Globus Spirits Ltd Management Discussions.

MACROECONOMIC SCENARIO

With the second wave impacting several countries, global economic prospects remain uncertain even as economies began opening one year into the pandemic. Economic recoveries are diverging across countries and sectors, reflecting variation in pandemic-led disruptions and the extent of policy support that is being provided by national and local governments.

While the Indian economy witnessed disruption amid Covid-19 pandemic in line with global economies which caused an 8% contraction in 2020, India witnessed a stronger than expected recovery compared to other emerging markets. According to IMF, the Indian economy is expected to grow at 12.5% in 2021. With most high-frequency indicators continuing to strengthen in Fiscal 2021, the economic recovery that commenced after the opening of the economy is expected to strengthen further in FY22 (Source: https://www.ibef. org/economy/monthly-economic-report).

INDIAN SPIRITS INDUSTRY

The Indian spirits industry holds great potential in India with its 1.3 billion population that is the demographic sweet spot for the consumer industry. With one of the youngest population make-ups in the world with ~50 % of its population below the age of 25; and ~65% of the population below the age of 35, coupled with rapid urbanization that is expected to enhance disposable income, the Indian Spirits Industry is set for a strong growth path.

The Indian Spirits industry consists of two distinctive markets differentiated based on target audience, product characteristics and distribution network:

1. Indian Made Indian Liquor (IMIL)

2. Indian Made Foreign Liquor (IMFL)

Parameter IMIL IMFL
Likely Consumer Segment differs in size and status Socio-economic D, comprising ~40% of population excluding below poverty line population More affluent, socioeconomic sections C and upwards
Growth is more in sync with population growth ~11% CAGR** for households with Household Premium ness Index (HPI) * between 6-10 (~SEC D) Local fruit flavour dominated market, varies with states Higher growth in IMFL with increasing affluence in India: e.g., ~14%+ CAGR for households with HPI >10 (SEC C+) North India - Whisky
Taste Preference East India - Rum
South India - Brandy & Rum
Point of Purchase State Government Regulated vends; Banned in Southern India, apart from dry states Standalone retail outlets, department stores and Government owned shops in some states like Delhi
Excise Control Highly regulated: Distillery must for selling in the state of sale Excise of 15 per Proof Litre Less restricted than IMIL, but higher excise duties of minimum of Rs.40 per Proof Litre
Alcohol Content ~30% on average Earlier made from Rectified Spirits, now increasingly trending towards ENA 42.8% IMFL is made from ENA (higher purity 96%)
Min Retail Price Rs.30-40 per nip (smallest size) Starts from Rs.80 per nip (economy brands)
Brand Loyalty Low with high distributor power and price sensitive consumer; now changing in line with increasing brand consciousness High with multiplicity of purchase options and more affluent consumer

The Indian market is shaping into an hourglass shaped market with product development efforts being aimed either at the top where margins are high or at the base where volumes are high, backed with high growth as well.

IMIL Industry

IMIL is evolving from a restricted quota-based, commoditized market to a consumer driven brand based industry. The main attractiveness of this market lies in its sizable base, comprising

SEC-D and below which could translate into ~40% of total population (excluding Below Poverty Line).

The growth in this segment is expected to be driven by growing consumer base, rising rural incomes and consumption, conversion from illicit/ toddy to IMIL with increasing awareness about health and quality, conducive regulatory policies and aided by growth in population. In the short run, the IMIL industry could benefit from lower discretionary incomes, which would push up the demand for lower priced liquor.

WHO, in 2010, estimated the illicit and unreported segment at ~75% of the reported market. Though this percentage may have reduced since then, it would still be sizable representing a large opportunity for the IMIL industry. The State Governments are expected to play an important role in this conversion. While they are developing the organized IMIL market to prevent hooch tragedies, the excise revenue potential is also significant.

IMFL Industry

After experiencing rapid growth during 2001 to 2011 period, growth in the IMFL segment slowed down significantly and has been flat for the last few years. The mass segment has borne the brunt with volumes declining though this has been partly offset by growth in the premium segment.

Nonetheless, the market at present is still dominated by strong national brands at low price points. The 300+ million cases market is undergoing a transformation with newer entrants, challenging the traditional labels and more so in the higher price points. There are high potential niche opportunities that are emerging in the space.

