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Q1FY22 results of GSL

HDFC Securities has said in its research report that “GSL, in Q1FY22, reported net revenue growth of 61% to Rs 371 Cr backed by an increase in the share of Rajasthan Medium Liquor (RML) in the Consumer Business segment and higher sales volume of 29.9 Mn liters in Bulk Alcohol Segment. EBITDA Margin grew for the 6th consecutive quarter and stood at a record high of 26.5% – up 940/183 bps YoY/QoQ in Q1FY22 on account of higher RML share in Consumer Business and better realizations. Bulk Alcohol sales volumes stood at 29.9 Mn litre in Q1FY22, up 45% YoY and 5% QoQ. The average realization for bulk alcohol came in at Rs. 51.6 per litre in Q1FY22. The share of Consumer Business grew to 42% in Q1FY22 from ~35% in Q1FY21, on the back of both volume and value growth.”

The company’s “Value Segment sales volumes grew by 65% YoY to 3.3 Mn cases and realisations by 16% YoY and 10% QoQ to Rs 462.5 per case in Q1FY22. Despite the 2nd wave of Covid-19, the Capacity Utilization in Q1FY22 stood at 98% (vs 58% in Q1FY21 and 99% in Q4FY21). On the expansion front, in West Bengal, expansion work of an additional 140 KLPD is nearing completion and likely to be commissioned in Q3FY22. In Jharkhand, work has commenced on a planned expansion of 140 KLPD and the project is expected to be commissioned in FY23. Additional 140 KLPD expansion is under evaluation between Bihar and another location; work expected to start later in FY22” said the brokerage.

Buy Globus Spirits Limited (GSL) with a target price of Rs. 1761

The brokerage has said that the company’s “Net revenues/ EBITDA/ PAT have grown at a CAGR of 15%/40%/94% over the last 5 years with EBITDA/PAT margin expanding from 9.5%/1.4% to 20.7%/11.4%. In fact the company has reported EBITDA margin expansion over the past 6 consecutive quarters, with it reaching a high of 26.5% in Q1FY22. Stable working capital, lower cash outlay for tax due to availability of MAT credit and a reduction in interest cost led CFO to improve to Rs 148.4 Cr in FY21 from Rs. 30.6 Cr in FY19. The company strengthened its balance sheet by reducing the debt of Rs. 75 Cr despite ongoing CAPEX. Robust cash flow generation will further aid debt reduction.”

HDFC Securities claims that “Going ahead, we expect GSL’s Net Revenues/EBITDA/ PAT to witness a strong CAGR growth of 21%/23%/28% over FY21-24E driven by capacity expansion in bulk alcohol and faster growth in IMIL business, led by increasing pricing gap vs. IMFL players in key states and the emergence of the ‘premium country liquor’ (medium liquor), which in our opinion is a game changer. Medium liquor realisations are ~50% higher than the value segment and offer strong growth and upgrading opportunities across the company’s key markets. While its foray in premium IMFL (highly margin accretive) through Unibev is at a nascent stage, a successful ramp-up here can drive the profitability.”

HDFC Securities has clarified in its research report that “Govt’s aim of 20% blending target by 2025 has created sheer supply-deficit of Ethanol (details inside) and has led to the diversion of ENA towards ethanol, creating structural support for ENA prices. While GSL may witness some moderation in margins (from 26.5% in Q1FY22), we expect the company to maintain 20%+ over near to mid-term, driven by higher realizations for bulk alcohol and benign input costs. Robust sales growth and improvement in profitability coupled with stable working capital is likely to aid higher cash flow generation in the coming years. We expect GSL to generate strong cumulative cash flows of ~Rs. 900 Cr to be utilised for its ongoing and future CAPEX programmes and, debt reduction.”

The brokerage has further stated that “Though the stock has rallied ~4x over the past 6 months, we believe there’s still upside to this rally, with the caveat that the Government maintains its supportive stance on ethanol blending. We think the base case fair value of the stock is Rs 1,619 (17x Sept’23E EPS) and the bull case fair value is Rs 1,761 (18.5x Sept’23E E EPS). Investors can buy the in stock Rs 1,454-1,482 band (15.5x Sept’23E EPS) and add more on dips to Rs 1,273-1,297 band (13.5x Sept’23E EPS). At LTP of Rs 1,469, it quotes at 15.4x Sept’23E EPS.”

Disclaimer

The stock has been picked from the brokerage report of HDFC Securities Limited. 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.

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Asset quality outlook improving

According to the brokerage firm, the asset quality outlook for public sector banks is improving gradually after a prolonged corporate NPL cycle – gross non performing asset ratios had reached the peak of 15% in FY18. a) Government initiatives to boost manufacturing; b) rising commodity prices; c) deleveraging by large corporates; and d) balance sheet cleanup, along with the increasing pace of stressed asset resolution, have resulted in GNPA ratios moderating to 9.5% as of FY21.

“Most public sector banks carry healthy PCR in the 63-70% range (barring BoI with 79%). This places them broadly in line with private peers. Thus, we estimate credit costs to moderate, but believe normalization to be an FY23 event,” the brokerage has said.

Strong rebound in earnings

Motilal Oswal in its latest report has also said that these banks are well-placed to deliver a strong rebound in earnings as we estimate FY22E PAT to be 11 times of the sum of FY17-21 PAT, while FY22-24E earnings would grow at a healthy 25% CAGR.

“We estimate RoA/RoE to improve to 0.8%/13.2% for FY24E v/s 0.4%/6.1% for FY21. For the past few years, PSBs have focused on strengthening their balance sheets by improving the coverage ratios, which improved significantly to 68% in FY21 v/s 47% in FY18. During FY15-21, the Top seven public sector banks took a significant stock of provisions towards stressed accounts, with the total provisions coming in at Rs 7.2t. Thus, provisions as a percentage of PPoP stood elevated at 63-144% in FY20,” the brokerage has said.

But the stocks of Bank of Baroda, Union Bank, Canara Bank, SBI and Indian Bank

Motilal Oswal has a buy call on the stocks of public sector banking names like State Bank of India, Union Bank of India, Indian Bank, Canara Bank and Bank of Baroda. The highest stock price gains that are being seen are in the stocks of Union Bank of India, State Bank of India and Bank of Baroda.

As far as we at goodreturns are concerned, while there maybe value in PSB stocks to buy them, the indices have run-up too sharply, thanks to huge inflows into mutual funds. We believe that it makes sense to avoid pumping large sums of money into stocks at the moment. Be a little cautious only because of where the markets are at the moment.

Disclaimer

The stocks have been picked from the brokerage report of Motilal Oswal Financial Services. 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.