TILAKNAGAR INDUSTRIES LTD.

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1 TILAKNAGAR INDUSTRIES LTD. HOLD CMP: Rs Date: December 29, 2009 Key Ratios: Particulars FY09A FY10E FY11E OPM (%) NPM (%) ROE (%) ROCE (%) P/BV(x) P/E(x) EV/EBDITA(x) Debt-Equity(x) Key Data: Sector Breweries &Distilleries Face Value Rs wk. High/Low Rs /57.00 Volume (2 wk. Avg.) BSE Code V.S.R. Sastry Vice President Equity Research Desk Target Price: Rs Market Cap.:Rs mn. SYNOPSIS Tilaknagar Industries (TI) is a leading player in the liquor industry and manufactures Indian Made Foreign Liquor (IMFL). The company remains committed to expand profit margins, achieve robust growth going forward and increase its footprints globally. Rapid induction of new consumers along with increasing urbanization will accelerate the company s future growth. The company is setting up a Rs 800 million grainbased distillery at Ahmednagar in Maharashtra. The company has given a bonus issue of Equity Share in the ratio of two Equity Shares of the Company of Rs 10/- each for every one Equity Share of the Company. Net sales and PAT of the Company are expected to grow at a CAGR of 27.25% & 1.78% over FY08 to FY11E. Share Holding Pattern: Dr. V.V.L.N. Sastry Ph.D. Chief Research Officer drsastry@firstcallindia.com 1

2 Table of Content Content Page No. 1. Investment Highlights Company Profile Peer Group Comparison Key Concerns Financials Charts & Graph Outlook and Conclusion Industry Overview 23 2

3 Investment Highlights Results Update (Q2FY10) For the quarter ended on September 30, 2009 (Standalone) the company has registered a % (YOY) growth in the net sales and stood at Rs mn from Rs mn of the corresponding period of the previous year.the operating profit margins for the quarter stood at 22.23%.The operating profit stood at Rs mn.during the Q2FY10 the net profit of the company stood at Rs mn. EPS for the quarter stood at Rs.1.34 per equity share of Rs Quarterly Results Standalone(Rs in mn) As at Q2FY09 Q2FY10 %Change Net Sales Net Profit (21.48) Basic EPS(Rs)* (85.46) 3

4 Margins (%): Operating Profit Margins (OPM %) Net Profit Margins (NPM %) 4

5 Bonus issued The company has given a bonus issue of Equity Share in the ratio of two Equity Shares of the Company of Rs 10/- each for every one Equity Share of the Company. Open Offer D & A Financial Services (P) Ltd, ("Manager to the Offer"), on behalf of the promoters ("Persons Acting in Concert(s)/ "PACs") has issued this Public Announcement ("PA") to the Equity Shareholders of Tilaknagar Industries Ltd ("Target Company").The Acquirers along with PACs intend to make an Open Offer in terms of the SEBI (SAST) Regulations, 1997 to the shareholders of the Target Company to acquire 2,019,014 Equity Shares of Rs. 10/- each representing 20% of post-conversion capital/voting capital of the target Company at a price of Rs (Rupees Ninety Four Only) per fully paid-up Equity Shares ("Offer Price"), payable in cash subject to the terms and conditions mentioned in PA. Expansion plans The company plans to continue with its proven strategy of expanding both its manufacturing presence and its marketing and distribution network, backed by strong, established brands and a consistent introduction of strategic brands in the overall product matrix. Build Rs 800 mn distillery in Ahmednagar Tilaknagar Industries is setting up a Rs 800 million grain-based distillery at Ahmednagar in Maharashtra. The company has already secured the license for the grain-based distillery from the state government. 5

