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Associated Alcohols & Breweries Ltd.

Company Overview Incorporated in 1989, Associated Alcohols & Breweries Ltd (AABL) is the flagship company of the Indore-based Kedia Group, promoted by the late Mr Bhagwati Prasad Kedia. The company produces variety of alcohol, including rectified spirit (RS), extra neutral alcohol (ENA), country (CL/IMIL), and Indian-made foreign liquor (IMFL), along with bottling for international brands such as .

AABL has a distillery and bottling facility in Khargone, Madhya Pradesh (MP)

Primary business activity

Associated Alcohols & Breweries Limited is one of the largest distilleries in enjoying a growing presence across the sectoral value chain.

1. Premium extra neutral alcohol /grain spirit 2. Rectified Spirit 3. Indian made foreign liquor (IMFL) 4. Indian made Indian liquor (IMIL) 5. Contract manufacturing partner (Diageo-USL)

Proprietary products

1. Titanium Triple Distilled with Orange and Green Apple Flavour 2. Central Province 3. James McGill Whisky 4. Jamaican Magic Rum 5. Bombay Special Series 6. Super Man Series

Licensed brands /franchised brands

1. Deluxe Whisky 2. Directors Special Whisky 3. Flavoured 4. Director’s Special Gold Whisky 5. DSP Black Special Whisky 6. McDowell’s No.1 XXX Rum

Contract manufacturing brands

1. Black Dog 2. VAT 69 Scotch Whisky 3. Vodka 4. Black & White Scotch Whisky

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Multiple revenues streams The Company derived the largest proportion of its revenues from IMIL sales (55 %) in 2017-18. Looking ahead, the Company expects the proportion of revenues derived from extra neutral alcohol to increase from 18% to 25% and the proportion of revenues derived from IMFL sales to increase from 15% to 25% across the foreseeable future.

AABL has a significant presence in MP where its factory is located. During FY18, MP contributed around 80% of the total potable alcohol sales against 76% in FY17. AABL has been allotted 9 districts by the Government of Madhya Pradesh (GoMP) for the sale of CL at pre-determined price.

AABL also manufacturers and markets its in-house IMFL brands. During H1FY19, AABL increased its focus of IMFL sales outside MP by entering into manufacturing agreements with local distilleries in various states and now supplies IMFL (under own brand) to , Kerala, Karnataka and Chhattisgarh. Consequently, the share of MP, which contributed approximately 84% of in-house IMFL brands in FY18, reduced to 59% during H1FY19, thereby gradually diversifying its revenue profile.

AABL also sells ENA to leading manufacturers of potable alcohols across India. During FY18, apart from MP, AABL supplied ENA to eight other states in India.

April 2017, AABL was awarded an exclusive franchisee for blending, bottling, branding and sales of five IMFL brands of USL in lieu of ‘royalty’ payment of Rs.6.20 crore for the state of MP. The contract of franchisee is for three years (extendable up to five years). Consequently, the contribution of IMFL sales (to total potable alcohol sales) has increased from 9% in FY17 to 23% in FY18 and further to 31% during H1FY19.

Key clients  Diageo/ Limited  Allied Blender & Distillers  Government-regulated retail contractors/agencies (for IMFL & IMIL)

Existing Capacity & Expansion Plans The Company embarked on a large green-field expansion to address the growing international and domestic demand. The initiative comprises of the commissioning of modern alcohol plants, increasing the production capacity from 30 million litters to 90 million litters per annum by 2021 - and higher operating efficiency

Project is expected to be executed in 2 phases. Expansion from 31 million litres in 2017 to 45 million litres to be completed in the first phase and 90 million litres per annum in the second phase by 2021.

AABL already increased its production capacity from 314 LLPA to 450 LLPA at a total cost of Rs.26.54 crore, funded through a term debt of 10 crore and balance through internal accruals. The project was completed within envisaged cost and time parameters and commenced commercial operations from October 2018.

