Analysis: SOM Distilleries & Breweries Ltd

The current section of the “Analysis” series covers SOM Distilleries & Breweries Ltd, a beer and Indian made foreign liquor (IMFL) manufacturer. The company produces beer brands like Hunter, Black Fort, Power Cool and Woodpecker, and IMFL brands like Milestone 100 whisky, White Fox vodka, Legend, Genius, Sunny, Gypsy and Blue Chip. The company is primarily active in the states of Madhya Pradesh, Karnataka and Odisha.

“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.

To benefit the maximum from this article, an investor should focus on the process of analysis instead of looking for good or bad aspects of the company. She should learn the interpretation of different types of data and transactions and pay attention to the parts of annual reports etc. used to get the information. This will help her in improving her stock analysis skills.

SOM Distilleries & Breweries Ltd Research Report by Reader

Hello Sir,

I have been a part of your workshop in Bangalore. To continue the learning, I have tried to analyse the company SOM Distilleries & Breweries Ltd. I have attached the analysis that I have done. Can you please review this and provide your valuable thoughts on the company.

Thanks in advance

Tilak Shetty

SOM Distilleries & Breweries Ltd:

It has a total capacity of 22.8 million cases per annum of beer and 3.3 million cases per annum of IMFL. This capacity is spread across three facilities located in Bhopal (Madhya Pradesh), Hassan (Karnataka) and Barapada, (Odisha).

The company has been looking at brand building. Hunter Beer – was the partner for recently held IIFA awards in Madhya Pradesh.

Business strategy of SOM Distilleries & Breweries Ltd:

• Premiumization of the portfolio (Hunter Beer)
• New launches and strengthening the core brand
• Pan India expansion (Odisha and Karnataka plants operational)
• Internal control system

While analysing the annual report, some of the key observations are:

1. Company’s sales growth last 10 years ~12% CAGR (from last 3 years they are publishing the consolidated results, before that it was standalone results).
2. If we compare it with the sales growth of peers in the same industry, it is growing almost in the same line or slightly lesser than the peers; but it is expected to catch up due to expansion in recent days.
3. SOM Distilleries & Breweries Ltd has scaled up and recent quarterly results (Dec 2019) shows that they have a 30% jump in sales compared y-y last year quarter
4. There is an increase in sales due to an increase in volumes. Two new plants under operational for the last 1 year.
5. However, its net profit margin (NPM) has reduced from 8% (2010) to 6% (2019). We can see that sales increased from 105 cr to 322 cr, but profit is reduced. Its sales come from expansion, which is funded by debt. It does not seem like there is a distinct business advantage. The result is that company could not convert its growth into profit.
6. From the last 10-year results, we could make out that SOM Distilleries & Breweries Ltd is able to convert its profits into cash, which can be invested from expansions.

Credit rating of SOM Distilleries & Breweries Ltd: One of the observations from the rating company is that the group has undertaken significant capacity expansion, both organic and inorganic, which will affect its return in near and medium turn.

Financial analysis of SOM Distilleries & Breweries Ltd:

Sales are growing at the rate of 13% (10 Year CAGR)

Operating profit margin (OPM) is increased from 12% to 17% and seen a dip from last 2 years at around 13%. The decrease in OPM in the year 2019 is reasoned as an increase in raw material (Barley) and bottling expense and employee cost. Bottling expense is considered a one-time charge and is believed to be reduced in coming years (as per the annual report)

Net profit margin increased from 8 to 11% from 2010 to 2014, but it is now decreasing and is at low (5%). This is due to the heavy interest burden, which the company has taken for expansion.

Profit growth is one of the poor compared to the peers in last 5 years. However, there is an increase in sales due to expansions, but the company not able to convert that into an increase in profit. If we check the recent quarter results, shown a significant improvement in scale, but the margin is still around 6%.

The interest coverage ratio is about six.

Based on analysis from the balance sheet: The debt to equity ratio is less than one.

Cash from operations is almost zero for the last year, resulting in borrowing and raising money through equity shares.

The current free cash flow (FCF) is negative.

Cumulative PAT is almost equal to Cumulative CFO; this means most of the profits are getting into operations (cash)

CFO is negative or zero, because of which the company has borrowed a lot of money for the expansion. As CFO<Capex, there is a risk.

The company is growing at a steady pace. We are seeing lots of investment being made for scaling the operations. Profitability is not under control. There is a debt, which is used for plants’ extension. It is expected to grow the sales as the new plants are in production. However, unless there is a step to increase the profitability, the FCF is going to be negative and that will affect any new investments.

Margin of safety of SOM Distilleries & Breweries Ltd:

The self-sustainable growth rate (SSGR) is around 15%, or slightly higher than the sales growth.

