Empee Distilleries' primary businesses - liquor, real estate and power may be exciting, but the long-term story is unlikely to give a high. |
With estimates of the Indian economy growing at nearly 10 per cent over the next five years, the already thriving middle class and the higher socio-economic classes are likely to have better disposable incomes to be spent over leisure and lifestyle products, including liquor. |
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A reflection of this belief could be seen in the facts that India is the third largest market for liquor products in the world, and players like the UB Group are on an acquisition spree to keep the supplies flowing to this demanding lot of consumers. |
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The result: liquor-makers' stocks have turned into runaway hits for investors and the big counters have seen strong buying over the past few months. |
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Besides the few national players like the UB Group and Radico Khaitan, there are a number of regional players which dominate the markets in a few states of the country. |
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One such player is Empee Distilleries, a prominent alcoholic beverages company based out of southern India, makes Indian-made foreign liquor (IMFL) products such as brandy, gin, rum and whisky to cater to the mid- and premium-market segments in Tamil Nadu and Kerala. |
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Empee Distilleries is now planning to spread its wings to the neighbouring states of Karnataka and Andhra Pradesh. For this, the company is coming up with an initial public offering to aggregate Rs 168-192 crore. |
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Spread too thin |
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The issue comprises of an offer of 4.8 million fresh equity shares which would make up 25.3 per cent of the company's post-issue paid-up capital. The price band is fixed between Rs 350-400, and the company aims to garner a market capitalisation of about Rs 672-768 crore upon listing. With the proceeds of the issue, Empee plans to set up a 60 kilolitre a day grain based distillery and a blending and bottling unit in Andhra Pradesh. |
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It will also set up a 7.5 MW biomass-based power project and develop 2 lakh sq ft of residential real estate in Sriperumbudur and to expand its existing production facilities in Tamil Nadu and Karnataka. |
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The company already has the power purchase agreements in place with the state electricity board, for the power to be produced at its power plant. For the real estate project, the company has a historical land reserve of around 46 acres, a small part of which will be utilised for the planned development. |
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Distilled markets |
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The operating environment of Empee is fairly different from the rest of the country, since the distribution and marketing of alcoholic beverages is undertaken by the respective state governments. The production capacities are governed by licenses, and so is the number of cases that can be sold. |
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The government derives these numbers from its estimates of the demand for each type of liquor. It is thus evident that the supply is just enough to meet demand, from the past production and sales track record of the company. |
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"The policy has its inherent advantages because our margins are always protected and we are assured of timely payments," says Nisha Purushothaman, joint managing director, Empee Distilleries. |
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The policy also makes it imperative for the few licensed players to compete on the basis of quality. Having an in-house grain-based distillery would thus give it an advantage in quality of liquor over products which are made from alcohol obtained from molasses. |
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A new mix |
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In addition to expanding its production capacities and marketing presence in more states, the company has plans to develop real estate and produce power. This, however, is unlikely to grow into a significant business, since the company plans to focus on its core business and sees these initiatives as measures to unlock value. |
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"Since we own the land historically, we will only incur the cost of construction," says Purushothaman. "Our profitability from real estate is likely to be high since the project will get tax breaks under section 80-I," she adds. |
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The company has 46 acre of land, and in the first phase, it will develop just two acre. Empee aims to commence construction in January 2008 and finish by March 2009. |
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The biomass-based power plant is likely to commence production this month onward, while its bottling plant will go on-stream by mid-2008. The grain-based distillery will be operational in January 2009. CAPPED PROFITS | Rs crore | FY06# | FY07E*# | FY08E# | Revenues | 554.5 | 700.4 | 768.9 | Operating profit | 31.7 | 43.1 | 47.7 | OPM (%) | 5.72 | 6.2 | 6.2 | Net profit | 17.34 | 30.12 | 33.06 | NPM (%) | 3.12 | 4.3 | 4.3 | EPS (Rs) | 9 | 15.7 | 17.22 | P/E @ Rs 350 | 38.9 | 22.3 | 20.3 | P/E @ Rs 400 | 44.4 | 25.5 | 23.2 | *FY07 numbers annualised # year-ending September | |
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Valuation |
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Even though the Empee issue seems to be priced at a low price-earnings multiple of 20-23 times, the regionally-focused company is likely to be valued at a discount to its peer group of established regional and national players. PEER COMPARISON | | P/E (x)^ | Balaji Distilleries | 39.7 | Jagatjit Industries | 30.7 | Khoday India | 92.3 | ^ trailing 12-month | |
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Besides, its earnings growth from the liquor business is capped by state government regulations. Fierce competition could also take the sheen off its already wafer-thin margins, if the company enters larger, unregulated markets as marketing and advertising costs would kick in. |
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It's the real estate and power forays which can help boost earnings but the immediate plans are modest. While power will start generating returns this year, its real estate business is fraught with execution risk. |
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The positive factor is that the market for liquor products is booming, and the company operates in a regulated environment, there appears little downside. There may be listing gains, but over the long run, Empee has to prove its mettle by improving its profitability consistently. Issue closes: November 6, 2007 |
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