G M Breweries..are we ignoring its potential?

Stock Opportunities
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I would like to initiate conversation on a company called G. M .Breweries.It isis engaged in the activities of manufacturing and marketing of Alcoholic Beverages; such as Country Liquor (CL) and Indian made Foreign Liquor (IMFL).GM Breweries is in the Breweries & Distilleries sector. The current market capitalisation stands at Rs 110.57 crore.The company has reported a standalone sales of Rs 74.99 crore and a Net Profit of Rs 6.04 crore for the quarter ended Mar 2014.

The Market Cap of the Company is about 110 cr while Book value is about 122 cr.

The Company is trading at a PE multiple of 5.14 while the PE multiple of therelated industry is about 12 times more.

The Company has recently proposed 25 % dividend & will also consider issue if bonus shares.

The company has shown steady profit growth for last couple of years.

Debt is negligible.

Financial Results:last fin year

Gross Sales= 97,628.30 Rs .in Lacs

Net Sales= 28,864.04 Rs. in lacs

Profit before depreciation & taxation= 3721.86 Rs. in Lacs

Profit after taxation= 2,149.68 Rs. in Lacs

Add: Balance brought forward from previous year=3,245.23

Surplus available for appropriation= 5,394.91 Rs. in Lacs

The company shows high profit earn capability and most attractively valued with in its industry.

Quality of Management is not known;but promoter stake is quite high about 74%.

I do not see any reason why this Cash-rich & growing company should be available at this price.

To me it seems the stock is undervalued yet to realize its true potential.I differ with Mr. Market on this stock. :slight_smile:

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Dear Dibyn, Ive been reading about the company over the last 2 weeks and am glad to see someone post about it.The company has a market share (in country liquor) of about 25% in Maharashtra and almost monopoly in Mumbai and Pune (thats what they claim in their AR). They have about 50% capacity idle again as per their AR.

It comes up in almost every screener that I have but there were a couple of things that really put me off.

1). The company just used to surplus cash to make a property investment last year. This seemed bizarre given that their business is making and selling alcohol! If I was an aggressive promoter I would use the cash to market my brand and try to increase the reach of my brand by investing in distribution in areas where my presence is relatively lower. Why invest in a illiquid asset such as property? This clearly tells me the promoter is happy with where his company currently is, wants to play it safe and has little or no desire to grow his business.

2). The company’s sale’s have grown barely 75% in the last 10 odd years which is odd given that all other liquor companies have atleast quadrupled their sales during this period. Barring last year, their profits have remained almost flat in the last 10 years, which again tells me that the promoter is very content and not too focussed on growing the business!

For me there are much better “cheap” 5 P/E type companies with high ROCE’s, low debts and fantastic working capital managements out there such as Munjal Auto Components, Avanti Feeds, and Dewan Housing Finance, RS software and Granules india who are focussed on growing their business!

Would love to have your views!

Disc: Invested in DHFL, Avanti, RS, Granules. Not invested in Munjal Auto and GM breweries

Abhishek.

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I guess Mr. Market is not that clueless as we sometimes make it out to be :p. That said, Im a rookie investor and my analysis might be completely wrong!

Disc: the above comment is meant to be taken in jest only!

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Hello,hanks for pointing out the flaws…as I have already mentioned in the first post I am clueless about the_quality of Management._

Though the companyhas got the facility to blend and bottle both Indian made foreign liquor and country liquor, theconcentration has been mainly on country liquorduring this year also due to competitive market conditionsin the IMFL segment as per ther AR. So_it does not have to compete against the biggies in its industry…its like being in a sub-industry within an industry._

The company has capacity to process13.76 crore bulk litres of country liquor per annum

out of which only about 43.39 % has been utilizedlast year.The existing capacity

should take care of the companyâs requirement atleast for the next Few year ;so**No need to incur capital expenditure for next few years.**…less capital expenditure …more free cash flow .The company has got potentialto utilize the balance capacity by_penetrating into__interior districts_of Maharashtra . Ref.Annual Report.

In the balance sheet I notice the company has Non-Current investment of about 49 cr.

Market cap–investments+debt=109 cr approx.(a)

Profit available for appropriation adding Balance brought from last year =54 cr approx(b)

(a)/(b)=109/54=2.01 approx.

