SOM Distilleries & Breweries Limited: Favourable demographics should support next leg of growth

SOM Distilleries & Breweries Limited is only listed company in India having both Beer and IMFL, which complement each other and minimizes risk of seasonality while providing marketing efficiencies. The company continues to focus on enhancing brand presence through CSD and market expansion in states including Uttar Pradesh and Delhi in addition to existing stronghold markets.

SOM Distilleries & Breweries Limited

Company details

SOM Distilleries & Breweries Limited is based in Bhopal and has been categorised as one a leading alcoholic beverage manufacturer in India. It has an installed capacity of 23 million cases through itself and its 2 subsidiaries. In previous 5 years, the company tripled its capacities. It has 3 millionaire strong beer brands in its portfolio.

Product portfolio

The company provides a broad line of products at every price point to cater to varied preferences of consumers. Product portfolio includes various options across beer, rum, brandy, vodka and whisky. It has 3 key millionaire brands (having sales of more than 1 million cases per annum) – Hunter, Black Fort and Power Cool. The company launched Woodpecker Wheat Beer in FY20. This is India’s first filtered wheat beer. Idea behind introducing new products with seasonal themes was to increase consumer traction and engagement such as Hunter Pint Beer and different flavors of RTD drinks.

Business model

The company is engaged in brewing, fermentation, bottling, canning and blending of beer and Indian Made Foreign Liquor (IMFL). The company supplies draught beer from its plants. 

Important developments in FY23

Genius Prestige whiskey gained 46% market share in Karnataka segment. This happened within 3 months of its launch. Legend Brandy and Pentagaon Whisky were approved for nationwide supply by Canteen Stores Department (CSD). The company executed an expansion plan of capex outlay of INR 1,000 million for new canning facility at Bhopal Plant and expanded Brewing Facility in Hasan Plant. The company views that expansion of Odisha Plant is expected to be completed by June 2023 at a capex outlay of INR350 million.

The company clocked highest sales ever in a single month by Karnataka unit in January. It has signed a contract with Radico Khaitan during 3Q23 to manufacture their IMFL and Ready to Drink brands at its plant in Hassan, Karnataka, leading to better utilization of its IMFL facility. Bhopal plant's beer dispatch in January 2023 doubled as compared to same period of previous year.

Financial position of the company

In 4Q23, the company saw its beer sales volume rise by 62% year-over-year to 47.2 lakh cases, with IMFL volume rising 43.2% to 2.4 lakh cases. The company has recorded total income growth of 73.4% year-over-year to INR2,530 million in 4Q23, while its gross profit saw an increase of 53.9% to INR877 million. The company’s EBITDA and net profit grew by 141.8% and 148.3% year-over-year to INR286 million and INR159 million, respectively. Its net profit for FY23 was INR60.41 crores against INR9.72 crores loss for FY22. Strong quarterly and annual results reflect successful implementation of strategies and efforts to achieve sustainable growth and profitability. The company’s beer and volumes grew at an annual rate of 2.1x and 1.5x, respectively. This indicates both high quality of product and the company's alignment with customers' preferences. In FY23, the company saw operational efficiencies which led to better cost management.

The company saw beer volume of 149.6 lakh cases, exhibiting 118.9% growth year-over-year and IMFL volume of 8.9 lakh cases in FY23. The company’s beer revenue came in at INR7,303 million. Its mainline brands- Hunter, Black Fort and Power Cool- saw volume growth of 99.5%, 65.9% and 181.8%, respectively in comparison to FY22.

Margins improved as a result of cost efficiencies achieved because of better utilization. EBITDA margins for 4Q23 stood at 11.3% against 8.1% in 4Q22. Its PAT margins for 4Q23 was 6.3% in comparison to 4.4% in 4Q22. Upcoming peak season is expected to further support better utilization, resulting in sustained margin improvements in next few quarters.

The company registered a total income of INR8,080 million in FY23 which was highest ever achieved by SOM Distilleries & Breweries Limited, growing 121.1% on YoY basis.

The company’s gross debt to equity ratio fell from 0.68x in FY22 to 0.65x in FY23 which exhibits improved debt position. Its net debt to EBITDA ratio saw significant decline from 9.59x in FY22 to 2.22x in FY23. This indicates considerable improvement in the company's ability to meet debt obligations.

Volume analysis

Strong expansion in mainline brands saw a significant impact on overall volumes, which indicates positive trend for the company. In FY23, Hunter's volume nearly doubled from previous fiscal year, while Power Cool's volume saw an increase by over 2.8 times. Thus, there is strong market demand for these products. Beer made up 94% of total volumes and 91% of revenue during FY23. Price realization for Beer during FY23 was INR488 and IMFL was INR744.

Future prospects and outlook

The company continues to be optimistic about its prospects and believes that its long-term equity story should continue to be strong. Focus will remain on maximizing utilization level across its plants to generate strong cash flows, which should drive value for its shareholders. The company has been evaluating various strategic opportunities such as bottling arrangements, acquisitions or setting up new units to further its reach in India.

The company principally caters to strong beer segment. Its mainline brand ‘Hunter’ services customers in premium strong beer segment. In FY21, the company launched ‘Woodpecker’ wheat beer in select markets in Northern India. It has launched new variant / limited editions of its existing brands on an ongoing basis. Therefore, portfolio premiumisation continues to be its strategy.

