With 99.09% YTD Return This Stock Is HDFC Securities’ Medium Term Pick For 2022

Shares of G. M. Breweries Ltd (GMBL) are up around 99.09%% this year (year-to-date). GMBL is involved in the production and sale of alcoholic products such as Country Liquor (CL) and Indian made Foreign Liquor (IMFL). The brokerage firm HDFC Securities has seen an upside in the next 6 months for the stock and hence initiated a buy rating. The brokerage has set a target price of Rs. 962 for the stock and have maintained a target period of 6 months for the stock to hit its target price from the current market levels.

The brokerage’s take on G. M. Breweries Ltd (GMBL)

HDFC Securities in its research report has said that "GMBL's brands (G.M. Santra, G.M. Doctor, G.M. Limbu Punch and G.M. Dilbhaar Sound) have been enjoying consistently good brand image and loyalty from the consumers for the past several years and the company enjoys a virtual monopoly in country liquor in the districts of Mumbai, Thane & Palghar. Reportedly, as per the State Excise Department, the company contributes about 25-30% of the total Excise duty for country liquor in Maharashtra, indicating >25% market share for the company. The company has the capacity to process 13.76 Cr bulk litres of country liquor per annum while utilisation levels have been <50%. Tackling the lower capacity utilisation, GMBL remained prudent in controlling costs. It is also making concerted efforts to penetrate deeper into other districts of Maharashtra taking advantage of its brand image which should drive utilisation levels and incremental volume growth."

According to the brokerage "The prices of rectified spirits have remained stable in past few months amidst increased ethanol blending demand from OMCs as Maharashtra is expected to report a record a sugarcane production in 2021-22. Inflation in packaging costs (mainly PET bottles) due to the increase in crude oil prices could impact margins a bit. GMBL's financials will grow at a faster pace realizing the dual benefits of higher revenues (demand recovery) and stable RM prices. GMBL's Cash Conversion Ratio (CFO/PAT) of 101.46% (avg. FY16-20) is the best in the liquor industry implying the strength of its brands. It is cash-rich, debt-free, and does not require any substantial capital given the lower utilization levels currently which means continued robust free cash flow (FCF) generation."

The research report of the brokerage also says that "The liquor industry has strong entry barriers in the form of licensing and ban on advertisement, in which GMBL enjoys strong brand value in Maharashtra leading to customer loyalty supported by the strong distribution network. The company is also making concerted efforts to penetrate deeper into other districts of Maharashtra. While the category growth has been low, larger players in the country liquor space like GMBL have continued to gain market share. Also, given the lower price point of the category (Rs 40-45/180 ml), in an environment of higher costs, we expect more pronounced market share gains, further aided by possible down-trading given increased IMFL prices, pressure on earnings at personal levels and government's crackdown on illicit liquor trade."

Buy G. M. Breweries Ltd (GMBL) Says HDFC Securities

The brokerage has clarified in its research report that "GMBL reported a solid set of numbers in Q2FY22 on the back of reopening of economy and easing of travel restrictions. While H1FY21 was a disaster for the liquor industry, the company did bounce back strongly in H1FY22 and we expect the momentum to continue in upcoming quarters. In addition to the revenue momentum, we expect the company to maintain its margins for H2FY22 on stable input prices. This along with superior balance sheet strength and inexpensive valuation makes GMBL a good case for opportunistic short-term investing. The Board of GMBL will meet on Jan 07, 2022 to consider Q3FY22 results."

According to HDFC Securities "GMBL could report 19.1%, 26.1% and 12.1% CAGR in Sales, Operating profit and PAT over FY21-FY23. The profit growth could be slower due to exceptional investment income in FY21. EPS could rise from 43.8 to Rs.55.1 in the same period. We believe investors could buy the stock in Rs 811-821 band and add more on dips to Rs 718 for base case fair value of Rs 895 and bull case fair value of Rs 962 over the next 2 quarters."

The brokerage has further claimed that "Though the business fundamentals and financial profile of the company have remained robust, questionable capital allocation policy (Rs ~ Rs 397 Cr in properties and other financial assets as on March'21 which translates into ~27% of market cap and ~78% of net worth), lower dividend pay-out despite negligible CAPEX requirements and concentrated core business (1-product, 1-region) make the long-term investment case look less clear at the moment. Additionally, the disclosure levels of GMBL are not high as few details about volumes, realisation, brand split, CAPEX plans, use of cash equivalents, entry into sales territories, etc. are not available in the public forum."

Disclaimer

The stock has been picked from the brokerage report of HDFC Securities. Investing in equities poses a risk of financial losses. Investors must therefore exercise due caution. Greynium Information Technologies, the author, and the brokerage house are not liable for any losses caused as a result of decisions based on the article.