Alcohol Industry

India I Equities
Consumer Sector Report
18 April 2012
India Consumer Alcoholic Beverages

Holding the fort
BSE FMCG: 4779 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
18 April 2012
India Consumer - Alcoholic Beverages Holding the fort
Snapshot of liquor industry in India

Liquor industry break-up
Imported 3% Beer 13%
Indian-made foreign liquor (IMFL) industry break-up Rum 20%
Beer industry break-up

Premium 1%
Country liquor 48%
Brandy 16%
IMFL 36%
Whisky 59%
Standard 45% Strong 54%
White spirits 5%
Per-capita consumption: IMFL

(ltr/p.a./person) 120 100 80
Per-capita consumption: beer

(ltr/p.a./person) 140 120
80
Market share: IMFL and country liquor

(%) 100
100 80
60 40 20 0 Brazil South Africa Hong Kong Philippines Indonesia Mexico Malaysia China Australia Taiwan Russia India Argentina Thailand Vietnam Egypt
60 40 20
60 40 20 0 New Zealand Denmark India Germany China

0 FY04 FY05 FY06 FY07 FY08 FY09 FY10 FY11
IMFL
Country liquor
Market share of IMFL companies Others 13%

Mohan Meakins 9% Tilak Nagar 4% Jagatjit 9% Radico 12%
Source: Companies, Anand Rathi Research
Market share of beer companies Others 13%

Mohan Meakins 6% UB 50% SAB Miler 31%
Region-wise market structure: IMFL North 12%

East 9% South 49%
United Spirits 53%
West 30%
Anand Rathi Research
Consumer
India I Equities
Sector Report
18 April 2012

Holding the fort
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.
BSE FMCG: 4779 Nifty / Sensex: 5290/17358
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 interstate 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, which further dissuades price hikes, as this attracts higher taxes. A few companies are using a premiumization strategy to pass on the volatile prices of molasses and glass, thereby improving realizations. Stock calls. We initiate coverage on Radico Khaitan, Tilaknagar Industries and Globus Spirits with Buy ratings. Top picks: Tilaknagar (strong IMFL franchisee) and Globus Spirits (healthy balance sheet).
Globus Radico
Shirish Pardeshi
Aniruddha Joshi
+9122 6626 6732 aniruddhajoshi1@rathi.com
Key Data
Tilaknagar
Rating Current price (`) Target price (`) M.Cap (US$m) Upside (%) Target PE (x) FY13e FY11-14e EPS CAGR (%) FY13e RoE FY13e RoCE FY13e PE (x)
Source: Company, Anand Rathi Research
Buy 102 170 45 67 7.0 21.0 18.5 23.0 4.2
Buy 122 161 311 32 20.0 22.2 13.2 14.1 14.9
Buy 59 74 136 25 13.0 28.4 12.7 14.8 11.0
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 Anand Rathi Research India Equities
18 April 2012
India Consumer Alcoholic Beverages Holding the fort

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
18 April 2012
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 in establishing brands. This helps incumbents maintain their market share Strong entry barriers protect incumbents The ban on liquor advertising in India has helped domestic brands maintain market leadership. The ban has also helped regional players 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
Others 25%
2011
Others 13% Mohan Meakins 9%
United Spirits 48%
Mohan Meakins 7% Tilaknagar 3% Jagatjit 7% Radico 10%
Tilaknagar 4% Jagatjit 9% Radico 12%
United Spirits 53%
Source: Companies
Sub-segmentation to offset limited brand-building & volatile income There are limited ways to create brands in Indias 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 subsegmentation is necessary to grow brand strength and attract consumers.
Anand Rathi Research 3
18 April 2012
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 Whisky Vodka Rum Brandy Gin
Black Dog (12-yr) Royal Challenge, Signature, Antiquity
Black Dog (8-yr) McDowell No.1, DSP Black Red Romanov Bagpiper Romanov, White Mischief McDowell Celebration, Old Cask McDowell No.1, Honey Bee 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 Radico Khaitan Tilaknagar Inds
102 122 59
45 311 136
18.5 13.2 12.7
23.0 14.1 14.8
19.8 17.8 16.6
18.3 18.5 25.1
4.2 14.9 11.0
Source: Bloomberg, Anand Rathi Research
18 April 2012
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 Khaitans 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 Tilaknagars aggressive investment in new products and new areas and the improved outlook for the medium term, we assign higher target multiples. Key risks
Fig 4 India liquor sector valuation matrix
M.Cap Company Price (`) (US$m) FY11 RoE (%) FY12e FY13e FY11 RoCE (%) FY12e Revenue EPS CAGR FY13e CAGR FY11-13(%) FY11-13 (%) FY11 PE (x) FY12e FY13e Div Yield FY12e (%)
Higher raw material prices Entry of foreign players
Globus Spirits Radico Khaitan Tilaknagar Inds
102 122 59
45 311 136
19.3 10.3 12.4
17.3 11.6 11.1
18.5 13.2 12.7
22.0 11.3 13.2
21.5 12.3 12.9
23.0 14.1 14.8
19.8 17.8 16.6
18.3 18.5 25.1
5.8 20.9 17.2
5.3 18.8 13.7
4.2 14.9 11.0
1.0 0.6 1.4
18 April 2012
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
Others 25%
Mohan Meakins 9% Tilaknagar 4% Jagatjit 9% Others 13%
2011
United Spirits 48% Mohan Meakins 7% Tilaknagar 3% Jagatjit 7% Radico 10%
United Spirits 53%
Radico 12%
Source: Companies
Registering a brand with the CSD is difficult Very high entry barriers have resulted in the market share of all incumbents staying constant Almost 15% of liquor sales takes place in the militarys CSD. To sell brands through CSD outlets requires prior registration, a process that 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
18 April 2012
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.
18 April 2012
Fig 8 Distribution structure in India

Structure I: Distributor -- Government; Retail -- Government
Kerala Tamil Nadu Delhi

Structure II: Distributor Government; Retail -- Free
Andhra Pradesh Bihar Chattisgarh Assam Daman Goa Jharkhand Gujarat Manipur Mizoram Nagaland
Source: Companies
Orissa Rajasthan Uttaranchal West Bengal Pondicherry Tripura Maharashtra
Uttar Pradesh Karnataka Bihar
Structure III: Distributor -- Free; Retail -- Free
States that have banned liquor
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 750ml 375ml 180ml 90ml
Source: Companies
Fourth-largest SKU Highest selling SKU Second-largest SKU Third-selling SKU Market creation unsuccessful
18 April 2012
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.
Fig 10 Limitations on brand building
Ban on advertising Govt permission required to launch products & variants 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
Due to the ban on advertising, the creation of new brands is difficult. A sub-segmentation strategy of established brands is likely to drive growth
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.
18 April 2012
Fig 11 Volatile per-capita income growth rates

( `) 80,000 (%) 17
60,000
14
40,000
11
20,000
0 FY01 FY02 FY03 FY04 FY05 FY06 FY07 FY08 FY09 FY10 FY11 FY12e FY13e
Per Capita GDP

Source: Government of India, Anand Rathi Research
Growth (RHS)
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 subsegmentation 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
10
18 April 2012
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)
(`/kg) 95 140 85 130 75 65 55 45 Aug-07 Sep-08 Jul-09 Sep-10 Feb-09 Jan-11 May-08 Jun-11 Dec-07 Nov-09 Nov-11 Mar-12 Apr-10 120 110 100 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-12 150
WPI of glass bottles
Source: RIL, RBI
11
18 April 2012
Fig 14 WPI of molasses

140
110
80
50 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
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 FY10 FY11 Globus
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%.
12
18 April 2012
Fig 16 EBITDA margins of liquor companies

(%) 25 22 19 16 13 10 7 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 Whisky Vodka Rum Brandy Gin
Black Dog (12-yr) Royal Challenge, Signature, Antiquity
Black Dog (8-yr) McDowell No.1, DSP Black Red Romanov Bagpiper Romanov, White Mischief McDowell Celebration, Old Cask McDowell No.1, Honey Bee Blue Riband
13
18 April 2012
Fig 18 Liquor companies in India and major brands

