GM Breweries Q1 FY25: This drink in the liquor market has enough fizz
The company has a solid balance sheet and the earnings outlook is robust.
Highlights
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- Revenues rose 4 percent in Q1
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- Gross margins rose 150 bps to 27.5 percent
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- Mills have requested a hike in sugar MSP
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- A good monsoon could drive volume growth
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- Stock is trading close to all-time highs
GM Breweries (GMB; Market cap: 2,063 crores; Rating: Over-weight), the Maharashtra-based country liquor manufacturer, has reported a modest uptick in top line in Q1 FY25. The earnings outlook appears stable, but any adverse industry developments could hurt the recovery in margins in the coming quarters.
Quarterly result highlights
Robust economic activity across the Mumbai Metro Region (MMR), especially across rural markets, drove the demand for country liquor in the quarter gone by. A revenue of Rs 152.4 crore in the quarter was up 4 percent year-over-year (YoY), in line with market expectations. Benign raw material costs drove the 140-basis points expansion in gross margins. While employee expenses came in nearly flat, other expenditures, which majorly include advertising, selling, and distribution costs, declined 10 percent YoY. The earnings before interest, taxes, depreciation, and amortisation (EBITDA) jumped 16 percent to Rs 31.5 crore.
Sugarcane output stable
The main raw material for GMB is molasses/rectified spirit, which is basically a byproduct of sugar production. According to the Indian Sugar & Bio-energy Manufacturers Association, sugar production in the current harvest season (2023-24), is estimated around 321 lakh tonnes, down ~3 percent YoY. Given the better-than-expected sugarcane output in the current harvest season and the existing market inventory, the sugar industry body is urging the government to permit sugar exports. Also, the National Federation of Cooperative Sugar Factories, the industrial body which represents the co-operative sugar mills in the country, has requested the central government to increase the minimum selling price (MSP) of sugar by 35 percent to Rs 42 per kg. The last hike happened when the government increased sugarcane price to Rs 31 in February 2019. Therefore, mills are requesting a price revision to offset the increase in production costs.
GMB’s gross margins have recovered recently on the back of favourable commodity yields. However, possible hikes in sugar MSP as well as the lifting of the ban on exports could exert some downward pressure on GMB’s gross margins in the coming quarters.
Outlook and recommendation
GMB has exhibited lacklustre sales growth for the last 4-5 quarters owing to subdued retail demand. Therefore, a recovery in the rural markets, helped by a good monsoon season and an upward revision in MSPs, could drive an uptick in consumer sentiment and business volumes in the near term.
The stock has recently been experiencing a bullish momentum, having witnessed a sharp rally of ~50 percent in the last 1 month. Still, the stock of GM Breweries makes for a good investment case right now on account of reasonable valuations (price-earnings ratio of 11 times FY25 earnings), solid balance sheet, and a robust earnings outlook.
Bymoneycontrol
