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MacVisit – Tilaknagar Inds.
Big plans, but execution holds the key
We met Tilaknagar Industries (TLNGR IN, Not rated) management recently to
get an update on the spirits industry and on the company. Tilaknagar is a fastgrowing
Indian Made Foreign Liquor (IMFL) player in India with a strong portfolio
of brandy, whisky and rum and two millionaire brands – Mansion House Brandy
and Madira rum. Tilaknagar has increased its capacity by 4x in the past two
years and sales volume growth has been 6x in past four years.
Guidance of 45% volume growth, execution will be the key
Tilaknagar has quickly ramped up its two leading brands Mansion House Brandy
and Madira Rum (contributing 60% of sales volume) and tripled their sales in the
past 3 years. Management has for guided 40–45% sales CAGR over the next
the three years, which, in our view, would be a challenge as we expect the IMFL
industry to grow at 13-14% pa.
Tilaknagar has increased its own capacity (excluding leased facilities) to 17m
cases and is expecting sales volume of 12m cases in FY11E. However, we think
brand building holds the key to future growth. A lack of strong brands can lead to
sales volatility as was seen in Andhra Pradesh (AP, largest market for Tilaknagar
followed by Tamil Nadu) where sales fell by 21% in FY10.
Geographical diversification to drive faster growth
More than 90% of Tilaknagar’s sales come from four southern states (distribution
is controlled by the state governments in all these states), which accounts for
45% of the IMFL and the majority of brandy sales in India. Tilaknagar’s
management is banking on another government controlled supply agency
Canteen Store Department (CSD) contract to supply the defence forces. CSD is
the largest buyer of alcohol in India and success with CSD could be a driver for
faster growth.
Improving distribution reach to eastern states like Orissa, Assam, and West
Bengal is a focus area based on initial success in these states.
63% of sales from brandy; focus shifts to whisky and rum
Brandy contributes 63% of sales and the company has dominant share in key
brandy markets at its products’ price points (Karnataka 86%, Kerala 78%, AP
56% and Tamil Nadu (TN) 42%). The company recently launched Black Power
whisky (Maharashtra and AP) and Dutch brandy (TN and Kerala).
Going forward, management expects the focus to be on whisky (57% of IMFL
market and 19% of its sales) and rum (18% of its sales) launches for a balanced
product mix. Tilaknagar’s promotion strategy is based on aggressive retail store
level promotions, which is key for its growth in absence of brand strength.
Attractive valuations; discount to sector leaders justified
Tilaknagar is currently trading at 8.5x its FY11E Bloomberg consensus earnings,
at a steep discount to the market leader. We think the gap is likely to remain
given the size of the business, execution track record, strength of brands and
differential in distribution reach. After the recent QIP issuance of Rs1.35bn,
debt/equity has come down from 2.2x to 1.3x.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
MacVisit – Tilaknagar Inds.
Big plans, but execution holds the key
We met Tilaknagar Industries (TLNGR IN, Not rated) management recently to
get an update on the spirits industry and on the company. Tilaknagar is a fastgrowing
Indian Made Foreign Liquor (IMFL) player in India with a strong portfolio
of brandy, whisky and rum and two millionaire brands – Mansion House Brandy
and Madira rum. Tilaknagar has increased its capacity by 4x in the past two
years and sales volume growth has been 6x in past four years.
Guidance of 45% volume growth, execution will be the key
Tilaknagar has quickly ramped up its two leading brands Mansion House Brandy
and Madira Rum (contributing 60% of sales volume) and tripled their sales in the
past 3 years. Management has for guided 40–45% sales CAGR over the next
the three years, which, in our view, would be a challenge as we expect the IMFL
industry to grow at 13-14% pa.
Tilaknagar has increased its own capacity (excluding leased facilities) to 17m
cases and is expecting sales volume of 12m cases in FY11E. However, we think
brand building holds the key to future growth. A lack of strong brands can lead to
sales volatility as was seen in Andhra Pradesh (AP, largest market for Tilaknagar
followed by Tamil Nadu) where sales fell by 21% in FY10.
Geographical diversification to drive faster growth
More than 90% of Tilaknagar’s sales come from four southern states (distribution
is controlled by the state governments in all these states), which accounts for
45% of the IMFL and the majority of brandy sales in India. Tilaknagar’s
management is banking on another government controlled supply agency
Canteen Store Department (CSD) contract to supply the defence forces. CSD is
the largest buyer of alcohol in India and success with CSD could be a driver for
faster growth.
Improving distribution reach to eastern states like Orissa, Assam, and West
Bengal is a focus area based on initial success in these states.
63% of sales from brandy; focus shifts to whisky and rum
Brandy contributes 63% of sales and the company has dominant share in key
brandy markets at its products’ price points (Karnataka 86%, Kerala 78%, AP
56% and Tamil Nadu (TN) 42%). The company recently launched Black Power
whisky (Maharashtra and AP) and Dutch brandy (TN and Kerala).
Going forward, management expects the focus to be on whisky (57% of IMFL
market and 19% of its sales) and rum (18% of its sales) launches for a balanced
product mix. Tilaknagar’s promotion strategy is based on aggressive retail store
level promotions, which is key for its growth in absence of brand strength.
Attractive valuations; discount to sector leaders justified
Tilaknagar is currently trading at 8.5x its FY11E Bloomberg consensus earnings,
at a steep discount to the market leader. We think the gap is likely to remain
given the size of the business, execution track record, strength of brands and
differential in distribution reach. After the recent QIP issuance of Rs1.35bn,
debt/equity has come down from 2.2x to 1.3x.
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