Analysis: Globus Spirits Ltd

Modified on November 29, 2018

The current section of “Analysis” series covers Globus Spirits Ltd, a manufacturer of country liquor (IMIL) and bottler for Indian made foreign liquor (IMFL) having a presence in multiple states with distilleries in Rajasthan, Haryana, West Bengal, and Bihar. The company owns IMIL brands like Nimboo, Narangi, Heer Ranjha, and Ghoomar.

“Analysis” series is an attempt to share with all the readers, our inputs to the company analysis submitted by readers on the “Ask Your Queries” section of our website.

 

Globus Spirits Ltd Research Report by the Reader (Gurjeev Anand)

 

Hello Sir

I wanted to share my analysis of Globus Spirits Ltd with you for your inputs.

 

About Globus Spirits Ltd:

Globus Spirits Ltd has 32% market share in Indian Made Indian Liquor (IMIL) in Rajasthan and 16% in Haryana where they have major operations. Doing some ground reality checks, I have found that Globus Spirits Ltd operates in all verticals of liquor space namely bulk liquor, packaging, IMIL and Indian Made Foreign Liquor (IMFL). Speaking and enquiring with locals, the brand sells. It is more of a volume play rather than premium play as of now.

 

Financial Analysis of Globus Spirits Ltd

Sales Growth of Globus Spirits Ltd:

20% CAGR (last 3 years 17%). Globus Spirits Ltd is maintaining a moderate growth rate. Indian Made Indian Liquor (IMIL) and bulk alcohol (Country Liquor) is a major percentage of their revenue. It also bottles for three major Indian Made Foreign Liquor (IMFL) companies.

Profit Margins of Globus Spirits Ltd:

  • Operating profit margin (OPM): Dropped from high teens of 17% to low of 7% in 2017. That means Globus Spirits Ltd has compromised on its margins for attaining its growth.
  • Net profit margin (NPM): Same trend is seen. From a high of 10% now down to 1%
Reasons for the same (last 2-3 years precisely):

In the last 2 years, Globus Spirits Ltd has spent ₹250 Cr in the expansion to install two plants (1 in Bihar and 1 in West Bengal). As the company’s plant was operational, Bihar was declared as a dry state and Globus Spirits Ltd had to close down operations. It affected Globus Spirits Ltd significantly.

The West Bengal plant has started recently and Globus Spirits Ltd would realize revenue from this plant soon. It has started 2 quarters back.

Globus Spirits Ltd has also managed to get a conditional license for operating Bihar plant from the authorities that it can produce Extra Neutral Alcohol (ENA) in Bihar but it would be allowed only to sell it outside the state.

Debt levels of Globus Spirits Ltd:

Globus Spirits Ltd has continuously increased debt to ₹272 Cr. This was mainly for capital expenditure (capex) of its plants. (Globus Spirits Ltd has India’s largest grain-based zero discharge plant).

Globus Spirits Ltd is also capitalizing its interest costs as interest cost in P&L is ₹18Cr and debt is ₹272Cr that turns out to be 6.5% roughly. The audit report does not specify the interest rates of the borrowings.

The large capital expenditure has led to an increase in the depreciation expense. The West Bengal plant has just started operations and Bihar would commence operation any time in Q2 -Q3 of FY18-19 as stated by the company in conference calls (concalls).

Interest Coverage of Globus Spirits Ltd:

Taking the effects of capitalization, the interest coverage ratio (ICR) is around two, which is not quite comfortable. An ICR above 3-4 would give a little sense of security.

Tax Rate of Globus Spirits Ltd:

The company has been entitled to minimum alternate tax (MAT) credit and is getting tax breaks.

Further advised reading: How to do Financial Analysis of Companies

 

Operating efficiency analysis of Globus Spirits Ltd

Net Fixed Asset Turnover (NFAT):

Due to heavy capex investments, the assets have gone up. Therefore, the NFAT has come down from five to 1.5.

Receivable Days of Globus Spirits Ltd:

The collections turnover has been faster and has come down from 26 days to 17 days.

Inventory Turnover Ratio (ITR) of Globus Spirits Ltd:

The inventory turns are stable around 14 -15. The same has increased from 12 in the last 4-5 years.

Working Capital Cycle of Globus Spirits Ltd:

As evident from the cash flow, Globus Spirits Ltd works on a negative working capital cycle, which helps them in getting their funds in due course. Otherwise, they would have to issue more shares or take more debt for commencing their operations.

It seems the business has attained some stability by a faster collection of receivables and faster inventory rotation. This has added them to keep debt levels under check. Their Self Sustainable Growth Rate (SSGR) is -5 to -6% but they have been growing at 17-20%

Capital work in progress (CWIP) has come down to nil. All the assets previously under construction are complete and the corresponding amount has been added to the fixed asset account. Now debt reduction can be focused (as intended by the management in several con calls).

Read on: How to Assess Operating Efficiency of Companies

 

Cash flow from operations (CFO) vs. net profit after tax (PAT)

Cumulative CFO (cCFO) is higher than Cumulative PAT (cPAT) for the last 10 years, mainly because of high-interest cost, high depreciation. However, the CFO has risen from ₹34 Cr to ₹100 Cr in the last 4 years. That shows the strength of the operations going ahead.

In spite of the higher cCFO, the company has negative free cash flow (FCF) due to heavy investments (capex) for setting up several new plants to increase capacity.

Further advised reading: Understanding Cash Flow from Operations (CFO)

 

Dividends of Globus Spirits Ltd:

The company has not paid dividends in the last 4 years and saved its earnings to invest in furtherance of business.

The company has introduced high margin IMFL products to improve operating margins and focusing now to reduce debt (that would reduce interest cost and improve bottom-line profitability).