Covid-19 impact and subsequent recovery

The Covid-19 pandemic has rendered the last fiscal as a challenging and unprecedented year, for most industries. For the alcohol beverage industry, it has meant that key consumption events such as celebrations have gone down, restaurants, pubs and bars have been shut and demand for alcohol from these centres has seen a downward trend. However, there has been an uptick and compensatory demand that has been flowing from in-home consumption leading to increased sales through shops and home deliveries. While this has been playing out largely in urban areas and metros, rural India, Tier II and Tier III cities - have been leading the charge in bringing the economy back on its feet.

Over the past year, there has been a recalibration of levies on alcohol as a lot of state governments turned to ad-hoc charges being implemented. States that imposed the "corona-cess" on liquor in May 2020 to compensate for the revenue deficit during Covid-19 lockdown saw sale of alcohol plummeting by more than half during the relaxation phase. The following table summarises some of the actions taken by the states:

State Rate hike during Covid-19 Recent Development
Rajasthan Delhi 10% increase in excise duty on IMFL 70% Covid Cess on MRP Withdrew the hike but only for beer Rolled back 70% covid cess & increased VAT by 5%
Karnataka 11% increase in excise duty
Andhra Pradesh 75% increase in excise duty Reduced by 2-30%
Telangana 15% Covid Cess on MRP
West Bengal 30% additional sales tax Reduced to 15%
Odisha 30% Covid Cess on MRP
Punjab Additional excise of Rs.10 per bottle
Tamil Nadu 15% increase in excise duty
Kerala 35% Covid Cess on IMFL
Assam & Meghalaya 25% increase in excise duty Withdrew the hike
Uttar Pradesh Hike of Rs.5 to Rs.400 depending upon type and size
Jammu & Kashmir 50% increase in excise duty Withdrew the hike
Goa 20% increase in excise duty

BUSINESS OVERVIEW

In Fiscal 2021, despite the pandemic, the consolidated Net Revenue (net of excise duty) of Rs.1,230.7 crore was higher by 5.3% year-on-year from Rs.1,168.8 crore in Fiscal 2020. Profitability improved phenomenally with EBITDA almost doubling to Rs.261 crore from Rs.128 crore in Fiscal 2020 and

Net Profit after Tax rose almost 3x to Rs.140.8 crore from Rs.49.7 crore in Fiscal 2020. This significant jump can be attributed to a higher share of consumer business, better realisations on bulk alcohol, lower finance costs on account of paring of debt, lower tax rate on account of ATIA deduction and MAT credit and other cost rationalisation measures that your Company undertook. This performance was achieved despite the pandemic led restrictions in the initial period as well as the floods in Bihar.

BUSINESS SEGMENTS

Manufacturing Segment

The manufacturing business revenue, comprising (a) Bulk alcohol manufacturing (b) Franchisee IMFL (third party bottling) and c) By-Products, was Rs.702 crore during Fiscal 2021. Manufacturing revenues were impacted by lower production of bulk alcohol due to Covid-19 and flood disruptions in Bihar, combined with higher captive requirements for the consumer business.

 

Bulk Alcohol: The bulk alcohol division is the backbone of your companys 360 business model and provides high quality Extra Neutral Alcohol to the other divisions, ensuring a sustainable competitive advantage. Several structural changes that were set in motion over the past few years are beginning to play out and this is further strengthening our play. Ethanol blending in India has reached more than 7.2 per cent — the first time it has reached this level — in the first four months of the ethanol supply year 2020-21 (December to November), putting the country on course to meet the target of 10 per cent blending by 2022.

For the Fiscal 2021, bulk alcohol sales for your Company were 103 million bulk litres as compared to 110 million bulk litres in Fiscal 2020. Despite the impact of Covid-19 in the initial part of the fiscal and disruptions due to floods in Bihar, the capacity utilisation was at 86%. Of the total production, ~25% of the production was used for value added products, i.e., consumer business and franchisee bottling, balance remaining thereafter being sold externally. The bulk realisations at Rs.53.2 per litre in Fiscal 2021 as against Rs.52.5 per litre in Fiscal 2020, underscores the structural shift that has played out.

