G M Breweries..are we ignoring its potential?


(sachit) #70

Hi all,
does anyone know why receivables and inventory figures of this company are consistently so low? Seems like an outlier for a heavily taxed industry like liquor


(Dinesh Sairam) #71

I don’t think taxing has anything to do with inventory levels for any industry. But you are right in the sense that GMB has lower levels of inventory compared to the broader Breweries industry.

GMB is a cash and carry business. The regular GMB customers are people like this;

Not this:

pub-1

They don’t maintain lots of inventory because they don’t have to. They produce according to immediate demand and everything gets sold on a cash basis.


(sachit) #72

I’m not sure about the broader liquor industry but I know for a fact that the brewery industry shows its inventory inclusive of excise duty charges (as per law). I used to audit some brewery clients. In case regulations have changed in the last 3 years I’m not sure.

Also, No matter how low the inventory will be, there needs to be some especially as the company purchases ENA. Packaging and bottling material as well as store and spare parts and other nominal things like diesel fuel alone would be significant. These companies normally maintain 15-20 days of inventory in order to avoid stock outs.

Also, receivables, of the company should ideally be inclusive of excise duty and other taxes which can range from 100-300% of the total sale value as when they sell their cases wholesalers and distributors, it needs to recover its taxes already paid upfront.


(Dinesh Sairam) #73

GMB’s Accounting Policy states how they record inventories:

Here’s the Excise Duty outgo of the company:

And here’s the amount they can offset:

They also mention the following vide recognition of Excise Duty:

So, what I understand is that GMB recognizes Excise Duty related offsets only when the goods are sold. If there’s any gap in my understanding, please let me know.


(Bheeshma Sanghani, PhD) #74

image

GMB has come up with a stable set of results. While quarterly results are variable due to raw material fluctuations, the yearly results are stable and quite good. The average ROE is 25% for 2019, which is excellent. The margins are great and have remained virtually unchanged from last year. Operating margin is at 24% and Net Margin is at ~18% for the last 2 years.

The cons are the the co is stingy is sharing all the cash it generates with shareholders and instead has opted to have a lot of investments on the balance sheet. This could be a cause for concern for some shareholders but i have chosen to live with it and have a smaller allocation of my portfolio to GMB.

The gross operating assets are roughly 1/4th of the balance sheet only. It has a very small operating balance sheet. The balance sheet is strong and there is no way the co is going to run into any financial trouble.

As far as inventory is concerned excise duty is to be netted off.

Best
Bheeshma


(jajushobhit) #75

It is surprising for a cash-rich, debt free, company which does not require any substantial capital to have an average five-year dividend payout ratio of ~8%. About 25% of market cap and 60% of net-worth is locked in investments. Why does it need capital as capacity utilization levels are low with no capacity expansion, acquisition planned, these questions worry me.It is earning about ~7% return on about 60% of net worth. Despite that the overall ROE is close to 25%. What kind of capital allocation is this? Why will a promoter settle for ~25% ROE if they can generate ROE of ~50% by just getting rid of excess cash, unless he does not want to share the pie with shareholders. Had they been returning about 70-75% of profits for shareholders, I would have immediately taken a large position in the stock. Having said that, I trust their sales, the near monopoly status in Maharashtra. Every time I go to a wine shop about 60% of the crowd will be buying IMIL and of which 80% will buy GM. The questions around capital allocation are not letting me buy this.
SJ
Disclosure: No investment


(Bheeshma Sanghani, PhD) #76

Hi @jajushobhit

Not sure about their reach in entire Maharashtra. I think their monopoly status is in thane and surroundings.

This article read with the 2016 AR - suggests its market share in country liquor market of Maharashtra is ~27%. About 24.08 crore bulk liters of country alcohol were consumed in 2016. GM produced 6.35 core bulk liters in 2016. This amount to about 27% share by volume. GM also contributed ~900 crores to state excise from the 3000 crore contributed by the total country liquor industry, which also amounts to about 30% share in state excise. It would be fair to say that GM has about 1/4th to 1/3rd share in the country liquor industry making it quite dominant but not a state wide monopoly

While it would be nice if they could distribute more the shareholders. I think they have been fairly consistent in their distribution of cash. They haven’t skipped a dividend since the last 15-16 years. Dividend per share has not gone down. They have been giving bonus shares every 2 years since 2014.

The sense I get that within the liquor universe, its a fairly stable company with a fairly good long term track record of creating shareholder wealth.

As you pointed out, they could certainly do more with the cash they have and there is always a risk that there is something unpleasant going on behind the scenes that we are unaware of. These are unknowables and prevent one from taking a large position.

Best
Bheeshma