 

Credit Rating Reports analysis of Globus Spirits Ltd

Globus Spirits Ltd faces volatility of input prices of raw material and limited pricing power (as the government controls the prices). This is the reason for fluctuating and then dropping operating margins. The alcohol industry is highly regulated. Govt. imposes several kinds of taxes on this industry.

Further advised reading: Credit Rating Reports: A Complete Guide for Stock Investors

 

What could be the triggers for Globus Spirits Ltd? (Valuations & Triggers):

1) Some portion of the depreciation related to new plants set up has come in the books. The plant would start operations this year. The earnings from the new plant would be seen form next year.

2) Management of Globus Spirits Ltd has Vijay Rekhi into the company. He is the person behind the huge success of United Spirits over last 3 decades. Mr Rekhi had served as President and MD of United Spirits until 2011.

3) The launch of high margin products under UNIBEV umbrella: In Dec 2017, Globus Spirits Ltd launched premium high margin brandy. In June 2018, they launched two premium whiskey brands. Slowly the movement of high margin brands IMFL would take more percentage of revenue and the operating margins would improve.

4) After the completion of its newly installed plant, Globus Spirits Ltd is focusing on restarting of Bihar plant and paying down debt.

5) If grain-based ethanol is allowed to be used as a mix for automobile fuel under the biofuel policy, then it will be good for Globus Spirits Ltd. India is now at 2% blending level in spite of the target of 10% blending.

6) Globus Spirits Ltd has been given a market cap of ₹350 Cr. (₹250 Cr was invested for setting up 2 plants & the business has been growing its operating cash flows from ₹34 Cr to ₹100 Cr in last 4 years). Globus Spirits Ltd is the cheapest of the peers as compared and it is available at a multiple of 3.5-4x of operating cash flows.

7) Elections in Rajasthan where Globus Spirits Ltd has a major market share.

8) The inclusion of liquor in goods and services tax (GST).

Thank You

Regards

Gurjeev Anand

 

 

Author’s Response

 

Hi Gurjeev,

Thanks for sharing the analysis of Globus Spirits Ltd Limited with us! We appreciate the time & effort put in by you in the analysis.

Let us analyse the performance of Globus Spirits Ltd over the last 10 years.

While analyzing the past financial performance data of the company, an investor would notice that until FY2014, Globus Spirits Ltd used to disclose only standalone financials. This is because; the company did not have any subsidiary until then and in FY2015, it two subsidiaries: M/s Uber Blenders & Distillers Ltd and M/s Globus Trade Bay Ltd. Therefore, since FY2015, the company has been preparing both standalone as well as consolidated financials.

We believe that while analysing any company, the investor should always look at the company as a whole and focus on financials, which represent the business picture of the entire group. Therefore, while analysing Globus Spirits Ltd, we have analysed standalone financials until FY2014 and consolidated financials from FY2015 onwards.

Further advised reading: Standalone vs Consolidated Financials: A Complete Guide

 

Globus Spirits Ltd FY2009 2018 Financials

 

Financial Analysis of Globus Spirits Ltd:

While analyzing the financials of Globus Spirits Ltd, an investor would note that in the past (FY2009-18), the company has been able to grow its sales at a decent rate of 15-20% year on year. Sales of the company increased from ₹196 cr. in FY2009 to ₹967 cr in FY2018.

However, when an investor analyses the operating profit margin (OPM) of Globus Spirits Ltd, then she notices a distinct pattern over the last 10 years (FY2009-18). The investor notices that the history of Globus Spirits Ltd can be divided into two distinct periods. The first period lasted until FY2013 when Globus Spirits Ltd reported OPM in the range of 15-17%. However, FY2014 onwards (the second period), the OPM of Globus Spirits Ltd declined sharply to 7-9%. It seems like the business dynamics of Globus Spirits Ltd underwent a sharp change in FY2014 and the company could not recover from the same until now.

While reading the FY2014 annual report, in the Chairman’s message to shareholders on page 18, the investor gets to understand the reasons for such a sharp decline in the OPM:

Globus Spirits Ltd FY2014 Price Increase Not In Line With Cost Increase

Further advised reading: Understanding the Annual Report of a Company

In the above communication, an investor would notice that Globus Spirits Ltd does not have the ability to pass on increases in the cost of raw material to its customers. This is because in the key markets of Globus Spirits Ltd, the pricing of its products (Indian made Indian liquor, IMIL) is determined by the state governments and Globus Spirits Ltd has no direct control over it.

An investor gets to know about the inability to Globus Spirits Ltd to pass on increases in the cost of raw material when she reads the credit rating report of the company prepared by CARE in Dec. 2017 (page 2):

Globus Spirits Ltd CARE 2017 Limited Pricing Power Price Flexibility

Further advised reading: Credit Rating Reports: A Complete Guide for Stock Investors

Such business conditions where a company is not able to pass on the increase in the cost of raw material to its customers are very difficult. This is because, in case of a sharp increase in the raw material prices, companies may end up making losses. Under such circumstances, companies may have to choose between the options of continuously lobbying the state governments to increase the prices while bearing losses in the interim or they may shut down their non-profitable operations.

In the case of Globus Spirits Ltd, the company has to keep running its operations at a lower level of profitability from FY2014 until now. This becomes evident when an investor notices the trend of raw material costs as a percentage of sales for Globus Spirits Ltd over FY2009-18. The investor notices that the raw material costs as a percentage of sales for Globus Spirits Ltd used to be in the range of 40% until FY2013. However, since the FY2014 onwards, it has increased to 60%. This sharp increase in raw material costs for Globus Spirits Ltd, which it is not able to reverse, is one of the key reasons for the sharp decline in the profitability of the company over the years. As highlighted above, the OPM of the company has declined from the previous range of 15-17% (FY2009-13) to current levels of 7-9% (FY2014-18). On similar lines, the net profit margin (NPM) of Globus Spirits Ltd has declined from a previous range of 8-10% (FY2009-13) to current levels of 1-2% (FY2014-18).