6 Dividend declared For the the financial year the company has declared a dividend of 25% (Rs.2.50 per share) on the face value of equity share Rs.10 each. Recently the company has hiked its equity capital to Rs mn from Rs mn. Company Profile Tilaknagar Industries (TI) is a leading player in the liquor industry and manufactures Indian Made Foreign Liquor (IMFL). Established in 1933 as Maharashtra Sugar Mills Ltd. (MSM), the company transitioned to the liquor business in Over its 75 year existence, TI has grown to be an organisation committed to quality, excellence and integrity Tilaknagar Distilleries & Industries Ltd. was promoted as a 100 per cent subsidiary of The Maharashtra Sugar Mills Ltd. The year 1973 saw TI diversify into the businesses of Industrial Alcohol, Indian Made Foreign Liquor (IMFL) and Sugar Cubes. Both Maharashtra Sugar Mills Ltd. and Tilaknagar Distilleries & Industries Ltd have been merged to form Tilaknagar Industries Ltd. (TI) with effect from August 6, 1993.Since then TI has been engaged in the business of manufacture and distribution of spirit and Indian Made Foreign Liquor (IMFL). There has been no change in the promoter of the company. The Dahanukar family continues to be the promoter of Tilaknagar Industries, sharing the same vision and values of the founders.due to its core competency in alcoholic beverages and conscious efforts, TI swiftly established its distinct identity in the liquor industry. Today TI s brand portfolio consists of unique and diverse brands that enjoy excellent consumer preference solely due to their quality and value for money. 6

7 Tilaknagar Industries (TI) is driven by its long term vision of emerging as a formidable brand in the global alcoholic beverages industry. TI plans to continue with its proven strategy of expanding both its manufacturing presence and its marketing and distribution network, backed by strong, established brands and a consistent introduction of strategic brands in the overall product matrix. Business areas The current business of the Company is manufacturing, marketing and selling of Indian Made Foreign Liquor comprising of Brandy, Whisky, Gin, Vodka and Rum. 7

8 Manufacturing The mainstay manufacturing hub of TI is located at Shrirampur, Maharashtra. The plant is an ISO 9001:2000 certified plant. A new 50,000 litres per day, state of the art, multipressure distillation plant will be in operation by September TI had acquired manufacturing locations last year in Karnataka and Andhra Pradesh and in addition, TI has 8 lease arrangements and 13 tie-up arrangements across the country for carrying out manufacturing and bottling activities. Hence, TI has in all 24 units in 18 States in the country. Strategic Initiatives To meet the growing demands of the IMFL segment, TI has planned to invest in expanding the manufacturing capacity of its main plant together with investing in cost saving equipment. The Company has successfully commissioned its Malt Spirit plant at its factory at Shrirampur. It has capacity to produce 3000 litres per day. The Company has successfully commissioned MEE plant to reduce effluent quantity and recover usable water. The Company has successfully commissioned Gas engine for generation of electricity of 700 KW per hour. The Company is expected to commission its 50 KLPD wash to ENA Plant by end of 2009 The Company is also planning to commission grain based ENA Plant with the capacity of 100 KLPD by end of the calendar year. 8

9 Marketing & Selling During the year , TI achieved a sales volume of 5.54 Million cases as against 4.21 Million cases in the previous year. The remarkable growth of over 30 per cent in adverse economic conditions was rendered even more impressive by higher sales in the premium categories, which has resulted in a 70 per cent growth in turnover. A drive to increase national presence, increasing dominance in their traditional markets and a cohesive marketing strategy were instrumental in achieving this growth. Senate Royale, which was launched as a flagship brand, has achieved a national presence including new markets such as Punjab, Haryana, Chandigarh, HP, Delhi, Orissa, Madhya Pradesh and Chattisgarh. Their Mansion House brand has been the fastest growing brand in the Canteen Stores Department, also contributing handsomely to the growth in turnover. TI has invested heavily in communication and customer engagement. In their various efforts to reach out to the target audience for the entire basket of brands, and create a pan-india impact, they have planned various consumer centric programs, which are aimed at engaging the consumers, intercepting with their lives, creating multiple occasions of consumption and ultimately converting them to loyal consumers of their brands. They have planned various below the line outlet level activities in addition to a visibility campaign across electronic and digital media. TI will continue to heavily focus on these key brands and expects to maintain the same momentum in the future. 9

