Allied Blenders and Distillers is the third largest Indian-made foreign liquor (IMFL) company in India, in terms of annual sales volumes between Fiscal 2014 and Fiscal 2022.

The company is one of the only four spirits companies in India with a pan-India sales and distribution footprint. As of March 31, 2023, its products were retailed across 79,329 retail outlets across 30 States and Union Territories in India.

The company is a leading exporter of IMFL, and had an estimated market share (in terms of sales volume) of 11.8% in the Indian whisky market for Fiscal 2023. As of December 31, 2023, the company exported its products to 14 international markets, including countries in the Middle East, North America, Africa, Asia and Europe.

In 9M FY24, the company derived 97.77% of its revenue from India and 2.23% from outside India.

To enter into the mass premium whisky segment, the company launched its flagship brand, Officer’s Choice Whisky in 1988. Officer’s Choice Whisky has been among the top selling whisky brands globally in terms of annual sales volumes between 2016 and 2019.

As of December 31, 2023, its product portfolio comprised 16 major brands across five main categories of IMFL, i.e., whisky, brandy, rum, vodka and gin. The company also sells packaged drinking water under Officer’s Choice, Officer’s Choice Blue and Sterling Reserve brands. In 9M FY24, Whisky contributed 96.1% to total sales volume, Brandy 2.64%, Rum 1.14% and Vodka 0.12%.

With sales across 30 States and Union Territories, the company has a market share of 8.2% in IMFL market by sales volumes in Fiscal 2023.

The company has adopted a lifestyle approach towards brand positioning by focusing on building awareness, enhancing the appeal of its products sold under various brands, ensuring affordability of products, maintaining the quality and building consumer engagement.

The company owns and operates distillery located in Rangapur, Telangana that is spread over 74.95 acres with a built-up area of over 25,000 square meters. Its in-house distillation capacity of extra neutral alcohol (ENA), the key material used in the manufacture of products, is 600 lakh litres per year.

The company also has extensive bottling capabilities across India. As of December 31, 2023, it relied on 32 bottling facilities, including bottling facilities owned and operated and contract bottling facilities both on exclusive and non-exclusive basis, for bottling its products. As of December 31, 2023, the company owned and operated nine bottling units.

In 9M FY24, owned and operated bottling facilities (including leased facilities) contributed 75.77% to total revenue and third-party bottling facilities 21.52%.

Going ahead, the company intends to introduce new products in the premium, semi-premium and deluxe segments with an aim to deliver higher margins and greater profitability over time. The company also intends to introduce product experiences that will appeal to younger consumers and include flavoured spirits, craft spirits, low alcohol content beverages and ready mixes.

The company is evaluating growth opportunities through selective acquisitions and investments that are complementary to its growth strategy, particularly those that can help enrich product portfolio and expand its customer base.

Offer and its objects

The IPO comprises fresh issue of equity shares worth up to Rs 1000 crore and an offer for sale of equity shares aggregating up to Rs 500 crore by Bina Kishore Chhabria and Resham Chhabria Jeetendra Hemdev.

Price band for the IPO is Rs 267 to Rs 281 per equity share of face value Rs 2 each.

The objectives for the fresh issue includes prepayment/scheduled re-payment of certain outstanding borrowings of Rs 720 crore and remaining amount to be used for general corporate purposes.

Promoters of the Company are Kishore Rajaram Chhabria, Bina Kishore Chhabria, Resham Chhabria Jeetendra Hemdev, Bina Chhabria Enterprises, BKC Enterprises, Oriental Radios and Officer’s Choice Spirits. Promoters and promoter group holds an aggregate of 244,113,665 equity Shares, representing 100% of the pre-Offer issued and paid-up Equity Share capital. The post IPO shareholding for the same is expected to be around 81%.

The issue, through the book-building process, will open on 25 June 2024 and will close on 27 June 2024.

Strengths

Over the years, the company has developed a well-recognized product portfolio spread across various categories and price points. Moreover, certain of its brands, such as, Officer’s Choice Whisky, Sterling Reserve, Officer’s Choice Blue and ICONiQ Whisky, are ‘Millionaire Brands’ that have sold over a million 9-litre cases in one year.

Third party bottling of products provides it with flexibility to meet production requirements. In addition, owing to its contractual arrangements with local and regional third-party bottlers, the company is not required to transport products beyond state borders, thereby limiting any additional excise import and export duty expenses that would otherwise incur. This ensures that its products remain competitively priced.

There is a natural barrier to new entrants in mass-premium whiskey segment given the complexities of the business. The mass-premium segment requires large scale of operations, multiple units across various states, a strong distribution network, the ability to deliver products cost-efficiently while maintaining product quality to match consumer expectations.

Large segments of audiences that currently consume country liquor or economy brands are looking to upgrade supported by rising incomes. Given these trends, the company is well prepared to Increase its market share of Officer’s Choice Whisky across regions.