 

Franchisee Bottling: With the dine-in segment and hotel sales impacted, our bottling operations saw a subdued year with 2.8 million cases as opposed to 4 million cases bottled in FY20. Your Company has bottling contracts with ABD India in the state of Rajasthan and with United Spirits in the states of Haryana and West Bengal to manufacture their flagship brands. Your companys strong management, deepened relations backed by captive high quality Extra Neutral Alcohol (ENA) gives unmatched value to top IMFL companies.

 

By-products: Our other products, that is, Animal Feed Supplements (AFS), and Hand Sanitisers has been a

 CO2

strong focus area for the Company. The By-product segment contributed about 11% to the Total Income. The market prospects for AFS remain promising though prices are volatile due to linkage to soya which is an agricultural commodity.

Consumer Business

The consumer business revenue, comprising largely of Value segment (IMIL) and Premium Segment (IMFL), has shown strong performance in Fiscal 2021 and grew by ~26% year-on-year to reach Rs.529 crore from Rs.421 crore in Fiscal 2020, on the back of higher volumes and better product mix.

 

Value Segment

This segment has seen itself morph on the back of changing demand due to increase in income in the rural and semi urban markets. As a strong player in this segment and a market leader in some, we have been able to post strong growth even during these challenging times. Rajasthan which comprised almost

70% of volumes in Fiscal 2021, witnessed strong growth on the back of continued demand and increasing acceptance and demand for our medium liquor product which helped lead to growth despite the pandemic headwinds. Haryana volumes picked up and helped us gain almost 2% points in market share on the back of state Government efforts to streamline the liquor trade in the state. West Bengal continues to grow with minor hiccups due to change in excise policy which saw decline in volumes. Your company re-entered the Delhi market in the second half of Fiscal 2021 on a small scale. The consolidated value segment sale stood at 12.3 million cases in Fiscal 2021 as against 11.0 million cases in Fiscal 2020.

 

Premium Segment

Your Company has been working on building a strong portfolio of brands under Unibev Limited, a subsidiary company which is in the process of being merged with Globus Spirits Limited. With an established presence in Pondicherry, Karnataka, Telangana, Andhra in the South and West Bengal, Chhattisgarh, Odisha in the Middle and the East, and Maharashtra, Goa in the West, your Company is hopeful of reviving expansion strategies in the forthcoming year. In wake of a challenging trading environment, your company ensured prudent steps by calibrating investments for expansion based on the regional scenarios. Our product launch of Seventh Heaven blended with up to 21-Year-Old Scotch is on track and this will be introduced in premium outlets in select states.

Unibev operates on an asset-light model with contract manufacturing arrangements. The size of the semi premium whisky segment is 20 million cases, whereas premium whisky is 8.5 million cases and super premium whisky is 1 million cases annually. The segments present a significant opportunity for growth.

Expansion Plan

Your Company plans to expand in those areas that continue to remain deficit in ENA for beverage and Ethanol for petrol blending.

Our upcoming facility in West Bengal with a capacity of 140-kilo litre per day capacity plant is a brownfield expansion with an estimated capex of 1,100 Million that is expected to come online in the third quarter of Fiscal 2022.

The debottlenecking of the Rajasthan Plant from 140 kilo litre per day to 160 kilo litre per day sets us up for strong success in the forthcoming years

Planning to expand the Bihar plant capacity by ~ 140 kilo litre per day

Also planning a greenfield expansion in the state of Jharkhand

Your Company is evaluating expansion in other states as well.

Financial Highlights

Net Revenues at 1,231 Crores, up by 5.3% y-o-y

EBITDA at 261 Crores with EBITDA margin of 21.1%

PAT at 141 Crores, with margin of 11.4 %

Environmental Compliance

Your Company is a zero-wastewater discharge company. We care for the environment as we believe in the philosophy of sustainable development. Air pollution is controlled through the installation of relevant control devices like ESPs which help in bringing air discharge to within permissible limit. Following are the steps we have undertaken in the new expanded capacity:

Air Pollution

a) Step forward to achieving zero discharge (explained below)

b) Air Pollution control through installation of the relevant Control devices with ESPs

c) Air pollution control through collection, purification, and sale of CO2. All Carbon dioxide generated in fermentation shall be collected purified and sold to buyers including soft drink manufacturers and others thus abating air pollution.

d) Proper disposal of all effluent related products such as spent grain and fly ash. Spent Grain shall be sold as cattle feed (see below) and fly ash/ash disposed off for land fill or for brick making.