10 Products The company is a leading manufacturer of liquor across the major categories - Whisky, Brandy, Rum, Vodka and Gin. TI has a market leading position in the southern and western parts of India Whisky: TI has eight brands under the 'Whisky' category of liquor 1. Senate Royale Whisk It manufactured from a blend of the finest Scotch malts from Spey and highland regions and the finest Indian spirits. 10

11 2. Mansion House Whisky It is perfected from Indian malts and select Scotch whisky to create a refined taste for the discerning palate. 3. Senate Whisky A unique blend of the finest Scotch malts and Indian neutral spirits 4. Shot Whisky A blend of barley matured into a drink with notable flavour and smooth taste 5. Classic Whisky A light, smooth flavoured Scotch blend made with the finest alcohol. 6. Royal Choice Whisky A blend of first generation barley matured into a drink with notable flavour and smooth taste. 7. Hottt Silk Whisky A refined peat flavoured blend of high quality ENA matured into a drink with notable flavour and smooth taste. 11

12 8. Castle Club Whisky A unique blend perfected from Indian malts and select Scotch whisky. Brandy: TI manufactures two leading brands of Brandy 1. Mansion House Brandy A blend of finest quality alcohol produced and blended with matured grape spirit. 2. Courrier Napoleon Brandy A blend made from select grapes, distilled in the Cognac pot stills of France Rum: TI holds three strong contenders in Rum brands 1. Savoy Club Rum It is full-bodied and dark, blended to perfection and matured in old oak casks. 12

13 3. Royal Choice Rum A blend made of first generation sugarcane juice spirit and matured to a product with a distinct flavour and smooth taste. 4. Madira Rum A blend made of first-generation sugarcane juice spirit and matured to a product with notable flavour and smooth taste. Vodka: TI manufactures two leading brands of Vodka 1. Classic Vodka It is a blend of the finest triple distilled alcohol with natural ingredients to give a crisp, smooth flavor. 2. Castle Club It is a blend of the finest triple distilled alcohol with natural ingredients. Gin: TI also manufactures two brands of Gin 1. Savoy Club Dry Gin 13

14 A blend of natural flavoured dry gin distilled with herbs for a pleasant taste. 2. Royal Choice Duet Gin A blend of natural flavoured gin distilled with herbs for a pleasant taste. Exports With a heritage of 75 years of success, and our long term relationships with local partners in Indian and offshore markets, they have responded innovatively to changing customer demands to capture new territories and forayed into uncharted markets. The distillery has the capacity to produce more than 60,000 liters of alcohol per day. In addition to TI s own distilleries and factory at Tilaknagar (Maharashtra), India, the Company also has lease/tie up with 24 more factories which cater to expanding demand in both domestic and export markets. The exports are catered from TI s main factory in Tilaknagar (Maharashtra) to ensure impeccable quality control and supervision. TI is exporting to many overseas markets in Africa, Caribbean Islands and Asia. Their brands continue to find favor with our growing customer base due to their taste, flavours, quality and competitive markets. Subsidiary companies Surya Organic Chemicals ( P) Ltd Prag Distillery (P) Ltd 14

15 Peer Group Comparison Name of the company CMP(R.s) (As on Dec ) Market Cap. (Rs. Mn.) EPS (Rs.) P/E (x) P/BV (x) Dividend (%) Tilaknagar Industries Empee Distilleries Khoday India Pioneer Distilleries Key Concerns Ban on Advertising, Surrogate Advertisement and Word-of-Mouth publicity Strict Distribution Regulation Complex Logistics Framework Heavy taxes, duties and levies Tough competition Availability of raw material Adequate availability of power risk 15

16 Financials Results updates 12 months ended Profit&loss Account (Standalone) Value(Rs. in million) FY08A FY09A FY10E FY11E Description 12m 12m 12m 12m Net Sales Other Income Total Income Expenditure Operating Profit Interest Gross Profit Depreciation Profit before Tax Tax Profit after Tax Net Profit Equity Capital Reserves Face Value Total No. of Shares EPS(Rs) A=Actual, E=Estimated 16

