Stocks that Could Get High on Alcohol Industry Growth 

Dear Viewers.

Next time when some of you visit a liquor store, chances are you will be surprised with a Coca Cola brand sitting next to the familiar names.

You see, Coca Cola is launching its ready to drink alcoholic beverage in the domestic market.

Already, pilot tests are on in Goa and Maharashtra.

This is not entirely a new arena for Coca Cola. The product is already in global markets like Japan, China, and Philippines.

If it does well, this could just be the beginning with more alcoholic products like ready to drink premixed cocktails in the offing.

It's too soon to say what that will mean for domestic incumbents in the alcohol industry. I don't think it will be negative.

In fact, if you asked me what is one business that could beat cyclicality, irrespective of economic recession, inflation, growth or slowdown, liquor or alcohol business would be at the top of my mind.

Keeping the moral overtones aside, be it an occasion to celebrate or a distraction for negative events in life, a lot of people turn to a bottle or glass of liquor. There is an official study that suggests that liquor consumption is price inelastic.

India is at an inflection point in my view.

Remember the long queues in Delhi after the lockdown announcement. I've seen a lot of liquor stores and new bars coming up in my neighbourhood. And no one is frowning. It's now a trend for the rising middle class to have a dedicated space for bars at homes with fancy glasses and liquor bottles. More Indians, including women are raising glasses. Favourable demographics, life style changes, mass urbanisation and premiumisation, liquor industry in India is set to grow.

The liquor segment in India is expected to grow at 8% CAGR for next five years. And the growth rate for beer is estimated at 9% CAGR.

If you share this view with me and are keen on how to ride that high through investment returns, researching beer, wine, and liquor companies is just the starting step.

Check out the list of the direct players in the slide here.

But these are not the companies I'll be dwelling on today.

You see the liquor industry has its own challenges. It is highly regulated. There are quotas, controlled pricing, and rules about production, taxes, licenses, and so on.

So, is there a way to ride this trend and minimise these risks?

The answer lies in the supply chain, which is what we would be exploring today.

Whether you are a teetotaller or a connoisseur, one thing we all agree on is the aesthetic appeal of glass liquor bottles.

Not only aesthetic appeal, but glass also remains a preferred packaging material for alcohol as it is non-reactive unlike plastic.

AGI Greenpac is one of the listed companies in this space and is the second largest glass container company in India. Glass containers make up 89% of its revenue. Of this, alcoholic beverages segment comprises 75%.

The company has over 500+ diversified institutional clients across industries such as Kingfisher, Bagpiper, Johnnie Walker, Corona, Carlsberg, Sula, Bacardi, Carlsberg, Nestle, it also supplies to Glenmark, HUL, and Coca Cola among others in the non-alcohol segment.

AGI claims to have the best industry margins in the glass container industry, with EBITDA of 23%. The company has ventured into the cosmetic and perfumery segment, where the margins are likely to be better with premiumization.

It claims to be the only container glass company in India with the flexibility to use multi fuel option that helps when the prices of fuels are volatile. And its glass operation has one of the best production efficiencies in the industry, resulting in over 90% machine efficiency. The key raw material is soda ash.

The company expects growth and premiumization in the liquor market to some of the key growth drivers.

Apart from income from packaging, it earns annual lease rental from investment property of Rs 21 crore.

For this year, which is FY24, the management has guided for a growth of 15%-18%.

The company aims to maintain margins in the range of 21%-23%.

AGI also has plans to acquire HNG or Hindustan National Glass, a listed entity in the same industry. In 2 to 3 years of acquisition, based on HNG's effective operating capacity, AGI expects thee topline at over Rs 55 bn versus a revenue of Rs 27 bn in FY23. However, this is subject to regulatory approvals.

While the acquisition, if it goes through, will be good for growth and market share, there are few things to keep in mind. First, acquisition will be funded by debt and is likely to take the debt-to-equity ratio of AGI at above 1 times. Second, the operating efficiency of HNG is much lower than the company with 9% EBITDA margin on a trailing 12month basis. Vs 23% AGI. So, there could be some moderation in margins until full efficiencies are achieved.

With return ratios at 15% and above, and debt to equity at 0.8 times, the stock of AGI trades at a PE of 20 times.

Haldyn Glass is another player in glass container segment with clients in liquor manufacturing, foods/FMCGG and non-alcoholic beverage manufacturing, pharmaceutical and perfumery sector. About 70% of its sales come from the liquor sector, with clients like Pernod Ricard, United Spirits, Tilaknagar Industries, and Shiva Distilleries. The stock is trading at a PE of 31 times .

Praj Industries, a leading biotechnology player, is another key beneficiary of the rise in beer consumption. The company has a 70% share in the domestic brewery industry, catering to plants, technology and equipment's requirements of the industry. For more details on Praj, you could check out my video shared in the link below this one.

Now don't consider any of these names as a recommendation. But they should indeed be in your extended watchlist for the liquor industry, beyond the direct players.

Let me know through your likes if you find this video useful. I would also appreciate your feedback in the comments section. For more such content, subscribe to Equitymaster YouTube channel. Thank you for watching. Goodbye.