Plant locations Plant is located at Khodigram (Barwaha, district Khargone, Madhya Pradesh). This plant accounts for bottling facilities, alcohol production and packaging capacity. Corporate office is situated in Indore

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Raw material AABL’s main raw materials are non-food grade grains (maize and rice) which contain higher percentage of starch. Production of food grains in India is dependent upon the vagaries of the monsoons and consequently the prices remain volatile. The food grain prices are also controlled by the Government through setting of minimum support prices. On the other hand, the main product of AABL, viz. CL, is supplied to the government at fixed rates. Hence, AABL’s production costs are vulnerable to the agricultural commodity price cycles. However, over the years, the company has been able to accommodate the swings in the prices of food grains through maintaining multi-grain feedstock for manufacturing alcohol.

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Industry Overview The global alcoholic beverages market is pegged to cross the US$1.9- trillion mark by 2025, growing from US$1.2 trillion in 2017 at a CAGR of 6.4%. Globally, is expected to remain the largest sub- segment by value with a 42.7% share. Global revenues from alcoholic beverages industry amounted to US$67,661 million in 2018 and this is expected to grow at a CAGR of 10.4% during 2019.

India is the third-largest and fastest growing liquor market in the world with ~30% of India’s population consuming alcohol. The industry is considered a sunrise industry owing to its high growth potential and the increasing social acceptance of alcohol as a recreational beverage.

The alcoholic beverages market in India is expected to grow at a CAGR of ~7.72% to Rs5.3 trillion by 2026. Consumption of liquor is also increasing in rural area thanks to easy availability of alcohol.

Though India is one of the largest consumers of alcohol in the world, the per capita alcohol consumption of India is one of the lowest in the world, consuming 5.1 litres of liquor per capita, against Asian average of 20.9 litres. The per capita consumption of alcohol per week for the year 2016 was estimated at 147.3 millilitres and is expected to grow at a CAGR of 7.5% to 227.1 millilitres.

Andhra Pradesh, Telangana, Kerala, Karnataka, Sikkim, and Himachal Pradesh were among the largest consumers of alcohol in India. The most popular channel of alcohol sale in India were liquor stores as alcohol consumption was primarily an outdoor activity and supermarkets and malls were primarily present in Tier-I and II cities.

IMFL accounts for 93.1% of the alcohol consumed in India with beer being the fastest-growing segment in the country (CAGR of 7.5% between 2017 and 2021). Whisky market The Indian whiskey market grew at a CAGR of >7% between FY2010-11 to FY2016-17, and is expected to reach new heights in the near future. The growing Indian whisky market is the result of the economic development translating into higher purchasing power. Moreover, changing demographics and consumption patterns strengthened whisky off-take. Southern India accounted for a >33% share of the total whisky consumed in the country.

(Source: Business Wire, PR Newswire) IMFL industry overview Imported alcohol accounted for a meagre ~0.8% share of the Indian market. Heavy import duties and taxes levied on imported alcohol put it beyond the reach of most individuals.

Though the popularity of and vodka is increasing at a remarkable CAGR of 21.8% and 22.8%, respectively, India remains the largest consumer of whiskey in the world consuming almost half the whisky produced worldwide, accounting for ~60% of the IMFL market. From the cheapest IMFL variant to limited-edition single-malt Scotch, Indians are drinking more whisky today than ever. Demand growth had been most conspicuous in the entry-level IMFL category (all alcoholic spirits made in India, except beer and wine).