Further advised reading: How to do Financial Analysis of Companies

An investor is in for a surprise when she compares the trend of raw material costs as a percentage of sales for Globus Spirits Ltd with another publicly listed country liquor manufacturer, GM Breweries Ltd. She notices that in the past, the raw material costs as a percentage of sales for GM Breweries Ltd has declined over the years, which is in sharp contrast to Globus Spirits Ltd where it has increased sharply.

Globus Spirits Ltd And GM Breweries Ltd Comparison Of Raw Material Costs As A Percentage Of Sales

Further advised reading: Analysis: GM Breweries Ltd.

Such wide variance in the business behavior of the companies in the seemingly similar business of Indian made Indian liquor (IMIL) indicates that investors should deeply understand the specific business aspects of any company before analysis irrespective of the sector in which it operates.

Further advised reading: How to do Business Analysis of a Company?

The tax payout ratio of Globus Spirits Ltd has been in the range of 30-35% for most of the years, which is in line with the corporate tax rate applicable to companies in India. However, for a few years, the tax payout ratio is different. Moreover, as communicated by the company during May 2018 conference call (page 8), it falls under minimum alternate tax (MAT):

Globus Spirits Ltd Minimum Alternate Tax MAT Applicable

We believe that an investor may contact the company for taking further clarifications in the tax calculations.

 

Operating Efficiency Analysis of Globus Spirits Ltd:

When an investor analyses the net fixed asset turnover (NFAT) of Globus Spirits Ltd, then she notices that the NFAT of the company has witnessed an overall decline over the years from 3.61 in FY2009 to 1.56 in FY2018. The overall declining trend in the NFAT indicates that the new investments that are done by the company over the last decade (FY2009-18) are not proving much efficient.

An investor would note that the inventory turnover ratios (ITR) of the company has been stable within the range of 12-14 over the years indicating that the company has been able to manage its inventory position well.

Read on: How to Assess Operating Efficiency of Companies

Over the years, Globus Spirits Ltd has been able to improve its receivables days. An investor would notice that the company used to have receivables days within the range of 35-40 days until FY2014, which has now improved to 16 days in FY2018. It indicates that the company has been able to collect the money from its customers in time.

The ability of the company to keep its working capital efficiency within control by keeping ITR and receivables days under check indicates that the company has been able to convert its profits into the cash flow from operations without the money being stuck in working capital. An investor observes the same while comparing the cumulative net profit after tax (cPAT) and cumulative cash flow from operations (cCFO) of the company for FY2009-18.

An investor would notice that over FY2009-18, Globus Spirits Ltd Limited has reported a total cumulative net profit after tax (cPAT) of ₹198 cr. whereas during the same period, it reported a cumulative cash flow from operations (cCFO) of ₹522 cr indicating that it has converted its profits into cash.

While analysing the step-by-step calculation of cash flow from operations (CFO), an investor would notice that over last 10 years (FY2009-18), Globus Spirits Ltd has had a total depreciation expense of ₹208 cr. and total interest expense of ₹104 cr. These expenses are non-cash (depreciation) and non-operating (interest expense) and are therefore added to net profit after tax to arrive at CFO. The significant amount of depreciation and interest expense has led to a significantly high cCFO than cPAT for Globus Spirits Ltd over FY2009-18.

Further advised reading: Understanding Cash Flow from Operations (CFO)

 

Margin of Safety in the Business of Globus Spirits Ltd:

Self-Sustainable Growth Rate (SSGR):

Further advised reading: Self Sustainable Growth Rate: a measure of Inherent Growth Potential of a Company

Upon reading the SSGR article, an investor would appreciate that if a company is growing at a rate equal to or less than the SSGR and it is able to convert its profits into cash flow from operations, then it would be able to fund its growth from its internal resources without the need of external sources of funds.

Conversely, if any company attempts to grow its sales at a rate higher than its SSGR, then its internal resources would not be sufficient to fund its growth aspirations. As a result, the company would have to rely on additional sources of funds like debt or equity dilution to meet the cash requirements to generate its target growth.

While analysing the SSGR of Globus Spirits Ltd, an investor would notice that the SSGR of the company has consistently been very low to negative over the years whereas the company has been growing at a rate of 15-20% over the years. As a result, investors would appreciate that Globus Spirits Ltd will have to continuously raise money from additional sources like debt or equity to meet its investment requirements.

Therefore, it does not come as a surprise to the investor when she notices that over the last 10 years (FY2009-18), Globus Spirits Ltd had to raise additional funds by multiple sources:

  1. Debt (₹235 cr.): Total debt has increased from ₹17 cr. in FY2009 to ₹252 cr. in FY2018 (235 = 252 – 17)
  2. Equity (₹156 cr.):
    1. Raised ₹75 cr. in FY2010 by the initial public offer (IPO)
    2. Raised ₹81 cr. in FY2013 by compulsory convertible preference shares (CCPS) to Templeton Strategic Emerging Markets Fund (₹70.5 cr.) and warrants to promoters (₹10.6 cr.).

FY2013 annual report, page 22:

Globus Spirits Ltd FY2013 CCPS To Templeton And Warrants To Promoters

Further advised reading: Understanding the Annual Report of a Company

The decision of the management of Globus Spirits Ltd to go for aggressive expansion plans over and above the sustainable levels from its business cash generation has led to a continuous increase in debt and equity dilution for minority investors.

 

Free Cash Flow Analysis of Globus Spirits Ltd:

While looking at the cash flow performance of Globus Spirits Ltd, an investor notices that during FY2009-18, the company had a cumulative cash flow from operations of ₹522 cr. However, during this period it did a capital expenditure (capex) of ₹755 cr. As a result, it had a negative free cash flow of ₹233 cr. (755 – 522).