Company Whisky Rum Vodka Brandy Beer Gin
Empee Distilleries Globus Spirits Imperial Spirits County club Glen Special, Gold Coast Malt Summer Hall, Colonel's special, Golden Eagle After Dark, 8PM
Old Secret, Victoria, Sixer Hannibal Rum Black Magic, Hatrick Black Magic, Imperial Iceberg Premium
Napoleon Le' Mans Imperial, Imperial Exclusive VSOP Triple Crown, Doctor's Reserve No.1 Magic Moments Old Admiral, Morpheus Hunter, Woodpecker Castle Club Mansion House Kingfisher, Zingaro, London Pilsner Savoy Club White Lace Seagull London Dry
Mohan Meakins
Old Monk
Big Ben London
Radico Khaitan Som Distilleries Tilaknagar Inds. United Breweries United Spirits
Contessa Black Fort
Mansion House, Senate Royale
Madira XXX Rum
McDowell No.1, Bagpiper, Royal Challenge
McDowell Celebrations, Red Romanov, Old Cask White Mischief
McDowell No.1, Honey Bee
Blue Riband
Source: Companies
14
18 April 2012
Company section
15
Consumer
India I Equities
Initiating Coverage
18 April 2012
Globus Spirits
Focus on high-growth country liquor, few organized peers; Buy
The strong performance of the rural economy is likely to positively impact Globus Spirits. A large part of the companys revenue arises from country liquor, which faces less competition and enjoys higher profitability. We estimate robust earnings CAGR of 21% over FY11-14 and initiate coverage with a Buy rating and a price target of `170.
Rating: Buy Target Price: `170 Share Price: `102
Key data
GBSL IN / GLOS.BO
Niche play on country liquor. Globus Spirits is a niche play in the 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 local and do not have strong managements or financial bandwidth. This makes it easier for organized players like Globus to gain market share. Rising rural economy drives growth. The increase in the MSP (minimum support price), greater allocations to the National Rural Employee Guarantee (NREGA) scheme and two good monsoons have raised the income of rural consumers and boosted consumption. Globus has a strong distribution network in rural areas and has placed its brands in the militarys Canteen Stores Department (CSD) distribution network. Lower costs of country liquor protect profitability. The companys 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. Valuation. 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. Risks. Changes in taxation or ban on sale of country liquor.
FY10 FY11 FY12e FY13e FY14e
52-week high / low Sensex / Nifty 3-m average volume Market cap Shares outstanding
`158 / `87 17358 / 5290 US$0.1m `2.3bn / US$45m 23m
Shareholding pattern (%)
Dec 11 Sep 11 Jun 11
Promoters - of which, pledged Free float - Foreign institutions - Domestic institutions - Public
66.3* 0.0 33.7 2.9 14.1 16.7
59.9 0.0 40.1 4.3 16.6 19.2
59.9 0.0 40.1 3.9 16.8 19.4
*Acquisition of ADLs liquor division- Issue of 3.24m shares
Relative price performance

160 140 120 100 GBSL 80 Aug-11 Dec-11 Feb-12 Jun-11 Oct-11 Apr-11 Apr-12 Sensex
Source: Bloomberg
Key financials (YE Mar)
Sales (`m) Net profit (`m) EPS (`) Growth (%) PE (x) PBV (x) RoE (%) RoCE (%) Dividend yield (%) Net gearing (%)
2,650 173 8.7 (17.2) 11.7 1.1 23.4 23.2 1.0 (3.8)
3,813 399 17.4 99.7 5.8 1.0 19.3 22.0 1.0 17.9
4,600 443 19.3 10.8 5.3 0.8 17.3 21.5 1.0 13.4
5,469 559 24.4 26.2 4.2 0.7 18.5 23.0 1.0 7.4
6,505 707 30.9 26.6 3.3 0.6 19.5 24.3 1.0 (0.1)
Aniruddha Joshi
Shirish Pardeshi
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)
Year-end: Mar FY10 FY11 FY12e FY13e FY14e
Fig 2 Balance sheet (`m)

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

Fig 4 Ratio analysis @ `102

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

( `) 350 300 250 200 150 100 50 0 May-10 Apr-11 Nov-09 Dec-10 Dec-11 Jan-10 Feb-11 Jun-11 Sep-09 Aug-10 Aug-11 Feb-12 Mar-10 Apr-12 Oct-10 Oct-11 12x 10x 8x 6x 4x
Fig 6 Revenue breakdown (FY11)
Other sales Branded IMFL 8% 6% Bulk alcohol 15%
IMFL franchisee 24%
Country liquor 47%
Source: Company
17
18 April 2012

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. Low competition is helping the company grow steadily while at the same time maintain profit margins Developing brands in country liquor is extremely difficult for any new player, as setting up the distribution network and establishing relations with vendors is not easy. The lack of proper advertisement channels also results in lower brand-building activities.
Fig 7 Liquor companies and sub-segments
Players Imported liquor IMFL Beer Country liquor
Globus Spirits United Spirits United Breweries Pernod Ricard Radico Khaitan Tilaknagar Tiger Beer
Source: Companies
No Yes No Yes No No No
Yes Yes No No Yes Yes No
No No Yes No No No Yes
Yes No No No Yes No No
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.
18
18 April 2012
Fig 8 Higher per-capita income of consumers

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

Source: RBI, Anand Rathi Research
Growth (RHS)
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 brandbuilding 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 5 0 FY07 FY08 FY09 FY10
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.
19
18 April 2012
Fig 10 Mean PE and standard deviation

11 10 9 +1SD 8 7 6 5 4 Oct-10 Jan-10 Sep-09 Aug-10 Jun-11 Aug-11 Feb-11 Oct-11 Feb-12 Apr-11 May-10 Nov-09 Dec-10 Dec-11 Mar-10 Apr-12 -1SD Mean +2SD
Risks

Higher raw material prices Increased competitive pressure Change in taxes or ban on sale of country liquor.
20
18 April 2012
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 country liquor in India; MNCs are not interested in the country liquor sub-segment
Fig 11 Liquor companies within segments
Players Imported liquor IMFL Beer Country liquor
Globus Spirits United Spirits United Breweries Pernod Ricard Radico Khaitan Tilaknagar Tiger Beer
Source: Companies
No Yes No Yes No No No
Yes Yes No No Yes Yes No
No No Yes No No No Yes
Yes No No No Yes No No
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.
21
18 April 2012
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 companys 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
22
18 April 2012
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 areas, higher allocations for the NREGA and rising disposal incomes are expected to drive consumption in rural areas The rise in per capita income of rural consumers is driving the growth in overall rural consumption levels. Per-capita income has grown 13.5% over FY07-11, against 10.3% over FY01-07. We believe a good monsoon and a rise in government expenditure will maintain income levels at higher levels and continue to drive growth in consumer products, including liquor.
Fig 15 Higher per-capita income of consumers
(`) 80,000 64,000 48,000 32,000 16,000 0 FY01 FY02 FY03 FY04 FY05 FY06 FY07 FY08 FY09 FY10 FY11 FY12e FY13e
(%)
(%) 19.0 16.0 13.0 10.0 7.0 4.0
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)
450,000 360,000 270,000 180,000 90,000 0 FY12e FY13e FY07 FY08 FY09 FY10 FY11
130 100 70 40 10 -20
NREGA Allocations
Growth (RHS)
23
18 April 2012
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.
24
18 April 2012
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 fewer brand-building activities help Globus maintain profit margins comparable to that of IMFL manufacturers, though at much lower realizations.
Fig 18 EBITDA margins comparable with IMFL players
(%) 30
25 20 15 10 5 0 FY07 FY08 FY09 FY10 FY11
The focus on low cost of production and packaging material is expected to protect profit margins
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)
(`/kg) 95 140 85 130 75 65 55 45 Aug-07 Sep-08 Jul-09 Sep-10 Feb-09 Jan-11 May-08 Jun-11 Dec-07 Nov-09 Nov-11 Mar-12 Apr-10 120 110 100 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-12 150
WPI of glass bottles
Source: RIL, RBI
25
18 April 2012
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 adspend 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 8 6 4 2 0 Globus Tilaknagar Radico United spirits
Source: Companies
26
18 April 2012
Financials
We expect Globus Spirits to report 19.5% revenue CAGR over FY1114, with an EBITDA margin of around 17%. Due to the companys 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 FY1114e, 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 6,000 5,000 (%) 45 40 35 30 25 20 15 10 FY05 FY06 FY07 FY08 FY09 FY10 FY11 FY12e FY13e FY13e FY14e FY14e
Geographical expansion, launch of brands and extensions are expected to drive growth
4,000 3,000 2,000 1,000 0
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 9 6 3 0 FY12e FY05 FY06 FY07 FY08 FY09 FY10 FY11
27
18 April 2012
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
400
200
0 FY12e FY13e FY14e

FY13e FY14e
0 FY05 FY06 FY07 FY08 FY09 FY10

FY10
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 FY11 FY12e
RoE
RoCE
FY11
28
18 April 2012

