SOM DISTILLERIES Rs 315
Not too long ago, liquor consumption in India was done furtively under shadows, away from the public eye. Society looked down upon drinking as a sin and the government did its best to discourage consumption by prohibition, imposing heavy taxes, and restricting production through licences etc. But in a few years, moderate drinking has gained widespread social acceptance. Friends get together to unwind with a drink, families sit together and bond over it and parties without liquor are considered incomplete.
Besides this easing of social stigma, another factor is aiding the growth of this industry. After introduction of GST, the only meaningful independent sources of revenue left with state governments in India are taxation on petroleum products, property registration and liquor. States are now vying with each other to gain a larger share of taxes on liquor by easing onerous price controls, facilitating smooth movement, and encouraging setting up of production facilities. Already many states like Karnataka, Kerala, Madhya Pradesh, and Maharashtra have stopped fixing prices for liquor, instead focusing only on determining the tax rates on them. This is a win-win for all the parties concerned. Companies can now price their products according to business economics, state governments collect higher taxes and consumers get better quality products at competitive prices. In short, the liquor industry is now becoming more businesslike and stable which is an essential prerequisite for making an investment case.
Without taking away anything from drinks like scotch, gin, rum, whiskey etc, a hot country like India has an enduring appeal for beer. There is a huge variety of beer and beer companies in India but as things would have it, only two are listed. One is the eponymous United Breweries Ltd (UBL) with over 50% market share having brands like Kingfisher and Heineken. The other is a little known Bhopal based Som Distilleries & Breweries Ltd (Som) with brands like Hunter, Black Fort and Power Cool.
Over 90% of Som’s topline comes from beer and it enjoys 5-6% national market share. Som’s core geographical areas are Madhya Pradesh, contributing about 50% topline (market share @ 45%) followed by Karnataka which contributes around 30% topline (market share @ 16%) and Odisha, 10% contribution (@ 12% market share). It has recently entered and/or is entering Tamil Nadu, Rajasthan, Delhi, UP, Kerala and Puducherry.
The most attractive facet of Som is the huge market share that it has been able to carve out in its existing geographies. It indicates that its brands strike a chord with consumers despite competition from big brands of UBL. Now that it is venturing into new areas, it can become very interesting if it is able to capture similar market share. After expansion in April 2024, it has an installed capacity of 35 million cases per annum with 55-65% capacity utilization thereby giving enough headroom to grow in near to medium term. Its Debt Equity ratio stands comfortably at 0.4x.
Past track record is reassuring with FY 2019 to 2023 revenues having compounded at around 20%. 9MFY24 performance has been very impressive with volumes up 47% at 15 million cases, total income up 62% at 901 cr, Ebitda up 48% at 110 cr, PAT up 50% at 67 cr. As per recent interviews, management aspires to almost double its topline in two years to 2000 cr reaching market share of 10%. Promoter holding has increased from 25% in Dec 2021 to 35% in Dec 2023. Management is desirous of taking it to over 50%.
As always there are a few ifs and buts. There had been an Income Tax raid on the company in Nov 2023 whose fallout is not yet known though management says there is no implication. Som had tried to do a QIP in Oct 2023 but had to abandon because of low participation. Finally, unlike UBL which is a well known MNC, its management track record is largely unknown.
At FY25 estimated EPS of Rs 12.50 it is trading PE of @ 25 with ROE of @ 18% which looks quite interesting provided the above unknowns are in order and the company is able to achieve its goals.