Further advised reading: Free Cash Flow: A Complete Guide to Understanding FCF

Considering fungibility of money, an investor may assume that Globus Spirits Ltd met this cash flow gap of ₹233 cr. in its capital expenditure needs from the additional debt of ₹235 cr. An investor would note from the discussion above that during FY2009-18 total debt of the company increased by ₹235 cr. from ₹17 cr. in FY2009 to ₹252 cr. in FY2018.

An investor would also note that the company would have to pay interest on the debt raised by it over the years. As per the concept of capitalization, part of the interest during the construction of the plants will be shown as the cost of the plant and will be considered under the capital expenditure. Whereas the balance interest will be deducted as interest expense in the profit & loss statement.

Further advised reading: Understand Capitalization of Interest and Other Expenses

Looking at the financial data of Globus Spirits Ltd for FY2009-18, an investor would note that apart from the interest capitalized in fixed assets (deducted as capex), the company had to pay additional interest of ₹104 cr., which is cumulative interest expense over FY2009-18.

From the above discussion on raising additional funds and fungibility of money, an investor would appreciate that Globus Spirits Ltd had to dilute its equity by way of IPO, CCPS, and warrants to raise funds to meet the interest expense.

Therefore, an investor would note that due to the decision of the company management to grow aggressively beyond the internal business strength, Globus Spirits Ltd had to dilute its equity and it got under a debt burden.

This is in sharp contrast to its peer GM Breweries Ltd, which has a positive free cash flow (FCF) and is currently a debt-free company.

GM Breweries Ltd FY2009 2018 Financials

Further advised reading: Analysis: GM Breweries Ltd.

Free cash flow (FCF) is one of the main pillars of assessing the margin of safety in the business model of any company.

Further advised reading: 3 Simple Ways to Assess “Margin of Safety”: The Cornerstone of Stock Investing

 

Additional aspects of Globus Spirits Ltd:

 

On analysing Globus Spirits Ltd, an investor comes across certain other aspects of the company:

1) Management Succession of Globus Spirits Ltd:

While analysing the past annual reports of Globus Spirits Ltd, an investor notices that in FY2013, Mr. Shekhar Swarup son of the promoter Mr. Arun Kumar Swarup has joined the company in the position of an Executive Director.

Investors would note that Mr. Arun Kumar Swarup is currently about 60 years of age and Mr. Shekhar Swarup is currently about 33 years of age. The presence of next generation of the promoter family in the active business role in the company while the founding promoter is still around, provide the good opportunity of grooming the next generation as future leaders of the company. It provides a continuity of the leadership for the company.

Further advised reading: Steps to Assess Management Quality before Buying Stocks

 

2) Suboptimal capital allocation by Globus Spirits Ltd:

As per the discussion above in the article, an investor would appreciate that Globus Spirits Ltd has attempted to grow more than the growth rate, which its internal business strength could sustain. As a result, the company had to raise funds by diluting its equity capital and by raising additional debt.

In addition, when an investor analyses the returns generated by these assets, then she notices that currently, Globus Spirits Ltd is able to generate a profit before tax (PBT) of ₹10 cr. from its net fixed assets (NFA) of ₹609 cr. in FY2018. This amounts to a pre-tax return of 1.6% on the money invested in plants & machinery, which is very low when compared to a risk-free pre-tax return of 7.80% provided by Government of India Securities 10-Years (2028) (Source: RBI Website on Nov 13, 2018).

Government Govt Of India Securities 10 Year Yield GS 2028 RBI 2018

The next best risk-free alternative of deploying money, a fixed deposit with State Bank of India (SBI) offers an interest rate of 6.85% on deposits exceeding ₹10 cr. (Source: SBI website on Nov. 13, 2018)

State Bank Of India SBI Fixed Deposit FD Interest Rates November 2018

An investor would note that a pretax (PBT) return of 1.60% earned by the company on its assets is very low when compared to other hassle-free and risk-free avenues like govt. securities or fixed deposits with banks.

An investor may note that in FY2018, the Bihar plant of the company was not operational. As a result, the profit before tax (PBT) of the company is lower than what it could have been if the Bihar plant were functional. However, an investor may appreciate that the Bihar plant has a capacity of 26 million bulk liters of alcohol out of which Globus Spirits Ltd expects to make a production of 25 million bulk liters when the Bihar plant starts. (Investors’ presentation, Sept 2019, page 9):

Globus Spirits Ltd FY2018 Production Data And Manufacturing Data

Investors would appreciate that Globus Spirits Ltd expects to produce 139 million bulk liters after production starts at the Bihar plant. In FY2018, the company produced 114 million bulk liters of alcohol, which generated a profit before tax (PBT) of ₹10 cr.

Globus Spirits Ltd communicated to investors that the production at Bihar plant would maintain the existing profit margins of the company. The conference call, May 2018, page

Globus Spirits Ltd 2018 Conference Call Profit Margins From Bihar Plant Will Remain The Same

If an investor assumes similar profit margins, then by a simple calculation an investor may extrapolate that the company may generate a PBT of about ₹12-15 cr. if the Bihar plant commences operations (10*139/114 = 12.2).

This level of pre-tax profit is very low when compared to the risk-free pretax profit that can be generated by investing ₹609 cr. (amount of NFA of Globus Spirits Ltd in FY2018) in Govt. of India securities (yield of 7.8%) or a fixed deposit with State Bank of India (interest rate of 6.85%). At 7.8%, an investor may expect to receive a risk-free pretax return of ₹47.5 cr. and at 6.85%; an investor may expect to receive a pretax return of ₹41.7 cr. by investing ₹609 cr.