Free Cash Flow: Both consolidated view, as well as standalone view, shows that FCF is negative for the last 3 years. This could be because of the investment for expansion. Cumulative FCF over 10 years is negative.

Management analysis of SOM Distilleries & Breweries Ltd:

Mr. J.K Arora (Chairman and MD). The Board consists of six directors including Chairman-cum-Managing Director. Three of the Directors on the Board are independent directors.

Promoter holding is around 24% (low). This is the one question asked during one of the interviews in CNBC and the Chairman replied saying they have a plan to increase it to nearly 50%. We have seen that recently (last couple of weeks) promoter/insider is buying the shares.

Promoters’ background: Not seen any issues reported by the management in the public domain (other than the trademark issue with Carlsberg).

Promoters’ salary: The annual report does not show the salary of the directors (only mentioned for Nakul Kam Sethi). So, I am not able to make out much from that.

Related party transactions: There is a money transaction with a subsidiary company of ₹17.89 cr (Source from 2019 annual report)

Conclusion:

The company is under expansion mode for the last 2 years. They have almost completed this phase and expected to get a better scale in the coming years. The company’s financial position is not looking good. The key risks are profit margins, FCF and increasing debt.  The current valuation is <14 PE, which seems to be good (compared to some of the peers).

Thanks in advance

Tilak Shetty

Dr Vijay Malik’s Response

Dear Tilak,

Thanks for sharing the analysis of SOM Distilleries & Breweries Ltd with us! We appreciate the time & effort put in by you in the analysis.

While analysing the past financial performance of the company, an investor notices that until FY2016, the company used to report only standalone financials. However, in FY2017, the company formed its first subsidiary Woodpecker Distilleries & Breweries Private Limited to build a brewery in Karnataka. As a result, the company started to report standalone as well as consolidated financials from FY2017.

We believe that while analysing any company, an investor should always look at the company as a whole and focus on financials, which represent the business picture of the entire company including its subsidiaries, joint ventures etc. Consolidated financials of any company, whenever they are present, provide such a picture.

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

Therefore, in the analysis of SOM Distilleries & Breweries Ltd we have used standalone financials up to FY2016 and consolidated financials from FY2017 onwards.

With this background, let us analyse the financial performance of the company.

Financial and Business Analysis of SOM Distilleries & Breweries Ltd:

While analyzing the financials of SOM Distilleries & Breweries Ltd, an investor notices that the sales of the company have grown at a pace of about 11% year on year from ₹175 cr in FY2011 to ₹460 cr in FY2020. Further, during the 12-months ending December 2020 (i.e. January 2020-December 2020), the sales of the company have declined to ₹275 cr.

While doing a detailed analysis of SOM Distilleries & Breweries Ltd, an investor notices that the company has had nearly consistent sales growth except in FY2014 when its sales declined by about 7% from ₹204 cr in FY2013 to ₹190 cr in FY2014.

When an investor analyses the profit margins of the company, then she notices that SOM Distilleries & Breweries Ltd had a nearly consistent operating profit margin (OPM) in the range of 14%-15% during FY2011-FY2017. In FY2018, the OPM of the company increased to 17%. However, thereafter, the OPM of SOM Distilleries & Breweries Ltd has declined consistently to 10% in FY2020. During the 12-months ending December 2020 (i.e. January 2020-December 2020), the company reported an operating loss.

In order to understand the reasons behind the decline in sales in FY2014 and the fluctuations in the profit margins of the company over the years, an investor needs to analyse the business model of SOM Distilleries & Breweries Ltd in detail. Only after understanding the reasons behind the fluctuating performance of the past, an investor would be able to make an educated guess about the future performance of the company.

Advised reading: How to do Business Analysis of a Company

While reading the annual reports of SOM Distilleries & Breweries Ltd, its credit rating reports, red-herring prospectus for IPO in FY2006 as well as various corporate announcements, an investor notices the following key characteristics of its business model, which influence its performance significantly:

A) SOM Distilleries & Breweries Ltd does not have the pricing power:

An investor notices that in the liquor industry, the manufacturers do not have any pricing power. In most cases, the state governments determine the final prices of the beverages and liquor manufacturers cannot change the prices at their will.

FY2020 annual report, page 12:

In many states, where the government is also the biggest distributor, it fixes the prices at which it buys products from the alcoholic beverage companies and the prices at which they will sell to the end consumers. The state governments decide the end consumer price, leaving manufactures with no say in determining their selling price.

B) The input costs for SOM Distilleries & Breweries Ltd are volatile, which affect its profit margins:

The key raw materials for SOM Distilleries & Breweries Ltd are agricultural inputs like barley, sugar and rice flakes.

