Will protect EBITDA even if revenue declines: Tilaknagar

Q: There were no sales in Tamil Nadu due bottling issues and also you have exited the unprofitable volumes in Kerala and Canteen Stores Department (CSD). Will this continue to impact your volumes and revenues even in Q3 as well as Q4?

A: We are exiting the unprofitable segments and they are secular to the geographies. So, if there is a profitable segment in any state we will chase back and Tamil Nadu happened to have the bulk of the unprofitable segment so did Kerala and CSD.

We have followed suit what the industry player has been doing. Industry players are also drawing down from the unprofitable segment; that is number one.

The second part of your question is what does the Q3 outlook look like? The way we look at it is we bit the bullet in the Q2, Q3 would be better than Q2. In Q2 our contribution margins are better than the last year Q2 contribution margins.

Q: With regards to your margins, for this year itself your EBITDA has come at around Rs 30 crore, your margins are roughly around 18-19 percent and that has seen a bit of contraction on a year-on-year (YoY) basis. However, going ahead is that likely to improve and if yes, till what level can we see the EBITDA margin move to?

A: I have been quite bullish about our EBITDA margins which were in the vicinity of 23 and 25 percent. However, the headwinds for the liquor industry have been very strong on two counts, a) the rest of the market other than non-liquor markets have been very buoyant; the other stocks. So, there would be a flow of capital out. That is the reason the industry per se is not showing 52 week highs but rather showing 52 week lows.

Two, we find that the working capital costs are very high if we are trying to cater to the lower end segments which take away your margins very strongly. So, we are trying to draw down and strengthen our per case figures.

Like if they are 18-19 percent it is as such per se pretty healthy in the liquor space and we would want to keep it at 20 percent.

Q: What was the contribution of Tamil Nadu as well as Kerala and CSD earlier?

A: They were giving us around 40 percent of our volumes but only 15 percent of our profit. So, in a way we are ratcheting down that operations and are chasing the profitable segments.

If you talk about Kerala even after reducing our volumes by 30-40 percent we have put a 5 percent marginal growth on the EBITDA numbers in Kerala.

The Indian consumer pays Rs 1,20,000 crore for his drinks but all the manufactures put together till today have been taking home no more than Rs 2000 crore EBITDA.

This value chain has to change and the industry leader now has the willingness and the mandate to do it. As he does it, it will augur well for every other company because we will go from just a volume chase and a market chase to a healthy bottomline. However, we need to do a ratcheting down, we have to bite the bullet at some point in time.

Q: With regards to your business segments going ahead, you are aiming to capitalise in the rum segment. Could you give us further clarity on that and what is your target going ahead?

A: Not only rum, in brandy we are the undisputed leader. We have 53 percent in the premium brandy and the premium rum segment. We do not play in the cheap and economy brandy not for that matter economy whisky segment. Rum by nature does not have profitable categories; we will have to build these categories for the future.

Going forward, we will continue to be the leaders. Even as we speak we have ratcheted the highest market shares in the profitable segments in Andhra Pradesh, Karnataka, Kerala included where we are talking about premium brandy and these are numbers in the public domain because these numbers come out by every company and you can look them up. However, the numerators are very strong.

The sales and market shares are strong. We just need to have some discipline when we draw down our numerators to the bottomline.

Q: What about the debt on books, where does it currently stand at and will you reduce it?

A: The debt is in the vicinity of Rs 850 crore. We would look towards reducing the debt because it is gravity when the EBITDA melts down to the PAT. So, nobody wants to continue working for banks, they want to work the shareholders.

Our EBITDA per se is Rs 170 crore for last year and Rs 170 crore on a sale of Rs 700 crore was a good number to start with. We would like to protect the EBITDA even at the cost of losing volumes. If the volumes were to go down by 23 percent or 30 percent and that is a choice we have to make to protect our EBITDA we will do it.

Q: Absolute EBITDA will you look to protect or the margins?

A: It works hand-in-hand because the absolute EBITDA comes at a working capital cost. So, it will be a very detailed explanation if I try to give you but somewhere there is an optima space where you say you go beyond the size the working capital will start eating into whatever you generate.