An investor would appreciate that Globus Spirits Ltd will have to improve its business by a huge margin to generate profits to meet the minimum benchmark of the risk-free return offered by Govt. of India securities or the fixed deposits of SBI.

Alternatively, an investor may consider that unless an investment in the business is able to generate returns higher than the risk-free returns provided by Govt. Securities or fixed deposits, there is no point in taking the business risk of investing money in creating large plants & machinery and taking the added stress of selling the produce in the market. In such situations, an investor may simply sell all its plant & machinery and invest the money in govt. securities or fixed deposits and earn a higher return.

Further advised reading: When a company should sell all assets and invest money in FDs?

You may read about some of the other companies, which have such low returns on their assets that the company might be better off selling all its assets and investing the money in bank fixed deposits:

An investor would note that the other listed player in the country liquor segment, GM Breweries Ltd has a pretax business return on its net fixed assets of about 100%. In FY2018, GM Breweries Ltd had a profit before tax of ₹111 cr. whereas it has net fixed assets of ₹111 cr. This is in sharp contrast to Globus Spirits Ltd., which in FY2018 has a profit before tax of ₹10 cr. on net fixed assets of ₹609 cr.

 

3) Signs of liquidity stress in Globus Spirits Ltd:

As discussed earlier, an investor would note that Globus Spirits Ltd decided to make investments beyond the sustainable ability of its business profits and as a result, it had to dilute its equity and raise significant debt. Moreover, the above discussion highlights that the investments done by the company have led to low returns in terms of business profits.

Because of these business decisions, Globus Spirits Ltd faced liquidity stress, which has been visible by various signs:

a) Delay in repayment to lenders:

In the past, there have been multiple instances where Globus Spirits Ltd could not meet its debt repayments on time. While analysing the annual reports of the company, an investor comes across multiple occasions where the auditor of the company has pointed it out in its report.

FY2014, default to lenders for 67 days (FY2014 annual report, page 47):

Globus Spirits Ltd FY2014 Default To Lenders

FY2015, default to lenders for 22 days (FY2015 annual report, page 57):

Globus Spirits Ltd FY2015 Default To Lenders

Further advised reading: Understanding the Annual Report of a Company

 

b) Delay in depositing statutory dues with the authorities:

Globus Spirits Ltd has done delays in depositing statutory dues like tax deducted at source (TDS), income tax etc. with govt. authorities. Investors should note that many times delays in the deposit of statutory dues with the authorities are the first sign of liquidity stress in a company.

FY2009 annual report, page 24: delay in depositing income tax and TDS with authorities:

Globus Spirits Ltd FY2009 Delay In Depositing Income Tax TDS

FY2010 annual report, page 29: delay in depositing income tax:

Globus Spirits Ltd FY2010 Delay In Depositing Income Tax

FY2012 annual report, page 25: delay in depositing income tax:

Globus Spirits Ltd FY2012 Delay In Depositing Income Tax

FY2014 annual report, page 47: delay in depositing income tax:

Globus Spirits Ltd FY2014 Not Regular In Depositing Statutory Dues

Further advised reading: Understanding the Annual Report of a Company

 

c) Use of short-term funds for the long-term purpose by Globus Spirits Ltd

In the financial management of businesses, it is always guided that long-term assets like plant & machinery, should be financed by long-term funds. This is because, in this situation, the company is able to repay the long-term funds, when the plant becomes operational after a few years.

On the contrary, if a company finances its long-term assets with short-term funds, then it may face problems in the future. This is because the short-term funds will need to be repaid very soon while the plant may not have become operational by that time. As a result, the company will have to raise new debt to repay the previous short-term debt used to finance the long-term assets (plant & machinery). In case, the company is not able to raise the new debt due to any issues, then it will not be able to repay the previous short-term debt. As a result, the company may go bankrupt or have to sell its assets in distress to repay the debt. We have seen such problems arise in non-banking finance companies (NBFCs) recently, which had used short-term funds raised in commercial paper (CP) market (repayable in 3-6 months), to fund long-term assets (infrastructure and home loans of 20 years duration).

Therefore, it is advised that companies should fund their long-term assets using long-term funds.

Whenever an investor notices that a company is using short-term funds for long-term purposes, then she should become cautious, as it may be one of the indications that the company is not getting long-term funds from lenders. This may be a sign of liquidity stress in the company, which lenders might have recognized at an early stage. As a result, lenders may not be willing to give it long-term funds forcing the company to use its short-term funds for the long-term purpose.

FY2012 annual report, page 26: use of short-term funds for the long-term purpose:

Globus Spirits Ltd FY2012 Use Of Short Term Funds For Long Term Purpose

FY2014 annual report, page 47: use of short-term funds for long-term purpose:

Globus Spirits Ltd FY2014 Use Of Short Term Funds For Long Term Purpose

Further advised reading: Understanding the Annual Report of a Company

The above cases of delays in repayment to lenders, delays in depositing statutory dues with govt. authorities and the use of short-term funds for the long-term purpose may indicate that the decisions of Globus Spirits Ltd to grow aggressively by making large capital investments beyond the business profits of the company may have created liquidity stress for the company. Aggressive capital investments with suboptimal returns may have caused issues with the company.

Therefore, it does not come as a surprise to the investors that in FY2013, the company had to raise money by diluting its equity capital by issuing compulsory convertible preference shares (CCPS) to Templeton Strategic Emerging Markets Fund and warrants to promoters.

In light of the continued sub-optimal returns on its assets, going ahead, investors should continuously monitor Globus Spirits Ltd for such signs of liquidity stress in the company.