FY2012 annual report, page 9:

Wherever possible and cost effective, we choose to source our raw materials – barley, rice flakes, sugar from local supplier

An investor would appreciate that in the case of agricultural inputs, both the prices as well as availability are highly dependent on natural factors like weather including monsoon etc. as well as local political factors. As a result, it becomes a challenge for the company to maintain its profit margins when its input costs like prices of agricultural inputs as well as labour increase.

In addition, due to the highly regulated nature of the industry, SOM Distilleries & Breweries Ltd does not have any power to increase the prices of their products. The govt. controls the pricing and revises it only once a year. As a result, if the prices of its raw materials increase during the year, then the companies have to take a hit on their margins.

FY2013 annual report, page 14:

Government controls the pricing of Beer in many states, which is allowed to be revised on a yearly basis. This makes the pricing inflexible for increase in the raw material cost or inflation.

Therefore, the companies have to lobby the govt. authorities for any increase in prices. An investor would appreciate that getting a price increase in such situations is difficult.

FY2018 annual report, page 29:

Furthermore, the regulatory barriers also pose challenges for offsetting cost inflation. Companies in the sector has to represent their case to state governments to get price increase, which is a time-consuming process.

In such a situation, an investor would appreciate that whenever there is an increase in cost prices, then the most preferred way for the company to maintain its profit margins is to control its costs.

During FY2011-FY2017, when SOM Distilleries & Breweries Ltd had a stable OPM of 14%-15%, it relied on controlling its cost efficiencies to maintain its profitability.

FY2012 annual report, page 8:

The inflationary pressures had quite an impact on the company not only on input costs, but also the labour costs in the company. Your company implemented many cost efficient programmes in order to bring down be production costs

However, still, SOM Distilleries & Breweries Ltd highlighted to its investors that in the liquor industry it is not possible to fully pass on the increase in raw material prices to its customers. As a result, maintaining profit margins is challenging.

FY2020 annual report, page 13:

Volatility in the Prices of Key Raw Material: The beer and IMFL industry can be adversely impacted due to the volatility in key input raw material prices such as barley, ENA and glass bottles. Since the pricing power is limited, companies would not be able to fully pass on the higher costs to consumers thereby margins gets impacted.

Due to the absence of pricing power, when SOM Distilleries & Breweries Ltd faced increasing costs in FY2019 and FY2020 due to its expansion and entry into newer markets, then its operating profit margin (OPM) declined. The OPM of the company declined from 17% in FY2018 to 13% in FY2019 and 10% in FY2020.

FY2019 annual report, page 3:

Our margins for the year were predominantly impacted due to higher costs pertaining to new glass bottles, employee and freight costs to target new markets. These cost pressures can be attributed to the expansion that we have undertaken in the last fiscal year and are transitionary in nature.

FY2020 annual report, page 13:

EBITDA margins for the year was 10.3% compared to 13.3% in FY2019. As the Company is in a growth phase, higher costs pertaining to new glass bottles, employee and freight costs to target new markets impacted the margins during the period

Therefore, an investor would appreciate that due to the low pricing power of SOM Distilleries & Breweries Ltd, whenever there is an increase in raw material costs, then the company finds it very difficult to increase the prices of its products. As a result, the company remains susceptible to a decline in its profit margins.

The credit rating agency, ICRA also highlighted the susceptibility of the company’s profit margins to the volatility in the raw material prices in its report in February 2020.

the Group’s margins remain exposed to volatility in raw material prices.

C) Beer is a perishable product with low shelf life:

While reading about the business performance of SOM Distilleries & Breweries Ltd, an investor notices that its key product, beer, is a perishable product. It has a very low shelf life. As a result, if beer is not sold within a short period of its production, then the entire stock becomes useless and is a straight loss for the company.

SOM Distilleries & Breweries Ltd faced big losses due to the expiry of unsold beer in 2020 when the company could not sell beer due to coronavirus related lockdown during March-June 2020.

In March 2020 quarter, the company had a loss of ₹8 cr due to the write-off of unsold beer.

FY2020 annual report, page 3:

The impact on profitability was primarily attributable loss on sales on account of pandemic outbreak coupled with inventory write-off to the tune of Rs. 80 million. As you are aware that beer has limited shelf life and given no sales during the lock down, we had to take the hit.

In April-June 2020, the company to take another hit of about ₹10 cr due to coronavirus lockdown and the lower shelf life of beer.

Q1-FY2021 result presentation, page 8:

Beer has a short shelf life due to which some inventory had to be written-off. There were write offs also on account of debtors, demurrage charges and others. The losses on account of these write-offs was ~Rs. 80 million and ~100 million, which is reflected in Q4 FY2020 and Q1 FY2021 financials, respectively.