Gross sales Less: excise duty Net sales Growth (%) Expenditure Cost of goods sold Staff cost Manufacturing expenses Admin & selling exps EBITDA EBITDA margin (%) Growth (%) Depreciation EBIT Interest expense & bank exps Other income Profit before tax Income taxes Income tax rate (%) Profit after tax Share of profit from associates Pref. dividends/minority interest Profit before X/O PAT margin (%) Growth (%) Extraordinary Items Profit for shareholders Number of shares (m) Earnings per share bef X/O (`) Earnings per share aft X/O (`)
3,843 1,193 2,650 34.0 1,620 45 416 200 369 13.9 41.1 46 323 14 33 342 170 49.6 173 173 6.5 33.4 117 289 20 8.7 14.6
5,216 1,402 3,813 43.9 2,220 67 674 256 595 15.6 61.2 71 523 28 59 554 155 27.9 399 399 10.5 131.5 399 23 17.4 17.4
6,292 1,692 4,600 20.6 2,633 83 810 308 767 16.7 29.0 115 652 44 6 615 172 28.0 443 443 9.6 10.8 443 23 19.3 19.3
7,481 2,011 5,469 18.9 3,095 98 963 366 947 17.3 23.4 139 808 44 11 776 217 28.0 559 559 10.2 26.2 559 23 24.4 24.4
8,897 2,392 6,505 18.9 3,644 117 1,145 436 1,163 17.9 22.9 162 1,002 44 24 982 275 28.0 707 707 10.9 26.6 707 23 30.9 30.9
29
18 April 2012

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

OCF before W/C changes W/c changes OCF after W/C changes Cash flow from investing Capital expenditure Disposal Investments Acquisitions Net cash used in investing Cash flow from financing Changes in share capital Changes in loans Dividends Net cash used in financing Extraordinary items Changes in cash & equivalents Opening cash & equivalents Closing cash & equivalents Free cash flow
387 (199) 188 (724) 2 (722) 750 (36) 714 180 24 204 (534)
657 (217) 440 (1,032) 2 (1) (1,031) 446 446 (145) 204 58 (590)
558 16 574 (500) 2 (498) (27) (27) 49 63 113 76
697 4 702 (550) 2 (548) (27) (27) 127 113 240 154
869 5 874 (600) 2 (598) (27) (27) 249 240 489 276
30
18 April 2012

Profitability ratios (%) EBITDA margin EBIT margin PBT margin PAT margin Income tax rate Excise duty rate RoE RoCE Major costs as % of net sales Cost of goods sold Staff cost Manufacturing expenses Admin & selling exps Per share data (`) Earnings per share Growth (%) Book value per share Growth (%) Dividend per share Growth (%) Sales per share Growth (%) Turnover ratios Debtors turnover ratio Current liabilities turnover ratio Inventory turnover ratio Fixed assets turnover ratio Valuation ratios (x) Price earnings Price/book value EV/sales EV/EBITDA Dividend yield (%) Other ratios (%) Net debt/equity FCF/EPS OCF/sales WC as % of net sales Div payout ratio
13.9 12.2 12.9 6.5 49.6 45.0 23.4 23.2
15.6 13.7 14.5 10.5 27.9 36.8 19.3 22.0
16.7 14.2 13.4 9.6 28.0 36.8 17.3 21.5
17.3 14.8 14.2 10.2 28.0 36.8 18.5 23.0
17.9 15.4 15.1 10.9 28.0 36.8 19.5 24.3
61.1 1.7 15.7 7.5
58.2 1.8 17.7 6.7
57.2 1.8 17.6 6.7
56.6 1.8 17.6 6.7
56.0 1.8 17.6 6.7
8.7 (17.2) 91.0 65.5 1.0 n/a 134.1 (16.9)
17.4 99.7 102.4 12.6 1.0 166.5 24.2
19.3 10.8 120.6 17.7 1.0 200.9 20.6
24.4 26.2 143.8 19.3 1.0 238.8 18.9
30.9 26.6 173.5 20.7 1.0 284.0 18.9
10.6 21.2 10.3 51.4
11.0 19.9 8.7 60.9
11.0 20.0 8.5 58.8
11.0 20.0 8.5 57.0
11.0 20.0 8.5 54.6
11.7 1.1 0.9 6.4 1.0
5.8 1.0 0.7 4.6 1.0
5.3 0.8 0.6 3.6 1.0
4.2 0.7 0.5 2.9 1.0
3.3 0.6 0.4 2.4 1.0
(3.8) (309.8) 7.1 13.8 11.5
17.9 (147.8) 11.5 11.6 5.7
13.4 17.1 12.5 9.2 5.2
7.4 27.5 12.8 7.7 4.1
(0.1) 39.0 13.4 6.4 3.2
31
18 April 2012
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 Officers Choice brand of Jagatjit Industries. Globus Spirits focuses on country liquor but is now expanding its IMFL franchise The company has recently begun focusing on IMFL. Its key IMFL brands are County Club whisky and Hannibal rum.
Fig 29 Revenue break-up (FY11)
Other sales Branded IMFL 8% 6% Bulk alcohol 15%
IMFL franchisee 24%
Country liquor 47%
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 copromoted 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 Shekhar Swarup Bhaskar Roy

Source: Company
Managing director Promoter CFO
Overall business operations IMFL division Finance & secretarial
32
Consumer
India I Equities
Initiating Coverage
18 April 2012
Radico Khaitan
Strong premiumization strategy, successful brand launches; Buy
Radico Khaitan has the second-largest distribution network in India and has made inroads into the militarys Canteen, Stores & Department to create and support its product launches. The companys earnings are driven by its capability to launch new products/brands with a strong premiumization strategy. We estimate EPS CAGR of 22% over FY11-14. We initiate coverage with a Buy rating and a price target of `161.
Key data
RDCK IN / RADC.BO
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 & Contessa. Strong distribution network. Radico has the second-largest distribution network in India, after United Spirits. It sells through ~35,000 retail outlets that cater to almost 80% of Indias liquor consuming areas. It has also made inroads into the Canteen Stores Department (CSD). 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 across price points and SKUs. This allows it to tap consumers across income levels. The company has products across all types of liquor, except for beers and wines. It is also strong in the country liquor and industrial alcohol segments. Valuation. We value the stock at a price target of `161, 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. Risk. Higher prices of molasses.
`148 / `108 17358 / 5290 US$0.9m `16.2bn / US$311m 133m
Dec11 Sep 11 Jun 11
39.9 45.4 60.1 24.4 14.0 21.7
39.9 42.3 60.1 25.4 15.3 19.4
39.9 41.0 60.1 26.7 14.8 18.6

150 140 130 120 110 100 Aug-11 Dec-11 Feb-12 Jun-11 Oct-11 Apr-11 Apr-12 RDCK Sensex
Source: Bloomberg
7,988 415 3.2 127.4 38.7 2.5 9.2 10.5 0.5 50.4
9,464 773 5.8 85.1 20.9 2.3 10.3 11.3 0.6 58.6
11,127 858 6.5 11.0 18.8 2.1 11.6 12.3 0.6 57.2
13,137 1,086 8.2 26.4 14.9 1.9 13.2 14.1 0.7 53.0
15,512 1,411 10.6 29.9 11.5 1.6 15.1 16.4 0.7 46.0
Aniruddha Joshi
Shirish Pardeshi
18 April 2012
Radico Khaitan Strong premiumization strategy, successful brand launches; Buy


7,988 18.0 6,654 1,334 16.7 745 256 167 84 16.8 415 415 3.2 127.4
9,464 18.5 7,905 1,559 16.5 359 271 111 267 25.6 694 (79) 773 5.8 85.1
11,127 17.6 9,294 1,833 16.5 397 314 70 334 28.0 858 858 6.5 11.0
13,137 18.1 10,881 2,256 17.2 405 375 53 443 29.0 1,086 1,086 8.2 26.4
15,512 18.1 12,715 2,797 18.0 409 422 49 605 30.0 1,411 1,411 10.6 29.9
264 5,689 5,952 4,461 464 10,877 4,669 894 894 4,982 332 10,877 3,699 62.4 48.7
265 6,249 6,514 4,912 498 11,923 4,904 709 709 6,217 94 11,923 4,607 65.7 52.9
265 6,992 7,257 5,012 498 12,767 5,490 509 509 6,696 71 12,767 4,929 60.2 58.5
265 7,955 8,220 5,112 498 13,829 6,065 409 409 7,273 82 13,829 5,118 55.4 65.8
265 9,234 9,500 5,112 498 15,109 6,643 409 409 7,955 103 15,109 5,098 51.3 75.4

