>GLOBUS SPIRITS LIMITED: GSL continues to remain the leader in the Country Liquor (CL) segment in North India

In our Q2FY11 update dated November 26, 2011, (CMP Rs.100.55) we had recommended buying/adding the stock to dips of Rs. 87 for a target of Rs. 120. The stock achieved our target of Rs. 120 on February 6, 2012 and made a high of Rs.129.40 on Feb 10, 2012. It is currently trading at Rs. 121.00.


GSL recently declared its Q3FY12 results and reported net sales of Rs. 152.6 cr. - up 38.0% Y-o-Y and up 15.6% Q-o-Q. The Operating Profit for the quarter was Rs. 19.7 cr in Q3FY12 vis-à-vis Rs. 19.4 cr in Q3FY11 and Rs. 17.3 cr in Q2FY12. OPM for the quarter was 12.8%, 450 bps down YoY and 10 bps down QoQ. The fall in OPM can be attributed to the 81.2% increase in “other expenses” YoY and marginal increase in raw material expense QoQ. The Net Profit for the quarter was reported at Rs. 11.7 cr vis-à-vis Rs. 11.4 cr in Q3FY11 and Rs. 9.7 cr in Q2FY12. Interest expense has risen largely due to capitalization of new capacity and an increase in working capital loans due to higher sales volumes. Increase in depreciation costs YoY is due to capitalization of new capacity since Q3FY11.



Concerns:
• Government regulation is a major concern in the industry. In FY11 the Maharashtra government raised taxes on liquor sales, increasing prices significantly. While this currently has no effect on GSL’s sales, the possibility of a domino effect in the other states is a concern. The increase in excise duty for franchise bottling in Haryana has had a direct negative impact on GSL as Jagatjit has suspended franchise bottling operations till the law is changed in the ensuing Budget.


• The liquor industry is very seasonal. Q3 is the best quarter while Q4 is traditionally a poor quarter due to depletion of stock due to the allocation of liquor sale licenses to retailers in the fresh fiscal year.


• “Other expenses” increased significantly in the quarter to Rs. 46.6 cr from Rs. 25.7 cr in Q3FY11, an 81.2% rise. Other expenses increased significantly in all 3 quarters due to added power and fuel costs during the stabilization period of the company’s newplants. Stabilization is now complete at both the locations and these expenses could come back down in the coming quarters. “Other expenses” also increased as GSL wrote-off ~Rs. 0.5 cr worth of old inventory in Q3FY12.


• Country Liquor (CL) realization has fallen 6.7% in Q3FY12 over that in Q3FY11 because of a change in product mix / packaging mix. However, the 9MFY12 realization remains in line with that last year. GSL is seeking increase in selling price of Country liquor in Rajasthan, Delhi and Haryana and is confident of getting it effective Apr/May 2012.


• While IMFL sales are growing, they are not growing rapidly. IMFL realization fell in the quarter to Rs. 669.6/case from Rs.1118.2/case in Q3FY12 and Rs. 804.2 in Q2FY12. This fall in realization is almost entirely attributable to a change in duty structure in new locations entered in Q2FY12 and product mix.


• GSL’s capacities have risen from 288 lakh BL (bulk litres) to 700+ lakh BL from FY10 to FY12. So far the demand scenario for RS/ENA has been robust. In case there is a slowdown in offtake going forward, GSL could get hit due to higher fixed costs, which may not be fully recovered. Further the plan of GSL to get higher value add for its production by converting more of industrial alcohol into IMFL/Franchisee bottling/Country liquor has been progressing at a slow pace resulting in OPM getting hit and rerating of the stock getting postponed.


• Realization on exports is lower (~10% lower) than that of domestic sales. GSL exports ~2 lakh litres every month. OPM for a quarter could get impacted by the proportion of exports in total sales.


• GSL has suffered a setback in its OPM during 9MFY12 due to stabilization issues of expanded capacity at both the locations. This results in higher power and fuel costs due to frequent boiler shutdowns and restarts, low capacity utilization resulting in higher fixed costs, some quantity of lower quality production resulting in overall realizations getting impacted. While the Haryana expansion was stabilized in H1FY12, the Rajasthan expansion was stabilized only in Q3FY12. In case these issues recur, GSL could get impacted in terms of production and margins.


To read the full report: GSL
RISH TRADER