An investor would appreciate that the limited shelf life of beer hit SOM Distilleries & Breweries Ltd hard in 2020. As a result, in the 12-months ending December 2020 (i.e. January 2020 – December 2020), the company had operating losses.

From the above discussions, an investor would appreciate that SOM Distilleries & Breweries Ltd has no pricing power over its customers. It operates in an industry with very high regulations. It faces challenges due to volatile prices and the availability of raw materials. In addition, its final product (beer) has a low shelf life. All these factors make it difficult for SOM Distilleries & Breweries Ltd to maintain its profit margins.

The operating losses reported by SOM Distilleries & Breweries Ltd during the 12-months ending December 2020 (i.e. January 2020 – December 2020), is not the first time when the company suffered losses in its business. In the past, the company had repeatedly faced losses in its business.

In the FY2005 annual report, the company told its shareholders that its business has suffered losses from the last 3 years. The company highlighted that the shape of its business was so poor that it could not even repay its lenders and as a result, it defaulted in its repayments.

FY2005 annual report, page 5:

Default in repayment of dues to Bankers and Financial Institutions are due to losses incurred by the company during last three years. Various efforts are being made to regularize the accounts with Banks and Financial Institutions.

Surprisingly, the company blamed the banker for its poor state of business affairs.

FY2005 annual report, page 7:

The Company has clear dependency on its bankers. This confidence was on the basis of long term relationship with the Bankers without realizing that the Bankers provide umbrella for non-raining days only. This dependency on and prolonged persuasion with the Bankers has put the Company into difficult situation where the Company has suffered huge losses due to non-availability of small requirement of working capital since last three years.

The poor business performance continued and the company continued to report losses in FY2007. (Source: FY2008 annual report, page 27).

Due to the continued poor business performance, SOM Distilleries & Breweries Ltd reached the bankruptcy stage and had to restructure its debt. As a result, in FY2007, the company took the help of Kotak Mahindra Bank and repaid its debt to the previous lenders: Bank of Baroda and Bank of India (Source: FY2008 annual report, page 36).

FY2008 annual report, page 17:

The company has completed the process of restructuring and with the induction of funds from Kotak Mahindra Bank as Working Capital, Company has turned around completely. The Company has also made settlement with the bankers for their dues with the help of Kotak Mahindra Bank.

An investor may think that these periods of poor business performance and debt restructuring of SOM Distilleries & Breweries Ltd have been events of the distant past and the company has moved further over the years with continued history of profits over the last 10 years.

However, while reading different public documents about SOM Distilleries & Breweries Ltd, an investor notices that the decline in the business performance of the company in recent years has put a lot of strain on the financial position of the company.

An investor gets the signs of liquidity stress in the company from the credit rating reports prepared by the credit rating agency, ICRA. For the first time, in the credit rating report by ICRA for its wholly-owned subsidiary, Woodpecker Distilleries & Breweries Private Limited, the investor notices that SOM Distilleries & Breweries Ltd has fully utilized its working capital limits.

Credit rating report of Woodpecker Distilleries & Breweries Private Limited by ICRA, Sept. 2019, page 2:

Full utilisation of working capital limit – The Group has been fully utilising its working capital limits. Any major deviation in working capital parameters may lead to a tight liquidity position.

An investor may think of working capital limits as the credit card limit available to individuals. If you notice that someone has fully utilized their credit card limits, then it usually shows the signs of expenses exceeding the income substantially or any emergency where the person has to use all the sources from where she can lay hand on money. In either case, the situation is urgent and demands attention.

In the case of SOM Distilleries & Breweries Ltd, this important sign of liquidity stress are still continuing. As per the credit rating report prepared by ICRA in February 2021 for SOM Distilleries & Breweries Ltd, the working capital limits of the company are fully utilized and in addition, it faces significant loan repayments, which can put further stress on the liquidity position of the company.

Credit rating report by ICRA, Feb. 2021, page 2:

Full utilisation of working capital limit and sizeable repayment of term loan – The Group has been fully utilising its working capital limits. Any major deviation in working capital parameters may lead to a tight liquidity position. The Group also has sizeable term loan repayment in the near to medium term.

The liquidity profile of the Group is stretched due to limited cushion available in working capital limits and substantial repayment liability in the near to medium term.

Therefore, an investor would appreciate that lack of pricing power, high regulations, volatile prices and availability of raw materials as well as the low shelf life of the final product has put the company in a difficult financial situation. The company has faced stress and reached near-bankruptcy in the past and it seems to be facing a tight liquidity situation now.

Advised reading: How to do Business Analysis of a Company

Going ahead, an investor needs to monitor the liquidity position of the company closely so that she may notice the early warning signs if the liquidity position of the company deteriorates further.