Fig 4 Ratio analysis @`122

Consolidated PAT + Non-cash items Cash profit - Incr./(decr.) in WC Operating cash-flow - Capex Free cash-flow - Dividend + Equity raised + Debt raised - Investments - Misc. items Net cash-flow + Op. cash & bank bal. Cl. Cash & bank bal.
415 256 760 (881) (121) (280) (401) (36) 3,330 (2,542) (568) 129 (87) 420 332
694 271 1,125 (1,007) 118 (540) (421) (92) 60 450 (246) 11 (238) 332 94
858 314 1,172 (479) 693 (900) (207) (115) 100 200 (23) 94 71
1,086 375 1,461 (577) 884 (950) (66) (123) 100 100 11 71 82
1,411 422 1,833 (682) 1,151 (1,000) 151 (131) 20 82 103
P/E (x) P/B (x) EV/sales (x) EV/EBITDA (x) RoAE (%) RoACE (%) Dividend yield (%) Dividend payout (%) RM to sales (%) Admin exps to sales (%) EBITDA growth (%) EPS growth (%) PAT margin (%) Volume growth (%) Realization growth (%)
38.7 2.5 2.5 15.1 9.2 10.5 0.5 19.0 49.2 21.9 135.9 127.4 5.2 -
20.9 2.3 2.1 13.0 10.3 11.3 0.6 12.0 47.5 22.5 16.9 85.1 8.2 -
18.8 2.1 1.8 11.1 11.6 12.3 0.6 11.6 47.6 22.5 17.5 11.0 7.7 -
14.9 1.9 1.5 9.0 13.2 14.1 0.7 9.8 46.9 22.5 23.1 26.4 8.3 -
11.5 1.6 1.3 7.3 15.1 16.4 0.7 8.0 46.0 22.5 24.0 29.9 9.1 -

( `) 350
300 250 200 150 100 50 0 Oct-06 Oct-07 Oct-08 Oct-09 Oct-10 Apr-06 Apr-07 Apr-08 Apr-09 Apr-10 Apr-11 Oct-11 Apr-12 36x 30x 24x 18x 12x

Pet bottles 3% Grain spirit 4% Others 3% Rectified spirits 2%
Silent spirits 6%
Subsidiary sales 8%
IMFL 50%
Country liquor 24%

Source: Company
34
18 April 2012

Its strong capability to launch premium brands and support launches with its premiumization strategy drives Radico Khaitans 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 subsegments such as rum and vodka. Its strong distribution network, inroads into the CSD, innovative packaging and effective usage of celebrity endorsements have helped it create strong brands. The company also 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
The company has been able to create strong brands across segments
Radico Khaitan
Country liquor
IMFL
Whisky Rum Brandy Vodka
Industrial liquor
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.
35
18 April 2012
Fig 8 Strong presence across all liquor segments

Product Brand Segment
8PM Whisky Vodka Brandy Rum

Source: Company
Regular Premium Premium Premium Regular Premium Regular
Whytehall After Dark Magic moments Old Admiral Morpheus Contessa
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 70 60 50 40 30 20 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 -1SD Mean +1SD +2SD
Key risks

Higher raw material prices Higher competitive pressures
36
18 April 2012
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 subsegments 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 Premium Premium Premium Regular Premium
1998 2004 2010 2006 2002 2009
The company has created a strong range of brands across all segments
Whisky Vodka Brandy

Source: Company
Whytehall After Dark Magic Moments Old Admiral Morpheus
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 companys 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 Magic Moments Contessa

Source: Company
Whisky Vodka Rum
Mallika Sherawat Hrithik Roshan Arjun Rampal
Source: Company
37
18 April 2012
Higher investments to create premium brands Radicos 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.
38
18 April 2012
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. Radico Khaitan uses its own field force to ensure brand building, marketing and selling. It also invests in in-shop promotions. These have helped Radico gain market share over the years and establish strong brands Established distribution in quasi-government-controlled markets In India, much of the distribution is controlled by the government. Selling products through specified retail stores is difficult. As every village may have just one or two liquor shops, establishing relationships is difficult. Radico Khaitan uses its own field force to ensure brand building, marketing and selling. It also invests in in-shop promotions. These have 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.
39
18 April 2012
Fig 13 Distribution structure in India

Structure I: Distributor Government; Retail Government
Kerala Tamil Nadu Delhi

Structure II: Distributor Government; Retail - Free
Andhra Pradesh Bihar Chattisgarh Assam Daman Goa Jharkhand Gujarat Manipur Mizoram Nagaland
Source: Company
Orissa Rajasthan Uttaranchal West Bengal Pondicherry Tripura Maharashtra
Uttar Pradesh Karnataka Bihar
Structure III: Distributor Free; Retail- Free
States that have banned liquor
40
18 April 2012
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 liquor
IMFL
Whisky Rum Brandy Vodka
Industrial liquor
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 subsegment 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 Whisky Vodka Brandy Rum

Source: Company
Regular Premium Premium Premium Regular Premium Regular
Whytehall After Dark Magic Moments Old Admiral Morpheus Contessa
Strong presence in country and industrial alcohols Twenty-four percent of Radicos revenues arise from country liquor, which helps it tap low-income and rural consumers Twenty-four percent of Radicos revenues arise from country liquor, which helps it tap low-income consumers and those in rural India. It has had a strong presence in country liquor for more than 30 years. This has helped it build up a strong distribution network. Further, ~12% of its revenue is from industrial alcohol. This absorbs excess capacity.
41
18 April 2012
Focus on regular and premium sub-segments The companys 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 Radicos 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 Tilaknagar Globus Spirits

Source: Companies
Whisky, vodka Brandy Country liquor
Country liquor Country liquor IMFL
42
18 April 2012
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 Radicos revenue growth momentum.
(`m) 16,000 (%) 60
12,000
40
We expect robust earnings growth momentum due to strong revenue growth and improving margins
8,000
20
4,000
0 FY12e FY13e FY14e FY04 FY05 FY06 FY07 FY08 FY09 FY10 FY11
-20
Revenues
Growth (RHS)
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
43
18 April 2012
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 FY04 FY05 FY06 FY07 FY08 FY09 FY10 FY11 FY12e FY13e FY14e
FY13e
-70
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, Radicos mounting cash on its balance sheet is likely to marginally reduce its return ratios.
(%)
35 28 21 14 7 0 FY04 FY05 FY06 FY07 FY08 FY09 FY10 FY11 FY12e FY14e
RoE
RoCE
44
18 April 2012

Gross sales Less: excise duty Less: sales tax Net sales Growth (%) Expenditure Cost of goods sold Staff cost Power & fuel Carriage & freight Advt & sales promotion Other expenses EBITDA EBITDA margin (%) Growth (%) Depreciation EBIT Interest expense & bank exps Other income Profit before tax Income taxes Income tax rate (%) Profit after tax Share of profit from associates Pref. dividends/minority interest Profit before X/O PAT margin (%) Growth (%) Extraordinary items Profit for shareholders Number of shares (m) Earnings per share bef X/O (`) Earnings per share aft X/O (`)
14,813 6,457 368 7,988 18.0 3,927 540 218 222 947 800 1,334 16.7 136 256 1,078 745 167 499 84 16.8 415 415 5.2 192.6 415 132 3.2 3.2
17,423 7,459 500 9,464 18.5 4,494 620 345 312 1,259 875 1,559 16.5 17 271 1,288 359 111 1,040 267 25.6 773 773 8.2 86.2 (79) 694 133 5.8 5.2
20,485 8,769 588 11,127 17.6 5,294 729 401 367 1,480 1,024 1,833 16.5 18 314 1,519 397 70 1,192 334 28.0 858 858 7.7 11.0 858 133 6.5 6.5
24,184 10,353 695 13,137 18.1 6,158 860 473 434 1,747 1,209 2,256 17.2 23 375 1,881 405 53 1,529 443 29.0 1,086 1,086 8.3 26.4 1,086 133 8.2 8.2
28,556 12,225 820 15,512 18.1 7,138 1,016 558 512 2,063 1,427 2,797 18.0 24 422 2,375 409 49 2,015 605 30.0 1,411 1,411 9.1 29.9 1,411 133 10.6 10.6
45
18 April 2012

Sources of funds Share capital Reserves and surplus Deferred tax liability Net worth Net worth net of rev. reserve Secured loans Unsecured loans Total loans Total Application of funds Fixed assets Gross block Less: depreciation Net block Capital WIP Gross block- brand value Goodwill Liquid investments Other investments Current assets Inventories Sundry debtors Cash & bank balances Loans & advances Current liabilities Liabilities Provisions Net current assets Total
264 5,689 464 6,416 6,416 2,449 2,012 4,461 10,877
265 6,249 498 7,012 7,012 3,398 1,514 4,912 11,923
265 6,992 498 7,755 7,755 3,398 1,614 5,012 12,767
265 7,955 498 8,717 8,717 3,498 1,614 5,112 13,829
265 9,234 498 9,997 9,997 3,498 1,614 5,112 15,109
5,505 1,366 4,139 530 5,505 894 6,770 1,230 2,356 332 2,851 1,455 976 479 5,315 10,877
5,728 1,539 4,189 715 5,728 709 8,063 1,275 3,191 94 3,503 1,752 1,153 598 6,311 11,923
7,343 1,853 5,490 7,343 509 8,826 1,502 3,750 71 3,503 2,059 1,358 701 6,768 12,767
8,293 2,228 6,065 8,293 409 9,786 1,773 4,427 82 3,503 2,430 1,603 828 7,356 13,829
9,293 2,650 6,643 9,293 409 10,927 2,094 5,227 103 3,503 2,870 1,892 977 8,057 15,109

