Globus Spirits

[Equity Section]

Key Points from Annual Report

1. “Supplier of Choice” to National & International Brands for over a decade IDV (Diageo), Herbertsons (United Spirits Ltd.), Allied Blenders & Distilleries Pvt. Ltd. & Jagatjit Industries Ltd.

2. Supplier of Bulk Spirits (ENA)
United Spirits Ltd., Allied Blenders & Distilleries Pvt. Ltd. & Jagatjit Industries Ltd., Seagram India (P) Ltd.

3. Present in 7 States in North India and 2 States in South India.

4. Combined installed capacity is 84.4 million litres p.a. at:
Samalkha (Haryana)
Behror (Rajasthan)
Hisar (Haryana)

5. Branded IMFL business has reported a growth of over 100% as compared to the last financial year. Our flagship brand 'County Club' has received an excellent response and has managed to carve a niche for itself given its unique blend as well as packaging. We had taken a lot of effort in terms of consumer research and getting the right blend and I am glad that we are reaping good rewards of our focused approach. We have built a fairly wide distribution network for County Club, and it has a presence in six states. The focal point
of our branded IMFL strategy is to build a strong distribution network from where we are in a position to launch newer brands at higher price points. Going forward GSL will aggressively look
to increase its reach as well as add newer brands to its stable.

6. Moving on to the Country Liquor space, it has witnessed a moderation in growth in FY11 but we are confident of the pick up in demand in FY12. GSL has launched a new brand 'Nimbu' which has received excellent response. Also the price differential on account of the steeper statutory levy on branded IMFL makes CL consumption cost effective for the rural consumer. Entry barriers to this business remain high as it is compulsory to have a distillery in the area of
operation.

7. The Bulk alcohol space has witnessed buoyancy in spirit prices and with capacities of close to 84.4 million Litres taking into account the ADL capacity, GSL should be able to take advantage of the higher prices. Post our capacity expansion program, the implementation of new technology would enable the company to produce ENA without separately engaging through the interim process of manufacturing rectified spirits. This would make the process more energy efficient and also leading to lower wastage in the manufacturing process. The ethanol blending program has made it mandatory to blend 5% alcohol with petrol. With crude oil prices at very high level, the demand for bulk spirits appears to be sustainable.

8. During the year the company has successfully completed the capacity expansion program to increase the capacity from 28.6 million BL to 70 million BL as well as the company has also successfully modernized its both the plants to a fully automatic Wash to ENAplant out of the IPO proceeds of Rs.75 crores raised during the year 2009-10 for this purpose.

9. During the year the company has reported satisfactory progress in country liquor segment in the state of Rajasthan, Haryana & Delhi. For FY2011 the CL business recorded volumes of stood at 88.15 lakh cases contributing 45.97% to the total revenue share.

10.Name of the States | Name of Brands
Haryana | 1) County Club Whisky.
Rajasthan | 2) Hannibal XXX Rum.
U.P. | 3) White Lace Gin & Vodka
Kerala | 4) Le Mans VSOP Brandy
A.P. | 5) Academy Delux XXX Rum
U.T.Chandigarh | 6) Academy Delux Brandy
Delhi | 7) Samurai XXX Rum
Punjab | 8) Samurai Grape Brandy
Himachal Pradesh

11. The company is also manufacturing & selling various products under the brand names such as “Officer's Choice”, “Class Grain Vodka” etc. in the State of Rajasthan vide its manufacturing agreement with Allied Blenders & Distillers Private Limited and “Aristocrat Premium Whisky”, “Bonnie Scot” etc in the State of Haryana with Jagatjit Industries Limited. And in addition to it the company is also having various bottling tie-ups for marketing & selling of its own IMFLBrands in the state of U.P., Kerala, A.P., Punjab and Himachal Pradesh.