To understand more about the alcohol/liquor industry and the factors that influence it, and the potential competition for the company, an investor may read the in-depth analysis of the following companies:

• Analysis: Associated Alcohols and Breweries Ltd
• Analysis: Globus Spirits Ltd
• Analysis: GM Breweries Limited
• Analysis: India Glycols Ltd

While looking at the tax payout ratio of SOM Distilleries & Breweries Ltd., an investor notices that in most of the last 10 years (FY2011-2020), the tax payout ratio of the company has been in line with the standard corporate tax rate prevalent in India.

In FY2018, the company reported a tax payout ratio of 47%. When an investor reads the FY2018 annual report of the company in detail, then she notices that out of the total tax expense of about ₹22 cr, approximately ₹5 cr was due to tax pertaining to previous years.

FY2018 annual report, page 71:

Further advised reading: How to do Financial Analysis of a Company

Operating Efficiency Analysis of SOM Distilleries & Breweries Ltd:

a) Net fixed asset turnover (NFAT) of SOM Distilleries & Breweries Ltd:

When an investor analyses the net fixed asset turnover (NFAT) of SOM Distilleries & Breweries Ltd in the past years (FY2011-20), then she notices that for most of the period (FY2012-FY2016), the NFAT of the company has stayed in the range of 2.8 to 3.5.

The NFAT of the company started increasing in FY2017 (3.8) and FY2018 (4.8). The reasons for an increase in NFAT in FY2017 was due to better pricing received by the company and better capacity utilization due to the sale of higher volumes of liquor.

FY2017 annual report, page 36:

During FY2017, the total income of the Company increased by 11.9% to Rs. 2,478 million. The increase was due to improved price realizations and increased sales volumes in the Beer segment and increase in realizations in the IMFL segment.

In FY2018, the NFAT of the company increased to 4.8 due to better capacity utilization as it could sell higher volumes of liquor.

FY2018 annual report, page 29:

During FY2018, beer volumes recorded a growth of 38.9% to reach 7.49 million cases compared last year. IMFL volumes stood at 0.75 million cases, indicating a growth of 10.3% in FY2017. This robust growth in volumes during the year was achieved due to combination of increased acceptance of our products in existing markets coupled with expansion in the states of Karnataka, Kerala, Chhattisgarh, Delhi and Maharashtra.

An investor would appreciate that the improving utilization of manufacturing capacity would improve the NFAT for any company.

However, in FY2019, NFAT of SOM Distilleries & Breweries Ltd declined sharply from 4.8 to 2.8. This was primarily due to the capital investments of about ₹190 cr done by the company on its Karnataka plant, for expansion of its Bhopal plant and purchase as well as upgradation of a brewery in Odisha. The Karnataka and Odisha plants started their operations in FY2019.

FY2019 annual report, page 24:

Orissa Acquisition: In July 2018, the Company announced acquisition of a brewery in Odisha through its proposed subsidiary, SOM Distilleries & Breweries Odisha Private Ltd. for a total consideration of Rs. 460 million. The capacity of this newly acquired unit is 42 Lakh cases per annum. This plant started commercial production in March 2019. During the year, the Company also invested on modernization and upgradation of the plant.

Karnataka Facility: The Company started commercial production of IMFL from Karnataka plant in November 2018 and White Fox RTD in January 2019.

An investor would appreciate that any new manufacturing plant for any company usually takes some time for reaching an optimal level of production. During this time, the company witnesses a decline in its NFAT.

In FY2020, the NFAT of SOM Distilleries & Breweries Ltd declined further to 1.8. This was due to further capital investment done by the company for the expansion of its Bhopal plant.

Credit rating report by ICRA, February 2020

The Group has also invested more than Rs. 150 crore in SDBL’s existing manufacturing unit in Bhopal to double the production capacity.

In addition to the capital investments, the loss of sales in March 2020 due to coronavirus related lockdown also contributed to the decline in the NFAT of SOM Distilleries & Breweries Ltd in FY2020.

Going ahead, an investor should keep a close watch on the NFAT of the company so that she may estimate whether the capital investments done by the company have started contributing at the optimal level or not.

Further advised reading: Asset Turnover Ratio: A Complete Guide for Investors

b) Inventory turnover ratio of SOM Distilleries & Breweries Ltd:

While analysing the efficiency of inventory utilization by SOM Distilleries & Breweries Ltd, an investor notices that for most of the period in the last 10 years, the inventory turnover ratio (ITR) of the company improved. The ITR of the company increased from 6.4 in FY2012 to 13.4 in FY2018. However, thereafter, the ITR of the company declined sharply.