The company focuses on expanding its exports portfolio. It has signed Memorandum of Understanding (MOU) with Indian Fashion FZE, based out of UAE for export of Beer and IMFL for West and Central Africa.

Industry research

India is being counted as 3^rd largest spirits market by volume in world, behind China and Russia. Indian alcobev industry is classified into 5 categories such as Indian Made Foreign Liquor (IMFL), India Made Indian Liquor (IMIL), foreign liquor Bottled in Origin (BIO), Beer and Wine. IMFL primarily includes brown spirits like whisky, rum, and brandy whereas white spirits include gin, vodka and white rum.

Demand for alcoholic beverages continues to increase because of rapid urbanisation, changing consumer preferences and sizeable and growing middle-class population having increased purchasing power. In addition, alcohol consumption share by middle income group has been increasing and is presently ~21%, which should reach over 40% by 2030.

Indian beer industry is mainly dominated by strong beer, accounting for over 80% of total beer volumes sold in India. Beer consumption in India is being driven by demand from southern states, accounting for more than half of volumes consumed in India. Around 30% of total consumption of beer is contributed by western region and equally spread between northern and eastern states. Even though India is a tropical country, it has one of lowest per capita alcohol consumption rates globally. Therefore, this indicates significant prevailing opportunity.

Growth in beer market is supported by young consumers and professionals. They consider beer as a trendy drink as compared to traditional spirits. Apart from factors like favourable demographics, improved disposable income and increased social acceptance, recent entry by new players resulted in wider options to consumers. Indian beer industry is very seasonal because ~40-45% of sales happen in summer.

Factors supporting industry growth

States including Uttar Pradesh and Delhi increased number of retail outlets. MP allowed sales of IMFL and beer through country liquor stores leading to significant rise in point of sales. Indian population segmentation by income level transitioned from pyramid shape to diamond shape, leading to larger share of middle-class population.

Increased mix of younger generation in India provides sizeable opportunity for alcobev industry in India. Over 55% of Indian population in age group of 18-45 years and nearly 19 million people are added to legal age for drinking every year.

Focus on premiumization and entrance of international players in India led to availability of wide variety of choices for Indian population. Trend for craft beer continues to pick up in India, particularly in metros. Availability of wider choice should cater to broader target audience leading to increased demand for industry. Given current low penetration level, there is significant scope for enhancing consumption which is expected to benefit overall industry.

Strong track record of management

Extensive experience of promoters and established track record in industry are expected to support growth of SOM Distilleries & Breweries Limited. Promoters of the company have been involved in alcobev business for over 3 decades. Its other company, Som Distilleries Private Limited (SDPL), is into manufacturing extra neutral alcohol (ENA), Indian made Indian liquor (IMIL), and Indian made foreign liquor (IMFL) since 1986. Promoter has other companies operating in this same business segment.

Management team of the company is being led by its Managing Director Mr. J.K. Arora, while Mr. A.K. Arora is the company’s Deputy Managing Director. Mr. J.K Arora is a visionary person and his seasoned leadership qualities, meticulous planning and strategies resulted in desired shape and direction to growth of the company. Customer centricity, quality, and evolution are thumb rules keeping the company motivated to be ahead in this industry.

Shareholding pattern of SOM Distilleries & Breweries Limited

As per recent filing, ~34.32% is being held by promoter and promoter group of SOM Distilleries & Breweries Limited, while remaining ~65.68% share is being owned by general public. Promoters have increased their shareholding in the company at May 2023 end as compared to March 2023. This is a positive sign and signals that leadership team has been thinking like true owners of the company. An increase in insider ownership is a sign of increased confidence of its insiders.

Mr. Jagdish Kumar Arora has increased his ownership in the company at end of May 2023.

Risks

State governments tend to have only liquor and fuel under their control. Any additional taxation on liquor to meet target state revenue objectives can prove to be detrimental for industry as it might have severe impact on its demand.

Alcobev industry is not allowed to conduct direct promotion of its product as it is banned in India. Typically, companies use surrogate advertisement to inform consumers about its product. As a result, promotion of new brands becomes challenging.

In several states, where government is also a biggest distributor, it fixes prices at which it buys products from alcoholic beverage companies and prices at which they will sell to ultimate consumers. State governments decide end consumer price. Therefore, manufactures have no say in determining selling price.

Valuation

Stock of the company currently trades at ~28.9x of FY22 EPS, which is at a discount to sectoral average of ~32.23x. Therefore, the company’s stock has a huge potential to grow from its current price. Market share enhancement in Karnataka, footprint expansion, exports, pan India expansion are some factors likely to support growth.

Investment rationale

The company has expanded capacity at Bhopal and Hassan, providing significant opportunity for volume growth in short to medium term. Lower penetration of beer and favorable demographic profile offer huge scope for industry growth. The company’s Odisha Plant is anticipated to start its operation by June 2023. It has capex outlay of INR350 million.

The company has made significant key developments in FY23 which are expected to support its revenue growth in upcoming quarters. Therefore, investors can consider going long on this stock.

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