Threats for the company as I perceive it could beGovt. Rules & taxation & Sales Concentrated inMaharashtra.

I have no idea about how good is the management.There are some uncertainties but it still looksundervaluedto me.

N.B.I am in no way qualified enough to makeintelligentstock analysis…and tend to be very much error prone.I have no position in the above mentioned stock.

:slight_smile:

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I am surprised to see, there is no reply even after the stock has surged to 400 in last three months.
I am holding the same since two weeks, though want to continue holding till March 2016.

Request to share your views now, especially on downside risk side.

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This company seems to have been an early bird in declaring quarterly numbers and that too relatively spectacular ones.

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What significant happened that it surges 750% in last 6 months ?

Disc: Not invested.

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I had a look at Q3 numbers,
Main boost in profit is because of cheep raw material. Cost of raw material is just 35.7% of sales whereas it was 46.7% of sales last year. This resulted in 157% increase in net profit for 18% increase in sales.

My bet in this segment is Pincon Spirits Ltd. Which is leader in west Bengal ( Like GM in Maharastra ). They are aggressive in promoting their brands and focused on growth. Stock is available at <15PE. Similar kind of results are expected in this quarter. I am also clue less about Pincon management.

Disc: Not invested in GM Breweries, invested in Pincon hence my views could be biased

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Do you have breakup of the raw materials and their costs?
Basically I want to understand why the cost of raw material decreased and for how long will it remain to.

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Its interesting to see that stock is up about 10 fold in since the thread was started from 110 cr market cap to 1064 cr market cap in less than two years. Trying to understand what are the actual reasons for such performance…

Disc. Not invested in GM breweries.

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Abhishek’s analysis is spot on. My 2 cents on why the company has seen a run i could be because it had an exceptional year in 2015-16. It may go on for sometime, but to me the management is the big dampener here.

If I could ask Jimmy Almeida, the founder & CEO, I would ask him the following questions.

My questions for Jimmy Almeida:

  • The Non-current investment has ballooned to 88 Cr. What is the land and what is the property that the company has and why does it need to invest in it? What long term advantages does this give the company?

  • Why are you paying only Rs 2.5 as dividend per share? The rest of money is not getting re-invested into the business, but instead into Non-current investments?

  • For the last 7 years: The sales (in units) has grown by 1.5% per year. The sales (in Rupee) terms has grown by 8% per year. The price per unit has been increased by 11% per year. In other words- the management has simply raised prices every year without really improving the unit sales and this has resulted in a phenomenal year in 2016. Is this strategy sustainable?

  • The Management analysis is a copy paste from year to year. How is an investor of this company supposed to learn more about the company? Is there nothing new that has happened in the last 5 years. Warren Buffet on the other hand writes lucid explanations and says we give you information just as we would expect if our positions were switched. And here, Mr. Almeida is not at all forthcoming.
    *> The economics of your business is just awesome. Even you yourself mention only competition from illicit liquor and not any other named brands. Dont you think its a great business to be in? See my reasons for that below:

Why is the economics of the business so appealing to me?
1.Total Prohibition has not worked successfully in India. I read an article that said how different states tried to implement prohibition at different points of time but have had so few success. That’s because Liquor companies contribute a vast sum to the state’s coffers. Second, Prohibition does not lead to abstinence; it leads people to consume illicit liquor which is more harmful. The more something has lasted, the more it is likely to last; in other words, consumption of alcohol has been going on for millenniums; humans are unlikely to give it up in a matter of few years. The article mentioned how state after state had tried and had to roll back after a few years. Even the two Dravidian parties in TN, have notoriously imposed and lifted bans before. Lets not assume it will be different in 2016.
2. The business needs no R&D. It doesnt need any Marketing because its banned anyway.
3. The ratio of consumption of Foreign Liquor to Country Liquor is roughly 1:4. Illicit liquor consumption is not reported. But my guess is, even with all progress and development, that # is unlikely to change very much in the next 10 years. Or at least its not like GMB will be out of business anytime soon.
4. Lastly- its a simple business. Easy to understand. Caters to a basic human need. Not much competition. Loyalty amongst customers. Brand recall.

I have placed some facts on how the management is not nudging in the right direction. And to me that is a huge dampener. But then, I could be wrong. And so, if anybody has contrarian thoughts, I would love to hear about it.

