Tilaknagar Industries Ltd. Shareholding % 2Q 3Q 4Q Promoters 74.0 74.0 61.0 MF/Banks/Indian FIs 6.0 7.0 2.0 FII/ NRIs/ OCBs 0.0 0.0 8.0 Indian Public 20.0 19.0 29.0 KEY DATA Market Cap (INR bn) 5.2 Market Cap (USD mn) 115.8 52 WK High / Low 177/24 Avg Daily Volume (BSE) 128008 Face Value (INR) 10 BSE Sensex 17639 Nifty 5274 BSE Code 507205 NSE Code NA Reuters Code TILK.BO Bloomberg Code TLNGR IN Performance Chart CMP : INR 172 Rating : Buy Target : INR 232 Initiating Coverage Investment Summary Tilaknagar Industries Ltd (TI) is one of the leading players in the Indian alcoholic beverage industry and manufactures Indian Made Foreign Liquor (IMFL), with over 24 manufacturing units across India. The company has total 16 brands across a diverse range of price and product segments under its portfolio. The IMFL industry (worth USD 2 billion) is expected to grow at CAGR of 12.7% through FY10-FY15E period. We believe, TI is well-placed to tap opportunity in the rising Indian liquor market and expect company to post excellent performance through FY09-FY12E period. Capacity Expansion…to boost volume: In FY09, TI had total installed capacity of 50 KLPD of molasses based ENA. The company has successfully commissioned a new 50 KLPD molasses- based ENA plant and 100 KLPD grain-based ENA plant in Sept09 and Dec09 respectively. We believe that the company will get full benefit of expanded capacity in FY11E and FY12E. We expect total IMFL sales volume to increase by 53.3%, 105.9% and 22.9% YoY in FY10E, FY11E and FY12E respectively. We expect net sales to grow at CAGR of 59.7% through FY09-FY12E period. Healthy growth in IMFL industry: The IMFL segment constitutes 31% of the total Indian liquor market and is a 195 million cases industry. With nearly half of Indian population being young and at working age with rising disposable income, the IMFL segment is expected to grow at a CAGR of 12.7% through FY10-FY15E period. With restriction in direct advertising and strong brand loyalty among consumers, existing alcoholic beverage manufacturers with well-established brands are in sweet pot to exploit the ensuing growth in IMFL industry. Grain-based distillery…less dependence on single feedstock: Molasses is the key raw material for alcohol production. Although, molasses is available in abundant quantity for TI, its prices are volatile as they are subject to vagaries of cyclicality in sugar industry. With setting up of 100 KLPD grain based distilleries, the company has reduced its over-dependence on molasses as a feedstock. In addition, the Maharashtra govt will give INR 10/litre rebate on the excise-duty to the grain-based distilleries, resulting in subsidy of INR 250 million for TI (to be availed till Dec 2013). Margins to improve: Due to increase in sugarcane acreage, on the back of handsome prices paid by sugar mills in SY10, we expect sugarcane production to increase by 30-40% YoY in SY11. Molasses availability being directly linked to sugarcane production, we conservatively expect molasses price to decline by 2.0% YoY in FY11E and FY12E each. (Molasses accounts for ~50% of total raw material cost). Overall, we expect EBITDA margins to expand by 80 bps, 70 bps and 30 bps YoY to 19.3%, 20.0% and 20.3% YoY in FY10E, FY11E and FY12E respectively. Improvement in Return Ratios: With completion of all the major expansion plans in FY10, we expect return ratios to improve going forward. We expect RoE and RoCE to increase from 14.3% and 8.6% in FY09 to 25.7% and 16.5% in FY12E respectively. We also expect company to turn FCF positive in FY12E and debt-equity ratio to increase from 0.8x in FY09 to 1.4x in FY10E and then again decline to 0.9x in FY12E. Key Concerns: Unfavourable judgement in legal case against Dutch spirit company UTO Increase in key input prices Concentration of revenue in Southern Region Valuations: At the current price, the company is trading at 8.4x and 6.2x FY11E and FY12E earnings and 5.7x and 4.3x FY11E and FY12E EV/EBITDA respectively. We initiate coverage on the company with BUY recommendation and price target of INR 232 (average of target FY12E EV/EBITDA of 5.5x and FY12E P/E of 8.0x). Sunny Agrawal Analyst Tel. : 4000 2667 [email protected]April 16, 2010 For Private Circulation Only FINQUEST research also available on BLOOMBERG FSPL <GO> and REUTERS. Financials F09 F10E* F11E (INR Mn.) Net Sales 2369.7 4108.6 7631.1 EBITDA 437.2 792.9 1527.1 EPS 19.1 10.4 20.6 P/E 9.0 16.5 8.4 * Issued Bonus in ratio of 2:1 and accounted for conversion of all CCPS and Warrants issued till FY10E end
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Tilaknagar Industries Ltd.
