Sachin Pal Moneycontrol Research
Highlights: - GM Breweries had a mixed Q3 FY19 - Festive demand aided topline growth - Cost pressures impacted operational performance - Anticipate margin recovery from Q4 onwards - Valuations reasonable at 14 times trailing 12-month earnings
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Maharashtra-based country liquor manufacturer GM Breweries reported a tepid performance in the third quarter of the current fiscal year. While the topline came in higher by nearly 6 percent, rise in input cost pressures weighed in on operating profits of the company. Further, a sharp jump in employee expenses (up 84 percent YoY) and higher depreciation (up 18 percent YoY) resulted in a subdued bottomline.
Margins decline on a sequential basis
The topline benefitted from a robust demand during the festive season. On the cost front, the prices of raw materials (rectified spirit) remained largely stable on a sequential basis but the rise in packaging costs dented the operating margins in the quarter gone by. Prices of PET bottles were higher in Q2 and Q3 due to increase in crude oil prices in the international market as well as adverse currency movements.
Brent crude oil appears to have peaked at around 85 dollars per barrel in September and October and have seen a deep correction since. While the Q3 margins hit yearly lows of 20 percent, we anticipate a recovery in margins from Q4 onwards as the PET bottle manufacturers have undertaken successive price cuts during the months of October, November and December. Besides, the company is gradually shifting to glass bottles to mitigate the packaging-related cost pressures.
Operating at nearly 50 percent capacity utilisation
With an installed capacity of 13.8 crore litres, GM Breweries is the single largest manufacturer of country liquor in Maharashtra. Driven by higher volumes, the capacity utilization moved closer to 50 percent in the last fiscal year. Going forward, the company plans to leverage its brand presence in Mumbai and Thane to penetrate deeper into other districts of Maharashtra.
Outlook and recommendation
At the current market price of Rs 640 per share, the stock appears fairly valued at trailing 12-months price-to-earnings multiple of around 14x. However, the stock should be kept on radar for accumulation on dips as the company has strong business fundamentals (debt-free balance sheet and return on capital of more than 25 percent). The company has sufficient capacity headroom to grow the volumes by more than 20-25 percent for the next 3-4 years. However, business execution as well as competitive landscape and regulatory risks needs to be monitored closely.
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