Globus Spirits

My notes of August 16, 2023 concall

Ethanol and ENA Business Dynamics

• Variables in Play: The ethanol blending scenario involves several variables: raw material (corn, rice), yield conversion, and offtake prices by OMCs.
• Fungibility Advantage: Flexibility exists to switch between ENA and ethanol production, comprising over 50% of installed capacity.
• FCI Rice Disruption: FCI halted rice supplies for ethanol production, prompting industry reliance on alternative materials like maize and broken rice.
• Price Adjustments: Industry requested price revisions due to unfavorable ethanol pricing based on raw material costs. Prices for maize and broken rice ethanol increased by INR 6 and nearly INR 5, respectively.
• Margin Impacts: Margins on ethanol differ across states and materials, sometimes lower than ENA. Reorganization of sales mix between maize ethanol, broken rice ethanol, and ENA is needed.
• Plant Operations: Jharkhand operates on ENA due to high grain rates, while West Bengal combines broken rice and maize for production.
• Q2 Impact: Closures in West Bengal and Jharkhand temporarily affect revenue and margin in Q2.
• Q3 Expectations: Q3 will see new crop availability, easing supply constraints and supporting margins.

Consumer Business Strategy and IMIL Penetration: State Approach and Expansion

• State-Specific Approach: IMIL presence varies across states, with some having IMFL-like segments, while others categorize it as IMIL or country liquor.
• Integrated Model: Globus pursues a comprehensive approach, including ENA production, bottling, and distribution within states featuring economy segments. This strategy ensures stability and sustainable margins compared to buying ENA and just bottling.
• Current Operational Scope: The strategy is actively implemented in Rajasthan, Haryana, and West Bengal. Future expansion plans encompass Jharkhand and Uttar Pradesh.
• Targeted Expansion: No immediate plans for Value and Value Plus expansion beyond these states, but future opportunities will be considered.
• Market Maturity: Rajasthan and Delhi stand as mature markets with well-established distribution networks. Haryana and West Bengal are identified as growth-oriented markets.
• Odisha Plant: While Globus has a plant in Odisha, there are no plans for entering the Value and Value Plus consumer market in the state.

Gross Margin Impact and Raw Material Costs

• Gross Margin Computation: Gross margin calculation factors in costs of raw material consumed and packing material consumed.
• Raw Material Costs: A significant factor in the decline of gross margins is the rise in costs of raw materials consumed.
• Raw Material Impact: While FCI supplied rice remained stable, the prices of other purchased broken rice increased in Q1 compared to Q4.

IMIL Volume Loss and Haryana Strategy

• Volume Situation: Year-on-year, IMIL volumes were down due to a decline in Haryana.
• Reason for Decline: Haryana experienced volume loss due to margin pressures. An investment pullback strategy was adopted to prioritize sustainable margins over immediate volume growth.
• Haryana Volume Impact: A significant portion of the volume loss (0.4 million cases) was attributed to Haryana.
• Reinvestment Strategy: The company has initiated reinvestment in Haryana due to a more favorable environment. Gradual growth is expected as the strategy unfolds.
• Future Outlook: The reinvestment strategy is anticipated to yield results in the upcoming quarters, with meaningful numbers expected next year.

RML vs. IMIL Trends in Rajasthan

• Past Policy Change: A policy change affected the medium segment or Value Plus segment, resulting in de-growth followed by anticipated growth.
• Current Observation: In Q1 and Q2, growth is observed in Rajasthan within this segment after a decline last year.

Maize and Broken Rice Impact on Margins

• Volatility and Flexibility: Shifting to maize and broken rice introduces more volatility compared to stable FCI rice prices. The flexibility to mix raw materials, however, helps mitigate some of the volatility.
• Margin Evolution: Q2 margins will be impacted due to shocks and the transition to maize and broken rice. While maize and broken rice aren’t as profitable as FCI rice, Q3 and Q4 are expected to see margins move closer to Q4-Q1 levels as new rice and maize crops become available.
• Annual Margin Expectation: Margin projection for the entire year is challenging for the next 3 to 4 months (August to November), with an estimated 1% to 2% drop. However, from November onwards, margins are anticipated to approach Q4-Q1 levels, but exact numbers are difficult to specify for the short term.

Consumer Business Performance and Growth Expectations

• Y-o-Y Volume Performance: Y-o-Y volumes for IMFL have fallen short of expectations in Q1, particularly for prestige and above IMFL, which grew by 5%.
• Pipeline Effect: It’s important to note the “pipeline effect.” When new brands were introduced last year, there was an initial surge in sales due to inventory buildup before the official launch. This phenomenon affected year-on-year comparisons. The current year reflects the replenishment phase following the initial introduction.
• Supply Challenges: Some supply issues at the quarter’s beginning temporarily impacted delivery but were promptly resolved.
• Future Trajectory: The company remains confident in its growth trajectory. Challenges are being overcome, and as the year progresses, a more robust performance is anticipated.
• Full-Year Expectation: The aspiration for the full year is to double IMFL business, reflecting the evolving nature of the business, expansion into new geographies, and portfolio growth.

Value and Value Plus Growth Expectations

• Growth Outlook: Anticipate slightly higher growth, around 5% to 7%, for Value and Value Plus segments this year.
• Quarterly Variation: Expect stronger growth in these segments on a quarter-on-quarter basis. Last year’s investment slowdown in Haryana impacted year-on-year growth until Q2, but growth is expected to rebound from Q3 onwards.

De-commoditizing the Business through Consumer Growth

• Key Focus: The strategy to de-commoditize the business revolves around strengthening the consumer-facing segments, which have higher margin potential.
• Consumer Business Growth: The goal is to gradually increase the revenue share from the consumer business, moving from the current position to around 50% initially.
• Long-Term Target: The aim is to achieve a healthy balance between the consumer and manufacturing segments, potentially reaching around 60% to 65% revenue share for the consumer business.
• Timeline Uncertainty: The exact timeline for achieving these targets is uncertain due to various factors, including the growth trajectory of the manufacturing business. It’s a medium to long-term objective that’s being closely monitored.

Prestige and Above IMFL Strategy

• Geographical Selection: The selection of geographical areas for the prestige and above IMFL segment is based on factors like favorable margins, route-to-market viability, and the potential to establish a competitive presence.
• Strategic Focus: The goal is to leverage the initial small base for higher growth rates compared to the larger IMIL business. The prestige and above IMFL segment offers higher margins and appeals to an evolving consumer base.
• Gradual Expansion: The company’s approach involves expanding gradually from state to state, building route-to-market capabilities and key account activities along the way.
• Growth Trajectory: The aspiration is to achieve a substantial increase in market share, with a medium-term target of reaching around 20% from current 4% for the prestige and above IMFL segment. This growth is driven by the evolving consumer preferences and the strategic expansion into select states.