Moneycontrol Research
We are recommending a smallcap liquor manufacturer -- Associated Alcohols & Breweries (market capitalisation: Rs 450 crore) as a tactical pick.
One of the key reasons for choosing this company is that prospects for the sector seem very exciting. Liquor consumption is on an uptrend and the companies in the sector have been picking up earning momentum on the back of buoyant consumer demand.
Along with higher volumes, the sector is also witnessing a shift to the premium segment and Madhya Pradesh-based Associated Alcohols, a key manufacturer of United Spirits’ top brands (Bagpiper, McDowell’s No 1, Smirnoff, Black Dog and Captain Morgan), remains well positioned to benefit from this trend.
Its financial performance has been also strong as the company has posted a topline and profit growth of 17 percent and 19 percent in the first nine months of this fiscal, respectively. Also, the company has recently completed its capacity expansion and ramp-up of the expanded facility is likely to be the key catalyst to earnings going forward.
Business performance is expected to be driven by higher volume growth, although the spike in input costs (bottling and extra neutral alcohol) could weigh on its near-term margin.
At its current market price, the stock is trading at a reasonable valuation of nearly 15 times FY19 estimated earnings. The stock presents an attractive investment opportunity in the consumption space. However, one should be prepared for the volatility ahead given the inherent nature of the smallcap and midcap space.
Read: Alcoholic beverages: Which stocks will give your portfolio a high?
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Disclaimer: Moneycontrol Research analysts do not hold positions in the companies discussed here
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