Sunday, November 13, 2011

High Spirits

The distillery industry is grappled with issues such as protective regulatory policies, failing monsoon hence lower sugar output and fragmented nature of the business. However, I believe the market has already factored these downfalls into company valuations and traders today are taking these stocks higher based on the short term factors such as anticipated M&A activity in the sector.

Companies operating in developed geographies with global brands have been trading at an average P/E multiples of 21-22. In India, distilleries are trading at an average P/E multiple of approximately 16-18. Based on these metrics one would assume there is not too much upside left in this industry.

However, I believe that in the long run this industry would provide good returns primarily due to the changing demographic profile, rising disposable incomes and growth of the consuming class leading to a consuming economy similar to that of the US and UK. If you dig deeper into the maze, you will discover that few mid market distilleries with locally recognized brands appealing to SEC B and C genres in the age group of 25+ are trading at average P/E multiples of 6-8. With the right sales and marketing strategy to create brands coupled with an inorganic growth strategy, it is these companies that would provide value to an investor.

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