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@VikasKasturi Nice discussion…loved the economics of the business part. Regarding break up of sales data -growth in unit terms and rupee terms…could you please share the source of this data …is this information available in the annual report?..to me also it seems if volume growth does not pick up ,sales growth due to reduction in cost(drop in raw material price) and realization growth is unsustainable as the first one may recover to earlier level sooner or later and one can not increases prices beyond a point .The current scenario i.e. higher sales growth and stock price movement may continue for sometime till raw material prices are subdued but is not sustainable in the long term until & unless the owners of the business find a way grow the business in terms of volume…!

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Hi. Yes the unit wise production and sale price are available in the Annual Reports.
My hypothesis would be that raw material prices will not impact the profitability of this company in the short term. That’s because of its pricing power. I dont follow stock prices, so I dont know what the movement will be like.

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But before that do you have a clear understanding why this went up 10x in a year and half before that ? I can see sales went up 18% but that can’t be the only reason for the stock to go up 900%

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Questions are What are the raw materials of Breweries ? Why did its cost decrease so much ? Is it going to continue to reduce further ? The stock already got a PE expansion from 5 to 20 in last 2 years in the expectation the raw material cost may drop further. If it doesn’t the stock looks overvalued. The company in general has a very low sales growth in single digit, so only decreasing trend in raw material cost is driving this marketcap. Even if raw material cost in F17 becomes 25-30% of sales and growth remains 10-15% the stock is overvalued. Only if they are able to get the raw material cost to 20% and also growth to 20% the stock is a good pick ie it can still double in a year assuming P/Es don’t expand or contract further. Stocks which gets triggered by raw material price decrease and not by sales growth are generally cyclical in nature and starts nose diving once the raw material stop showing signs of decreasing further.
Current valuation not a buy for me but if I were holding I would hold for a year more.
Disc: Not invested

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@GM investors
What are the raw materials used in this industry. Can some one throw light on this.

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Good analysis Vikas. Just one comment on your point of sales growth being just 1.5% in last 7 years and co has been raising prices at rate of 11%…is the strategy sustainable? Since you mentioned about Buffett would like to mention his example. Sees Candy, one of the best investments of him, was growing at 2% in volumes (less than the GDP growth of California). However, Sees candy had pricing power and was able to raise the price per unit every year. So to answer your question, I believe such strategy is definitely sustainable.

This absolutely doesn’t imply that I am comparing quality of two businesses.

disc: Not Invested.

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Hi @csteja

The main raw material for country liquor is Rectified Spirit

Raw material supplier to GM Breweries

Screenshot from 2016-10-15 22:56:16.png1073Ă—710 405 KB

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Hi! I lost interest in this company completely for a number of reasons.

  1. What is this non-current investments that the company is making? How does the company benefit from it?
  2. The Annual Report is a window to the company. Every year the letters to the shareholder is copy paste of the previous year; how can a lay investor know more about the company? If I invest in the company for a long term, I need to know the company well enough and I don’t get that feeling by looking at the annual report.
  3. Other issues. Concentration in Maharashtra is a huge risk. I overlooked this earlier.

Regarding the comparison to See’s- yes there is some comparison given the natures of the 2 businesses. But when it comes to capital allocation, Buffett has said in 2007: "Last year See’s sales were $383 million, and pre-tax profits were $82 million. The capital now required to run the business is $40 million.This means we have had to reinvest only $32 million since 1972 to handle the modest physical growth—and somewhat immodest financial growth—of the business. In the meantime pre-tax earnings have totaled $1.35 billion. All of that, except for the $32 million, has been sent to Berkshire (or, in the early years, to Blue Chip). After paying corporate taxes on the profits, we have used the rest to buy other attractive businesses.”
Contrast that with the 80 Cr of Non Current Investment that GMB has made with no explanation.

Given the above reasons, I have moved on. I would rather omit this, than take a risk partnering with Almeida.

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Some numbers

Pasted image972Ă—121 7.37 KB

If you look at the growth in the net operating assets of the company its about 6% over a 10 year period and the growth in sales is 8.76% , while the growth in PAT is 19.35%. The company was struggling to extract returns from capital during 2009 to 2013. Even during these trying times it managed to recover its cost of capital ( which I think is around 10 to 11%) except for one year (2010). Over a span of 10 years not only it has consistently recovered its cost of capital but exceeded it by a wide margin

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