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Key findings
Tilaknagar Industries is the third-largest domestic player in the Indian India-made
foreign liquor (IMFL) industry and has increased revenues at a CAGR of 51% over
the past four years, well ahead of the industry 15% CAGR. The IMFL industry is a
direct beneficiary of growth in incomes and discretionary consumption, in our view.
The company has maintained higher margins and return ratios (ROE) than its peers
over the past two years, but trades at a steep discount to them based on FY10 P/E.
Linked to discretionary spend
Exposure to IMFL consumption theme
Tilaknagar Industries Ltd (TIL) is a direct link to IMFL consumption in
India, which the company expects will record a 15% CAGR in volumes
over the next few years. The increase in disposable income, low per
capita consumption of spirits in India and shift from country liquor to
IMFL is likely to lead to high and sustainable growth in this industry for
next few years, in our view.
Track record of higher-than-industry growth rates
The company is the third-largest domestic IMFL producer (volume
market share of around 4%) in the country. It has increased revenues at
a 51% CAGR over the past 4 years, far outpacing the industry growth
rate of 15% over the same period. TIL already has 40 brands on which it
can rely to pursue growth during the next few years.
Consistently high margins and return ratios
Among its products, TIL has focussed on brandy (50% of volumes) and
geographically, it has focussed on south India (90% of revenues). It has
maintained higher margins and ROCE than its competitors. The
company recently increased capacity fourfold to 200 KLPD (kilo litres
per day), implying to us that an increase in top and bottom line is likely
Lower valuations than peers
Management expects revenue growth of 30-40% per annum for the next
three years. This growth is based on planned geographical expansion to
other territories like north India and further penetration in canteen stores
department (CSD).
The stock trades at an FY10 P/E of 11.7x and EV/EBITDA of 13.9x,
which implies a steep discount to its two large-listed competitors, Radico
Khaitan and United Spirits.
Link to India’s IMFL consumption
As per TIL, IMFL consumption has grown rapidly, with volumes recording a 15%
CAGR over last five years and this growth is likely to continue. Key drivers of this IMFL
growth include:
More than 60% of India’s population is in the 15 to 64 age group, implying potential
for industry growth as shown in the exhibit below left.
The McKinsey Global Institute forecasts that increase in disposable income driven
by strong economic growth could boost alcoholic beverage consumption.
Low per capita consumption of spirits in India as shown below.
Shift from country liquor to IMFL as per company.
Track record of consistent growth in past few years
The pace of the company’s volume and revenue growth has been much higher than
that of the industry and its peers. TIL’s consolidated sales grew at a CAGR of 63%
over FY08-10, while sales volume (cases) grew at a CAGR of 83% over FY07-10.
Industry volumes have grown at a CAGR of 15% over the past five years according to
the company, while those of players such as United Spirits have grown at 17% over
FY8-FY10.
Focus on brandy shields TIL from direct competition from
larger players
Brandy accounts for more than 50% of the company’s revenue, which is the IMFL
industry’s third-largest category after whisky and rum in terms of cases sold, according
to the company. TIL Mansion House brandy sold over 4.5mn cases in 2010, out of the
total volume sold of 8.3mn cases.
Consistently high margins and return ratios
Despite a highly competitive industry, TIL has been able to generate better-thanindustry
and — peer returns on capital employed. For example, in FY10, Radico
Khaitan sold almost 2.5x TIL volumes — 20mn cases versus TIL’s 8.3mn cases — but
the difference in net profit was marginal.
Trades at lower valuations than its peers
The stock trades at an FY10 P/E of 11.7x versus 44.5x for United Spirits and 54.9x for
Radico Khaitan, despite its outperformance versus both United Spirits and Radico in
terms of revenue growth, margins and return ratios.
