Desi Daru, Ethanol and Foreign Liquor ??

The degree of interconnectedness is what makes investing very interesting. Joining seemingly unrelated dots, and turning them into a money-making opportunity is what perhaps keeps the entire research team at Rupeeting going.

A few weeks ago, we had written about how the government’s priority of ensuring food safety resulted in the ban of sugar being directed towards ethanol production. Half of India’s ethanol is made from sugar, and we sensed an opportunity in Praj Industries, over sugar stocks.

Praj Industries which makes equipment for distilleries, saw an uptick in orders from ethanol manufacturers, who used grains, instead of sugar. The diversified portfolio would be able to buffer it from such shocks in the future, as food safety always trumps climate change.

But in the same breath, at the time, the government had also banned the purchase of rice from FCI (Food Corporation of India) for making ethanol. This move, also impacted the business of a rice-dependent distillery called Globus Spirits.

But in this tragedy too, we’ve sensed some opportunity!

But Wait, What is Globus Spirits?

Global Spirits makes alcohol - simple. It makes alcohol in bulk, which mainly includes:

• Extra Neutral Alcohol (ENA), which is used for manufacturing IMIL, or Indian Made Indian Liquor, which is an alcoholic beverage with 30% alcohol content produced locally
• Ethanol, which has got a major impetus in the last few years, with the government promoting its blending with petrol, and it targeting a blending rate of 20%

Other than this, it also makes alcohol that can be consumed:

• IMIL, or Indian Made Indian Liquor - which it makes and sells under its own brands - most of which you’d have never heard
• IMFL, or Indian Made Foreign Liquor - where it mainly focuses on whisky and gin, but has plans laid out for beer and ready drinks as well

What’s the Tragedy?

In July 2023, the government banned the purchase of rice from FCI, for making ethanol. This immediately disrupted the ENA and ethanol manufacturing business for Globus Spirits, which depended on rice, and contributed to ~65% of the total revenue.

The abrupt supply disruption resulted in a stoppage of some of Globus Spirits’ plants, and took a few days to move to maize and broken rice, and restart production. Additionally, since rice for ethanol got banned, the prices of broken rice and maize for ethanol saw a sharp jump - to historic highs.

Despite aggressive capacity expansion (of nearly 2x in just 2 years), Globus Spirits saw its profitability taking a massive hit - from Rs. 7.1 per litre in FY23 to a mere Rs. 2.9 per litre in FY24.

Consequently, the stock also took a massive hit, dropping by 40% in the 12 months after the FCI ban.

Are the Troubles over Now?

After 13 months of a ban, the government, on August 30, 2024, lifted restrictions, and within a month the stock recouped most of what it had over the last year. Globus Spirits can now turn back to using rice for ethanol - making supply more predictable and cheaper.

The saving grace for Globus Spirits has been the fact that its manufacturing facilities were fungible. It could move from FCI rice to broken rice and maize, and even hop between producing ENA or ethanol in order to manage output.

If it weren’t for this flexibility, the damage to Globus Spirits in terms of business operations, financials and valuations could have been much worse that what was, since both input and output had the potential to come to a complete standstill.

Additionally, Globus Spirits gets a lot of stability (or upside) from its Consumer business - wherein it manufacturers and sells branded liquor. This business contributes to 35% of total revenue, and has been exhibiting double-digit revenue growth.

Where’s the Opportunity?

Even after the stock has recouped most of what it has lost, we see opportunities in Globus Spirits in several pockets:

1. Maize, the next big thing?

India has, by far, been reliant on sugar and rice for the production of ethanol. This contrasts with the US, where 94% of bioethanol is produced using maize. Given the fact that maize has a lower standing on the Indian plate, this can reverse over the years as maize contributed 30% of the ethanol produced while rice only contributed 19% as of 2024

Higher demand and subsequent cultivation of maize can result in normalisation of prices over time, and result in steadier supply, thereby minimising the issues faced in the last year

While Globus Spirits ramped up on maize out of force, the exposure might have just given it a trial on a much-needed long term fix, which could mitigate future risks emerging out of food security priorities

On the demand front, drivers seem to be fairly in place, with the government steady on its target of achieving a 20% fuel blending, which ensures growing ethanol demand, even if there were to be a slowdown in ENA

2. Liquor business shows immense promise

Historically, Globus Spirits has been present in the ‘value spirits’ market - aka desi daru! In this category, last year, the company sold 1.4 crore cases of liquor. That’s 12 bottles per case - which is close to 17 crore bottles, making about Rs. 740 crore in revenue.

So the urban privileged us not having heard of Ghoomar, Shahi or Goldee, in no way implies that these products don’t exist, or sell. And with a 19% EBITDA margin, these also sell profitably!

However, India is moving towards more premium stuff - and so is Globus Spirits. In an effort to capitalise on this trend, the company has been taking several steps, which seem to be adding the much needed boost to the portfolio.

• The company’s ‘Prestige & Above’ category, where it has 10 brands grew by 38% YoY in FY24
• It recently launched a whisky called Brothers & Co, and has launches planned through FY25, to further boost sales
• It is currently present in 7 states, but is aggressively expanding its presence across the country
• It has seen immense success in the premium Gin market through the brand Terai, where it is expanding its portfolio to add a gin and a whisky
• The company has also been making inroads into two fast-growing markets - beer and ready to drink

The Last Sip

Historically, we’ve disliked companies which have high downside risk exposure to government policy. However, the shift to maize, and a growing consumer business make Globus Spirits more buffered as time passes.

Over the long run, we see a case for structural growth, driven by

1. Strong demand in ethanol, thanks to fuel blending, led by climate change goals, the bid to make fuel cheaper for consumers, and given India’s import reliance for crude
2. Premiumisation in India’s liquor consumption, led by more brand-focus, soaring popularity of IMFL, and higher disposable incomes

Globus Spirits can offer a strong thesis, based on both these factors. Additionally, in the premium liquor business, there’s always an option value, like we see in start-ups, where a certain brand can take off, and add immensely to a company’s financials and valuations.

So if you observe someone ordering a Terai gin next time, remember to join the dots to Globus Spirits!

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