Further advised reading: How to Monitor Stocks in your Portfolio

 

4) Non-compliance to accounting & other guidelines by Globus Spirits Ltd:

a) Capitalization of advertising expenses instead of deducting them in profit & loss statement:

In FY2014, the auditor of Globus Spirits Ltd pointed out that until FY2013, the company has capitalized advertisement and promotional expenses of about ₹36 cr. as intangible assets in the fixed assets. Ideally, Globus Spirits Ltd should have deducted these expenses from the profit & loss statement as expenses in the years in which the company spent this money.

FY2014 annual report, page 45:

Globus Spirits Ltd FY2014 Capitalization Of Advertising And Promotional Expenses

This qualified opinion by the auditor indicates that the pretax profits for the years before FY2014 were higher to the extent of ₹36 cr. After this observation by the auditor, Globus Spirits Ltd deducted these expenses over the next five years (FY2014-18) as additional depreciation of about ₹7.2 cr. each year.

Further advised reading: Understand Capitalization of Interest and Other Expenses

 

b) Payment of remuneration to the relatives of directors without proper approvals from shareholders and central govt.:

While analysing the past annual reports of Globus Spirits Ltd, an investor notices an observation from its auditor that the company has paid a remuneration of about ₹70 lakh to a relative of one of the directors of the company without seeking proper approvals from shareholders and central govt. After this observation from the auditor, the company seems to have initiated the process to recover this remuneration paid by it to the related party.

FY2014 annual report, page 45:

Globus Spirits Ltd FY2014 Remuneration To Relative Of Director Without Approvals

Further advised reading: Why Management Assessment is the Most Critical Factor in Stock Investing?

 

5) Weakness of internal controls of Globus Spirits Ltd:

While analysing the annual reports of the company, an investor would notice that in FY2016, the auditor of the company has raised concerns about the assessment of fixed assets (plants & machinery) by the company. The auditor has highlighted that the assessment by Globus Spirits Ltd is weak and it might have resulted in a misstatement of financial statements.

FY2016 annual report, page 55:

Globus Spirits Ltd FY2016 Material Weakness In Fixed Assets Assessment

Further advised reading: Understanding the Annual Report of a Company

Similarly, in the FY2014 annual report, page 46, the auditor has highlighted issues regarding the purchase of fixed assets. The auditor has mentioned that key controls regarding the purchase of fixed assets by Globus Spirits Ltd are weak and therefore, need to be strengthened.

Globus Spirits Ltd FY2014 Controls For Purchase Of Fixed Assets Need To Be Strengthened

The above key observations by the auditor of Globus Spirits Ltd first regarding the purchase of fixed assets (FY2014) and then about the assessment of fixed assets (FY2016) should make an investor extra cautious while analysing the financial statements of the company.

Further advised reading: Why Management Assessment is the Most Critical Factor in Stock Investing?

 

6) Purchase of Associated Distilleries Ltd by Globus Spirits Ltd from its promoters:

Globus Spirits Ltd merged the distillery unit of Associated Distilleries Ltd (ADL) located at Hisar with itself by issuing 3.24 million shares of Globus Spirits Ltd to the owners of Associated Distilleries Ltd.

FY2011 annual report, page 9:

Globus Spirits Ltd FY2011 Associated Distilleries Ltd Unit Merged

An investor may note that Associated Distilleries Ltd is a related party of the company as it is owned/controlled by the family of promoters of the company.

FY2010 annual report, page 40:

Globus Spirits Ltd FY2010 Associated Distilleries Ltd Is A Related Party

The merger involved almost all the assets of ADL except freehold land, building, road, and the temple. In addition, all the liabilities of ADL were transferred to Globus Spirits Ltd. As per the FY2011 annual report, the book value (i.e. net assets = assets – liabilities) of the demerged unit of ADL, which the shareholders of Globus Spirits Ltd received was ₹9.9 cr.

FY2011 annual report, page 37-38:

Globus Spirits Ltd FY2011 Associated Distilleries Ltd Net Assets Transferred

The merger was effective from the date of April 1, 2010. It indicates that all the assessment of valuation including the assets & liabilities of a demerged unit of ADL as well as the market price of shares of Globus Spirits Ltd was done taking April 1, 2010, as the reference date. Therefore, an investor may estimate the market value paid by the shareholders of Globus Spirits Ltd to owners of ADL based on the market price of shares of Globus Spirits Ltd on April 1, 2010.

On April 1, 2010, shares of Globus Spirits Ltd closed at ₹139.70 on Bombay Stock Exchange (BSE). As a result, by issuing 3.24 million shares, Globus Spirits Ltd effectively paid a consideration of about ₹45 cr. for the Hisar unit to its promoters. (₹139.70 * 3.24 million shares = ₹452.6 million = ₹45.26 cr.)

Therefore, an investor may appreciate that in this transaction the shareholders of Globus Spirits Ltd purchased the Hisar unit having a book value of ₹9.91 cr. from the promoters at a consideration of ₹45 cr.

 

a) Financial performance of Associated Distilleries Ltd during the merger period:

While analysing the merger, an investor finds the financial performance of ADL for FY2010 and FY2011 in the annual report of Globus Spirits Ltd for FY2011.

FY2011 annual report, page 21:

Globus Spirits Ltd FY2011 Associated Distilleries Ltd Financial Performance For FY2010 And FY2011

The above data indicates that in FY2010 and FY2011, ADL generated profits of ₹6.4 cr. and ₹12.6 cr. respectively. Therefore, shareholders of Globus Spirits Ltd may believe that for ₹45 cr., they have got an asset generating profits of about ₹6-12 cr. every year. However, an analysis of Associated Distilleries Ltd before the merger and after the merger indicates a different picture.

 

b) Financial performance of Associated Distilleries Ltd before the merger period:

While analysing the red herring prospectus (RHP: Source) filed by Globus Spirits Ltd for its IPO in 2009, an investor gets to know about the financial performance of Associated Distilleries Ltd for FY2007, FY2008 and FY2009.

