Globus Spirits Ltd Management Discussions

MACROECONOMIC SCENARIO

While the global economy has faced several shocks in recent years, it has managed to maintain a surprising level of resilience. The global inflation rate is being controlled without causing a recession throughout the world. The journey has been eventful due to the following reasons: a Russian-Ukraine war that triggered a global energy and food crisis, and a significant rise in inflation, followed by a global tightening of monetary policy. There was another conflict between Gaza and Israel which can be escalated further into the wider region. And, another headwind was due to ongoing hostilities in the Red Sea and disruptions in other key global trade routes, geopolitical risks remain high and container shipping costs have risen.

Outlook: In the wake of the recent conflict in the Middle East, as well as the Russian Federations invasion of Ukraine, geopolitical risks have risen, if tensions escalate, energy prices could rise, affecting global activity and inflation. The global economy is expected to slow further this year as a result of tight monetary policy, restrictive financial conditions, and weak global trade and investment.

The Indian economy was sturdy and continues to sustain the momentum achieved, touted as a sleeping giant, an untapped market, and a potential superpower, Indias economy is claiming its global prominence, and the economy is growing strong despite the World Economy showing uncertainty and weakness. The Indian consumption story is yet to play out which will be the next leg of growth. The International Monetary Fund estimates that in 2024, Indias economy is expected to grow by 6.8 per cent, and by 6.5 per cent in 2025, as domestic demand and the working-age population continue to grow. (Source: World Economic Outlook, International Monetary Fund : April 2024).

INDIAN SPIRITS INDUSTRY

The alcohol industry plays an important role in the national economy, generating jobs, income, and economic growth. India is one of the fastest-growing alcohol markets in the world, market is dominated by whisky followed by beer and wine. The countrys population is around 1.3 billion and the strong demographic profile that 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 the per capita alcohol consumption in India is set to boom. As we look to the future, the importance of the alcohol industry in India is poised to grow because of the demographic shift, the growth of the young, expanding middle class with increased purchasing power, rapid urbanization, changing consumer preferences, and a reduction in cultural barriers to drinking. A conducive operating environment for this sector can be fostered through constructive government policies.

In CY2023 Spirits grew by 12.1% over the last year; whereas wine was up by 18%, growth contributed by increased volumes of imported brands. The highest growth was witnessed by Beer and RTD segment of 38% each. Over the next five years, Indias alcoholic beverage market is projected to reach US$ 64 billion, ensuring its position as the fifth-largest contributor to global market revenues. As of 2021, the sector accounted for around 2% of the nominal GDP of the country, with a market size of $52.4 billion. AlcoBev is an important economic engine, making it essential that relevant stakeholders acknowledge and value its economic impact. (Source: International Spirits & Wines Association of India)

The Indian spirit industry has faced many disruptions in recent years, some of them are excise duty hikes across states, changes in route-to-market in some states, demonetization, Levy of Customs Duty on imports, Administration of national regulations, highway ban and GST implementation. Even after facing turbulent times, the industry is poised for strong growth as there are several tailwinds which will drive the demand for the coming years.

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

1. Prestige & Above or Premium Segment

2. Regular & Others or Value & Value Plus Segment

1. Prestige & Above or Premium Segment

Adapting comprehensive strategies and premiumizing their products are becoming increasingly important for beverage alcohol brands in the rapid evolution of the global travel retail landscape. Although IMIL caters to a large segment of the Indian population, it is expected that prices will rise and premiumization will become prevalent in the Indian Alcohol Industry. The focus is on product development and the efforts being aimed either at the top where margins are high or at the base where volumes are high. Also, showcasing new products, branding of shelf space in retail outlets and company outreach to its customers through multiple marketing initiatives so that it suits consumers preferences and the core focus is on brand recognition/brand recall.

Craft spirits have inspired curiosity and high interest among new-generation consumers. Every sip is a celebration of craftsmanship, where tradition meets innovation. Traditionally, brown spirits have dominated the premium segment in India, namely whisky, rum, and brandy. However, the share of white spirits like vodka and gin is picking up. – (source: Technopak Advisors). Based on Euromonitor International estimates, IMFL volume will reach 353 million cases in CY25.

Over the past few years, premium segment growth has slowed down significantly after experiencing rapid growth between 2001 and 2011.Volumes in the mass segment have declined, but growth in the premium segment has partially offset this. While 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.

2. Value and Value Plus Segment

In volume terms, the country liquor segment accounts for about a third of the alcoholic beverage market. A high acceptance rate in rural areas makes this segment very attractive to price-sensitive and lower-income consumers in India. (source: Technopak Advisors)

The Value segment 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). In this segment, growth will be driven by an increasing consumer base, increasing rural incomes and consumption, conversion from illicit/toddy to value segment, conducive regulations, and population growth. In the short run, the Value segment could benefit from lower discretionary incomes, which would push up the demand for lower priced liquor.

