Stock of the Month (July 2013) – Tilaknagar Industries
12 July, 2013
Favourable demographics: Industry with exponential growth potential
The Indian liquor industry is amongst the fastest growing and is expected to triple in size over the next three years to 2015E. The minimum legal age for consuming alcoholic beverages varies from state to state and ranges between 18-25 years of age. The future prospect of the industry is very encouraging with a significant portion of the country’s large population being below the minimum legal age to consume alcoholic beverages. Such a ‘young’ economy with growing disposable incomes and greater exposure to western lifestyles is favourable for an aspirational product such as liquor. As per Census India 2011 data, there will be roughly 100 million people attaining the age of 18 in the next 5 years. This should create a potentially huge market and considerable demand for alcoholic beverages in the long term.
According to a recent report by the industry body Associated Chambers of Commerce and Industry of India (“Assocham”), India’s alcoholic beverage market, will cross Rs. 1.4 lac Cr in 2015 from the current size of around Rs. 50,700 Cr. As per the report, alcohol consumption will cross 19,000 million litres by 2015 from the current level of 6,700 million litres. In particular, Indian Made Foreign Liquor (“IMFL”) segment, comprising of Indian made whiskey, brandy, rum, vodka and gin, will continue growing at the fastest rate and command a 56 % market share from the current 37 % by 2015E.
Existing liquor companies, like Tilaknagar Industries Limited (“Company”) will benefit the most from this exponential growth given their existing brand recognition and high entry barriers which exist for new companies to enter the Indian liquor industry.
Strong Entry Barriers
Obtaining a new license and setting up distilleries is time consuming and capital intensive. The production of liquor products in India requires manufacturers to obtain licenses from the respective state governments under the local state laws. These licenses determine the production capacity of each facility and are granted for a predefined price and time period. In addition to the discretionary power of awarding license to manufacture liquor, in many states, distribution of liquor products is also controlled by the state government.
Additionally, there is a ban on advertising of liquor products in India, other than on the points of sale, which makes it extremely difficult for a new entrant to create brand awareness. Further, since excise duty rates on liquor vary from state to state, selling liquor across states attracts higher excise duty which compels any new entrant to set up distilleries in many states to compete in a meaningful way. Such a regulatory and legal framework makes it extremely difficult for a new player to enter the Indian liquor industry and gives the existing liquor manufacturers huge competitive advantages.
Tilaknagar Industries’ brand portfolio is well recognised in south Indian states (Tamil Nadu, Kerela, Andhra Pradesh, and Karnataka) which account for 80% of the company’s revenues. Tilaknagar Industries’ primary manufacturing facility is in Srirampur, Maharashtra with an installed capacity of 200 KLPD, including 100 KLPD of grain based distillery and 100 KLPD of molasses based distillation. Additionally, the Company has its manufacturing facilities spread across India which it operates through its subsidiaries and various tie-up arrangements.
New product launches and premiumisation
The Company’s product range comprises whisky, rum, brandy, gin and vodka under a total portfolio of 40 + brands. Tilaknagar Industries enjoys a strong franchise in brandy in south India where its Mansion House brand is really popular. To leverage on its brand equity, Tilaknagar Industries is aggressively reaching out to newer territories with its existing line of products particularly in the north and east of India with the launch of its senate royal and classic whiskey brands.
During the past year, the Company introduced its white house rum in Kerala and launched the courier Napoleon Green and Courier Napoleon Blue brandy in Tamil Nadu. In October 2012, it launched the premium Seven Islands Vintage Single Malt whiskey in Chennai. Going forward, the Company plans to premiumise its offerings which help in (1) passing on the volatility in raw material prices to the end consumer thereby increasing overall margins and (2) ensuring loyalty by offering refined and higher priced products to those who wish to graduate to more premium offerings.
During FY 2012, Company acquired following companies to augment its manufacturing capacity achieve forward and backward integration:
► Punjab Expo Breweries Private Limited (“PEB”): PEB has a bottling unit in the state of Punjab with an existing capacity of 50,000 cases per month. This acquisition will help the Company in enhancing its manufacturing capacity and will also give it a strategic foothold in northern India.
► Srirampur Grains Private Limited (“SGP”): SGP sells agricultural products and is located in the state of Karnataka. The acquisition will help the Company leverage on the skills of SGPs staff in procuring a significant supply of grains as raw materials for TIs grain based distillery.
► P. P. Caps Private Limited (“PPP”): PPP manufactures caps and containers. Its acquisition will help the Company in becoming self-reliant in sourcing packaging material thereby cutting costs by having an in-house packaging material facility.
► Mykingdom Ventures Pvt. Ltd. And Studd Projects P. Ltd: Both these companies are in the business of construction and plant erection. By leveraging on the in-house expertise infrastructure development expertise of these companies, Tilaknagar Industries would achieve significant advantage in terms of cost effectiveness and timely execution of various projects as it expands.
► Shivprabha Sugars Ltd (“Shivprabha”): Shivprabha has the necessary approvals and land for setting up a 3000 TCD Sugar Plant, 30 KLPD Distillery and 16.5 MW Cogeneration Power Plant in Sholapur. This acquisition is part of backward integration initiative, which will augment uninterrupted supply of molasses, a key raw material for the Company and will help the Company to become substantially self-reliant for its raw material requirements.
Limited scope for price rise & rising raw material prices
For past many months India has been suffering from a high rate of inflation with the general level of prices for commodities and raw materials rising at an alarming rate. This has put some pressure on the margins of liquor companies. For FY 13, Tilaknagar Industries’ raw material expenses went up by 48 %, in comparison, net income from sale of products increased by only 17 %.
Liquor prices are controlled by state governments which revise them once every year.
Liquor companies cannot increase or revise the prices during the course of the year, irrespective of any rise in price of raw materials or under any other competitive pressures. The major raw materials for liquor companies is molasses and glass, the prices for both of which has been volatile. Additionally, Uttar Pradesh and Maharashtra are the source of a majority of the domestic molasses requirements. Most other states have imposed an import tax on molasses which puts further pressure on profitability margins of liquor companies, if there is a shortfall in a given year and the companies need to import from another state.
Margin pressure on liquor companies is likely to sustain until inflation is controlled in a meaningful way. In the near term we expect this to put some pressure on overall profitability.
About the Author
Rajat Sharma is a well known stock market analyst and commentator. He has covered Indian markets for over a decade and is regarded for consistently identifying early stage investment opportunities. Attorney by qualification, Rajat has done extensive work for improving corporate governance and disclosure standards.Follow @SanaSecurities