IPO Red herring prospectus, page 201:

Globus Spirits Ltd FY2009 Associated Distilleries Ltd Financial Performance For FY2007, FY2008 And FY2009

By analysing the above data, an investor notices that before the merger during FY2007, FY2008 and FY2009, the financial performance of Associated Distilleries Ltd was continuously declining year after year. During this period, Associated Distilleries Ltd was generating a net profit after tax of about ₹50 lac (₹5 million).

 

c) Financial performance of Associated Distilleries Ltd after the merger period:

While analysing the FY2016 annual report of Globus Spirits Ltd, an investor finds that the auditor of the company has highlighted about a plant of the company, which is lying unutilized for more than three years i.e. at least since FY2012-FY2013.

FY2016 annual report, page 52:

Globus Spirits Ltd FY2016 Hisar Plant Lying Unutilized Since More Than Three 3 Years

The auditor has highlighted that the plant is lying unused for many years and the management is looking for some alternative uses for this plant. Moreover, the auditor is not able to confirm the recoverability of the carrying value of this plant.

The management of the company in its response to the auditors’ qualified opinion, communicates to the shareholders in the directors’ report that the plant under question, which is lying unused since more than last three years (i.e. at least since FY2012-FY2013) is Hisar plant.

FY2016 annual report, page 19:

Globus Spirits Ltd FY2016 Management Response To Hisar Plant Lying Unutilized Since More Than Three 3 Years

As per the above explanation, it seems that the Hisar plant, whose purchase transaction was completed by Globus Spirits Ltd in FY2012 by paying ₹45 cr. in shares to its promoters, stopped working within a year after the purchase transaction and the company is now looking for alternative uses for this plant.

Further advised reading: Why Management Assessment is the Most Critical Factor in Stock Investing?

As per the clarification provided by the management, the alternative uses of the Hisar plant can generate good value for the shareholders.

Investors may seek updates from the company about the status of the Hisar plant and if the management is able to find an alternative use for it.

 

7) Remuneration of promoters of Globus Spirits Ltd:

While analysing the financial performance of the company, an investor notices that Globus Spirits Ltd has been facing challenges since FY2014 onwards. However, while analysing the remuneration of the promoters, an investor notices that the remuneration has been increasing almost consistently over the years.

Globus Spirits Ltd Remuneration Of Promoters

An investor would notice that the remuneration of promoters used to be about 1-2% of net profits in the earlier years, which has increased to 33% of net profits in FY2018.

Further advised reading: Steps to Assess Management Quality before Buying Stocks

Going ahead, an investor should monitor the remuneration of promoters.

 

8) Promoters of Globus Spirits Ltd operating competing businesses in their personal capacities:

While reading the red herring prospectus (RHP: Source) filed by Globus Spirits Ltd for its IPO in 2009, an investor gets to know that the promoters have a few companies, which operate in alcohol industry and thus in turn act as competitors to Globus Spirits Ltd.

IPO Red herring prospectus, page 22-23:

Globus Spirits Ltd DRHP Promoter Operating Competing Companies

The company has highlights three companies in RHP (2009):

  • Associated Distilleries Ltd.,
  • Rajasthan Distilleries Pvt. Ltd. and
  • Northern India Alcohol Sales Pvt. Ltd.

Investors would appreciate that when promoters of any publicly listed company operate competing businesses in their personal capacity, then it leads to a precarious situation for the minority shareholders of the publicly listed company. This is because the promoters may prioritize their personal interests over the interests of the publicly listed company and its minority shareholders.

Further advised reading: Why Management Assessment is the Most Critical Factor in Stock Investing?

 

9) Related party transactions of Globus Spirits Ltd:

Investors would notice that over the years, Globus Spirits Ltd has been involved in multiple transactions with related parties/associate companies of promoters. The company has been regularly making payments on behalf of promoter entities. However, in FY2017, the company wrote off the money that was due from some of the promoter entities.

FY2017 annual report, page 72:

Globus Spirits Ltd FY2017 Related Party Transactions And Write Offs

The above information in the related party section of FY2017 annual report of Globus Spirits Ltd indicates that the company has been making payments on behalf of multiple promoter entities including Globus Spirits (Jharkhand) Limited and Himalayan Spirits Limited. However, in FY2017, Globus Spirits Limited wrote off about ₹1.25 cr., which was due from Globus Spirits (Jharkhand) Limited and Himalayan Spirits Limited, indicating that there is almost nil possibility of recovery of this money. This is essentially a loss to the shareholders of Globus Spirits Ltd.

Further advised reading: Why Management Assessment is the Most Critical Factor in Stock Investing?

Investors may seek clarifications from the company about the nature of these transactions and the reasons for the writing off the dues from promoter entities.

Moreover, in the above table, investors would also notice that Globus Spirits Ltd has given a security deposit of about ₹4.65 cr. to Associated Distilleries Limited. Investors would remember from the discussion above that Associated Distilleries Ltd is the entity of promoters that had sold almost all its assets except freehold land, building, road and a temple to Globus Spirits Ltd in FY2012.

FY2011 annual report, page 37:

Globus Spirits Ltd FY2011 Assets Of Associated Distilleries Ltd Transferred To Gsl

Investors may contact the company for clarifications about the reasons for the payment of security deposit to Associated Distilleries Limited and the benefits that shareholders of Globus Spirits Ltd might get from it.

Going ahead, investors may monitor the related party transactions entered by Globus Spirits Ltd with various promoter entities.

Further advised reading: How to Monitor Stocks in your Portfolio

 

10) Errors in the annual report of Globus Spirits Ltd:

While reading the FY2018 annual report of the company, an investor notices that the section of details of promoters’ shareholding shows that some of the shares held by the promoters are pledged/encumbered.