The illicit alcoholic beverage market is estimated to be worth Rs. 23,466 crores in 2019-20, according to FICCI. Though this number may have reduced since then, it would still be sizable representing a large opportunity for the industry. The State Governments play an important role in this conversion. As there is a significant potential revenue stream from excise taxes, it is important to organize the Value and Value Plus markets to prevent tragedies.

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
Taste Preference	Local fruit flavour dominated market, varies with states	North India - Whisky
		East India - Rum
		South India - Brandy & Rum
Point of Purchase	Mostly State Government Regulated vends (except for West Bengal and Haryana where distributor model also exists); 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 Rs 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 100-200 for 750 ml	Starts from ~ Rs 600 for 650 ml
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

Outlook

In light of the large number of young people in India, this industry has a great deal of potential for growth. It is likely that young adults will be the driving force for much of the expected and projected future demand for alcohol as they reach the legal drinking age and become more affluent. Rather than focusing on traditional marketing and storefronts, brand owners are focusing on online marketing to reach out to as many young people as possible. There is no doubt that the spirit industry is due for a growth phase, however in order to sustain that growth, it will require an ecosystem which is conducive to growth.

ETHANOL INDUSTRY

Ethanol production has resulted in a reduction in petrol or crude oil imports, saving foreign exchange and enhancing Indias energy security. It is the Government of Indias goal to blend 20% ethanol with petrol by 2025. It is estimated that by 2025, 1700 crore litres of ethanol production capacity will be required, assuming an operational efficiency of 80%. Ethanol interest subvention schemes have been implemented to facilitate the establishment and expansion of distilleries. The implementation of these policies has resulted in significant growth in the supply of ethanol to Oil Marketing Companies (OMCs) and increased blending percentages. Oil Marketing Companies (OMCs) released a tender for 825 crore liters of ethanol with a 15% blending target during the Ethanol Supply Year (ESY) 2023 - 24 (November to October).

BUSINESS OVERVIEW

As a company, we have focused on creating steady growth through the development of a well-established distillation business, as well as laying the foundations for growth in our consumer goods business.

The well-balanced consumer and manufacturing segment continues to generate healthy cash returns, which are deployed through growth investments in the Prestige & Above segment.

The Prestige & Above segment consists of niche segments and high-margin brands which we are building. Our overall volume in FY24 reached 3.8 lakh cases, marking an important milestone for us.

In Fiscal 2024, the consolidated Net Revenue (net of excise duty) of Rs 2,415 crore was higher by 15% year-on-year from Rs 2,109 crore in Fiscal 2023. EBITDA was at Rs 184 crore and Net Profit after Tax was at Rs 97 crore. This significant jump in topline can be attributed to the raw material inflation in grain cost, which the company was able to pass it on to its ENA customer base, also as OMCs had revised ethanol prices.

BUSINESS SEGMENTS

1. Manufacturing Segment

The manufacturing business revenue, comprising (a) Bulk alcohol manufacturing (b) Franchisee IMFL (third party bottling) and c) By-Products, was Rs 1,628 crore during Fiscal 2024 which was up by 17% YoY due to the companys resilient business model which allows them to pass on the raw material inflation in ENA. On 28th March 2024, commenced commercial production of additional capacity at two of our existing units located in Jharkhand and West Bengal. With this expansion, the capacity of the units was increased from 140 KLPD to 200 KLPD at Jharkhand and from 240 KLPD to 300 KLPD at West Bengal. The additional capacity will be used for various products including ENA and Ethanol. As one of the central pillars of your companys integrated strategy, bulk alcohol division is the heart and soul, the two core products in this division are: Extra Neutral Alcohol: To maintain a competitive advantage, we distribute high-quality Extra Neutral Alcohol to the other divisions. We were able to protect our margins in this challenging year when costs were high due to the natural hedge provided by ENA for the consumer business. In addition, as the prices were rising in FY24, the ENA that was not consumed internally could also be sold outside of the company at elevated spot prices, which helped to increase the top line.

Ethanol: Several structural changes that have been put into motion over the past few years are starting to play out and this is further strengthening our abilities as a team. Ethanol blending in India has reached 12% blending. Our participation in such government initiatives has given us the opportunity to ramp up our capacities in Jharkhand and West Bengal, and we will be able to capitalize on those opportunities in the years to come.