The company has a robust distribution network across India, ensuring widespread availability of its products and efficient reach to consumers across urban and rural areas.

Low per capita consumption coupled with positive demographics factors and addition of more than 13 million people each year to the population eligible for drinking, make India an attractive market for alcoholic beverages. The company is well positioned to capture tailwinds in the Indian IMFL industry.

The company is focused on innovation and new product development to cater to younger consumers.

The company is led by an experienced management team with a deep understanding of the alcoholic beverages industry and a track record of executing growth strategies effectively. Further, the company has decided to reconstitute the composition of its Board and senior management to include more industry experts.

Weaknesses

The company is substantially dependent on sales of whisky products under the Officer’s Choice brand, which generated 75.85% of its revenue in fiscal 2023 and 73.02% of revenue in 9M FY24. Any reduction in sales of these products could have a material adverse effect on business and financial prospects.

The company operates on a very low operating and PAT margin. In 9M FY24, its OPM and PAT margin was 3.09% and 0.07% respectively.

Government may increase taxes on alcohol to discourage its consumption. Changes in alcohol regulations, tax policies, or licensing requirements could adversely affect operations and profitability.

The company’s contingent liabilities constitute 47.07% of its net worth as of December 31, 2023. If these contingent liabilities materialize fully or partly, its financial condition may be adversely affected.

The income tax department conducted search and seizure operations (basis warrants issued) from December 11, 2023 to December 17, 2023 at several premises of the company. An adverse outcome in proceedings may result in significant tax liabilities.

Certain of its subsidiaries have incurred losses during Fiscal 2021, 2022 and 2023, and in the nine months ended December 31, 2022 and December 31, 2023.

Increasing scrutiny on environmental sustainability and social responsibility practices within the industry could lead to higher regulatory compliance costs or reputational damage, if not managed effectively.

The alcohol industry is working capital intensive in nature, and the company funds a large part of its operations through borrowings. As of March 31, 2024, the company had total financial indebtedness of Rs 834.58 crore.

The company’s Statutory Auditors have included certain emphasis of matters in their examination report and have included certain observations in Restated Consolidated Financial Statements.

The Company, its Directors, and Promoters are involved in certain legal and regulatory proceedings (including criminal proceedings). Any adverse decision in such proceedings may have a material adverse effect on business and reputation.

Valuation

In 9M FY24, consolidated sales were up by 9.69% to Rs 5911.14 crore compared to 9M FY23. OPM increased by 58 bps to 3.09%, which led to 34.69% increase in operating profit to Rs 182.37 crore. Other income decreased 63.18% to Rs 3.83 crore, while interest cost increased 30.15% to Rs 127.93 crore and depreciation decreased 5.61% to Rs 39.09 crore. PBT before EO increased 214% to Rs 19.18 crore. Tax expenses for 9M FY24 was of Rs 9.97 crore compared to tax expense of Rs 3.22 crore in 9M FY23. Net profit rose 46.79% to Rs 4.23 crore.

In FY23, consolidated sales were down by 1.27% to Rs 7105.68 crore compared to FY22. OPM decreased by 13 bps to 2.6%, which led to 5.76% decrease in operating profit to Rs 184.99 crore. Other income decreased 1.57% to Rs 11.07 crore, while interest cost decreased 6.98% to Rs 134.97 crore and depreciation decreased 5.96% to Rs 55.14 crore. PBT increased 55.57% to Rs 14.2 crore. Tax expenses for FY23 was of Rs 4.35 crore compared to tax expense of Rs 2.35 crore in FY22. Net profit increased 8.47% to Rs 1.60 crore.

The TTM EPS (excluding extraordinary items and relevant tax) on post-issue equity works out to Rs 0.16. At the upper price band of Rs 281, P/E works out to 1772.39.

The company will be repaying 90% of its debt from the issue proceeds. This will bring down its interest cost substantially and boost profits. TTM EPS works out to Rs 5.57 if 90% of its interest cost is removed, keeping all other items, including tax rate same. Re-worked P/E, at upper price band, moderates to 50.

As of 20 June 2024, its listed peers such as United Spirits trades at TTM P/E of 65, Radico Khaitan trades at TTM P/E of 91 and Globus Spirits trades at TTM P/E of 19. For FY23, Allied blenders & distillers OPM and ROE stood at 2.6% and 0.39% respectively, compared to 13.35% and 18.93% for United Spirits, 11.4% and 9.98% for Radico Khaitan, and 11.64% and 13.78% for Globus Spirits respectively.

Pre-IPO Enterprise Value/TTM Sales of Allied Blenders work out to 1.03 times, compared to FY24 Enterprise Value/ Sales of 3.56 times of United Spirits, 1.59 times of Radico Khaitan and 0.81 times of Globus Spirits.