In FY2019, the ITR of SOM Distilleries & Breweries Ltd declined to 6.3 and further to 4.6 in FY2020.

The ITR of the company declined in FY2019 due to heavy investments in the inventory as two new breweries of the company started operations in Karnataka and Odisha. Due to the enhanced size of operations, the company had to invest substantial money in its stores, consumables, packing material (e.g. glass bottles) as well as hold more stock of finished goods to be supplied in newer markets. In FY2019, the inventory holding of SOM Distilleries & Breweries Ltd increased to ₹95 cr from ₹28 cr in FY2018.

FY2019 annual report, page 70:

In FY2020, the inventory requirements of the company increased further as the new plants of the company increased their capacity utilization. The inventory of SOM Distilleries & Breweries Ltd increased to ₹104 cr in FY2020 from ₹95 cr in FY2019.

Going ahead, an investor should monitor the inventory turnover ratio of the company in order to ascertain whether the company is able to bring the new breweries at the same level of operating efficiency as the Bhopal brewery or not. This is because, on an overall basis, in the last 10 years, the ITR of SOM Distilleries & Breweries Ltd has deteriorated from 6.4 in FY2012 to 4.6 in FY2020.

Further advised reading: Inventory Turnover Ratio: A Complete Guide

c) Analysis of receivables days of SOM Distilleries & Breweries Ltd:

Over the last 10 years, receivables days of SOM Distilleries & Breweries Ltd have deteriorated from 66 days in FY2012 to 99 days in FY2020. An increase in receivables days is more prominent in recent years where it increased from 62 days in FY2018 to 99 days in FY2020.

The increase in receivables days indicates that the customers of SOM Distilleries & Breweries Ltd are taking more days to clear their dues. One of the reasons for delayed payments by the customers can be a higher credit period given by SOM Distilleries & Breweries Ltd to its customers in the new markets.

From the above discussion, an investor would notice that in recent years, SOM Distilleries & Breweries Ltd has entered two new markets of Karnataka and Odisha by establishing breweries there. In order to gain customers in these new markets, the company might have to offer a longer credit period. It might be one of the reasons for deteriorating receivables days for the company.

Further advised reading: Receivable Days: A Complete Guide

An investor would appreciate that when SOM Distilleries & Breweries Ltd expanded its operations in new markets of Karnataka and Odisha, then its liquidity position became stretched. This is a sign of a working-capital-intensive business model. As a result, the growth in the business of the company requires heavy investments in the working capital (inventory, and trade receivables) of the company.

The credit rating agency, ICRA, highlighted the working-capital-intensive nature of the business of SOM Distilleries & Breweries Ltd in its report for the company in February 2020.

The ratings are also subdued on account of the working capital-intensive nature of operations, resulting in high utilisation of working capital limits.

Going ahead, an investor should keep a close watch on the receivables position as well as the inventory position of SOM Distilleries & Breweries Ltd. This is because, if the company is not able to bring efficiencies in its working capital management, then it can face a liquidity crunch.

From the above discussion, an investor would remember that in recent years, the company’s liquidity position is stretched and it has fully utilized its working capital limits from banks. As a result, it has very little cushion available to manage any liquidity shock.

Credit rating report by ICRA, Feb. 2021, page 2:

Full utilisation of working capital limit and sizeable repayment of term loan – The Group has been fully utilising its working capital limits. Any major deviation in working capital parameters may lead to a tight liquidity position. The Group also has sizeable term loan repayment in the near to medium term.

The liquidity profile of the Group is stretched due to limited cushion available in working capital limits and substantial repayment liability in the near to medium term.

Therefore, it is essential that an investor keeps a close watch on the liquidity position and working capital efficiency of the company. This is because, in the past (FY2002-2007), the company faced bankruptcy when it could not manage its working capital position properly in the light of poor business performance.

When an investor compares the cumulative net profit after tax (cPAT) and cumulative cash flow from operations (cCFO) of SOM Distilleries & Breweries Ltd for FY2011-20 then she notices that the company has converted its profits into cash flow from operating activities.

Over FY2011-20, SOM Distilleries & Breweries Ltd reported a total cumulative net profit after tax (cPAT) of ₹172 cr. During the same period, it reported cumulative cash flow from operations (cCFO) of ₹241 cr.

It is advised that investors should read the article on CFO calculation, which would help them understand the situations in which companies tend to have the CFO lower than their PAT. In addition, the investors would also understand the situations when the companies would have their CFO higher than the PAT.

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

Learning from the article on CFO will indicate to an investor that the cCFO of SOM Distilleries & Breweries Ltd is higher than the cPAT due to the following factors:

• Depreciation expense of ₹52 cr (a non-cash expense) over FY2011-FY2020, which is deducted while calculating PAT but is added back while calculating CFO.
• Interest expense of ₹62 cr (a non-operating expense) over FY2011-FY2020, which is deducted while calculating PAT but is added back while calculating CFO.