760 (881) (121) (283) 3 (568) (847) 3,330 (2,542) (36) 752 129 (87) 420 332 (401)
1,125 (1,007) 118 (627) 87 (246) (786) 60 450 (92) 418 11 (238) 332 94 (421)
1,172 (479) 693 (900) 200 (700) 100 (115) (15) (23) 94 71 (207)
1,461 (577) 884 (950) 100 (850) 100 (123) (23) 11 71 82 (66)
1,833 (682) 1,151 (1,000) (1,000) (131) (131) 20 82 103 151
46
18 April 2012

Profitability ratios (%) EBITDA margin EBIT margin PBT margin PAT margin Income tax rate Excise duty rate Sales tax rate RoE RoCE Major costs as % of net sales Cost of goods sold Staff cost Power & fuel Carriage & freight Advt & sales promotion Other expenses Per share data (`) Earnings per share Growth (%) Book value per share Growth (%) Dividend per share Growth (%) Sales per share Growth (%) Turnover ratios (%) Debtors turnover ratio Current liabilities turnover ratio Inventory turnover ratio Fixed assets turnover ratio Valuation ratios (%) Price earnings Price/book value EV/sales EV/EBITDA Dividend yield (%) Other ratios (%) Net debt/equity FCF/EPS OCF/sales W/C as % of net sales Div payout ratio
16.7 13.5 6.3 5.2 16.8 80.8 4.6 9.2 10.5
16.5 13.6 11.0 8.2 25.6 78.8 5.3 10.3 11.3
16.5 13.7 10.7 7.7 28.0 78.8 5.3 11.6 12.3
17.2 14.3 11.6 8.3 29.0 78.8 5.3 13.2 14.1
18.0 15.3 13.0 9.1 30.0 78.8 5.3 15.1 16.4
49.2 6.8 2.7 2.8 11.9 10.0
47.5 6.5 3.6 3.3 13.3 9.2
47.6 6.6 3.6 3.3 13.3 9.2
46.9 6.6 3.6 3.3 13.3 9.2
46.0 6.6 3.6 3.3 13.3 9.2
3.2 127.4 48.7 87.6 0.6 100.0 60.6 (8.3)
5.8 85.1 52.9 8.7 0.7 16.7 71.4 17.8
6.5 11.0 58.5 10.6 0.8 7.1 83.9 17.6
8.2 26.4 65.8 12.4 0.8 6.7 99.1 18.1
10.6 29.9 75.4 14.7 0.9 6.3 117.0 18.1
29.5 12.2 15.4 58.5
33.7 12.2 13.5 51.8
33.7 12.2 13.5 49.3
33.7 12.2 13.5 46.2
33.7 12.2 13.5 42.8
38.7 2.5 2.5 15.1 0.5
20.9 2.3 2.1 13.0 0.6
18.8 2.1 1.8 11.1 0.6
14.9 1.9 1.5 9.0 0.7
11.5 1.6 1.3 7.3 0.7
50.4 (96.5) (1.5) 62.4 19.0
58.6 (54.5) 1.2 65.7 12.0
57.2 (24.2) 6.2 60.2 11.6
53.0 (6.1) 6.7 55.4 9.8
46.0 10.7 7.4 51.3 8.0
47
18 April 2012

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 Indias 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 and Magic Moments vodka. It plans to be a major player in IMFL and focuses on premium products.
Pet bottles 3% Grain spirit 4% Others 3% Rectified spirits 2%
Radico Khaitan is one of the oldest companies in liquor in India and is strongly represented across segments
Silent spirits 6%
Subsidiary sales 8%
IMFL 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 Abhishek Khaitan Dilip Banthiya K P Singh

Source: Company
Chairman & managing director Managing director CFO Director
Overall business management IMFL division Finance and secretarial Production activities
48
Consumer
India I Equities
Initiating Coverage
18 April 2012
Tilaknagar Industries
Strong position in the south, expansion into north & east; Buy
Well established within the militarys Canteen Stores Department (CSD) and in the southern states where distribution is governmentcontrolled, Tilaknagar Industries commands strong profit margins. The company plans to leverage its strong position in the south to expand nationwide. We expect 28% earnings CAGR over FY11-14 and initiate coverage with a Buy rating and a price target of `74.
Key data
TLNGR IN / TILK.BO
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. Nationwide expansion. With ~80% of its revenue generated in south India, Tilaknagar now plans to expand nationwide in order to dilute its concentration risk. Aggressive brand launches, leased units and tie-ups are targeted to help the company acquire marketshare nationally. Further, its acquisition of infra consulting firms is expected to drive internal 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 the south, since a large part of distribution is state government controlled and Tilaknagars brands are well entrenched. Valuation. Our price target of `74 is based on a target PE of 13x FY13e earnings. Our target PE is at +1 standard deviation to the mean PE. Due to Tilaknagars aggressive investment in new products and newer areas and the improved outlook for the medium term, we assign higher target multiples to the stock. Risk. Higher molasses prices.
`69 / `28 17358 / 5290 US$0.9m `7.1bn / US$136m 120m
Dec 11 Sep11 Jun 11
54.3 0.0 45.7 17.9 3.3 24.5
54.3 0.0 45.7 18.6 3.4 23.7
54.2 0.0 45.8 18.3 4.6 22.9

70 60 50 40 30 20 Aug-11 Jun-11 Apr-11 TLNGR Dec-11 Feb-12 Oct-11 Apr-12 Sensex
Source: Bloomberg Key financials (YE Mar)
3,808 349 3.6 (6.3) 16.4 2.7 19.2 15.5 1.4 196.9
4,623 396 3.4 (4.6) 17.2 1.6 12.4 13.2 1.4 97.7
5,386 496 4.3 25.3 13.7 1.5 11.1 12.9 1.4 81.5
6,288 645 5.4 24.9 11.0 1.3 12.7 14.8 1.4 53.2
7,343 877 7.3 36.0 8.1 1.1 14.8 17.3 1.4 35.5
Aniruddha Joshi
Shirish Pardeshi
18 April 2012
Tilaknagar Industries Strong position in the south, expansion into north & east; Buy


3,808 57.2 3,008 800 21.0 236 71 46 190 35.2 349 349 3.6 (6.3)
4,623 21.4 3,487 1,136 24.6 388 131 26 248 38.5 396 396 3.4 (4.6)
5,386 16.5 4,095 1,291 24.0 364 185 20 267 35.0 496 496 4.3 25.3
6,288 16.7 4,781 1,507 24.0 329 204 17 347 35.0 645 645 5.4 24.9
7,343 16.8 5,590 1,753 23.9 267 208 71 472 35.0 877 877 7.3 36.0
326 1,701 2,027 4,494 120 6,641 3,745 3 3 2,627 266 6,641 4,345 69.0 22.1
1,250 2,811 4,061 4,333 199 8,593 4,714 3 3 3,710 166 8,593 4,363 80.2 37.0
1,250 3,199 4,449 3,933 199 8,582 4,628 3 3 3,810 140 8,582 3,989 70.7 40.3
1,298 4,037 5,335 3,533 199 9,067 4,525 3 3 3,952 587 9,067 3,142 62.9 46.1
1,298 4,802 6,100 2,533 199 8,833 4,417 3 3 4,119 293 8,833 2,436 56.1 52.5


