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«“Globus Spirits Q4 FY13 Earnings Conference Call” May 22, 2013 MANAGEMENT: MR. AJAY SWARUP MANAGING DIRECTOR & CEO, GLOBUS SPIRITS MR. SHEKHAR ...»

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“Globus Spirits Q4 FY13 Earnings Conference Call”

May 22, 2013

MANAGEMENT: MR. AJAY SWARUP -- MANAGING DIRECTOR & CEO,

GLOBUS SPIRITS

MR. SHEKHAR SWARUP -- EXECUTIVE DIRECTOR,

GLOBUS SPIRITS

DR. BHASKAR ROY -- EXECUTIVE DIRECTOR, GLOBUS

SPIRITS

MS. RUCHIKA BANSAL – VICE PRESIDENT, GLOBUS

SPIRITS

MODERATOR: MR. NIKHIL VORA – MANAGING DIRECTOR & HEAD,

RESEARCH, IDFC LTD.

Page 1 of 16 Globus Spirits May 22, 2013 Ladies and gentlemen, good day and welcome to the Globus Spirits Q4 FY’13 Earnings Conference

Moderator:

Call hosted by IDFC securities. As a reminder for the duration of the conference, all participant lines are in the listen only mode and there will be an opportunity for you to ask questions at the end of today’s presentation. If you need assistance during this conference call, please signal an operator by pressing ‘*’ and then ‘0’ on a touch tone phone. Please note that this conference is being recorded. At this time I would like to hand the conference over to Mr. Nikhil Vora. Thank you and over to you sir.

In FY’13 earnings conference call for Globus Spirits, we have with us the senior management team of

Nikhil Vora:

Globus represented by Mr. Ajay Swarup – Managing Director and CEO, Shekhar Swarup – Executive Director and Dr. Bhaskar Roy – Executive Director. I will hand it over to Ajay to make the opening remarks and then to Dr. Bhaskar Roy to lead on to financials and open the floor for Q&A later on. So over to you Ajay.

Ajay Swarup: Thank you. Good afternoon everyone and a very warm welcome to our Q4 and FY13 earnings call. I will begin by sharing key highlights and achievements in the period, following which Dr. Bhaskar Roy will take you through the financial results.

We are happy to report several positives in both our consumer and manufacturing businesses. Our brands have shown good traction with our IMFL rum brand Hannibal receiving CSD approval and IMIL flagship brand “Nimboo” pushing growth in Rajasthan. We have also successfully increased our capacity, which due to our 360 degree strategy is already operating at high utilizations. We have firmed up our plans for Greenfield expansion into the fast-growing market of Bihar as a first step to tapping the lucrative Eastern states. With the recent investment by marquee international

–  –  –

Let me now take you through business wise performance: In our consumer business, the highlight in the period under review has been the success of our branding initiatives both in IMFL and IMIL. In IMFL, our rum brand Hannibal saw success with approval for CSD sales. The CSD approval opens up a rum market opportunity of over 5mn cases and is significant as we would gradually apply for approvals for our other IMFL brands. We expect sales to commence in H1’FY14 itself. Our gin brand ‘White Lace’ has emerged as the third largest in its category in the state of Rajasthan. As mentioned in our previous calls, we are consciously reorienting our portfolio with a clear focus on contributions and have in fact exited the ‘cheaper’ segment which is reflected in improved realizations but lower sale volumes of IMFL for this year.

Our branding push in IMIL, the largest contributor to our revenues with 46% share, has also shown success. Our flagship IMIL brand Nimboo continues to be a market leader in Haryana with 60% share in clear spirits. This year, we took Nimboo to Rajasthan, where we are replicating the Haryana success. Nimboo’s launch has already helped us expand our distribution in Rajasthan where we grew Page 2 of 16 Globus Spirits May 22, 2013 7.6%, as we opened up previously untapped areas of the state. In fact, it is thanks to the growing strength of the brands that we were able to successfully reduce trade schemes in the period under review. This was possible because of the ‘pull’ for our brands from the consumer which in turn helped us maintain our market shares above 20% in Haryana. In total, we have built a successful portfolio of 3 mainstream IMFL brands in Whisky, Rum and Gin categories and 4 IMIL brands aligned to regional flavor preferences and are strongly committed to grow them further. During the period, we have also made an entry into the large Maharashtra IMIL market. We have successfully done a pilot run there via a bottling partner. This would help us tap the largest IMIL consuming state in India with a consumption of about 35 million cases per annum.

