Indian alcohol (IMFL) manufacturers have traditionally generated low RoCEs and we expect that to continue. The IMFL industry is governed by regulations that not only protect the market share of the incumbents, but also make the industry capital intensive.
IMFL manufacturers sell to distributors at what is known as exdistillery price (EDP), which includes excise duty (about 50% of EDP). Excise duty is payable at the factory gate, but manufacturers receive payment from distributors after 45-60 days. While IMFL manufacturers do get liberal credit from their suppliers, the quantum is small relative to the receivables.
IMFL manufactures usually fully fund the working capital needs of their contract bottling units. This shows up under “loans & advances” in the balance sheet. Altogether, the working capital cycle is usually higher than 100 days of net sales.
Even at the peak of a margin cycle, IMFL manufacturers’ return ratios are barely above their cost of capital and thus have to raise capital to fund growth. In this context, we find valuations expensive. We maintain our UNDERPERFORM rating on United Spirits.