For Fiscal 2024, bulk alcohol sales for your Company were ~208 million bulk litres as compared to ~182 million bulk litres in Fiscal 2023, the capacity utilisation was at 90%. The bulk realisations at ~Rs 63 per litre in Fiscal 2024 as against ~Rs 59 per litre in Fiscal 2023, underscores the structural shift that has played out and the high raw material inflation scenario witnessed in the current year.

Franchisee Bottling: Our bottling operations was at 2.7 million cases as opposed to 3.0 million cases bottled in FY23. Your Company has bottling contracts with United Spirits in the states of Haryana and West Bengal to manufacture their flagship brands and with Bacardi in West Bengal. It is through the companys strong management, deepened relationships, and captive high-quality Extra Neutral Alcohol (ENA) that your company can provide unmatched value to top companies in the IMFL industry.

By-products: Our other products, that is, Animal Feed have been a strong focus area for the Company. The By-product segment contributed about 11% to the Total Income in Fiscal 2024. AFS remains a promising market prospect, but due to its linkage to soya, an agricultural commodity, prices are volatile.

2. Consumer Business

The consumer business revenue, comprising largely of Regular & Others (IMIL) and Prestige & Above (IMFL), has shown strong performance in Fiscal 2024 and grew by ~9% year-on-year to reach Rs 787 crore from Rs 721 crore in Fiscal 2023, on the back of higher volumes and better product mix. As a company, we have made efforts to invest in human capital which is extremely important in the consumer business to allow us to understand the consumers taste preference and allow us to enter the new segments we want to expand into and prosper in. So, to drive this we have a completely dedicated innovation team to gain traction in the Prestige & Above Segment:

Prestige & Above (IMFL) Segment

Under your Prestige & Above segment, the company has been building a strong portfolio of brands, with an established presence in Pondicherry, Karnataka, Telangana, Andhra Pradesh, West Bengal, Chhattisgarh, Odisha, Maharashtra, Goa Haryana, Uttar Pradesh and Delhi market. Currently, your company is seeking both organic and inorganic growth opportunities, which means we will be adding more brands to the portfolio as well as strengthening the ones that are already here. We are confident about our product range and will be focused towards the journey of premiumization by targeting new geographies. As Indias preferred drink is Whisky, there are good growth prospects in the market, the size of the semi-premium whisky segment is almost 50 million cases, whereas premium whisky is almost 15 million cases and super premium whisky is almost 2 million cases annually.

There are two crucial highlights we would like to highlight, we are foraying into the Ready-to-Drink (RTD) segment with the formation of a subsidiary in M/s Bored Beverages Pvt. There is a strategic alignment as well as a thrilling journey that will cater to the changing preferences of consumers of today as well as tomorrow in a way that will engage them. Indias RTD market volume is projected to grow from 3.82 Cr litres in FY20 to 6.56 Cr litres by FY25. Apart from this, recently announced a Joint Venture partnership with ANSA McAL Ltd, a diverse conglomerate with a rich Caribbean heritage, the primary objective of this venture is to engage in the manufacturing, sourcing, and distribution of beer in India, with the initial focus placed on introducing the world-renowned Carib? beer brand to the Indian market.

As we strive to provide premium quality products, we are focusing on ensuring our commitment to excellence and customer satisfaction. The driving force behind our premiumization journey is creating a positive and memorable experience for our customers.

Regular & Others Segment

It is a segment that has been undergoing a transformation due to an increase in income in the rural and semi-urban markets driving a change in demand. Despite the challenging year, we have been able to post solid growth in this segment and maintain our market leader position in Rajasthan, even though the industry has witnessed a degrowth. In Rajasthan under RML, the Companys market share is maintained at almost 57% on the back of strong consumer acceptance and preference. It is clear that consumers are ready to move from a cheaper product to a more expensive product and will be ready to upgrade for a better (or you can say a premium) product at a higher price point. The consolidated Value and Value Plus segment sales stood at ~14.16 million cases in Fiscal 2024 as against ~14.06 million cases in Fiscal 2023.

Expansion Plan

Your Company plans to expand in those areas that continue to remain deficit in ENA for beverage and Ethanol for petrol blending. Eventually, the company plans to target the consumer segment in that state after establishing itself in the manufacturing business. In Q4FY24 enhanced the capacity by 60 KLPD at West Bengal & Jharkhand. In Q1FY25 Bottling Capacity in Uttar Pradesh - Commenced commercial production with a bottling capacity of 25,000 cases per line per month.

Financial Highlights

Net Revenues at Rs 2,415 Crores, up by 15% y-o-y.

EBITDA at Rs 184 Crores down by 27%, with EBITDA margin of 7.6%.

PAT at Rs 97 Crores, down by 21% with margin of 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 2024, the employee (excluding casual) count for the company stood at 908 compared to 892 on 31st March 2023.

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