Our manufacturing has been our underlying strength. We have built one of the largest and the most efficient grain distillery operations in India with highest recovery rates. We are suppliers to premium IMFL brands not only in India but have seen traction with premium brands in the export market as well. The benefits of the 360 degree model were clearly evident in our brownfield addition of 42.2 million litres of ENA capacity at Behror (Rajasthan) and Samalkha (Haryana) where we have been quickly able to reach 85% utilization in the new plants. The quick ramp-up was reflected in bulk alcohol volume sales, which increased by 58%. In IMFL Franchisee business, we entered into a new contract with United Spirits and revived our contract with Jagatjit industries for bottling of their brands at our Samalkha facility. Our IMFL franchisee business took great strides with 52% growth in total volumes.





In a very positive development, marquee international investor Templeton Strategic Emerging Markets has joined us as a partner in our growth. They share our belief that IMIL business has substantial growth potential coupled with attractive economics, especially for a 360 degree fully integrated setup, where one can optimize the opportunities presented by the market. The funding is for greenfield expansion in the fast growing Bihar market. Bihar has a large IMIL market of over 22mn cases growing at 20% annually. The state also faces a shortage of bulk alcohol, with demand supply gap exceeding 50mn BL in FY13. We look forward to implementing our successful 360° business model there. The work on the project has commenced, and we expect commissioning to happen in 18 – 24 months.

We approach FY14 with great optimism; as all our business segments are primed for growth. Our expanded manufacturing capacity will come into full play this year. Our IMFL business is now well focused and on a growth path. We believe we have several niche market opportunities in higher value added segments which we can profitably address. In IMIL, we are building Nimboo in Rajasthan. We will soon expand our coloured spirits offerings in Haryana. Our company is continuously implementing initiatives to increase productivity, quality and efficiency in alcohol manufacturing as well as the by-products chain. We see opportunities in export market for our high quality products. On the cost front, the grain prices have now stabilized and we should see improvement in margins going ahead. I would now like to hand over to Dr. Bhaskar Roy for the overview on our financial performance.

–  –  –

Moderator: Thank you very much. We will now begin the question answer session. The first question is from the line of Harit Kapoor from IDFC Securities. Please go ahead.

–  –  –

Shekhar Swarup: Yes thank you very much for that question. Our IMFL strategy for the current financial year is to retain our growth in the higher value added segments which is mainly the regular category, as also to add high value premium brand in the market. As far as volume targets go, our volume targets are based on the markets where the regular brands have been successful and do not include the cheap brands that were part of our portfolio last year. We expect to maintain total sales that we achieved last year within the regular brands that we have. And as far as the premium sales are concerned, those will be small and will come in towards the second half of this financial year.

Harit Kapoor: What is our capacity utilization currently in terms of we have added certain capacities, just wanted to know what our current capacity utilization is and what do we see that in FY’14?

–  –  –

Harit Kapoor: Okay so what would be the total capacity utilization as in, in terms of our capacity would be utilized in terms of million liters currently?

Dr. Bhaskar Roy: Our present capacity is, we will offer a capacity of 92.6 million liters it is out of 120 million liters and out of that we will achieve at least around 80% of the capacity.

–  –  –

Dr. Bhaskar Roy: Not Maharashtra, in Bihar.

Harit Kapoor: Okay in Maharashtra when do we see the business starting?

Dr. Bhaskar Roy: Maharashtra we have already started with sales of country liquor through franchise modes and we have done initial pilot projects wherein we have already sold around 9-10 thousand cases last year.

We will continue with the franchise arrangement in this current year. Last year, we started selling only in February and March, so this year we will have a full year.

Harit Kapoor: And it is under same brands that we have.

