On Tuesday, 24th November 2015, Porinju Veliyath and Rajasthan Global Securities launched an aggressive, no-holds-barred attack on the counter of Globus Spirits, the micro-cap (Rs. 219 crore) manufacturer of IMFL (Indian Made Foreign Liquor) brands like ‘Nimboo’, ‘Ghommar’, ‘Heer Ranjha’, ‘Narangi’ etc.
The duo was in a rush to grab all the stocks in sight and was in no mood to bargain with the sellers. Porinju pocketed 1,55,000 shares at Rs. 66.30 each. Rajasthan Global pocketed 6,30,081 shares at a slightly better price of about Rs. 65.85 each. The sellers were beaming with joy because the stock rocketed 20% and tripped the upper circuit.
Porinju has pumped in about a crore of rupees into Globus while Rajasthan Global’s investment is about Rs. 4 crore.
At first glance, Globus Spirits does not appear to fit in with Porinju’s investment philosophy because it is not a “cheap” stock. At the CMP of Rs. 76, the stock is at a P/E of 26x, which is quite exorbitant for a micro-cap. The stock also has a low average three-year ROE of 3.5% and a poor growth record.
Porinju’s timing was most inauspicious. The very next day, Nitish Kumar, the newly re-elected Chief Minister of Bihar, made the grim announcement that the State of Bihar will go dry from 1st April 2016 and the sale and consumption of liquor will be banned.
The rationale for the ban is that “the poorest of the poor are consuming liquor, badly hitting their families and their children’s education” and “Increasing liquor consumption is also a major cause for domestic violence, particularly against women, and has contributed to a rise in crimes”. It is also stated that “Women are suffering more than anyone else due to increasing liquor consumption.”
The ban will affect a body blow on the fortunes of Globus Spirits. Shekar Swarup, its’ ED, had stated a few days ago that the Company is setting up a distillery in Bihar and that there is a “good response” to IMFL in Bihar.
Nitin Mathur, an expert, opined that “the ban is going to be a huge negative for companies like Globus Spirits, United Spirits Limited and Radico Khaitan as Bihar forms a significant portion of their revenue”. Priya Sheth of CNBCTV18 estimated that Bihar constitutes 17% of Globus’ sales.
To compound the issue, Shivraj Chavan, Chief Minister of Madhya Pradesh, came on record to state that “We have decided that we will not let any new liquor shop open anywhere in the state”.
We have decided that we will not let any new liquor shop open anywhere in the state-MP CM Shivraj Chauhan pic.twitter.com/sUJ9CwmJtS
— ANI (@ANI_news) November 28, 2015
Devendra Fadnis, the Chief Minister of Maharashtra, appears to have taken a cue from this and is mulling a State-wide ban.
After Bihar, Maharashtra planning statewide ban on liquor
— IndiaTodayFLASH (@IndiaTodayFLASH) November 27, 2015
Prohibition is already in force in the Chandrapur district of Maharashtra. The same has been challenged in Court and is pending.
Production, sale and consumption of alcohol is already prohibited in Gujarat, Kerala, Manipur, and Nagaland.
It is notable that the proposed ban on liquor has supporters amongst prominent citizens. Kamal R. Khan, who has a massive following of 9,67,000 people on twitter, demanded the ban:
Will Maharashtra government show courage to ban liquor in the state? Come on @Dev_Fadnavis Sir, do it for the poor people of your state.
— KRK (@kamaalrkhan) November 26, 2015
However, several other eminent citizens are opposed to the ban on the basis that the Government cannot dictate what the citizens can and cannot do. Some experts are also concerned about the adverse impact that the ban will have on the revenues of the State.
In this state of affairs, liquor stocks are the last place that one should be investing in. Surely, savvy investors like Porinju Veliyath and Rajasthan Global have alternative stocks to deploy their funds.
It is also important to bear in mind is that even if the liquor ban is not made effective or is diluted so as not to apply to IMFL, the overhang of the regulatory hammer will constantly haunt these stocks and prevent from reaching their full potential. One could see this in the case of Titan Industries. When the RBI announced an adverse change in the norms for the gold-leasing scheme, the stock plunged like a ton of bricks. However, thereafter, even though the ban was lifted by the RBI, the stock never fully recovered because investors were wary that the RBI could change its mind anytime and reintroduce the ban. One can also see this fear in Pharma stocks which are singed by a FDA ban. Investors are wary about such stocks and prefer to keep away.
What Porinju and Rajasthan Global do about their brand new investment in Globus Spirits deserves to be closely watched!