GM Breweries Ltd - Rs 50.00
Promoted by Mr. Jimmy Almeida, GM Breweries (GMBL) was incorporated in 1981 to manufacture alcoholic liquor. Since then it has emerged as the single largest manufacturer of country liquor in Maharashtra and enjoys virtual monopoly in the districts of Mumbai and Thane. Earlier, it also used to make and market Indian made foreign liquor (IMFL) like brandy, rum, whisky etc as Pioneer Special Doctor Brandy, Hot Shot Rum and Reporter’s Choice Whisky but due to competitive market conditions, it has been concentrating on country liquor for the past few years. Its country liquor brands like GM Doctor, Tango and Punch are fast-selling and quite popular brands. However, the country liquor industry is dominated by illegal & unorganized small players to evade the high duty structure. And GMBL being the only organized & large player in whole of Maharashtra; pays 60% of its gross sales (or one can say 170% of its net sales) towards excise duty and sales tax. For FY08 it paid a massive Rs 246 cr only towards excise duty. Hence, Maharashtra govt is getting more than one fifth of the total excise duty on country liquor from GMBL alone.
GMBL’s plant is located in Thane and has the facility to blend and bottle both IMFL and country liquor. Interestingly, all products are manufactured using in-house know-how and no outside technology is being used in manufacturing. With the installation of additional bottling lines last fiscal company now has the capacity to process 12.84 crore bulk litres of country liquor per annum. However company produced and sold nearly 5.50 crore bulk litres only in FY08 which represent capacity utilization of less than 45%. This indicates that company has got huge potential to utilize the balance capacity by penetrating into interior districts of Maharashtra taking advantage of its brand image. This seems quite possible as company's products have been enjoying good brand image from the consumers for the past several years. Meanwhile, GMBL is making representations at various levels of the government to take effective steps to curb the illicit market in the interest of the industry, revenue of the state as well as the public health. For the next couple of years, company doesn’t have any major capex plan as the existing capacity is enough to cater the demand, at least for the next five years. Interestingly, till now the company has been funding its expansion plan through a mix of debt and internal accrual and hasn’t diluted its equity since its IPO in 1994.
Financially, GMBL has been doing well with cash generation of Rs 15~20 cr thru operating activities and has consistently been reporting an OPM of nearly 15% for the last 3 years. But due to considerable increase in input cost led by recent hike in prices of rectified spirit, company reported lower profit in the last two quarters. Its operating margin drastically fell down to less than 8%. Accordingly, despite reporting 15% rise in topline to Rs 101 cr its PAT declined by 55% to Rs 3.45 cr for six months ending Sept 2008. But prices of rectified spirit which shot up to Rs 35 per litre during Sept’08 has already cooled off a bit and is further slated to fall in near future. This will substantially reduce the margin pressure on the company. Thus GMBL may report disappointing nos for Dec quarter as well but it will post much better performance for FY10.
Fundamentally, GMBL is on a strong footing with a huge gross block of Rs 81 cr (net block Rs 61 cr) and reserves to the tune of Rs 36 cr. With no major capital expenditure company has a very low debt equity ratio of 1:3. Remarkably, company has been earning very high return on Capital Employed & Net Worth, which stands at 45% and 37% respectively for FY08. With 70% promoters holding, company boast of having an uninterrupted record of dividend payment from the day of listing. Incidentally, promoters have increased their stake by 2% in the last two quarters which is a positive sign. For FY09 it is estimated to register net sales of Rs 210 cr and PAT of Rs 9 cr i.e. EPS of Rs 10 on equity of Rs 9.40 cr. But for FY10 it has the potential to clock an EPS of more than Rs 15. To conclude, GMBL with a sustainable business model is trading grossly cheap at an Enterprise Value of merely Rs 60 cr. Long term investors are advised to gradually keep accumulating the scrip at sharp declines for a price target of Rs 75 in 9~12 months.
GMBL’s plant is located in Thane and has the facility to blend and bottle both IMFL and country liquor. Interestingly, all products are manufactured using in-house know-how and no outside technology is being used in manufacturing. With the installation of additional bottling lines last fiscal company now has the capacity to process 12.84 crore bulk litres of country liquor per annum. However company produced and sold nearly 5.50 crore bulk litres only in FY08 which represent capacity utilization of less than 45%. This indicates that company has got huge potential to utilize the balance capacity by penetrating into interior districts of Maharashtra taking advantage of its brand image. This seems quite possible as company's products have been enjoying good brand image from the consumers for the past several years. Meanwhile, GMBL is making representations at various levels of the government to take effective steps to curb the illicit market in the interest of the industry, revenue of the state as well as the public health. For the next couple of years, company doesn’t have any major capex plan as the existing capacity is enough to cater the demand, at least for the next five years. Interestingly, till now the company has been funding its expansion plan through a mix of debt and internal accrual and hasn’t diluted its equity since its IPO in 1994.
Financially, GMBL has been doing well with cash generation of Rs 15~20 cr thru operating activities and has consistently been reporting an OPM of nearly 15% for the last 3 years. But due to considerable increase in input cost led by recent hike in prices of rectified spirit, company reported lower profit in the last two quarters. Its operating margin drastically fell down to less than 8%. Accordingly, despite reporting 15% rise in topline to Rs 101 cr its PAT declined by 55% to Rs 3.45 cr for six months ending Sept 2008. But prices of rectified spirit which shot up to Rs 35 per litre during Sept’08 has already cooled off a bit and is further slated to fall in near future. This will substantially reduce the margin pressure on the company. Thus GMBL may report disappointing nos for Dec quarter as well but it will post much better performance for FY10.
Fundamentally, GMBL is on a strong footing with a huge gross block of Rs 81 cr (net block Rs 61 cr) and reserves to the tune of Rs 36 cr. With no major capital expenditure company has a very low debt equity ratio of 1:3. Remarkably, company has been earning very high return on Capital Employed & Net Worth, which stands at 45% and 37% respectively for FY08. With 70% promoters holding, company boast of having an uninterrupted record of dividend payment from the day of listing. Incidentally, promoters have increased their stake by 2% in the last two quarters which is a positive sign. For FY09 it is estimated to register net sales of Rs 210 cr and PAT of Rs 9 cr i.e. EPS of Rs 10 on equity of Rs 9.40 cr. But for FY10 it has the potential to clock an EPS of more than Rs 15. To conclude, GMBL with a sustainable business model is trading grossly cheap at an Enterprise Value of merely Rs 60 cr. Long term investors are advised to gradually keep accumulating the scrip at sharp declines for a price target of Rs 75 in 9~12 months.
1 comment:
Thanks for the detail on GM Breweries
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