Dr. Bhaskar Roy: Yes same brands Nimboo and others, which we are doing in Haryana.

Shekhar Swarup: I just want to come in here, the important thing for us is that this is the first time an IMIL player is using the franchised bottling route to market its brands in this segment. It is low risk start for us and we are only opening up our brands for sales in limited markets situated in Maharashtra. Once we have some traction in this we would be able to report more concrete targets for the period to come.

Harit Kapoor: Also I just wanted to understand on the Bihar Greenfield expansion, what is the capacity that we are putting up their which you said will take 18-24-months?

Dr. Bhaskar Roy: We are putting up 65 KLPD ENA plant with a bottling of around 2 to 3 lakh cases per month.

Ruchika Bansal: 65 KLPD roughly translates to 20 million liters per annum.

Harit Kapoor: Got that, just also on your RM, I just wanted to understand you have seen this huge increase in grain prices, I just want to know what the average was for Q4 and how is that looking right now?

Dr. Bhaskar Roy: At the start of last year, prices were around Rs. 1100 per quintal. We ended with around Rs 1,450per quintal but the good thing is that for the last 4-5 months the prices are hovering at the same range. So, we are feeling that the worst is over and the prices will remain steady at this level.

–  –  –

Dr. Bhaskar Roy: In the bulk spirit segment, we fix the prices every month so there is a chance of passing on at least part of the increased cost to the finished product. But in case of bottled products like IMIL and IMFL, the prices are fixed in the beginning of the year. So, in the middle of the year if there is a disruption we have to absorb it. Now in this year we have received price increases in two states, Haryana and Delhi. In Rajasthan as it was an election year, we have not received any price increase.

Harit Kapoor: Okay what would be the quantum in Haryana and Delhi that we would have got?

–  –  –

Dr. Bhaskar Roy: Haryana we got Rs. 30 and in Delhi we got Rs. 22.

Harit Kapoor: Okay sir lastly just wanted to check on your bulk alcohol business, initially we got a new contract with United spirits and you have renewed your Jagatjit contract so just wanted to know for what market and how much capacity is this, what will we be operating for them?

Dr. Bhaskar Roy: Actually this year we have done franchise volumes of around 19 lakh cases. Next year our target is that this should, at least, grow by 50% with the current contracts in hand.

Harit Kapoor: That will be led by these two?

Dr. Bhaskar Roy: That will be led by Jagatjit and USL. To provide a boost to the franchisee business, we are adding bottling lines and bottling halls so that we can accommodate higher volumes from them.

–  –  –

Moderator: Thank you. Next question is from the line of Madresh Shah from M Capital. Please go ahead.

Madresh Shah: Last year you had reduced your cheaper brands sales quite drastically, of course this has increased realizations. This year do you plan to continue to reduce the cheaper brand sales even more?

Dr. Bhaskar Roy: We have already discontinued the cheaper brands and we are only concentrating on the regular brands.

Shekhar Swarup: Part of the sales that we have reported for last year includes sale of cheap brands, as the decrease in sale of these brands happened over the course of the year. As we start the new financial year in April, we do not have any cheap brands business and all business that we will have in the current financial year, will be that of higher value added products.

Madresh Shah: Okay so this should lead to further realization growth as you discussed earlier I assume?

Shekhar Swarup: Yes this should lead to further improvement in realizations.

Moderator: Thank you. Next question is from the line of Sachit Khera from Smart Equity. Please go ahead.

–  –  –

Sachit Khera: I was just looking at your presentation and I noticed that the realization of the bulk alcohol segment has increased from 41.8 to 42.4. Could you just give me a few thoughts on that because considering the inflation rates how does this realization work?

Dr. Bhaskar Roy: It does not depend on the inflation rate, it depends on the market situation. It depends also on the surrounding market. We primarily make alcohol from grain. In Haryana we are surrounded by 2 states

- Punjab and UP. In UP, the spirit is available from molasses, so now that the molasses spirits is cheaper than grains spirits, we have to match our price such that bulk alcohol consumers in Haryana buy only from within the state.

–  –  –



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