The Margin of Safety in the Business of SOM Distilleries & Breweries Ltd:

a) Self-Sustainable Growth Rate (SSGR):

Read: 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 can 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.

An investor may calculate the SSGR using the following formula:

SSGR = NFAT * NPM * (1-DPR) – Dep

Where,

• SSGR = Self Sustainable Growth Rate in %
• Dep = Depreciation rate as a % of net fixed assets
• NFAT = Net fixed asset turnover (Sales/average net fixed assets over the year)
• NPM = Net profit margin as % of sales
• DPR = Dividend paid as % of net profit after tax

(For systematic algebraic calculation of SSGR formula: Click Here)

While analysing the SSGR of SOM Distilleries & Breweries Ltd, an investor would notice that the SSGR of the company used to be about 15% in FY2014; however, it has since declined sharply to 9% in FY2020. On the contrary, the pace of sales growth of the company has picked up in the last 5 years (FY2015-2020) to 17% per year and 23% per year in the last 3 years (FY2017-2020).

An investor would appreciate that the declining SSGR and increasing sales growth would put pressure on the resources of any company.

When SOM Distilleries & Breweries Ltd was growing at a pace less than its SSGR during FY2011-2014, then it could manage to reduce its debt from ₹19 cr in FY2011 to ₹6 cr in FY2014. However, since FY2015, when the company increased its sales growth higher than its SSGR, then it realized that its business profits are not sufficient to meet its fund requirements. As a result, in the last 5 years (FY2015-2020), SOM Distilleries & Breweries Ltd had to use additional resources like debt and equity dilution to meet its growth requirements.

During FY2015-FY2020, the company used the following additional sources of money to fund its business growth:

• ₹216 cr of additional debt: Total debt of the company increased from ₹6 cr in FY2014 to ₹222 cr in FY2020.
• ₹100 cr of equity raised in 2018 via private placement by issuing shares to Karst Peak Asia Master Fund and Vermilion Peak Master Fund.

FY2018 annual report, page 30-31:

Preferential Allotment: In July 2018, the Company successfully raised ₹ 1,000 million through preferential allotment of shares. The key shareholders who participated in the fund raise were Karst Peak Asia Master Fund (Shares: 2.5 million, Value: ₹ 667 million) and Vermilion Peak Master Fund (Shares: 1.2 million, Value: ₹ 333 million). The shares of the company were allotted at a price of ₹271.55.

• ₹35 cr of equity raised by issuing 12,88,906 warrants to promoters at ₹55 per share (12,88,906 * 271.55 = ₹35 cr).

FY2018 annual report, page 31:

The promoters of the company also have subscribed to 12,88,906 warrants amounting to 12,88,906 shares at a price of ₹271.55.

Therefore, an investor would notice that from FY2015 onwards, when SOM Distilleries & Breweries Ltd started growing its business by establishing a new brewery in Karnataka and thereafter acquiring a brewery in Odisha, then its business profits turned out to be insufficient for meeting its growth requirements. As a result, the company has to rely on debt as well as equity dilution to meet its funds’ requirements.

An investor arrives at the same conclusion when she analyses the free cash flow (FCF) position of SOM Distilleries & Breweries Ltd.

b) Free Cash Flow (FCF) Analysis of SOM Distilleries & Breweries Ltd:

While looking at the cash flow performance of SOM Distilleries & Breweries Ltd, an investor notices that during FY2011-2020, it generated cash flow from operations of ₹241 cr. During the same period, it did a capital expenditure of about ₹414 cr.

Therefore, during this period (FY2011-2020), SOM Distilleries & Breweries Ltd had a negative free cash flow (FCF) of ₹(173) cr (=271 – 414).

In addition, during this period, the company had a non-operating income of ₹21 cr and an interest expense of ₹62 cr. As a result, the company had a net negative free cash flow of ₹(214) cr (= -173 + 21 – 62). Please note that the capitalized interest is already factored in as a part of capex deducted earlier.

From the above discussion, an investor notices that the company raised equity by way of preferential allotment of shares (₹100 cr) and warrants (₹35 cr) to meet its cash flow shortfall. In addition, SOM Distilleries & Breweries Ltd raised a debt of ₹203 cr during FY2011-2020 as its total debt increased from ₹19 cr in FY2011 to ₹222 cr in FY2020.

An investor observes that over the last 10 years (FY2011-2020), SOM Distilleries & Breweries Ltd has reported significant negative free cash flow, which it has to bridge by raising additional debt and equity dilution. Therefore, she would appreciate that the dividends paid out by the company over the last 10-years (FY2011-2020) i.e. ₹34 cr without considering dividend distribution tax, are effectively funded by debt.