12. During the year the demerged undertaking of ADL has been merged into Globus Spirits Limited (GSL) on a going concern basis with effect from April 1, 2010 in pursuant to sanction of the scheme by the order of Hon'ble High Court of Delhi vide dated 24.08.2011.
The board has approved the distribution ratio of 1:6 for the merger of the demerged undertaking of ADL into GSL i.e. for every 1 equity share of ADL of Rs.10 each fully paid up, 6 equity shares of Rs.10 each fully paid up will be issued according to the valuation criteria suggested by E&Y based on the CCM, DCF Market Price & the NAV method to value companies. GSL has to issue additional 3.24 million shares which will take the post dilution equity share capital of GSLto 22.99 million shares of face value Rs. 10 each.

13. GSL is the only spirits Company in India which has a strategic presence across all four segments. This unique business model enables a seamless integrated production process. It covers the 360 degree presence across the sector; right from manufacturing, marketing, and sale of country liquor, IMFL, industrial alcohol apart also from taking up contract bottling cater to renowned Indian branded players. The focus of your Company is to develop each line of business and extracting synergies with differentiated strategy for each one of them. The following table provides a brief summary of the Company's performance in different segments.

Product |Cases/BL* (Mn.) | Sales (Rs. Mn.)
Branded IMFL | 0.41 | 414
Country Liquor | 8.81 | 2,429
IMFLFranchisee | 0.78 | 1,289
Bulk Alcohol | 23.33 | 808
Other Sales | - | 343

14. In its Franchise Bottling business, Your Company manufactures IMFL brands for Allied Blenders & Distillers and Jagatjit Industries from its Rajasthan and Haryana distilleries respectively. The arrangement has been renewed for a period of 3 years; post the expiry of the existing agreement in FY 2010. Brand-owners are generally hesitant to change tie-up manufacturers. Franchise Bottling is also of strategic importance given Your Company's
endeavor to be an integrated alcohol manufacturer. Besides this, the expansion of other pan-India IMFL players without adequate bottling capacities will provide future opportunities for this business.

15. Franchisee IMFL clocked volumes of 17.59 lac cases in FY2011 contributing Rs. 1289.1 million to the total revenue translating into a revenue share of 24.40%. Bulk alcohol recorded volumes of 233.34 lakh BL and contributed Rs. 808.1 million to the total revenue translating into a revenue share of 15.30%.

[Equity Section]

Globus Spirits like themselves to be called a 360 degree liquor company. They have a Debt/Equity ratio of 0.34 as on September, 2011. Their Shareholders' Funds stands for around Rs. 2.29 billion while their Loan Funds of Globus Spirits is about Rs. 789.6 million. Globus Spirits currently has Capital Employed of about Rs. 3.36 billion with Fixed Assets of about Rs. 2.41 billion and Net Current Assets of about Rs. 949.6 million. For March 2011, their Return on Capital Employed(ROCE) was about 21%. Their annual sales increased by 36% to Rs. 5.21 billion on account of merger of ADL into Globus Spirits. Their Operating Margins are 11% at Rs. 593.1 million while Net Profit Margin is 8% at Rs. 399.3 million. For March 2011, Cash Conversion Cycle(CCC) of Globus Spirit is minus 34.36 days.

If we talk about September 2012, Net Sales of Globus Spirits stand at Rs. 1.67 billion, up by 32% as compared to the same quarter for previous year. Their Operating Margins are 10% at Rs. 165.2 million. Their Net Profit Margins are 6% at Rs. 96.7 million.

Earning per Share of Globus Spirits for the past four quarters stand at Rs. 18.97. Price per Share of Globus Spirits is at Rs. 104.60. Price per Earnings per Share(PE) of Globus Spirits is coming out to be 5.51. Total Assets per Share of Globus Spirits is Rs. 100.34.

I think, based on above valuations, that this company is undervalued. They have been able to grow their own IMFL brand County Club. Post merger, Globus Spirits have huge capacities to consolidate. Also, their Rajasthan capacity is getting stabilised. We can see some significant sales growth on that front.