Shareholding % 2Q 3Q 4Q
Promoters 74.0 74.0 61.0
MF/Banks/Indian FIs 6.0 7.0 2.0
FII/ NRIs/ OCBs 0.0 0.0 8.0
Indian Public 20.0 19.0 29.0
KEY DATA
Market Cap (INR bn) 5.2
Market Cap (USD mn) 115.8
52 WK High / Low 177/24
Avg Daily Volume (BSE) 128008
Face Value (INR) 10
BSE Sensex 17639
Nifty 5274
BSE Code 507205
NSE Code NA
Reuters Code TILK.BO
Bloomberg Code TLNGR IN
Performance Chart
CMP : INR 172Rating : BuyTarget : INR 232
Initiating Coverage
Investment Summary
Tilaknagar Industries Ltd (TI) is one of the leading players in the Indian alcoholic beverageindustry and manufactures Indian Made Foreign Liquor (IMFL), with over 24 manufacturingunits across India. The company has total 16 brands across a diverse range of price and productsegments under its portfolio. The IMFL industry (worth USD 2 billion) is expected to grow atCAGR of 12.7% through FY10-FY15E period. We believe, TI is well-placed to tap opportunityin the rising Indian liquor market and expect company to post excellent performance throughFY09-FY12E period.
Capacity Expansion…to boost volume: In FY09, TI had total installed capacity of 50 KLPD ofmolasses based ENA. The company has successfully commissioned a new 50 KLPD molasses-based ENA plant and 100 KLPD grain-based ENA plant in Sept09 and Dec09 respectively. Webelieve that the company will get full benefit of expanded capacity in FY11E and FY12E. Weexpect total IMFL sales volume to increase by 53.3%, 105.9% and 22.9% YoY in FY10E, FY11Eand FY12E respectively. We expect net sales to grow at CAGR of 59.7% through FY09-FY12Eperiod.
Healthy growth in IMFL industry: The IMFL segment constitutes 31% of the total Indian liquormarket and is a 195 million cases industry. With nearly half of Indian population being youngand at working age with rising disposable income, the IMFL segment is expected to grow at aCAGR of 12.7% through FY10-FY15E period. With restriction in direct advertising and strongbrand loyalty among consumers, existing alcoholic beverage manufacturers with well-establishedbrands are in sweet pot to exploit the ensuing growth in IMFL industry.
Grain-based distillery…less dependence on single feedstock: Molasses is the key raw materialfor alcohol production. Although, molasses is available in abundant quantity for TI, its pricesare volatile as they are subject to vagaries of cyclicality in sugar industry. With setting up of 100KLPD grain based distilleries, the company has reduced its over-dependence on molasses as afeedstock. In addition, the Maharashtra govt will give INR 10/litre rebate on the excise-duty tothe grain-based distilleries, resulting in subsidy of INR 250 million for TI (to be availed till Dec2013).
Margins to improve: Due to increase in sugarcane acreage, on the back of handsome pricespaid by sugar mills in SY10, we expect sugarcane production to increase by 30-40% YoY inSY11. Molasses availability being directly linked to sugarcane production, we conservativelyexpect molasses price to decline by 2.0% YoY in FY11E and FY12E each. (Molasses accountsfor ~50% of total raw material cost). Overall, we expect EBITDA margins to expand by 80 bps,70 bps and 30 bps YoY to 19.3%, 20.0% and 20.3% YoY in FY10E, FY11E and FY12Erespectively.
Improvement in Return Ratios: With completion of all the major expansion plans in FY10, weexpect return ratios to improve going forward. We expect RoE and RoCE to increase from14.3% and 8.6% in FY09 to 25.7% and 16.5% in FY12E respectively. We also expect companyto turn FCF positive in FY12E and debt-equity ratio to increase from 0.8x in FY09 to 1.4x inFY10E and then again decline to 0.9x in FY12E.