17 Quarterly ended Profit & Loss Account (Standalone) Value(Rs. in million) 31-Mar Jun Sep Dec-09E Description 3m 3m 3m 3m Net Sales Other Income Total Income Expenditure Operating Profit Interest Gross Profit Depreciation Profit before Tax Tax Profit after Tax Net Profit Equity Capital Face Value Total No. of Shares EPS(Rs)

18 Key Ratios: Particulars FY09A FY10E FY11E Equity Capital (Rs.mn.) EBDITA Margin (%) 19.35% 19.89% 19.30% Net Profit Margin (%) 8.87% 6.03% 5.70% P/E (x) ROE (%) 39.49% 16.35% 15.43% ROCE (%) 27.52% 24.53% 25.12% EV/EBDITA(x) Book Value (Rs.) P/BV (x) Debt-Equity ratio(x)

19 Charts A) Net sales & PAT Chart B) EV/EBITDA (x) chart 19

20 C) P/E(X) Chart D) Debt-Equity ratio(x) chart 20

1 Year Comparative Graph TIL BSE SENSEX Outlook and Conclusion At the current market price of the stock Rs.90.00, the stock trades at a P/E of 17.79 x and 15.94x for FY10E and FY11E respectively.

21 1 Year Comparative Graph TIL BSE SENSEX Outlook and Conclusion At the current market price of the stock Rs.90.00, the stock trades at a P/E of x and 15.94x for FY10E and FY11E respectively. The EPS of the stock is expected to be at Rs.5.06 and Rs.5.65 for the earnings of FY10E and FY11E respectively. The top line and bottom line of the company are expected to growth a CAGR of 27.25% and 1.78% over FY08 to FY11E. On the basis of EV/EBDITA, the stock trades at 6.89 x and 6.54 x for FY10E and FY11E respectively. Price to Book Value of the stock is expected to be at 2.91 x for FY10E and 2.46 x for FY11E. Rapid induction of new consumers along with increasing urbanization will accelerate the company s future growth. The company focused on not just growing volumes, but increasingly positioning itself in the higher priced segments of the market. 21

22 The company is strongly positioned in the Indian alcoholic beverages market, as a result of its impressive performance for the last couple of years and the consistent quality and acceptability of its brands, most of which are segment leaders. Investments in equipments, expanding capacities, product diversification and line extensions are part of their constant drive to push the benchmarks. The Indian Made Foreign Liquor Segment is a 125 million cases industry that is worth US$ 2 billion. The IMFL segment constitutes 31 % of the total liquor market. The IMFL is expected to grow at a CAGR of 9.7%. The Company is also planning to commission grain based ENA Plant with the capacity of 100 KLPD by end of the calendar year. The company offers a strong outlook for the coming years, based on its multi-pronged strategy of increased manufacturing bandwidth, greater geographical reach, supplemented by introduction of new products and a strong marketing focus on its existing brands. Today TI s brand portfolio consists of unique and diverse brands that enjoy excellent consumer preference solely due to their quality and value for money. The company remains committed to expand profit margins, achieve robust growth going forward and increase its footprints globally. We recommend HOLD in this particular scrip with a target price of Rs for Medium to Long term investment. 22

23 Industry Overview The Indian alcoholic beverages industry is poised for a rapid growth in both value and volume terms in the times to come. The Indian alcoholic beverages industry is at its tipping point now, with high growth rates, across the entire spectrum of price points and categories. With more and more consumers (men and women) getting added into the alcohol consumption base every year, and with the rising disposable income of these consumers, the premium brands are doing exceedingly well and consequently, the Industry as a whole has begun to take strategic marketing of alcoholic beverage and its distribution much more seriously. The Indian alcoholic drinks market generated total revenues of $12.9 billion in 2008, representing a compound annual growth rate (CAGR) of 11.1% for the period spanning In comparison, the Chinese and South Korean markets grew with CAGRs of 7.5% and 2.6%, respectively, over the same period, to reach respective values of $49.2 billion and $14.4 billion in Market consumption volumes increased with a CAGR of 8.6% between , to reach a total of 2.2 billion litres in The market s volume is expected to rise to 3.4 billion litres by the end of 2013, representing a CAGR of 8.6% for the period. Spirits sales proved the most lucrative for the Indian alcoholic drinks market in 2008, generating total revenues of $9.6 billion, equivalent to 74.6% of the market s overall value. In comparison, sales of beer, cider and flavored alcoholic beverages generated revenues of $3.1 billion in 2008, equating to 23.7% of the market s aggregate revenues. 23