Details of Zero Discharge – Liquid Discharges

Achieved through the following steps:

1. Separation of spent grain from spent wash: The spent wash emerging from distillation (waste) would be passed through suitable equipment for the separation of spent grain.

2. Evaporation of Spent Wash: The lean spent wash would then be evaporated and concentrated to syrup in an evaporator specially put for the purpose which is integrated with the Distillation plant. This would be required to enable its drying later.

3. Mixing the concentrated spent wash with spent grain: The syrup spent wash and the spent grain obtained would be mixed to form Wet Grain which can be disposed as cattle feed.

4. Drying the same to powder: To improve on the quality of the Wet grain produced above the same would be dried and sold as dried cattle feed.

Water Management

1. All water re-circulated to process with or without treatment thus no discharge of any water stream.

2. Surplus water used in make ups or in the boiler and cooling towers after treatment.

3. Condensate from process reused in the boiler as boiler feed water.

4. Condensate from evaporator reused in the process after treatment.

5. All cooling water is through recirculation.

6. All bottle washing water reused after treatment in the process or used for horticulture.

Thus, achievement of zero discharge on all streams as per requirement of the Pollution Boards

R&D Activities in Globus (Technology)

a) Higher efficiencies of conversion: The expansion was done with the state-of-the-art latest technologies to get the best conversions to alcohol at the highest efficiencies. This would be in line with the best practices being followed. We are also working on improving conversions not only of starch but also to alcohol with new strain enzymes and yeasts.

b) Improving Distillation techniques and translating that to the plant in the expansion – Multi-pressure: To improve both on quality and energy consumption the distillation plant shall be of the multi-pressure design which would give us the benefit of both. The quality would be matched with the best alcohol available in the country.

c) Looking at alternate disposals of spent grain: To keep in line with the requirements of government regulations we would look at the waste as cost centre and are looking at alternative markets in the cattle feed segment for its best disposal at the best price. Branding of the product is also being examined.

d) Looking at better blends as final product diversification: With better quality alcohol available we are moving to higher segments in the potable alcohol sector with better blends and brands and would be launching further brands in the future to build our market.

Risk Management

The nature of our business is such that it is subject to certain risks at different points of time. Some of these include escalation in the cost of raw materials and other inputs, increasing competitive intensity from other players, changes in regulation from central and state governments, changes in supplier-distributor relationship, labour shortage. Your company has always had a proactive approach when it comes to risk management where it periodically reviews the risks and strives to develop appropriate risk mitigation measures for the same. To enhance this focus, your company has formed a Risk Management Committee to frame, implement and monitor risk management plan.

Internal Control Systems

Your Company has ensured that stringent and comprehensive controls are put in place to ensure the optimal and efficient utilization of resources and to ensure safety and protection of all assets from unauthorized use. An extensive program of internal, external audits along with periodic reviews by the management is carried out to ensure compliance with the best practices.

Human Capital Overview

Your Company considers human capital a core area for sustainable growth and has been making conscious efforts to engage and develop human capital at all levels. The Human Resource Department of your Company is highly focused on enhancing stakeholder value by ensuring a fit between the management of an organizations employees, and the overall strategic direction of the company. Over the years your company has been able to build a team of qualified, dedicated & motivated professionals. The working atmosphere provided to the employees is aimed at creating a sense of ownership which helps them to shoulder greater responsibilities. As on 31st March 2021, the employee (excluding casual) count for the company stood at 568 compared to 519 on 31st March 2020.

Disclaimer

Certain statements in this MDA may be forward looking within the meaning of applicable laws and regulations. Actual results may differ from those expressed or implied. Important developments that could affect the Companys operations include a downtrend in domestic industry, significant changes in the political environment, changes in tax laws & excise duties, litigation, and labour relations.