Globus Spirits

As of now, margins are really suppressed due to elevated raw material prices for the manufacturing division and business building activities for the P&A consumer business .Business has internal financial resources and management’s efforts are focused in the right direction: use cash flows from manufacturing business to nurture and build consumer businesses, mainly Prestige and Above in multiple states in an incremental manner.

In a timeframe of 2~3 years, blended OPM % could be 13~14%. Per my thinking:

1. Manufacturing business could do a revenue of ~2000Cr. (including upcoming 80 KLPD capacity at UP) and base case EBITDA of 10% (EBITDA of Rs. 4.5 per liter like it did in FY19 although management stresses upon average of Rs. 7 but that seems too optimistic estimate as it includes too good years of FY21 and FY22). However, this will not show any topline growth unless new plants for Ethanol are built, which is not the intent right now but this division may surprise on profitability as and when the raw material cycle turns favorable.
2. R&O consumer business: Caters to masses earns EBITDA at 18~20% and could scale revenues to ~1000 Crores, considering UP foray and high single digit growth of the base business.
3. P&A consumer business which is a key focus area and is loss making at EBITDA level could scale to a revenue of 250 Crores (20% of overall consumer business) and might have an EBITDA of 25~30%.

On an absolute basis, the business has the potential to do EBITDA of 440 Cr [Sum of EBITDA from points 1,2, and 3: 200+180+62] in a 3 years time frame. Considering 3 year forward profitability, business is available at EBITDA of 8 and PE of 12. However, the overall sales growth rate might be only in single digit unless some P&A brands become very popular. On a relative basis, the gold standard of the industry (United Spirits Ltd) trades at EV/EBITDA of 46 and PE of 73 as of 05-Nov-2024 with OPM at 18% and single digit sales growth rate. Overall, I think the business has value both on an absolute and relative basis.

Disc: No position. Not qualified to advise. Just a personal opinion for co-learning.