(Source: Businesswire, Livemint) ENA industry overview The output of the extra neutral alcohol industry in India reached 2.7 billion litres in 2017, a CAGR of ~6.1% over the previous few years. Punjab was the largest producer of extra neutral alcohol in India The market for extra neutral alcohol gained momentum majorly as a result of the increasing consumption of alcohol in the region. In India, ~90% of the extra neutral alcohol is used for manufacturing potable alcohol. This figure is expected to reach 3.8 billion litres by 2023 owing to a rise in the demand for potable alcohol. Extra neutral alcohol is a >H30,000-crore industry and, apart

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from scotch, beer and wine, most IMFL manufacturers use extra neutral alcohol as raw material with other blends. (Source: IMARC, Times of India) Competitors Associated United G M IFB Agro Pincon Radico Som United Pioneer

Alcohols Spirits Breweries Inds Spirit Khaitan Distilleries Breweries Distilleries

Mcap 425.76 40650.50 1052.30 395.03 32.98 5118.15 449.78 36216.09 180.54 PER 14.59 54.68 12.68 11.35 0.67 41.46 17.83 61.83 0.00 PSR 1.16 4.56 2.29 0.41 0.02 2.85 1.28 5.74 0.95 PBR 3.53 16.24 3.61 1.15 0.23 4.48 2.79 13.47 7.06 Dividend Yield 0.43% 0.00% 0.42% 0.00% 10.04% 0.26% 0.92% 0.15% 0.00% 1Y Sales Growth Rate 13.41% 9.11% 22.93% 7.62% 50.22% 15.09% 43.27% 18.65% 40.29% 3Y Sales Growth Rate 2.78% 0.76% 21.19% 15.02% 54.89% 8.67% 19.37% 6.18% -9.47% 5Y Sales Growth Rate 15.58% -0.30% 14.23% 13.97% 42.05% 8.22% 11.49% 7.55% 5.54% 10Y Sales Growth Rate 14.31% 8.10% 13.94% 13.87% 220.17% 11.54% 19.06% 14.21% 6.12% 1Y OPM 15.74% 12.20% 26.65% 6.23% 6.71% 15.05% 16.70% 18.60% 22.43% 3Y OPM 14.56% 7.88% 11.56% 6.88% 6.18% 13.23% 15.54% 14.96% 19.28% 5Y OPM 12.77% 5.84% 10.52% 6.88% 5.91% 13.34% 15.33% 14.47% 15.82% 10Y OPM 10.94% 9.51% 9.07% 7.09% 5.73% 13.78% 14.91% 13.58% 13.03% 1Y NPM 7.77% 6.88% 7.93% 3.55% 3.04% 6.87% 7.20% 7.01% 51.91% RoE 20.86% 22.43% 25.03% 9.17% 29.82% 10.81% 15.67% 14.65% 273.69% RoA 14.34% 8.47% 23.66% 7.53% 9.35% 5.46% 7.88% 12.28% -3.59% RoCE 31.95% 18.77% 43.16% 12.85% 23.21% 14.36% 26.64% 22.08% 48.15% D/E 0.18 1.30 0.00 0.09 2.06 0.52 0.29 0.12 11.97 Interest Cover 22.78 5.14 2039.00 19.05 3.77 3.94 6.67 38.12 1.56 Receivable Days 18.76 110.54 0.69 24.00 42.07 111.21 75.43 86.61 0.37 Inventory Days 37.80 76.54 9.24 24.86 47.95 63.40 26.83 46.61 79.11 WC Cycle 36.69 179.20 7.27 38.01 88.21 167.22 90.58 69.22 96.66

1. WC cycle among the best in the industry (next only to GM Breweries), with receivable days of around 2.5 weeks 2. One of the most asset-light businesses with RoA next only to GM. RoE >20% 3. Decent margins, at par with the industry 4. Leverage is quite low at 18% 5. Decent and fairly consistent top-line growth

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Shareholding Promoter holding & recent changes Promoter holding is 58.45%, - unchanged for last 5 quarters.

Image source: valueresearchonline.com Historical changes in promoter holdings No recent changes. More than 1% shareholders

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2 corporate bodies – Garnet Tradelink & Attic Dealcom, hold more than 1% as Public shareholders. These entities are owned by the same individuals.

