ASSOCIATED ALCOHOLS & BREWERIES LTD - doubts regarding the transparency

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Promoters are merging this company into their unlisted company (Mount Everest Breweries Limited) which is into Beer manufacturing. Board has approved this merger. Now they will seek all approvals from various regulatory authorities.

I am bit skeptical about this transaction since there is not much information in the public domain. If anyone has any details, please share.

Disc: Invested

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In the past, I had studied AABL and I will write based on that. Over a long run, the ticker has done quite well 40% CAGR. But, Several red flags for me

  1. There was never a solid case for how they could expand out of MP. Liquor being a govt. Regulated industry, barriers to open in New states are no trivial. Thus, long term, the most likely case is a 7% state gdp growth at best. They had some hits in kerala etc which later seemed to fizzle out. Their stated volume expansions kept getting delayed or suddenly revised downwards.
    Having one large integrated distillery into really great considering cross border alchohol transfer and ena/ethanol being out of gst ambit.
  2. Dr. Vijay malik has a thorough study going back many years which dredged up a lot of Corp governance issues. Remuneration to the Kedia’s, loans from AABL to MEBL, MEBL coming in as subsidiary and then moving out etc.
  3. Beer and spirits have different unit economics. United spirits and united breweries are separate entities for instance. Since broached the merger a few quarters back, AABL stopped quarterly earnings calls too, the case for merger is never clearly explained. It has been in the works for long.

Given this background, in my opinion, the prudent thing is to let the market price the combined entity and to see whether the claimed synergies are indeed coming through.

Disclosure - I am an IDIOT, please treat this as no more than the rants of a drunken sailor.
I am not invested. This is NOT a recommendation.

4 Likes
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This is clearly a situation where the interests of minority shareholders are being sidelines.
A few things that caught my attention:

  1. During Q2, OPM of Associated came down drastically (nearly 7%) (I say drastically because one of the reasons Associated catches most people’s attention is the consistency in their margins) and during the same timeframe margins of Mount Everest were significantly higher. The reasons given by mgt. in the concall were raw material price pressures and energy prices, but the obvious thesis is the same should have been effected Mount Everest OPM as well which is not the case. I personally think they just did this to extrapolate the good margins of Mount Everest whilst valuing for the purpose of merger.
  2. Whenever they are asked about the reasoning for the swap ratio, all they say is the fact that they will have huge synergies due to a single shop for both liquor and beers. No solid mathematics behind it. They just keep saying a reputed valuer has done it.
  3. As per AR 21, investment in MEBL was valued in the books of Associated at 128 per share, in AR 22 it was valued at 225 per share and now for the merger at 650 per share! Makes sense? To me atleast it doesn’t!
  4. Overall it’s a scheme which completely kills the minority share holders and only benefits Kedia family since they are the promoters in both companies.
3 Likes
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As per audited figures on Care ratings report, Mount beverages had operating margins of just 4-5% in FY21 and FY22.

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Associated alcohol OPM have been hovering around 14-15 percent and this certainly looks quite contrary to the management claims (snippet below from the concall)
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Link to the report

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Announcement under Regulation 30 (LODR)-Award_of_Order_Receipt_of_Order
Announcement under Regulation 30 (LODR)-Award_of_Order_Receipt_of_Order.pdf (14.9 KB)

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Q3 FY24-

We have constantly solidified our preferences as critical players in Kerala and Madhya Pradesh. Further, we are delighted to note an increasing demand of our products in Delhi.

In line with our broader strategies to become a pan-India player , we actively target markets in Karnataka, Maharashtra and Goa. The company plans to form a subsidiary in Uttar Pradesh to expand its footprint domestically. The decision is driven by the state’s favorable incentives for manufacturing. We are in the early phase of acquiring land for the Greenfield project and are actively engaged.

we are confident that the plant will operate at full capacity from February 2024 onwards, the recent addition in anticipation to the yield meaningful revenue by FY25.

Notably, a slight margin pressure has been attributable to an increase in grain price. We expect this to continue in future as well . The price of other critical material has also remained at an elevated level.

Furthermore, industry shift has impacted our ENA sales, particularly prohibition of sugar syrup as an ethanol feedstock. In response to these industry headlines, we have deliberately decided to retain our stock, aligned with our commitment to maximize returns. We are optimistic that the market condition will soon be as favorable as most suitable stream

IMIL sales volume was stood at INR28.40 lakhs due to change in the policy of MP Government.

Ethanol OPM margins- 8%, 9%. including by-products.
So in the next financial year, we’ll be entering Maharashtra, Goa, Pondicherry and Karnataka, Assam and Pondicherry market. But now from April onwards, we will be available in Goa and Maharashtra for sure . And then we are looking at Karnataka, Pondy and Assam this financial year.
we already have booked 100% orders for Ethanol Plant. So that much supply is less so that the demand is more in the market.

So we have a multi-feedstock plan. Currently we are using maize. So we can maize, rice, sorghum or any other raw material which have a starch content. And plus we are strategically located in Indore so we can procure raw material from the neighbouring states which are either maize or rice-driven state. So that’s not an issue but overall the price of all the commodities are at elevated level. So currently all the commodities are moving in tandem.

Currently we are using maize since we are getting more benefit as compared to rice.

Using Maize to produce Ethanol. And if I do the math, you require about 2.85 kgs of maize to produce one litre of ethanol.This plant will generate 250-300cr in yearly basis FY25 and onwards.

Going towards premium Brands which will increase the margins in the future.(whole industry is going through Premium brands)

So see, Imran, what we have, so we have a third party, tri-party agreement with the solar power producers. So accordingly, we get a substantial lower power charges from the MPP. And they just charge the additional conveyance fee for supplying the power.

So that’s the advantage we have on the this thing. Plus, as far as boiler, we have a captive power sources as well. We have a turbine through which we generate our own power. So if we purchase a power from the grid, it will be costlier than what we are producing at our own end. So that’s why we have a benefit over the others. Right.

And there’s a huge opportunity now because of tourists and everybody coming and placing UP. Plus, apart from that, we need to have presence in, we are already present in central India and Madhya Pradesh. So, now to cater to the northeastern market, which has got great potential, we have planned to set up a plant in Uttar Pradesh. In that, we have planned to put in 100KL plant with a bottling unit.

So, post license approval, probably around 12 to 24 months, around 24 – 18 to 24 months, we can seal the plant up. Yes.

Investors asking to get new young promoters on concalls.

As per an investor, packing is not that good, if they improve packing then can command higher prices.(Jo dikhta h wo bikta h)