Sachin Pal Moneycontrol Research
Highlights: - GM Breweries revenues advanced at a steady pace - Increasing cost pressures continued to impact margins - Margin pressure to continue over the next few quarters - Stock has declined by 40 percent since the start of 2019
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The second-quarter earnings of Maharashtra-based country liquor manufacturer GM Breweries were a mixed bag. The revenue growth was impressive despite the broader economic slowdown, but the margins were predictably weak due to higher cost of raw materials.
Quarterly results highlights
- The company's Q2 FY20 revenue of Rs 121 crore increased by 9 percent year-on-year (YoY) on the back of higher offtake of country liquor.
- Gross margins were down again in Q2 FY20, mainly on account of higher key input prices (rectified spirits and packaging). Gross profit declined 13 percent YoY as the margins for Q2 came in at 28.3 percent.
- Operating income during the quarter came in at Rs 24 crore, down 20 percent YoY. During July-September period, the company witnessed a sharp spike in employee expenses (up 53 percent YoY), but this was offset by reduction in operating and manufacturing expenses.
- Higher ethanol blending by oil marketing companies (OMCs) has had an adverse impact on the margins of all liquor manufacturers. Prices of ethanol as well as rectified spirits have surged on the back of increased demand from OMCs. Additionally, the production of sugarcane in 2018-19 was hit by weak rainfall and low water levels in key reservoirs. The sugarcane supply crunch has had an inflationary impact on the prices of rectified spirits in the past 8-12 months.
- In an effort to protect its business margins, GM Breweries has altered its packaging mix from glass bottles to PET bottles. Given the lower manufacturing cost of PET bottles, the management expects that the recent change in the packaging mix will assuage some of the input cost pressures.
- The management earlier indicated that input prices would continue to remain at elevated levels until the arrival of the new sugarcane crop in October-November. Prices of rectified spirit are hovering near lifetime highs and overall raw material costs were higher by nearly Rs 22 crore in Q2 in comparison to 2018.
Outlook and recommendation
- The company has exhibited stable volume growth of 5-7 percent over the past several years on the back of market expansion and solid execution. Given the track record, we anticipate that it has potential to deliver similar volume growth in coming 2-3 years.
- Shares of GM Breweries are down nearly 40 percent since the start of 2019. At the current market price of Rs 371 per share, the stock is trading at the trailing 12-month price-to-earnings multiple of around 8.8x.
- The expected decline in 2019-20 sugar production, coupled with the announcement of buffer stock (4 million tonnes), will keep the margins under pressure in coming quarters. However, investors should keep an eye on the stock for accumulation on dips as its profitability remains well poised for a revival in the medium term.
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Disclaimer: Moneycontrol Research analysts do not hold positions in the companies discussed here
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