protocol.

To expand and modernise its existing facilities, Globus Spirits requires Rs 89.28 crore. To raise this amount, the company is entering the capital market with its initial public offering of 75 lakh equity shares of face value of Rs 10 each through a 100% book-building process at a price band between Rs 90 and Rs 100 per equity share. It is also getting a term loan of Rs 12 crore from SBI. The remaining will be through internal accruals.

Strengths

Good financial track record, with consistent growth in sales and profit.

Strategically located with access to raw material (molasses and grains). The plant also has technological flexibility to use both grain and molasses as raw material, insulating from dependence on any specific raw material.

Weaknesses

Products lack adequate awareness, and have limited geographical presence across the country. Dependent on a single customer for bottling of IMFL products

Does not have adequate distribution network for its products in the IMFL segments.

The industry is heavily taxed and regulated by the government.

Valuation

Globus Spirits has set a price band of Rs 90 to Rs 100 per equity share of Rs 10 face value. At the lower band of Rs 90 per share, the P/E will be 13.8 times the EPS for the financial year ended March 2009 (FY 2009). At the upper price band of Rs 100 per share, the P/E will be 15.3 times. In the breweries & distilleries industry, comparable companies such as Tilaknagar Industries and Associated Alcohols and Breweries have P/E around 5.3 and 7.3 times FY 2009 EPS.

Globus Spirits

Globus Spirits, a Delhi-based alcohol beverage company, is planning an initial public offering (IPO) to raise Rs 68 crore.

The company has filed a daft red herring prospectus (DRHP) with Securities & Exchange Board of India (Sebi). The Book Running Lead Manager of the proposed issue is SREI Capital Markets.

The company posted a gross turnover of Rs 116.67 crore in 2006-07 with a CAGR of over 30% in the last three years, and registered a PAT of Rs 8.66 crore.

The company proposes to modernise and expand its production facilities at Behror, Rajasthan and Samalkha, Haryana, develop and acquire IMFL brands, and revamp its storage and bottling capacity