Som Distilleries & Breweries Ltd. is betting that improved acceptance of its Hunter beer across the country will boost its revenue in the next few years as it looks at adding capacity and acquisitions to boost output.
Shares of the Bhopal-based distiller, valued at about Rs 700 crore, rose as much as 12 percent to their highest in 30 months a day after value investor Porinju Veliyath bought 0.5 percent stake in the company at Rs 197.95 each. His EQ India Fund bought 1.8 percent equity at Rs 197 each. The stock has risen a little over 90 percent in the last 12 months.
“Our products are getting good acceptance in various parts of the country, including Canteen Stores Department as well as small markets in the U.S.,” JK Arora, chairman and managing director at Som Distilleries, told BloombergQuint in an interview. Buoyed by the demand, Arora said the company is also adding capacity.
New capacity will come on-stream in the fourth quarter ending March and the company will increase it further in the year to March 2020. “We are also looking at a potential Rs 100 crore acquisition.”
Arora is confident of earnings growth remaining buoyant, he doesn’t expect any dramatic improvement in margins.
Here are the edited excerpts of the interaction:
Q. You have set up a new distillery in Karnataka which will have a capacity of 3.5 million cases of beer, and 2.8 million cases of Indian made foreign liquor which will be operational from the fourth quarter. Is that expansion on track?
A. Expansion is very much on track. It is ready, and formalities with the government are on and by the end of this month, we will be fully operational on that unit.
Q. What is your current capacity utilization, and how soon are you expecting this capacity to reach optimum capacity utilisation?
A. The present capacity is installed in Karnataka. We are looking for another expansion next year. So, in two years we will be able to utilise it. By 2020, we have to make another expansion. For any company, the biggest asset is consumer choice. Once your brand, quality and business model is accepted, then we all know how big this country and consumer base is. So, we have no doubt in performing better in coming years.
Q. Are you coming up with an expansion plan in financial years 2019 and 2020?
A. Yes, we are.
Q. What do you expect financial year 2018 to be like and what is the kind of growth rate you are expecting with all these capacities coming in?
A. In this year, the growth rate is about 40 percent so far. But the current growth is more than 50 percent in current months and we are expecting same kind of growth in the next year as well. So, this year we have clocked about Rs 250 crore and we are closing in at about Rs 300 crore. Next year, we are hoping to get more than 50-70 percent growth.
Q. What are the triggers for these sales? You also got the Army Canteen Store Department approvals, which will be leading to sales. How big is this project for you?
A. We have an all-India market share of about 40 percent in beer in armed forces canteens. The acceptance of the product is the biggest strength. As an India company, any Indian will look for value for money from our products. Our endeavor has always been that we should be one up in quality and pricing. Value for money is our mantra for our business.
Q. How large is the U.S. market for you and what are the timelines thereof?
A. We started exporting there last month, and the orders for this year have already doubled. So, the initial response has been very good. The way we are looking at it, it will be big business for us in the U.S.
Q. What is the size of the order in U.S.?
A. It (business) has been just registered, as I said we have sent a trial order last month and they have doubled the quantity. At this stage, where the business is just beginning, the size of the order has not been that big. We have also got order of food containers. But, we are hoping to make it very big in the coming years.
Q. Do you have internal targets in mind?
A. The U.S. is one such market that if the acceptance comes, then we can expect up to 100 containers. If the fundamentals are right and there is market acceptance, then the market is huge. They are open to accept good products from any part of the world. So, we are hopeful that something big will come. Because it has just begun, giving numbers at this stage will not be right.
Q. Molasses costs have come across the chain. How big a benefit is it for you as a company?
A. As a group, we have big units which are based on molasses. Molasses is a large factor and its profitability has become huge because of the prices.
Q. What kind of margin enhancement comes in as a result of premiumisation?
A. We are focusing on the upper middle class in India. We are not targeting to the scotches and super premium range. We are clear that 5-10 percent of the total sales, which is at the top layer, belong to multinationals. But 90 percent of the business in India belongs to us. We can do as much as we want. Fortunately, the Indian consumer is now open to good quality, packaging and paying at a better pricing. So, we are going for premiumisation as we did in beer.
We are introducing one of our finest brands in the coming months in the semi-premium whiskey segment, which is a large consumer base. Almost 40 percent of the IMFL (Indian-made foreign liquor) business belongs to this range. We are introducing this product in the new financial year. The initial trials have already been done and consumers are quite satisfied with it.
Q. Where does this excess of premiumisation exercise take your margins to?
A. We have maintained the balance between the selling and overheads of the company. But due to premiumisation, the margins are going to improve. In the coming year, the top line and bottom-line will improve phenomenally.
Q. Are there any numbers to the earnings before interest, tax, depreciation and amortisation estimates that you have?
A. It will be around 18-20 percent in IMFL. Beer is a volume gain product. We have sold 25 lakh cases last year till September, and this year we have already done 14 lakh cases. Margins will improve…but it will not be at the level of IMFL. But in terms of volume, it is much bigger than IMFL, which is a quality gain product.
Q. Any kind of funding requirement that you need to execute for the expansion plans?
A. We are a financially disciplined as well as a cash surplus company. For our Karnataka plant, the investment is more than Rs 165 crore, and we have not taken funding from any financial institution. It is all from internal tools. We are going for an acquisition too, before the close of this financial year. For this acquisition, we may need some funding. All the institutions are happy and willing to come to us. We have to just approach them and can have access to the requirements.
Q. So, will you tap debt market as opposed to equity markets for making this acquisition? What could be the size of acquisition?
A. Acquisition will be around Rs 100 crore. We will be operational by the end of this month and this acquisition will bring equal size of top line and bottom-line. It will be Rs 100 crore or probably 10 percent plus or minus.
Q. Is it the capacity that you are acquiring or the brand?
A. It is the capacity. In brands, we are already in place. Because of interstate taxation you cannot move all the areas and other consumer products because of taxation of state governments. You are not able to put through all the products all over India. So, you have to be strategically placed as well as manufacturing is concerned. It is not that we cannot send stocks from here to Karnataka, but it will have freight cost and inter-state taxation, which makes these things unviable. Because of this, we have to have multiple manufacturing locations. It is adding a lot of value. As Dr. (Vijay) Mallya has done in his case and made the company bigger and bigger. That is the only model available for the Indian companies emulate in order to prosper.