Consolidated PAT + Non-cash items Cash profit - Incr./(decr.) in WC Operating cash-flow - Capex Free cash-flow - Dividend + Equity raised + Debt raised - Investments - Misc. items Net cash-flow + Op. cash & bank bal. Cl. cash & bank bal.
349 71 48 (177) (129) (205) (334) (10) 38 328 (0) 22 5 27
396 131 62 (108) (46) (107) (153) (11) 172 (17) (1) (10) 27 17
496 185 681 (100) 581 (100) 481 (107) (400) (26) 166 140
645 204 848 (142) 706 (100) 606 (111) 352 (400) 447 140 587
877 208 1,085 (167) 918 (100) 818 (111) (1,000) (294) 587 293
P/E (x) P/B (x) EV/Sales (x) EV/EBITDA (x) RoAE (%) RoACE (%) Dividend yield (%) Dividend payout (%) RM to sales (%) Admin exps to sales (%) EBITDA growth (%) EPS growth (%) PAT margin (%) Volume growth (%) Realization growth (%)
16.4 2.7 2.4 11.5 19.2 15.5 1.4 23.1 39.7 24.8 87.1 (6.3) 9.2 -
17.2 1.6 2.4 9.7 12.4 13.2 1.4 23.3 34.7 24.5 41.9 (4.6) 8.6 -
13.7 1.5 2.0 8.5 11.1 12.9 1.4 18.6 34.8 24.8 13.7 25.3 9.2 -
11.0 1.3 1.8 7.6 12.7 14.8 1.4 14.9 34.8 24.8 16.7 24.9 10.3 -
8.1 1.1 1.6 6.5 14.8 17.3 1.4 10.9 35.0 24.7 16.3 36.0 11.9 -

( `) 160
140 120 100 80 60 40 20 0 Oct-06 Oct-07 Oct-08 Oct-09 Oct-10 Apr-06 Apr-07 Apr-08 Apr-09 Apr-10 Apr-11 Oct-11 Apr-12 4x 16x 26x 21x
IMFL - own unit, 11%
Industrial alcohol, 3%
Subsidiary sales, 37% IMFL lease units, 24%
10x
Tie up units, 25%

Source: Company
50
18 April 2012

Well established within the militarys 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 Tilaknagars 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 franchise in brandy in south India
80
60
40
20
0 Tamil Nadu
Source: Company
Kerala
Andhra Pradesh
Karnataka
Expansion plans across India Nearly 80% of the companys 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 companys 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 Classic Whisky Production units Acquisition of infra consulting firms
Source: Company
Orissa, West Bengal Delhi, Rajasthan Leased and tie-up units Enhancing of in-house expansion capabilities
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
18 April 2012
a large part of distribution in south India is state-government-controlled. Since Tilaknagars 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 Established govt. distribution network in south India Strong focus on less-competitive brandy business
Source: Company
Reduction in packaging costs Lower distribution costs Lower media spends
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 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
+2SD
Key risks

Higher raw material prices Higher competitive pressures
52
18 April 2012
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 companys 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 Tilaknagars market share in brandy (FY11)
(%) 100
80
Strong focus on brandy in south India
60
40
20
0 Tamil Nadu
Source: Company
Kerala
Andhra Pradesh
Karnataka
Strong focus in the south one of Indias largest brandy markets Nearly 80% of the companys 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 subsegmentation 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.
53
18 April 2012
Fig 13 Sub-segmentation strategy used for Mansion House brandy

Mansion House
Brandy
Whisky
Mansion House
Source: Company
MS VSOP
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 Radico Khaitan Mohan Meakin United Spirits

Source: Companies
Mansion House, Courrier Napoleon Morpheus Triple Crown, Doctor's Reserve No.1 McDowell, Honey Bee
54
18 April 2012
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 companys revenue is generated here.
Fig 15 Revenue breakdown: region-wise (FY11)
Exports 1% CSD 5% Rest of India 14%
Nationwide expansion will reduce the concentration risk involved in being a single region company
South 80%
Source: Company
Aggressive pan-India expansion The companys 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 Classic Whisky Production units Acquisition of infra consulting firms
Source: Company
Orissa, West Bengal Delhi, Rajasthan Leased units and tie-ups Enhancing in-house expansion capabilities
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.
55
18 April 2012
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 Tilaknagars bottles are re-cycled. The company expects this figure to move up to 60% in three years.
Fig 17 Packaging cost as per cent of net sales
(%) 29
27 25 23 21 19 17 15 FY12e FY13e FY14e FY04 FY05 FY06 FY07 FY08 FY09 FY10 FY11
Re-using bottles helps reduce costs and maintain customer loyalty
Packaging cost
Source: Company, Anand Rathi Research.
Lower distribution costs due to government-controlled market As most of the companys 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.
56
18 April 2012
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 FY12e FY13e FY14e FY04 FY05 FY06 FY07 FY08 FY09 FY10 FY11
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 Tilaknagars grainbased projects.
57
18 April 2012
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
7,000 6,000 5,000 4,000
(%) 70
60 50 40 30 20 10 0 -10 FY12e FY13e FY12e FY13e FY14e FY14e FY04 FY05 FY06 FY07 FY08 FY09 FY10 FY10 FY11 FY11
We expect the EBITDA margin in the next three years to be ~15%
3,000 2,000 1,000 0
Revenues
Growth (RHS)
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 5 0 FY04 FY05 FY06 FY07 FY08 FY09
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.
18 April 2012
Fig 21 Net profit and growth

(`m)
1,000 800 600 400 200 0 FY04 FY05 FY06 FY07 FY08 FY09 FY10 FY11 FY12e FY13e FY14e
(%)
630 490 350 210 70 -70
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
59
18 April 2012

Gross sales Less: excise duty Less: sales tax Net sales Growth (%) Expenditure Cost of goods sold Staff cost Power & fuel Carriage & freight Advt & sales promotion Other expenses EBITDA EBITDA margin (%) Growth (%) Depreciation EBIT Interest expense & bank exps Other income Profit before tax Income taxes Income tax rate (%) Profit after tax Share of profit from associates Pref. dividends/minority interest Profit before X/O PAT margin (%) Growth (%) Extraordinary items Profit for shareholders Number of shares (m) Earnings per share bef X/O (`) Earnings per share aft X/O (`)
5,480 1,636 36 3,808 57.2 1,511 201 23 330 488 455 800 21.0 87.1 71 729 236 46 539 190 35.2 349 349 9.2 76.3 349 97 3.6 3.6
6,496 1,812 60 4,623 21.4 1,603 209 39 503 613 521 1,136 24.6 41.9 131 1,005 388 26 643 248 38.5 396 396 8.6 13.4 396 115 3.4 3.4
7,568 2,111 70 5,386 16.5 1,876 242 48 592 722 614 1,291 24.0 13.7 185 1,106 364 20 763 267 35.0 496 496 9.2 25.3 496 115 4.3 4.3
8,835 2,465 82 6,288 16.7 2,190 283 57 692 843 717 1,507 24.0 16.7 204 1,303 329 17 992 347 35.0 645 645 10.3 30.0 645 120 5.4 5.4
10,318 2,879 96 7,343 16.8 2,572 330 66 808 977 837 1,753 23.9 16.3 208 1,545 267 71 1,349 472 35.0 877 877 11.9 36.0 877 120 7.3 7.3
60
18 April 2012

Sources of funds Share capital Reserves and surplus Deferred tax liability Net worth Net worth net of rev. reserve Secured loans Unsecured loans Total loans Total Application of funds Fixed assets Gross block Less: depreciation Net block Capital WIP Gross block-brand value Goodwill Liquid investments Other investments Current assets Inventories Sundry debtors Cash & bank balances Loans & advances Current liabilities Liabilities Provisions Net current assets Total
326 1,701 120 2,146 2,146 2,721 1,773 4,494 6,641
1,250 2,811 199 4,260 4,260 4,310 23 4,333 8,593
1,250 3,199 199 4,649 4,649 3,910 23 3,933 8,582
1,298 4,037 199 5,534 5,534 3,510 23 3,533 9,067
1,298 4,802 199 6,300 6,300 2,510 23 2,533 8,833
2,351 281 2,070 1,636 2,351 39 3 4,080 843 820 266 2,151 1,187 928 260 2,893 6,641
4,326 445 3,881 747 4,326 86 3 4,905 813 966 166 2,959 1,029 797 232 3,876 8,593
5,173 630 4,543 5,173 86 3 5,146 916 1,131 140 2,959 1,196 926 269 3,950 8,582
5,273 834 4,439 5,273 86 3 5,935 1,069 1,320 587 2,959 1,396 1,082 314 4,539 9,067
5,373 1,041 4,331 5,373 86 3 6,043 1,248 1,542 293 2,959 1,630 1,263 367 4,413 8,833
Fig 25 Cash flow statement (`m)

48 (177) (129) (205) 0 (0) (205) 38 328 (10) 356 22 5 27 (334)
62 (108) (46) (111) 4 (1) (109) 172 (17) (11) 145 (10) 27 17 (153)
681 (100) 581 (100) (100) (400) (107) (507) (26) 166 140 481
848 (142) 706 (100) (100) 352 (400) (111) (159) 447 140 587 606
1,085 (167) 918 (100) (100) (1,000) (111) (1,111) (294) 587 293 818
61
18 April 2012

