#1 Have you ever read an Annual Report wherein the management over the last 10 years has maintained verbatim content, wording, format? Even the Industry Structure & Development (part of Management Discussion & Analysis) in the alcoholic beverage industry has remained constant according to management since the last 10 years.
Reproducing the “Industry Structure & Development” section from the company’s Management Discussion & Analysis from its Annual Report FY2019.
G.M.Breweries Limited (GMBL) is engaged in the manufacture of alcoholic liquor. Though the company has got the facility to blend and bottle both Indian made foreign liquor and country liquor, the concentration has been mainly on country liquor during this year also due to competitive market conditions in the IMFL segment. The Company has been making steady progress in the business of country liquor during the past five years. Even though not much official statistics are available about the production of country liquor by various manufacturers, the data gathered from The State Excise Department shows that the company contributes about 25 to 30 % of the total Excise duty for country liquor in the whole of Maharashtra.
The only change which the management reported was the company’s contribution to the State Excise Department – From 23% in FY210 to ranging between 25% to 30% in FY2019.
#2 The company has not been doing well since its capacity utilization has been abysmal since the last 10 years – From 42% in FY 2010 to 51% in FY 2019. Really? Let’s find out.
While the company claims to have virtual monopoly in country liquor in the districts of Mumbai, Thane & Palghar and is the single largest manufacturer of country liquor in the State of Maharashtra. The company has capacity to process 13.76 crore bulk litres of country liquor per annum out of which only about 51 % has been utilized last year. – This was FY2019. In FY2010, capacity utilization was 42%. So, there has been a meagre CAGR volume growth of 2.2% p.a. since the last 10 years (assuming that the entire production is being sold – after all, alcohol is habit forming!!
However, this also brings about an interesting revelation – While volume growth has been abysmal to the tune of 2.2% every year since the last 10 years; gross revenue has grown by 12% every year since FY2010; which essentially means that the average revenue per litre has increased by 9.6% every year, i.e. the company has pricing power – it is able to increase the price of its products, without really losing customers!! This is obviously a goodsign. Imagine you having invested in a company wherein the management has to go to a prayer meeting every time its thinking of increasing the price of its product or service by a small fraction.
#3. Why is an alcohol beverage company engaged in solar power production?
This is how the company justified its investment in the renewal energy – As a part of its endeavour to conserve nations precious natural resources, by minimizing the use of power generated from conventional sources, the company has installed and commissioned an solar power plant of 500 KWp (FY2017) ; additional solar power plant of 325KWp (KWp = Kilowatt Peak) (FY2018) capacity with net metering facility during the previous year. With this the company has total solar generation capacity of 825KWp which translates into optimum generation of about 12 lakh units per annum under ideal conditions. Apart from tax benefits this will result in substantial reduction in the cost of power consumed.
Is there a need to diversify into something irrelevant when power & fuel expense is less than 1% of the total expense in Profit & Loss Statement? Also, the solar industry is in deep distress and the rates have plummeted like a rock. Why waste good money on bad?
#4. The company’s market capitalization has increased by CAGR of 25% p.a. since the last 10 years.
Despite a non-communicative management, low capacity utilization, diversification in unrelated business, the company’s market capitalization has increased by 25% p.a. since the last 10 years. Yes, company’s market capitalization as on July 3, 2020 was INR 740 crores. Not too bad, at least the company survived – more importantly gave returns to shareholders who have stuck on with the company since the last 10 years!!
Disclaimer: Please note that these are my personal views. While, I am NOT a registered Research Analyst as per SEBI (Research Analyst) Regulations, 2014, all investors are advised to conduct their own independent research into individual stocks or industries before making any decision. In addition, investors are advised that past stock performance is not indicative of future price action.