Management believes this outperformance will continue in coming years, on expected
revenue growth of 30-40% over the next few years. Management’s growth outlook is
based on planned geographical expansion to other territories such as north India and
further penetration in CSD, which only accounted for 5% of revenues in FY10
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Key findings
Tilaknagar Industries is the third-largest domestic player in the Indian India-made
foreign liquor (IMFL) industry and has increased revenues at a CAGR of 51% over
the past four years, well ahead of the industry 15% CAGR. The IMFL industry is a
direct beneficiary of growth in incomes and discretionary consumption, in our view.
The company has maintained higher margins and return ratios (ROE) than its peers
over the past two years, but trades at a steep discount to them based on FY10 P/E.
Linked to discretionary spend
Exposure to IMFL consumption theme
Tilaknagar Industries Ltd (TIL) is a direct link to IMFL consumption in
India, which the company expects will record a 15% CAGR in volumes
over the next few years. The increase in disposable income, low per
capita consumption of spirits in India and shift from country liquor to
IMFL is likely to lead to high and sustainable growth in this industry for
next few years, in our view.
Track record of higher-than-industry growth rates
The company is the third-largest domestic IMFL producer (volume
market share of around 4%) in the country. It has increased revenues at
a 51% CAGR over the past 4 years, far outpacing the industry growth
rate of 15% over the same period. TIL already has 40 brands on which it
can rely to pursue growth during the next few years.
Consistently high margins and return ratios
Among its products, TIL has focussed on brandy (50% of volumes) and
geographically, it has focussed on south India (90% of revenues). It has
maintained higher margins and ROCE than its competitors. The
company recently increased capacity fourfold to 200 KLPD (kilo litres
per day), implying to us that an increase in top and bottom line is likely
Lower valuations than peers
Management expects revenue growth of 30-40% per annum for the next
three years. This growth is based on planned geographical expansion to
other territories like north India and further penetration in canteen stores
department (CSD).
The stock trades at an FY10 P/E of 11.7x and EV/EBITDA of 13.9x,
which implies a steep discount to its two large-listed competitors, Radico
Khaitan and United Spirits.
Link to India’s IMFL consumption
As per TIL, IMFL consumption has grown rapidly, with volumes recording a 15%
CAGR over last five years and this growth is likely to continue. Key drivers of this IMFL
growth include:
More than 60% of India’s population is in the 15 to 64 age group, implying potential
for industry growth as shown in the exhibit below left.
The McKinsey Global Institute forecasts that increase in disposable income driven
by strong economic growth could boost alcoholic beverage consumption.
Low per capita consumption of spirits in India as shown below.
Shift from country liquor to IMFL as per company.
Track record of consistent growth in past few years
The pace of the company’s volume and revenue growth has been much higher than
that of the industry and its peers. TIL’s consolidated sales grew at a CAGR of 63%
over FY08-10, while sales volume (cases) grew at a CAGR of 83% over FY07-10.
Industry volumes have grown at a CAGR of 15% over the past five years according to
the company, while those of players such as United Spirits have grown at 17% over
FY8-FY10.
Focus on brandy shields TIL from direct competition from
larger players
Brandy accounts for more than 50% of the company’s revenue, which is the IMFL
industry’s third-largest category after whisky and rum in terms of cases sold, according
to the company. TIL Mansion House brandy sold over 4.5mn cases in 2010, out of the
total volume sold of 8.3mn cases.
Consistently high margins and return ratios
Despite a highly competitive industry, TIL has been able to generate better-thanindustry
and — peer returns on capital employed. For example, in FY10, Radico
Khaitan sold almost 2.5x TIL volumes — 20mn cases versus TIL’s 8.3mn cases — but
the difference in net profit was marginal.
Trades at lower valuations than its peers
The stock trades at an FY10 P/E of 11.7x versus 44.5x for United Spirits and 54.9x for
Radico Khaitan, despite its outperformance versus both United Spirits and Radico in
terms of revenue growth, margins and return ratios.
Management believes this outperformance will continue in coming years, on expected
revenue growth of 30-40% over the next few years. Management’s growth outlook is
based on planned geographical expansion to other territories such as north India and
further penetration in CSD, which only accounted for 5% of revenues in FY10
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