Profitability ratios (%) EBITDA margin EBIT margin PBT margin PAT margin Income tax rate Excise duty rate Sales tax rate RoE RoCE Major costs as % of net sales Cost of goods sold Staff cost Power & fuel Carriage & freight Advt & sales promotion Other expenses Per-share data (`) Earnings per share Growth (%) Book value per share Growth (%) Dividend per share Growth (%) Sales per share Growth (%) Turnover ratios (%) Debtors turnover ratio Current liabilities turnover ratio Inventory turnover ratio Fixed assets turnover ratio Valuation ratios (%) Price earnings Price/book value EV/sales EV/EBITDA Dividend yield Other ratios (%) Net debt/equity FCF/EPS OCF/sales WC as % of net sales Div payout ratio
21.0 19.1 14.1 9.2 35.2 43.0 0.9 19.2 15.5
24.6 21.7 13.9 8.6 38.5 39.2 1.3 12.4 13.2
24.0 20.5 14.2 9.2 35.0 39.2 1.3 11.1 12.9
24.0 20.7 15.8 10.3 35.0 39.2 1.3 12.7 14.8
23.9 21.0 18.4 11.9 35.0 39.2 1.3 14.8 17.3
39.7 5.3 0.6 8.7 12.8 12.0
34.7 4.5 0.8 10.9 13.3 11.3
34.8 4.5 0.9 11.0 13.4 11.4
34.8 4.5 0.9 11.0 13.4 11.4
35.0 4.5 0.9 11.0 13.3 11.4
3.6 (6.3) 22.1 (23.3) 0.8 39.3 (16.4)
3.4 (4.6) 37.0 66.9 0.8 (4.0) 40.1 2.1
4.3 25.3 40.3 9.1 0.8 46.7 16.5
5.4 24.9 46.1 14.3 0.8 52.4 12.1
7.3 36.0 52.5 13.8 0.8 61.2 16.8
21.5 24.4 22.1 97.3
20.9 17.2 17.6 100.1
21.0 17.2 17.0 84.3
21.0 17.2 17.0 70.6
21.0 17.2 17.0 59.0
16.4 2.7 2.4 11.5 1.4
17.2 1.6 2.4 9.7 1.4
13.7 1.5 2.0 8.5 1.4
11.0 1.3 1.8 7.6 1.4
8.1 1.1 1.6 6.5 1.4
196.9 (95.8) (3.4) 69.0 23.1
97.7 (38.6) (1.0) 80.2 23.3
81.5 97.0 10.8 70.7 18.6
53.2 94.0 11.2 62.9 14.9
35.5 93.3 12.5 56.1 10.9
62
18 April 2012

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 family has run the company since inception. Today, the company is wellestablished 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.
IMFL - own unit, 11% Industrial alcohol, 3%
An 80-year-old company focusing on IMFL in India
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 Shivani Dahanukar Lalit Sethi

Source: Company
Chairman and managing director Executive director CFO
Overall management, marketing Day-to-day operations Finance, secretarial
63
18 April 2012
Un-rated Companies
64
Consumer
India I Equities
18 April 2012
Empee Distilleries
Healthy growth but profitability margins capped
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 decades.
Rating: Not Rated Target Price: NA Share Price: `68
Key data
EDIS IN / EMDI.BO
Business. Headquartered in Chennai, the two-decade-old company 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 business. M.P. Purushottaman is the chairman of the company and overlooks administrative operations. Shaji Purushottaman is the managing director and R. Anand is the CFO and company secretary. Growth outlook. As the company operates in government-controlled 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. Valuation. At the ruling price of `68 and annualized earnings of FY12e, 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 regions.
`122 / `52 17358 / 5290 US$0.1m `1.3bn / US$25m 19m
Dec11 Sep 11 Jun 11
71.1 47.7 28.9 0.0 0.1 28.8
72.2 38.2 27.8 0.0 0.3 27.5
72.1 38.1 27.9 0.0 0.1 27.8

130 110 90 70 50 Aug-11 Jun-11 Oct-11 Apr-11 EDIS Dec-11 Feb-12 Apr-12 Sensex
Source: Bloomberg Key financials (YE Mar) FY07 FY08 FY09 FY10 FY11
Source: Company
4,554 136 9.6 (43.3) 7.1 1.6 22.2 20.8 1.5
4,159 121 7.3 (23.3) 9.3 0.5 10.2 14.5 7.4 0.7
4,850 111 6.6 (9.5) 10.3 0.5 6.0 9.3 7.4 0.6
6,192 154 7.1 6.9 9.6 0.5 6.2 6.7 8.8 1.4
5,882 212 10.3 45.6 6.6 0.5 8.5 7.3 8.8 1.4
Aniruddha Joshi
Shirish Pardeshi
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 companys 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 companys growth plans.
Key brands of Imperial Spirits

Type of liquor Whisky Brandy Segment Regular Premium Regular Special Regular Rum Spirit Whisky Vodka Gin
Source: Company
Brand Glen Special Gold Coast Malt Imperial XO premium Imperial exclusive VSOP Black Magic Hatrick Amazon white Gentlemen imported Black Magic Imperial Iceberg Premium Seagull London dry
Regular Premium Premium Regular Premium Regular
Aniruddha Joshi
Shirish Pardeshi
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 Meakins major brands are Golden Eagle, Lion and Meakins in beer. Its Old Monk is a strong brand in rum. The companys 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. Growth plans. The company plans to aggressively grow its Old Monk and beer brands and to expand its distribution network to south and west India. In addition, Mohan Meakin is entering into non-alcoholic fruit juices and breakfast cereals as well as the vinegar and mineral water segments.
Key brands and products Type of liquor Whisky Brandy Gin Beer Rum Juices Vinegars Mineral water Breakfast food
Source: Company
Brand Summer Hall, Colonel's Special, Golden Eagle, Top Brass, Blue Bull Triple crown, Doctor's reserve No.1, D.M., MMB Big Ben London Golden Eagle, Gold Lager, Solan No.1, Lion, Old Monk Old Monk Mohun's Gold coin Mohun's brewed Golden Eagle, Mohun's Mohun's Porridge, Mohun's corn flakes
Other products Brand
FY07
FY08
FY09
FY10
FY11
Sales (`m) Net profit (`m) EPS (`) Growth (%) PE (x) PBV (x) RoE (%) RoCE (%) Dividend yield (%) Debt/ equity (%)
Source: Company
2,648 11 1 85 3 7 155
2,695 5 0 (61) 1 8 167
2,842 4 0 (13) (31) (3) 190
3,006 (31) nmf (0) 6 228
3,165 83 10 nmf (14) 1 226
Aniruddha Joshi
Shirish Pardeshi
Consumer
India I Equities
18 April 2012
Som Distilleries
Progressive deregulation, young consumers to drive growth
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 per capita consumption is lower than the global average.
Key data
SDB IN / SDB.BO
Business. With its registered office in New Delhi, Som Distilleries has a strong focus on beer and IMFL in India. Its major areas of operations are 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 Singh and Guru Darshan Arora. Growth plans. Som Distilleries plans to expand its manufacturing capacities in beer as well as IMFL. It recently commenced installing a 40,000kl beer plant, which is expected to start production from 1QFY13. 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, the stock trades at a PE of 28.2x. Risks. Higher raw material prices and the aggressive focus of MNCs on Indian markets.
`230 / `117 17358 / 5290 US$0.1m `4.6bn / US$94m 27.5m
Dec11 Sep 11 Jun 11
13.7 0.0 86.3 0.0 0.0 86.3
13.7 0.0 86.3 0.0 0.0 86.3
13.6 0.0 86.4 0.0 0.0 86.4

230 210 190 170 150 130 Aug-11 Dec-11 Feb-12 Jun-11 Oct-11 Apr-11 Apr-12 Sensex SDB
Source: Company
523 (5) nmf 19.1 266.0
543 58 3.2 nmf 51.3 13.9 27.4 16.0 124.0
729 65 3.6 12.5 45.6 10.5 19.1 13.7 75.0
1,048 83 3.0 (15.8) 54.1 7.9 16.9 13.7 0.3 59.0
1,830 151 5.5 81.5 29.8 7.3 24.4 19.7 0.5 31.1
Aniruddha Joshi
Shirish Pardeshi
Consumer
India I Equities
18 April 2012
United Breweries
Low penetration, growing popularity to drive growth in beer
Indias 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 consumption in India is lower than the world average. It also expects premiumization of its brands to be a strong growth driver.
Key data
UBBL IN / UBBW.BO
Business. Focused on beer in India, United Breweries (UB) has 48% market share. The companys strongest beer brand is Kingfisher. Its other brands include London Pilsner, Zingaro, UB Export, Black Label, Bullet and Guru. UBs business operations and production units cover most states in India. Management. Scottish & Newcastle (40.4% stake) and the UB Group (34.4% stake) jointly hold the company. Managed by the UB Group, Dr Vijay Mallya is the chairman, Kalyan Ganguly is managing director and Guido Do Boer is CFO. 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 Kingfisher Blue as driving value growth. Valuation. At the ruling price of `510 and annualized earnings of FY12e, 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 regions.
`644 / `340 17358 / 5290 US$4.5m `135bn / US$2.6bn 264m
Dec11 Sep 11 Jun 11
74.8 8.7 25.2 17.4 0.8 7.0
74.1 9.1 25.9 17.5 0.9 7.5
74.1 9.1 25.9 14.9 1.1 9.9

