Sachin Pal Moneycontrol Research
Highlights: - GM Breweries had a mixed Q4 FY19 - Topline growth was steady but cost pressures impacted margins - Expect the margin to hover around current levels - Valuations reasonable at 13.8x trailing 12-month earnings
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Maharashtra-based country liquor (IMIL) manufacturer GM Breweries’ quarterly performance was on expected lines. The topline grew in mid-single digits but the rise in input costs continued to weigh on the operating performance.
Q4 result highlights
- Extended winters in Maharashtra led to a healthy demand for country liquor in the quarter gone by. The topline for the quarter was Rs 117 crore compared to Rs 112.2 cores in the same quarter last year.
- A sharp jump in key input prices (mainly molasses and packaging) kept the gross margins as well as operating margins under pressure on a yearly basis. Gross profits were 10 percent lower year-on-year (YoY) while the operating profit decreased 18 percent YoY in Q4 FY19. The margins, however, recovered sequentially (quarter-on-quarter) on the back of moderation in cost pressures.
- Profit after tax was marginally lower as the jump in depreciation as well as operating and manufacturing expenses were offset by a reduction in employee costs
- The overall performance for the full year (FY19) was decent as the company reported a 9 percent YoY growth in both revenue and operating profits.
- The balance sheet remains debt-free although the working capital has ballooned due to the jump in inventory days from 99 days (Q4 FY18) to 139 days (Q4 FY19).
-While receivables and trade payables continue to remain stable, the increase in inventory can be attributed to the upcoming election season.
- As highlighted in our previous note, prices of PET bottles peaked during Q2/Q3 FY19 due to a spike in crude oil prices in the international market as well as adverse currency movements. Consequently, the operating margins improved to 23.8 percent in Q4FY19 (vs 20.0 percent Q3 FY19) as the PET bottle prices have come down in line with the oil price movement.
- Going forward, we anticipate the earnings before interest, tax, depreciation and amortization (EBITDA) margin to hover around current levels (23-25 percent) as the key input prices (extra neutral alcohol/molasses as well as PET bottles) appear to have stabilised in the past few months.
Outlook and recommendation
- The company is operating at a capacity utilisation of nearly 50 percent and has sufficient capacity headroom to grow the business without incurring capital expenditure. However, competitive landscape, as well as, business execution and regulatory risks need to be monitored closely.
- At the current market price of Rs 622 per share, the stock appears fairly valued at trailing 12-months price-to-earnings multiple of around 13.8x. However, the stock should be kept on the radar for accumulation on dips as the company has strong business fundamentals (debt-free balance sheet with strong return ratios).
Read: Alcoholic beverages: Which stocks will give your portfolio a high?
Disclaimer: Moneycontrol Research analysts do not hold positions in the companies discussed here
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