Associated Alcohols Stock Analysis

Associated Alcohols & Breweries Ltd. is a part of the Associated Kedia group which is into the business of manufacturing and bottling of liquor. The company has understandings with companies liked Diego, Mason and Summers, who buy a large chunk of the IMFL produced by AABL. The company's distillery is located in Khodigram in Madhya Pradesh. The promoters hold a 58.45% stake in the company. The Indian alcohol industry is growing at a 8.8% CAGR and is expected to reach 16.8 Billion litres by FY22.

Business Overview

The company's capacity as per the FY19 data was 45 MTPA. The management has undertaken capex plans to double this capacity to 90 MTPA by FY21. The company sells 80% of its potable alcohol in Madhya Pradesh. In FY19, the company started geographic diversification by entering into agreements with local distilleries in different states and now sells its own branded IMFL to Delhi, Karnataka, Kerala and Chhatisgarh. Following this, Madhya Pradesh's contribution to the IMFL sales reduced from 84% in FY18 to 50% in FY19.

The company derives 45% of its revenues from IML (Indian made liquor), where the realisation is fixed by the Government. While the raw material prices are volatile, the selling price is regulated and unfavourable movement in raw material prices can put pressure on the margins. The competition in this segment is intense.

Financial Snapshot

Prima facie, the company has a solid track record with a 5 year CAGR of 13% for revenues and 38.96% for PAT. The company has generated operating cash flows of Rs 175 Crores against 10 year cumulative PAT of Rs 114 Crores.

Over the last decade, the revenues have gone up 4x and the PAT has gone up nearly 30x. During this period, the company has undertaken capital expenditures of ~ Rs 168 Crores. The operating margin has gone up from 6.76% in FY12 to 14.47% in FY20. The PAT margin has also gone up from ~ 1.87% in FY12 to 7.59% in FY19.

The company has a very healthy balance sheet with a low debt-equity ratio. The company has increased capacity through internal accruals and did not have to rely on borrowings. The debtor days are at a comfortable 28 days and the working capital to revenue requirement is ~ 14%. From FY15 to FY19, the company has maintained a high ROE, >19%. This coincides with the company's diversification of revenue sources (franchising, selling in-house brands, etc).

Red flags in Corporate Governance

The Kedia family, which is the promoter group, is not part of the board. However they have been withdrawing salaries at a large percentage of the net profits.

When the promoter family is literally taking away 40% to 50% of the profits of a company as way of salaries which are beyond the limits stated by law, it is a major red flag. The family has a ~ 58% stake and can also take dividends, which would also benefit retail shareholders. The Companies Act, 2013 specifically puts a 11% cap on the managerial remuneration. Moreover, this payment is made without the approval of shareholders.

The promoter family runs a breweries business called Mount Everest Breweries Ltd which uses the supply chain of AABL. Associated Alcohol has made a 3 Crores investment in MEBL and has given an unsecured guarantee of Rs 52 Crores. AABL has also given a loan of ~ Rs 10 Crores to MEBL. In FY15, the company wrote off a Rs 1.3 Crore investment in a promoter company ~ Vedant Energy Ltd.

There have been instances of IT raids on the promoter company which had unearthed cash transactions, undisclosed incomes, etc. Investors can search the internet for detailed versions of the same.

Verdict

The company trades at a PE of just 7x and is available at a market capitalization of ~ Rs 300 Crores. The company's turnover is above Rs 500 Crores (FY20 TTM). This implies a sales to M.Cap ratio of ~ 0.6. Looking at the past performance of the company, the financials look strong and the valuations seem cheap. However, there are severe corporate governance issues where the promoter group is siphoning away profits meant for the retail shareholders. In the long run, the retail shareholders wouldn't get the benefits of the company's business performance. We would advice investors not to make any investment in the stock and if you believe in the long term alcohol consumption story, you can look at other listed players like USL and UBL.