650 UBBL 550 450 Sensex 350 Aug-11 Dec-11 Feb-12 Jun-11 Oct-11 Apr-11 Apr-12
Source: Company
11,968 550 2.1 nmf 240.6 38.4 16.7 12.0 0.0 101.0
15,590 542 2.1 (0.5) 241.7 35.0 14.6 11.4 115.0
19,295 456 1.5 (29.4) 342.3 15.9 7.0 12.2 0.1 87.0
22,755 896 3.3 122.1 154.1 14.6 10.2 11.4 0.1 71.0
30,132 1,475 5.4 61.6 95.3 12.4 14.8 15.2 0.1 65.0
Aniruddha Joshi
Shirish Pardeshi
Consumer
India I Equities
18 April 2012
United Spirits
High-end brand building to grow premium products
The worlds 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 raising per-capita consumption and premiumizing its product range.
Key data
UNSP IN / UNSP.BO
Business. The largest company in the world by volume, United Spirits 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 operations. S.R. Gupte is vice-chairman and Ashok Capoor is the managing director. Ravi Nedungadi looks after overall finance operations. Growth plans. United Spirits plans to tap the vast potential of the rising Indian economy and the growing consumerism. It sees opportunities in 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. Valuation. At the ruling price of `700 and annualized earnings of FY12e, the stock trades at a PE of 20.6x. Risks. Higher raw material prices and the aggressive focus of MNCs on Indian markets.
`1123 / `450 17358 / 5290 US$24.5m `91.7bn / US$1.8bn 131m
Dec11 Sep 11 Jun 11
28.0 91.5 72.0 52.9 2.5 16.6
28.0 89.6 72.0 52.9 2.6 16.5
28.0 87.7 72.0 51.4 2.9 17.7
1,200 UNSP 1,000 800 600 400 Aug-11 Dec-11 Feb-12 Jun-11 Oct-11 Apr-11 Apr-12 Sensex
Source: Company
29,823 6,107 73.1 987.5 9.6 4.2 26.2 18.6 0.1 120.0
45,902 3,012 33.7 (53.9) 20.8 3.0 15.8 19.6 0.2 212.0
54,681 (4,085) nmf 2.9 (17.5) 4.4 0.3 309.0
63,623 (232) nmf 2.2 (0.0) 7.3 0.4 221.0
73,762 5,683 44.7 nmf 15.7 2.1 14.3 13.6 0.4 157.0
Aniruddha Joshi
Shirish Pardeshi
Appendix 1
Analyst Certification The views expressed in this research report accurately reflect the personal views of the analyst(s) about the subject securities or issuers and no part of the 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 Large Caps (>US$1bn) Mid/Small Caps (<US$1bn) Buy >20% >30% Hold 5-20% 10-30% Sell <5% <10%
Anand Rathi Research Ratings Distribution (as of 10 April 2012) Buy Anand Rathi Research stock coverage (146) 75% % who are investment banking clients 6%
Hold 13% 5%
Sell 12% 0%
Other Disclosures This report has been issued by Anand Rathi Share & Stock Brokers Limited (ARSSBL), which is regulated by SEBI. The information herein was obtained from various sources; we do not guarantee its accuracy or completeness. Neither the information nor any opinion expressed constitutes an offer, or an invitation to make an offer, to buy or sell any securities or any options, futures or other derivatives related to such securities ("related investments"). ARFSL and its affiliates may trade for their own accounts as market maker / jobber and/or arbitrageur in any securities of this issuer(s) or in related investments, and may be on the opposite side of public orders. ARSSBL, its affiliates, directors, officers, and employees may have a long or short position in any securities of this issuer(s) or in related investments. ARSSBL or its affiliates may from time to time perform investment banking or other services for, or solicit investment banking or other business from, any entity mentioned in this report. This research report is prepared for private circulation. It does not have regard to the specific investment objectives, financial situation and the particular needs of any specific person who may receive this report. Investors should seek financial advice regarding the appropriateness of investing in any securities or investment strategies discussed or recommended in this report and should understand that statements regarding future prospects may not be realized. Investors should note that income from such securities, if any, may fluctuate and that each security's price or value may rise or fall. Past performance is not necessarily a guide to future performance. Foreign currency rates of exchange may adversely affect the value, price or income of any security or related investment mentioned in this report. This document is intended only for professional investors as defined under the relevant laws of Hong Kong and is not intended for the public in Hong Kong. The contents of this document have not been reviewed by any regulatory authority in Hong Kong. No action has been taken in Hong Kong to permit the distribution of this document. This document is distributed on a confidential basis. This document may not be reproduced in any form or transmitted to any person other than the person to whom it is addressed. If this report is made available in Hong Kong by, or on behalf of, Anand Rathi Financial Services (HK) Limited., it is attributable to Anand Rathi Financial Services (HK) Limited., Unit 1211, Bank of America Tower, 12 Harcourt Road, Central, Hong Kong. Anand Rathi Financial Services (HK) Limited. is regulated by the Hong Kong Securities and Futures Commission. Anand Rathi Financial Services Limited and Anand Rathi Share & Stock Brokers Limited are members of The Stock Exchange, Mumbai, and the National Stock Exchange of India. 2012 Anand Rathi Share & Stock Brokers Limited. All rights reserved. This report or any portion hereof may not be reprinted, sold or redistributed without the written consent of Anand Rathi Financial Services Limited. Additional information on recommended securities/instruments is available on request.

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India I Equities

Consumer Sector Report

India Consumer Alcoholic Beverages

BSE FMCG: 4779 Nifty / Sensex: 5290/17358

India Consumer - Alcoholic Beverages Holding the fort

Snapshot of liquor industry in India

Indian-made foreign liquor (IMFL) industry break-up Rum 20%

Beer industry break-up

Country liquor 48%

Standard 45% Strong 54%

Per-capita consumption: IMFL

Per-capita consumption: beer

Market share: IMFL and country liquor

60 40 20 0 New Zealand Denmark India Germany China

Market share of IMFL companies Others 13%

Market share of beer companies Others 13%

Region-wise market structure: IMFL North 12%

United Spirits 53%

Anand Rathi Research

India Consumer Alcoholic Beverages

BSE FMCG: 4779 Nifty / Sensex: 5290/17358

Buy 102 170 45 67 7.0 21.0 18.5 23.0 4.2

Buy 122 161 311 32 20.0 22.2 13.2 14.1 14.9

Buy 59 74 136 25 13.0 28.4 12.7 14.8 11.0

India Consumer Alcoholic Beverages Holding the fort

India Consumer Alcoholic Beverages

Un-rated Companies .....................................................................64

Anand Rathi Research

India Consumer Alcoholic Beverages Holding the fort

Investment Argument and Valuation

Mohan Meakins 7% Tilaknagar 3% Jagatjit 7% Radico 10%

Tilaknagar 4% Jagatjit 9% Radico 12%

United Spirits 53%

India Consumer Alcoholic Beverages Holding the fort

Scotch Whisky Vodka Rum Brandy Gin

Black Dog (12-yr) Royal Challenge, Signature, Antiquity

Source: United Spirits

Globus Spirits Radico Khaitan Tilaknagar Inds

18.5 13.2 12.7

23.0 14.1 14.8

19.8 17.8 16.6

18.3 18.5 25.1

4.2 14.9 11.0

Source: Bloomberg, Anand Rathi Research

Anand Rathi Research

India Consumer Alcoholic Beverages Holding the fort

Higher raw material prices Entry of foreign players

Globus Spirits Radico Khaitan Tilaknagar Inds

19.3 10.3 12.4

17.3 11.6 11.1

18.5 13.2 12.7

22.0 11.3 13.2

21.5 12.3 12.9

23.0 14.1 14.8

19.8 17.8 16.6

18.3 18.5 25.1

5.8 20.9 17.2

5.3 18.8 13.7

4.2 14.9 11.0

1.0 0.6 1.4

Source: Bloomberg, Anand Rathi Research

Anand Rathi Research

India Consumer Alcoholic Beverages Holding the fort

Strong Entry Barriers