Indirectly related shareholders Mount Everest Breweries appears to be one such entity. Company has issued corporate loans to the tune of 12 crores, additionally provided guarantee of additional 52 crores as of end FY18. Ranjan Tiberewal, one of the directors of this company was a director of AABL until 2014 [1]

Nitin Tiberal, director of Associated Alcohol, along with Ranjan Tibrewal are directors of Vedant Energy. There at least 3 Tibrewals (Nitin, Manish, Sanjay Kumar – CFO) in the management of Associated Alcohols.

15.11 crores loan given to corporates.

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Total unsecured loans is 18.73 crores, which includes 15.11 crores given to corporates above, plus 3.62 crores given to employees:

Interest income on loans is 1 crore:

Assuming average outstanding of 14.06 crores (average of FY18 & FY17 outstanding loans) gives an interest rate of 7.11 %, which is below the market rates. This is assuming security deposits are non- interest bearing.

Shares pledged None

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Management Analysis Directors KMP does not have any MD/ CEO

Remuneration 11.5 crore is the remuneration to KMP & relatives, out of 25 crore out of a PAT of 25 crores (around 46%)

Day to day operations of the company is run by a Whole Time Director Tushar Bhandari who do not belong to the promoter family draw modest salary. CFO’s salary is also quite modest. Unusual aspects are:

1. Company is run by WD, not MD/CEO 2. Salaries of WD & CFO is modest 3. KMP does not include any MD / CEO 4. Aggregate KMP remuneration is extremely high, despite managers who run the day-to-day operations drawing modest salaries.

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5. KMP includes 2 promoters whose role in operations not clear, but they seem to daw very high salaries. However their salary breakup is not detailed in the same manner as has been for the others 6. Loans and guarantees given to corporates at below market rate which could be related to CFO

Related Party Transactions Check sub-heading ‘Remuneration’ above. Online Reviews & Findings [2, 3] November 2017. Income Tax department conducted raids at 40 locations of Kedia group across 6 states. Large team of 275 officers took part in this raid. Promoters Vinay & Anand Kedia were ‘missing’ as part of media reports.

IT seized 5 crore cash, documents of 350 acre land, as well as traced 24 shell companies.

Company had deposited 13.5 crore during demonetisation, and black money worth 1 crores under Pradhan Mantri Garib Kalyan Yojna. This apparently drew IT attention.

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Financials 10Y historical financials

Growth rates Long term sales growth has generally been 13%+, although past 3 years have been sluggish before picking up again in FY18.

EBITDA growth has been healthy 19%+; while PAT growth 26%+. Cash Flow

OCF has been > PAT for both past 5 and 10 years cumulative. Cumulative FCF also has been positive during these periods.

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Profitability

OPM, PAT – both have been showing expanding trends.

PBILIDT margin of AABL improved by 212 bps to 16.81% in FY18 on account of increase in share of high margin IMFL sales along with rationalization in its fuel costs. PAT margin also witnessed similar improvement of 192 bps y-o-y to 7.68% in FY18 on account of stable depreciation charge and reduction in interest expenses. Leverage & Liquidity, debt outlook

Leverage and liquidity positions are healthy. The inflexion in subscribed equity capital in FY16 was due to 1:1 bonus issue

Borrowings had spiked in FY14 after which it has steadily declined.

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Cost analysis 90.00% 80.00% Inventory/Sales 70.00% Raw material/ Sales 60.00% Fuel/ Sales 50.00% Employee /Sales 40.00% Other Expense/ Sales 30.00% Selling & Admin 20.00% Change in Inventory 10.00% Other Mfg. Expense 0.00% Raw matl. + OT Mfg. Exp -10.00%

Raw material costs as a percentage of sales appears to have been quite volatile for past 10 years, as has been other manufacturing expenses. Although this volatility declines if we take these 2 cost heads together. Not sure if this is due to inaccurate mapping of cost heads. Contingent Liabilities

Contingent liabilities amount to approximately 45 crores, around 14% of FY18 sales, 180% of PAT. Tax rates & benefits if any Last 3 & 5 year average tax rates have been 37%+. This is due to higher tax rates for alcohol industry.

