We would like to share with you a detailed report on Associated Alcohols & Breweries (BSE Code – 507526).
In Jul’16 we shared a detailed report on Associated Alcohols and Breweries (AABL) (BSE Code – 507526) which is engaged in the manufacturing of potable alcohol, i.e. Country Liquor, Rectified Spirit (RS) and Extra Neutral Alcohol (ENA) including triple distilled grain spirit. The company also owns IMFL brands and does bottling for other international brands.
The report was initiated for Alpha and Alpha plus members in July 2016 at around levels of 70 (CMP – 248). The stock has already delivered more than 250% return in less than 2 years; however we could not completely capitalize on the returns and closed the recommendation in less than a year at around 117 with a gain of 65%
With the benefit of hindsight, it’s easy to think of closing the recommendation in Feb’17 at 117 as wrong decision; however at that time there was growing talk of Madhya Pradesh (MP) govt. considering liquor ban in the state and we all know how irrational political parties can be. As AABL derives 60-70% of its sales from MP, liquor ban would have almost killed the business and we therefore took the decision of closing the recommendation.
Well, till now the MP govt. hasn’t implemented the ban and the company continues to do well with expanding margins and profitability.
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The detailed report on AABL can be accessed at the following LINK
Note: This is not an investment advice. We provide equity research service, so please carry out your due diligence or consult your financial adviser before buying/selling the stock.
AABL – Basic details
(24th Jul’16 note on the stock)
Incorporated in 1989, Associated Alcohols and Breweries Ltd. (AABL) is a flagship entity of the Indore-based Kedia group promoted by late Mr Bhagwati Prasad Kedia. AABL is the second largest distillery in Madhya Pradesh (MP) and is engaged in the manufacturing of potable alcohol, i.e. Country Liquor, Rectified Spirit (RS) and Extra Neutral Alcohol (ENA) including triple distilled grain spirit. The company also owns IMFL brands and does bottling for other international brands.
We like the company on several fronts however one major negative is that the promoters take home very high salary (with respect to profits) of the order of 6 crores per annum.
As far as positives are concerned we like its product profile, the customers it serves, operational changes brought over the last few years, expansion and modernization of production facilities, strong operating performance with decent cash flows and good balance sheet and lastly the valuations.
As mentioned above AABL is Indore based distillery engaged in capturing the entire value chain of potable alcohol, starting from rectified spirit and country liquor to supplying high grade ENA to major international brands and to bottling and blending single malt Scotch whisky.
The company produces rectified spirit and is also one of the leading sellers of country liquor in Madhya Pradesh.
Moving up the value chain, it produces high quality ENA which is a vital ingredient in the making of alcoholic beverages and AABL supplies ENA to national and international liquor majors including reputed companies like Diageo, Mason & Summers and Diageo-Radico. These companies buy a major portion of ENA produced by AABL. The company uses remaining production for supplies to other branded players apart from manufacturing its own IMFL brands.
As per the company its triple distilled fine grade grain spirit is used by Diageo for Smirnoff Vodka in India.
AABL also manufactures and markets its in-house IMFL brands like Red & White, James McGill, Bombay Special (in the whisky segment), London Bridge (in the gin segment) and Jamaican Magic in the rum category.
Lastly AABL is also engaged in the business of bottling vodka and Scotch whisky for large reputed international brands. The company does blending and bottling for global brands like Smirnoff Vodka, Christian Brothers Brandy, HAIG Scotch Whisky, Masterstroke and Glen Drummond Single Malt Scotch Whisky.
Distillation and bottling facilities – AABL’s distillery capacity is around 314 lacs litres per annum and it also has bottling operations with capacity of 50 lacs litres per annum. The company has the operational flexibility to manufacture alcohol through grain and molasses route thus providing insulation against raw material price/supply volatility; however its main focus is on premium grain based ENA. It also has close proximity to dual sources of raw materials – Maharashtra (largest source of molasses) and the grain producing belt of Amravati and Akola.
During the last few years the company expanded its distillery and modernized it by upgrading from Atmospheric Pressure technology to Multi-Pressure ENA technology.
The Govt. of Madhya Pradesh has recently enhanced the licensed capacity of the Company’s distillery unit from 314 Lacs Bulk Liters to 900 Lacs Bulk Liters per annum and the company has already submitted the pre-feasibility report along with other necessary documents for environment clearance of the proposed Grain based 137 KLPD distillery (current capacity 104 KLPD) unit and co-generation power plant of 6 MW adjacent to the existing unit. The details can be accessed at the following LINK
The reins of the company are in the hands of the promoters Mr. Anand Kumar Kedia, Chairman and Mr. Prasann Kumar Kedia, Vice Chairman. Besides the two Mr. H K Bhandari has been with the company since long and is the Vice President and Mr. Ashish Gadia is the Whole Time Director.
