Small Midcap Mantra | This beverage stock trebled in 3 months, can add 50% in 3-6 months

Small Midcap Mantra | This beverage stock trebled in 3 months, can add 50% in 3-6 months
September 14
14:28 2021

Increased prices of beverages and wider acceptability of alcohol drinks in social circles have driven investor sentiment in the stock of the company, which posted strong results.

Sunil Shankar Matkar

September 14, 2021 / 01:53 PM IST

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Alcoholic beverages company Globus Spirits, a part of the BSE SmallCap Index, has delivered bumper returns to investors in the past three months, outshining not only the benchmark, broader and sectoral indices, but also its peers by a wide margin.

The stock price has trebled in three months, becoming the second-biggest gainer on the BSE SmallCap Index after Brightcom Group, which surged 219 percent. In the same period, the BSE SmallCap Index gained 11 percent, the BSE MidCap Index was up 8 percent and the benchmark BSE Sensex gained 11 percent.

Global Spirits shares decisively crossed Rs 500 for the first time on June 17. They surpassed Rs 1,000 on August 31 and Rs 1,200 on September 13, to hit a record high of Rs 1,216.95. Technically, the stock has formed strong bullish candles on the monthly charts in three of the past four months.

What’s driving the stock?

Strong earnings growth in the previous two quarters along with rising prices of beverages and increased liquor consumption are among the factors that boosted investor sentiment, experts said.

“Reopening of the economy, higher prices of beverages, disposable incomes that increased due to the pandemic, favourable demographics, an expanding middle class, a stronger preference for luxury food and drink experiences, greater acceptability of alcoholic beverages in social circles, increased liquor consumption in rural areas and better-than-expected results are the factors that are fuelling the rally in the sector,” said Gaurav Garg, head of research at CapitalVia Global Research.

Garg said the ability of beverage companies to serve customers in both good and bad times is a distinct advantage.

Globus Spirit is a producer of grain-based extra neutral alcohol, with a capacity of 160 million litres per annum. It has a presence in Rajasthan, Haryana, Bihar and West Bengal. Its business is largely divided into two segments – manufacturing business (bulk spirits, franchisee bottling and by-products) and the consumer business (value and premium segments). It recently started producing sanitisers.

The share of the consumer business widened to 42 percent in Q1 of FY22 from 35.5 percent a year earlier on the back of growth in both volumes and value.

Earnings Performance

The company recorded a 198 percent year-on-year increase in profit to Rs 55.67 crore in the quarter ended June and a sequential rise of 10 percent, driven by operating income and volume growth with a reduction in finance costs.

Net revenue from operations grew 61 percent YoY and 3.9 percent QoQ to Rs 370.5 crore in Q1.

Earnings before interest, tax, depreciation and amortisation grew 146.9 percent to Rs 99.19 crore from a year ago and 11.2 percent from the previous quarter. The EBITDA margin increased to 26.7 percent from 17.4 percent YoY and 24.9 percent QoQ.

The EBITDA margin expansion was driven by the higher share of the consumer business and ongoing impact of ethanol sales, the company said in a presentation published in August.

It said finance costs declined 23 percent YoY to Rs 3.9 crore in Q1. The savings in finance costs were due to reduced outstanding debt and lower interest costs. The higher EBITDA margin coupled with lower finance costs drove profitability at the PAT level, the company said.

Expansion and Merger

The company is expanding capacity in West Bengal and Jharkhand.

In West Bengal, the expansion work of an additional 140 kilolitres per day (KLPD) is nearing completion and is likely to be commissioned by September 2021, Globus Spirits said. Work on the planned expansion of 140 KLPD in Jharkhand has started and the project is expected to be commissioned in FY23.

An additional 140 KLPD expansion is under evaluation between Bihar and another location, where the work may start later in FY22, the company said.

In an update on the status of the merger of subsidiary Unibev with itself, the company said shareholders, secured creditors and unsecured creditors of both companies have approved the scheme. The final hearing at the National Company Law tribunal that was initially set for June 10 was postponed to August 26 due to the second wave of Covid-19, according to the presentation.

The company’s merger with Unibev is on track and is expected to be completed by next year, said Aprajita Saxena, a research analyst at Trustline Securities.

What should investors do and where is the stock headed?

Experts said the stock is in bullish territory with strong volumes and can continue rising to Rs 1,800-1,900 in the next three to six months, gaining 48-56 percent over the current market price. The company’s performance in the past two quarters has added more confidence in the stock, they said.

“Investors who have already added the stock into their portfolio can hold the stock as it is recording higher highs on a closing basis with a stop-loss of Rs 990 and those who want to add the stock should wait for the correction,” said Garg of CapitalVia. “By looking at the increased sales in the company and its performance in the past two quarters, we may expect the stock to reach Rs 1,800-1,900 in three to six months.”

Sachin Gupta, AVP-research at Choice Broking, said Globus Spirits has been rising continuously for the past three weeks after breaking out of Rs 988 levels.

“It has gained more than 20 percent from the breakout levels and closed at Rs 1,212.75 on Monday,” he said.

Technically, he said the stock is in bullish territory with rising volumes, which indicate bullish strength.

“Moreover, the price has been trading above the upper Bollinger Bands and Ichimoku Cloud formation. Also, a momentum indicator RSI and Stochastic witnessed a positive crossover that supports the bullish trend,” he said.

“The stock has traded in a higher highs and higher lows formation, which suggests more upside move for the near term.”

Based on this technical structure, “we expect the upside to continue till Rs 1,450-1,500 levels. On the downside, support comes at Rs 1,050,” he said.

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