Auditors comments Chartered Accountants: Singhi & Co. made no significant negative observations (except noting that company is continuing to collect VAT & CST)

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Disputes

Credit rating Current ratings

Historical change in ratings Historical ratings show improving trend in credit profile.

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Valuation, earnings estimates Relative valuations

Valuation PSR PER PBV PCF PDY

Current 1.16 14.59 3.53 10.96 0.43%

Historical 0.55 12.05 1.65 4.98 0.16%

Trend Forecasts Q Growth 5Q 4Q 3Q 2Q 1Q

Sales 14.99% 18.3% 15.2% 16.8% 19.0%

NP 79.85% 13.7% 55.4% 36.7% -14.9%

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Risk Analysis Susceptibility of its margins to adverse price fluctuations of grains AABL’s main raw materials are non-food grade grains which contain higher percentage of starch. While the production of food grains in India and its price is dependent upon the vagaries of the monsoons, CL is supplied to the government wherein the rates are fixed. AABL’s average cost of various grains consumed increased by 12% to 15,970/ MT during FY17 (9% increase in FY16). However, over the years, the company has been able to accommodate the swings in the prices of food grains through maintaining multi-grain feedstock for manufacturing alcohol.

High entry barriers and highly regulated environment with high duties and taxes The Liquor industry is highly regulated in India with each State government controlling its policy on production, distribution, retailing and duty structure independently. As a result, there are difficulties in transfer of production from one state to another, along with huge burden of duties and taxes. The players such as AABL also remain exposed to regulatory changes such as ban on sale of liquor. Also, with all the alcohol consuming States/Union Territories having their own regulations and entry-exit restrictions, it is difficult for new entrants to get licenses in new states thus providing a competitive advantage to existing players.

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Historical price chart One Year

Five Years

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ITD

(Chart updated on 17th April, 2019. 300 appears to be an area of major overhead supply)

RSI, momentum 36.9/100

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Free float, liquidity  FF is 189 crores on a market-cap of 450 crores  2 week average quantity is 19,000 (or Rs 47.5 lakhs per day in value terms) Conclusion While AABL has a strong and growing business, it also comes with associated risks and concerns. Investors should weigh the risks associated with this business carefully before investing. Pros 1. Company has been consistently growing. Top-line has grown at a decent pace of 13%+ over past 10 years, while EBIDTA and PAT has grown even faster at 19% & 26%+ respectively 2. AABL has decent financials, with low WC days of 2.5 weeks, low leverage of 18% and healthy cash-flows 3. Operating margins have been steadily increasing as contribution of high margin IMFL continues to increase in the revenue mix 4. Asset utilization is among the best in the industry 5. Management has laid out aggressive capex plan to expand ENA capacity 3x by 2021 in 2 phases. P1 is already complete and has increased capacity by 1.5x for ENA. ENA contributed to 18% sale in FY17 and this is expected to rise to 25% 6. The alcoholic beverage space has strong prospects due to low penetration, changing life-styles and supportive demographics Cons Issues are mainly to do with corporate governance and integrity, which is a common thread that runs across the small size alcohol producers in India.

1. Aggregate KMP remuneration is extremely high, despite managers in-charge of day-to-day operations drawing modest salaries. KMP includes 2 promoters with very high salaries. However their salary breakup is not detailed in the same manner as has been for the others 2. Loans and guarantees given to corporates potentially below market rate which could be related to CFO 3. Promoters reportedly have been accused of large scale tax evasion. IT raids reportedly revealed 24 shell companies, cash and other “incriminating evidences”

Reference 1. AR FY14 https://www.bseindia.com/bseplus/annualreport/507526/5075260314.pdf 2. Kedia Group owners go missing after IT raids https://www.freepressjournal.in/indore/indore-kedia-group-owners-go-missing-after-i-t- raids/1171241 3. IT raids Kedia group across 6 states https://timesofindia.indiatimes.com/business/india- business/income-tax-raids-kedia-group-across-six-states/articleshow/61647090.cms

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