Key Concerns:
Unfavourable judgement in legal case against Dutch spirit company UTO
Increase in key input prices
Concentration of revenue in Southern Region
Valuations: At the current price, the company is trading at 8.4x and 6.2x FY11E and FY12Eearnings and 5.7x and 4.3x FY11E and FY12E EV/EBITDA respectively. We initiate coverageon the company with BUY recommendation and price target of INR 232 (average of targetFY12E EV/EBITDA of 5.5x and FY12E P/E of 8.0x).
Profitability/Solvency Ratios (%)EBITDA Margin 18.5 19.3 20.0 20.3ROCE 8.6 7.8 12.6 16.5ROE 14.3 15.9 24.8 25.7Debt to Equity 84.3 141.9 130.4 86.0Interest Coverage Ratio 411.4 339.6 416.7 488.2* Issued Bonus in ratio of 2:1 and accounted for conversion of all CCPS and Warrants issued till FY10E end
Company Description
TI is one of the leading players in the Indian
alcoholic beverage industry and manufactures
Indian Made Foreign Liquor (IMFL), with over
16 brands across a diverse range of price and
product segments. TI's primary manufacturing
facility is located in at Shrirampur, Maharashtra.
Currently, the company has 100 KLPD molasses
based and 100 KLPD grain based distillery. The
company commands 4% of domestic IMFL
market.
www.tilind.com
Sector
Alcoholic Beverage
Key Management Personnel
Mr. Amit Dahanukar
MD & Chairman
Mrs. Shivani A Dahanukar
Executive Director
Mr. Lalit Sethi
CFO
PRICE PERFORMANCE (%)
3 M 6 M 12 M
Absolute 1.8 3.4 62.5
Relative (55.9) (129.7) (378.0)
Valuation Thesis
At CMP, the company is trading at 8.4x and 6.2x
FY11E and FY12E earnings and 5.7x and 4.3x
FY11E and FY12E EV/EBITDA respectively. We
recommend BUY rating with price target of INR
232 (average of target FY12E EV/EBITDA of 5.5x
and FY12E P/E of 8.0x).
Financial Summary
For Private Circulation OnlyApril 16, 2010 3
Investment Rationale
Capacity Expansion…To Boost Volume
Capacity Expansion…
Tilaknagar Industries Ltd (TI) is one of the leading players in the Indian alcoholic beverage industryand is in business of manufacturing, marketing and selling of Indian Made Foreign Liquor (IMFL)comprising of Brandy, Whisky, Gin, Vodka and Rum. In FY09, TI had total installed capacity of 50KLPD of molasses based ENA. The mainstay manufacturing hub of TI is located at Shrirampur,Maharashtra on 253 acres of land. In Sept09, the company has successfully commissioned a newmolasses-based ENA plant of 50 KLPD at the same location. In addition, a grain-based ENA plant of100 KLPD has been commissioned in Dec09. Thus, the total ENA manufacturing capacity of the
company has increased by stellar 300% YoY to 200 KLPD.
Year-end ENA Installed Capacity
Source: Company, FQ Research
* 50 KLPD operational in Sept09 and 100 KLPD operational in Dec09
Asset light Business Model…
In addition to own manufacturing units, TI business model also includes manufacturing and sellingIMFL through Lease arrangement and Tie-up arrangement. TI has 7 lease arrangements and 21 tie-uparrangements across the country for carrying out manufacturing and bottling activities. In leasearrangement, TI can use all capacities installed of the lessee and pays the lease rentals against thesame. In tie-up arrangement, TI purchases the input materials as per its quality norms. The blenders ofTI are stationed at the bottling units to oversee the blending and bottling operations. The entire workingcapital of the tie-up units is funded by TI and the net receipts i.e. sales less excise duty, raw materialcost and bottling charges are transferred to TI books and classified as Income from Tie up units. InFY09, IMFL sales through tie-up units were 43% and the rest were through own and lease units. TI'sstrategy of expanding capacity through lease and tie-up units leads to asset light business model for
the company and also helps the company to serve the consumers through shortest lead distance.
* Issued Bonus in ratio of 2:1 and accounted for conversion of all CCPS and Warrantsissued till FY10E end
Standalone Financials
For Private Circulation OnlyApril 16, 2010 21
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