IPO: Allied Blenders & Distillers

Allied Blenders & Distillers, a leading Indian-made foreign liquor (IMFL) company, is coming out with its IPO (initial public offering) on June 25, 2024. Here's a breakdown of the company's strengths, weaknesses, and growth prospects to help investors make an informed decision.

In a nutshell

• Quality: The company's three-year average ROE and ROCE are 0.5 per cent and 11.3 per cent, respectively. Moreover, its cash flow from operations (CFO) has been positive during FY21-FY23.
  
• Growth: The company's revenue grew by around 6 per cent annually during FY21-23 due to stable demand and the introduction of new products. However, its profitability has been volatile with an average operating margin of 2 per cent during the same period.
  
• Valuation: Post the IPO, the stock will be valued at a P/E and P/B ratio of 2,665 and 5.6 times, respectively.
  
• Overview: Whiskey dominates the IMFL market and accounted for 95 per cent of the company's volumes in FY23. The company stands to benefit from stable demand due to the habitual nature of its products, and the rising trend of premiumisation in the overall industry. That said, the industry is highly regulated. It faces the constant risk of increasing taxes. The inability to raise prices due to volatile raw material costs and regulatory price restrictions are a constant threat to the company's margins.

About the company

Allied Blenders & Distillers is one of the leading alcohol producers in India, with an 8.2 per cent market share (in terms of volumes) in the IMFL market in FY23. It primarily produces whiskey, followed by brandy, rum, vodka, and gin. Some of its prominent brands include Officer's Choice, Sterling Reserve, and Iconiq. Allied Blenders & Distillers boasts a pan-India distribution network with 79,329 distributors.

Strengths of Allied Blenders & Distillers

• It is a well-established brand in the Indian whiskey market, with an 11.8 per cent market share as of FY23.
  
• It operates in an industry with high capital requirements and entry barriers for other players. Moreover, advertising is highly restricted, which benefits existing brands.

Weaknesses of Allied Blenders & Distillers

• It has one of the lowest operating margins in the industry at 2.3 per cent as of 12-months ending December 2023.
  
• Around 48 per cent of the company's revenue comes from various government-controlled retail outlets, leading to lower pricing power .
  
• It is unable to raise prices due to government mandated regulatory caps on prices and delays in the revisions of MRP (maximum retail price).
  
• Competitive pricing amongst the existing IMFL players also weighs on the profitability of the company.

Risk report

Company and business

• Are Allied Blenders & Distillers' earnings before tax more than Rs 50 crore in the last 12 months?
  No. Its profit before tax was Rs 14 crore for 12-months ending December 2023.
  
• Will Allied Blenders & Distillers be able to scale up its business?
  Yes. Rising premiumisation in the alcoholic beverages industry due to increasing income levels, coupled with stable demand due to the habitual nature of products will help the company scale up.
  
• Does Allied Blenders & Distillers have recognisable brands with client stickiness?
  Yes. The company has well-established brands including Officer's Choice and Sterling Reserve under its product portfolio.
  
• Does the company have a credible moat?
  No. It operates in a highly competitive environment.

Management

• Do any of the company's founders still hold at least a 5 per cent stake in the company? Or do promoters hold more than a 25 per cent stake in the company?
  Yes. Promoters' stake will be 81 per cent post the IPO.
  
• Do the top three managers have more than 15 years of combined leadership at Allied Blenders & Distillers?
  Yes. The combined leadership tenure of the top three managers is 32 years.
  
• Is the management trustworthy? Is it transparent in its disclosures, which are consistent with SEBI guidelines?
  Yes. There is no information to suggest otherwise.
  
• Is the company's accounting policy stable?
  Yes. There is no information to suggest otherwise.
  
• Is Allied Blenders & Distillers free of promoter pledging of its shares?
  Yes. It is free of promoter pledging of its shares.

Financials

• Did the company generate a current and three-year average return on equity (ROE) of more than 15 per cent and a return on capital employed (ROCE) of more than 18 per cent?
  No. Its three-year average ROE and ROCE are 0.5 and 11.3 per cent, respectively. Its ROE and ROCE were 0.7 and 15.1 per cent, respectively, for 12-months ending December 2023.
  
• Was the company's operating cash flow positive during the last three years?
  Yes. It reported positive cash flows from operations in the FY21-FY23.
  
• Is the company's net debt-to-equity ratio less than one?
  No. Its net debt-to-equity stood at 1.8 times as of December 31, 2023.
  
• Is Allied Blenders & Distillers free from reliance on huge working capital for day-to-day affairs?
  No. Inventories and receivables constitute more than half of its balance sheet. Moreover, most of its borrowings are short-term and are used to meet its high working capital requirements.
  
• Can the company run its business without relying on external funding in the next three years?
  Yes. The company generated free cash flows in the last three financial years. Moreover, the IPO proceeds will help it lower its debt and save on interest outflows.
  
• Is Allied Blenders & Distillers free from meaningful contingent liabilities?
  No. Contingent liabilities as a percentage of equity stood at 47 per cent as of December 31, 2023.

Valuations

• Does the stock offer an operating earnings yield of more than 8 per cent on its enterprise value?
  No. Post the IPO, the stock will offer an operating earnings yield of 2.1 per cent on its enterprise value.
  
• Is the stock's price-to-earnings ratio less than its peers' median level?
  No. The stock is valued at a price-to-earnings ratio of 2,665 times as compared to its peers' median level of 79 times.
  
• Is the stock's price-to-book value less than its peers' median level?
  Yes. The stock is valued at a price-to-book ratio of 5.6 times, compared to its peers' median of 9.8 times.

Disclaimer: This is not a stock recommendation. Do your due diligence before investing.

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