Consumer Products: Pernod India's annual report, 2014 - another good year Energy: Here to stay :Kotak Sec,link

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Pernod India’s annual report, 2014—another good year. Pernod India (PI) reported
a good year with gross sales, EBITDA and PAT growing by 19%, 25% and 18%,
respectively. Post-tax RoCE was 129%. As per our estimates, EBITDA margins increased
by ~130 bps yoy, in a year in which margins for rest of the industry were under
pressure due to RM inflation and subdued volumes. Cash flows were robust; FCF to PAT
conversion was 70% in FY2014. PI’s consistent outperformance implies that even in a
consumer-oriented business, heavily regulated by the government, companies that
focus on building strong brands do well in short/long term.

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Great performance in a year that competing companies would call ‘disastrous’ from all angles
PI’s gross sales, EBITDA and PAT grew 19%, 25% and 18% respectively in FY2014. As per our
estimates, EBITDA margins increased by ~130 bps yoy in a year in which all other companies in
the sector struggled on the margins front, led by RM inflation and subdued volumes. We are
not able to establish PI’s exact volumes (mn cases) in FY2014; Pernod’s global annual report
puts volume growth in India in FY2014 (year-ending June) at 17% while some news reports put
this number at 9% (we assume this in our calculations). Both numbers are impressive in a year
in which there was hardly any growth in the industry. In our view, PI’s success is attributable
to domestic brands only as imported volumes remain at low levels. As per the annual
report, goods purchased from related parties (which should comprise global brands to be sold
in India and some blends to be used in the domestic business) increased from `2.4 bn in
FY2013 to `3.2 bn in FY2014. Also, overall imports increased from `2.5 bn in FY2013 to `3.4
bn in FY2014. In our view, a large amount (`1.2-1.5 bn at `40-50 per case) out of that should
be the cost of blend (Scotch) which PI would normally buy from its parent. Hence, in our view,
sales of global brands would be a very small part of company sales; most of the performance is
attributable to domestic brands. In our view, contribution of global brands to EBITDA would be
very low as PI would likely be earning only distribution commission of 6-8% on their sales.
Balance sheet continues to be asset light: RoCEs are out of this world
For sales of ~31 mn cases, PI had a gross block of only `2.5 bn and it invested only `406 mn in
tangible assets in FY2014. Over FY2011-14, PI invested (capex) only `1.3 bn on
tangible/intangible assets as volumes grew from ~20 mn cases in FY2010 to ~31 mn cases in
FY2014. As per our understanding, PI does not own distillation plants in India and outsources
80-85% of its bottling operations to third parties. The company generated `5.6 bn of FCF,
implying FCF to PAT conversion of 70% in FY2014. Post-tax RoCE was 129% in FY2014. Over
FY2011-14, PI paid `17 bn of dividend to its parent company. As per our estimates, working
capital (number of days of sales) rose to 67 from 55 days in FY2013, largely on lower liabilities.
Brand wins even in a heavily regulated environment, in a consumer business
PI’s continuing success implies that a company that can build strong brands can be very
profitable even in a consumer business with a very high degree of government regulation (over
pricing, taxation and licensing). In our meetings, investors expressed concerns about the
difficulty in building a profitable liquor business in India due to excessive state government
controls on almost all aspects of the business. PI’s performance should dispel all such concerns
as it implies that companies that can create strong brands, which appeal to consumers, will
outperform in the short/long term despite the well-known constraints.

LINK

http://www.kotaksecurities.com/pdf/indiadaily/indiadaily01122014aa.pdf