FY2018 annual report, page 29:

Globus Spirits Ltd FY2018 Annual Report Shows Pledging Of Promoter Shares

Further advised reading: Share Pledge by Promoters: A Complete Guide

However, while analysing the shareholding pattern disclosure for March 31, 2018, done by Globus Spirits Ltd to Bombay Stock Exchange (BSE, Source); the investor notices that the company has denied any pledging/encumbrance of promoters’ shares.

Globus Spirits Ltd BSE Shareholding Disclosure Shows No Pledging Of Promoter Shares

We believe that in case an investor finds any information in the annual report, which is out of place or contrary to the information available on other public sources, then she may contact the company directly in order to ascertain the correctness of disclosures made by the company.

Further advised reading: How should investors contact Companies/Management for clarifications or additional information?

In another instance, in the FY2018 annual report, Globus Spirits Ltd has classified the investment in shares of Bank of India under “unquoted” indicating that the shares of Bank of India are not listed on any stock exchange. However, investors would appreciate that the shares of Bank of India are listed for trading on both the major stocks exchanges of India: BSE and NSE.

FY2018 annual report, page 101:

Globus Spirits Ltd FY2018 Shares Of Bank Of India Shown As Unquoted

Further advised reading: Understanding the Annual Report of a Company

 

Margin of Safety in the market price of Globus Spirits Ltd:

Currently (November 13, 2018), Globus Spirits Ltd is available at a price to earnings (PE) ratio of about 75 based on consolidated earnings of FY2018. The PE ratio of 75 does not offer any margin of safety in the purchase price as described by Benjamin Graham in his book The Intelligent Investor.

Further advised reading: 3 Principles to Decide the Ideal P/E Ratio of a Stock for Value Investors

Read: How to Earn High Returns at Low Risk – Invest in Low P/E Stocks

Further advised reading: Hidden Risk of Investing in High P/E Stocks

 

Conclusion:

Overall, Globus Spirits Ltd seems like a company, which has seen quite contrasting phases in its business over the last 10 years (FY2009-18). Until FY2013, the company was growing at a moderate pace with good profitability. However, FY2014 onwards, everything changed suddenly and the company could barely report net profit margins of 1-2%. The company finds it very difficult to pass on the increases in the cost of its raw material to the end customers as the pricing of its products is decided by state governments and is outside its control.

It seems that during the good times, Globus Spirits Ltd decided to undergo fast expansion. Such aggressive expansion was beyond levels that could be sustained from its business profits. As a result, the company faced a liquidity crunch, which was visible through multiple signs like delay in repayment to lenders, delay in payment of income tax, TDS and other statutory dues as well as usage of short-term funds for long-term purposes.

Moreover, during this period, the company acquired the distillery plants of one of the promoter entity, which became out of use shortly after purchase. As a result, Globus Spirits Ltd had to raise a significant amount of additional funds by debt and equity dilution. The company raised equity funding by way of IPO, CCPS, and warrants.

However, in the current times, the business returns generated by Globus Spirits Ltd on its assets are lower than the risk-free returns, which can be obtained from Govt. securities and fixed deposits of banks.

The business performance of Globus Spirits Ltd is in sharp contrast to one of its listed peers, GM Breweries Ltd, which has shown good sales growth with decent profitability and free cash flows. As a result, GM Breweries Ltd is currently a debt-free company.

Further advised reading: Analysis: GM Breweries Ltd.

During analysis, investors note that the promoters of Globus Spirits Ltd operate multiple companies, which are operating in the same alcoholic business as the company itself. Moreover, Globus Spirits Ltd has been making payment on behalf of many of the promoters’ entities. In FY2017, Globus Spirits Ltd has written off some of the money that was due from promoters’ entities.

There are many aspects where the compliance/control levels within the company leave scope for improvement. Initially, the company capitalized the money spent on advertising and promotions of its products, which it should have ideally deducted as an expense from the profit & loss statement. As a result, during these years, the profits of the company were higher than what they actually should have been. The auditor of the company raised objections to the same and the company deducted the same as additional depreciation over the next five years.

The company paid remuneration to relatives of the directors without proper approvals from shareholders and central govt. The auditor raised an objection on the same and as a result, the company started recovery of this payment from the concerned person.

The auditor has also highlighted issues with the process over control of purchase of fixed assets as well as the assessment of fixed assets of the company. The auditor has raised caution that these issues may lead to the misstatement of financial statements of the company. As a result, investors should do high due diligence before making any final investment decision.

Going ahead, investors should closely track the improvement in the business returns generated by the company on account of the start of the Bihar unit as well as the performance of the new segment of premium alcoholic beverages (Unibev). This is because the company needs to show a remarkable improvement in its performance to justify the risk undertaken to run the entire business.

Investors may also monitor the transactions of the company with various promoters’ entities, remuneration of promoters, debt levels and developments related to the Hisar unit.

Further advised reading: How to Monitor Stocks in your Portfolio

These are our views on Globus Spirits Ltd. However, investors should do their own analysis before taking any investment related decision about the company.

You may use the following steps to analyse the company: “Selecting Top Stocks to Buy – A Step by Step Process of Finding Multibagger Stocks

Hope it helps!

Regards,

Dr Vijay Malik

P.S:

DISCLAIMER

Registration Status with SEBI:

I am registered with SEBI as an Investment Adviser under SEBI (Investment Advisers) Regulations, 2013

Details of Financial Interest in the Subject Company:

Currently, I do not own stocks of the companies mentioned above in my portfolio.

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The objective of “Peaceful Investing” approach is the selection of such stocks, where once an investor has put in her money, then she may sleep peacefully. Therefore, if later on, the stock prices rise, then the investor is happy as she is now wealthier. On the contrary, if the stock prices fall, even then the investor is happy as she can now buy more quantity of the selected fundamentally good stocks.

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