Overall the promoters have run the company well as AABL is one of few profitable companies in the liquor space and has a distinguished list of customers.
Earlier the company lacked internal audit and controls systems; however over the years the management has made steady progress on those lines and the comments and qualifications from the auditors have reduced significantly. The management has also implemented SAP ERP successfully and as per them they are among the few liquor companies to have the SAP ERP system.
The promoters of the company own more than 58% stake and therefore their interests are directly aligned with those of shareholders. In fact, in the years 2009, 2010, 2011 and 2014 promoters increased their stake in the company through open market purchases and the cumulative purchases were to the tune of 14 lakh shares (28 lakh shares adjusted for 1:1 bonus) i.e. around 15% creeping acquisition spread over 6 years.
One worrying fact though is that promoters Mr. Anand Kumar Kedia and Mr. Prasann Kumar Kedia took home Rs 6.2 crore salaries in FY 15 (Rs 3.1 crore each) and it seems they got paid similar amount in FY 16 as well. The Annual Reports of the company suggest that this arrangement started in FY 15 because for earlier years the salaries were low at 0.2-0.3 crores. While the profits of the company have risen despite the humongous increase in salaries of the promoters, we believe there should have been clear-cut explanation for the same.
Further, promoter’s attention gets dividend between AABL and one of their other companies Mount Everest Breweries which is engaged in contract manufacturing of beer for United Breweries and also manufactures and sells its own brands.
One of the major positives of AABL is its operating performance which has improved significantly over the years.
Between FY 09 and FY 15 the company spent ~ Rs 95 crores (~ Rs 60 crores during FY 12 and FY 13) towards expansion and modernization of its distillery unity and for setting up PET bottle manufacturing adjacent to its distillery complex.
The company has benefitted immensely from its measured and well-spread out CAPEX with sales of the company improving from Rs 97 crores in FY 09 to Rs 287 crores for FY 16, EBITDA improving from Rs 5.82 crores to Rs 38 crores and before tax profitability improving from Rs 2.47 crores to Rs 23 crores. It’s important to note here that Rs 23 crores PBT is despite promoter’s salary increasing by ~ Rs 6 crores.
With operating efficiency and improvement in scale of operations the EBITDA margins of the company have improved from 5-6% to 12-13%.
At its peak the company had net debt of around 72 crores (gross debt of Rs 91.50 crores) at the end of FY 14, however with both improvement in profitability and strong operating cash flows the net debt of the company has reduced to only Rs 31 crores at the end of FY 16.
The company’s return ratios have also improved from sub 10% to ~ 25% ROCE and 30% ROE on pre-tax basis for FY 16.
At around current price of 70 the market capitalization of the company is Rs 127 crores and the enterprise value is Rs 158 crores.
For FY 16 the company recorded sales of Rs 288 crores with EBIT of Rs 28 crores and PAT of Rs 14.29 crores. The stock is therefore trading at 8.90 times trailing twelve months earnings and EV/EBIT multiple of 5.65.
On both absolute and relative basis we find the valuations of the company reasonable and believe there’s potential for re-rating if the company is able to sustain current level of performance.
Another positive is that since FY 15 the company has restarted paying dividends and increased the same by 100% (adjusted for bonus) in FY 16.
Risks and Concerns
The major concern as mentioned above is that promoter’s salary is very high with respect to the overall profitability of the company. Further, company hasn’t come out with any clear cut policy or clarification on promoter’s salary.
The company might be getting divided attention of the promoters as they have another company Mount Everest Breweries engaged in production and sale of beer.
Bihar has imposed ban on liquor sale from 1st Apr’16 while Kerala has been implementing prohibition in a phased manner since 2014. If Madhya Pradesh Govt. imposes similar ban, AABL’s operations will get impacted significantly.
Alcohol industry in India is subject to very strict regulations, taxes and licensing and the same is hindering growth of the industry.
Last but not the least the industry is also subject to strict environmental laws including Water [Prevention and control of Pollution] Act and any laxity on the part of the company can result in suspension of license.
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Disclosure: I don’t have any investment in the stock and have not traded in it in the last 30 days.
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Positive – Expected return of ~15% + on annualized basis in medium to long term for investment recommendations and in short term for Special situations
Neutral – Expected Absolute return in the range of +/- 15%
Negative – Expected Absolute return of over -15%
Coverage closure – No further update on the stock
% weightage – allocation in the subject stock with respect to equity investments
Short term – Less than 1 year
Medium term – Greater than 1 year and less than 3 years
Long term – Greater than 3 years
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Name: Ekansh Mittal Email Id: email@example.com Ph: +91 727 5050062
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