24 Constitution and product segments However, the optimism stems from the following factors: Rapid induction of new consumers along with increasing urbanization will accelerate growth Spending on non basic discretionary items and personal consumption to grow at 9-10 % p.a. Disposable income to increase at an average of 8.5% p.a. up to 2015 Working population to rise by 30% by million new customers likely to be added totarget consumer group in this decade Growth Drivers The Indian Alcoholic Beverages Industry is witnessing high growth traction owing to the following reasons: The Favorable Indian Demography India is best placed demographically, with nearly 485million people in the age group of years in 2001, expected to increase to 636 million by Greater exposure to western media, lower inhibitions about consuming alcoholic beverages coupled with the lowest per capita global alcohol consumption clearly indicates huge potential in the market. These factors are likely to add another 150 million new consumers to the Indian alcoholic beverages industry in the coming years. 24

25 Rising Disposable Incomes Economic growth is leading to higher per capita income and the proportion of the consuming class is increasing. The average per capita income has increased from US$450 in FY01 to an estimated US$790 in FY07. It is expected that the growing per capita income will increase disposable incomes which is expected to outperform the GDP growth and this will lead to an increased consumption of lifestyle products such as alcoholic beverages. Improving Regulatory Framework There has been significant number of changes in the regulatory framework, each of them forward looking that of further reforms. Several States have moved away from the practice of auctioning distribution rights to state controlled distribution to free market, reducing prices by 20-25% together with improved product quality. Thus boosting demand significantly and increasing the profit margins of existing players. Disclaimer: This document prepared by our research analysts does not constitute an offer or solicitation for the purchase or sale of any financial instrument or as an official confirmation of any transaction. The information contained herein is from publicly available data or other sources believed to be reliable but we do not represent that it is accurate or complete and it should not be relied on as such. Firstcall India Equity Advisors Pvt. Ltd. or any of it s affiliates shall not be in any way responsible for any loss or damage that may arise to any person from any inadvertent error in the information contained in this report. This document is provide for assistance only and is not intended to be and must not alone be taken as the basis for an investment decision. 25

26 Firstcall India Equity Research: B. Harikrishna Banking B. Prathap IT A. Rajesh Babu FMCG C.V.S.L.Kameswari Pharma U. Janaki Rao Capital Goods E. Swethalatha Oil & Gas D. Ashakirankumar Automobile Rachna Twari Diversified Kavita Singh Diversified Nimesh Gada Diversified Priya Shetty Diversified Tarang Pawar Diversified Neelam Dubey Diversified Firstcall India also provides Firstcall India Equity Advisors Pvt.Ltd focuses on, IPO s, QIP s, F.P.O s, Takeover Offers, Offer for Sale and Buy Back Offerings. Corporate Finance Offerings include Foreign Currency Loan Syndications, Placement of Equity / Debt with multilateral organizations, Short Term Funds Management Debt & Equity, Working Capital Limits, Equity & Debt Syndications and Structured Deals. Corporate Advisory Offerings include Mergers & Acquisitions (domestic and cross-border), divestitures, spin-offs, valuation of business, corporate Restructuring-Capital and Debt, Turnkey Corporate Revival Planning & Execution, Project Financing, Venture capital, Private Equity and Financial Joint Ventures Firstcall India also provides Financial Advisory services with respect to raising of capital through FCCBs, GDRs, ADRs and listing of the same on International Stock Exchanges namely AIMs, Luxembourg, Singapore Stock Exchanges and Other international stock exchanges. For Further Details Contact: 3rd Floor, Sankalp, The Bureau, Dr.R.C.Marg, Chembur, Mumbai Tel.: / / Telefax: info@firstcallindiaequity.com 26

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