We believe that when an investor notices that the dividend payouts of any company are funded by debt, then she should not take any comfort from its dividend payouts in her investing decision. This is because, at the time of stress, the dividends are the first outflows that are stopped by the companies.

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

Self-Sustainable Growth Rate (SSGR) and free cash flow (FCF) are 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

From the above assessment, an investor would notice that the business model of SOM Distilleries & Breweries Ltd does not seem to support its business growth and the company is dependent upon additional capital by way of debt or equity dilution to meet its funds’ requirements and dividend payments. The market also seems to have realized this. As a result, over the last 10 years, the market capitalization of SOM Distilleries & Breweries Ltd has declined from ₹546 cr in FY2011 to ₹193 cr now, a decline of about ₹353 cr. Over the last 10 years, the company retained earnings of about ₹138 cr. However, looking at the significant decline of the market capitalization of the company over the last 10-years, an investor would appreciate that the company has not created any value for the shareholders for the earnings retained by it in the last 10-years.

Additional aspects of SOM Distilleries & Breweries Ltd:

On analysing SOM Distilleries & Breweries Ltd and after reading its past annual reports since FY2005, its credit rating reports and other public documents, an investor comes across certain other aspects of the company, which are important for any investor to know while making an investment decision.

1) Management Succession of SOM Distilleries & Breweries Ltd:

The company is a part of SOM group of companies, which apart from SOM Distilleries & Breweries Ltd and its subsidiaries, includes other companies like SOM Distilleries Pvt. Ltd. (SDPL) operating in the liquor industry as well as companies like Aryavrat Tollways Pvt Ltd and Aryavrat Projects & Developers Pvt Ltd. operating in real estate and infrastructure segments.

Credit rating report, Brickwork, June 2019:

Som Group is into distillery business, real estate and infrastructure. The group Companies are Som Distilleries Private Limited (rated BWR BBB- (outlook: stable)/A3 dated 24 May 2018), Woodpecker Distilleries and Breweries Pvt Ltd (rated BWR BB+ (outlook: stable) dated 07 Jun 2018), Aryavrat Tollways Pvt Ltd (rated BWR BB- (Outlook Stable) dated 19 Jan 2018) and Aryavrat Projects & Developers Pvt Ltd (rated BWR BB- (Outlook Stable)/A4 dated 22 June 2018).

As per the website of the company, four members of the promoter family are in executive positions in the SOM group of companies: Mr J.K. Arora (MD), Mr S.K. Arora (Deputy MD, brother of Mr J.K. Arora), Mr Deepak Arora (CEO, son of Mr J.K. Arora) and Mr Alok Arora (Director).

As per the publicly available information, Mr. Deepak Arora is the son of Mr. J.K. Arora (Source).

Spearheaded by industry veteran, Jagdish Arora (CMD) and ably supported by his young & dynamic son, Deepak Arora as the CEO, the company is expanding its footprints in the country’s fast evolving alcoholic beverages industry.

While reading the annual reports of SOM Distilleries & Breweries Ltd, an investor notices many signs that indicate that the promoters of the group manage all the group companies with an overall common strategy without segregating the management and resources of each of the companies.

An investor gets first such instance in FY2009 when the promoters Mr J.K. Arora and Mr S.K. Arora resigned from SOM Distilleries & Breweries Ltd from their positions of CMD and Director respectively.

FY2009 annual report, page 6:

With effect from 21.3.2009, Shri Jagdish Kumar Arora resigned as Chairman / Managing Director, Shri Ajay Kumar Arora resigned as Director and Shri Surjeet Lal who has been a director since 19.5.1993 was appointed as Managing Director.

The investor notices that the promoters of SOM Distilleries & Breweries Ltd resigned from the board of directors of the company and in their place, Mr Surjeet Lal was appointed as the MD of the company.

An investor further notices that SOM Distilleries & Breweries Ltd did not propose to pay any remuneration to the new MD, Mr Surjeet Lal because he is also the CMD of another group company Som Distilleries Pvt. Ltd. (SDPL) and takes his salary from SDPL.

FY2009 annual report, page 8:

Shri Surjeet Lal is a B.Sc. He is 65 years old… He is also Chairman and Managing Director of Som Distilleries Pvt. Ltd. from which company he draws his remuneration. He holds 5010 shares of the company. He may be regarded as a person acting in concert with the promoters. But he is not a promoter.

From the above incident, an investor would appreciate that the promoters of the company put Mr Surjeet Lal as an executive in charge of both their group companies, SOM Distilleries & Breweries Ltd. as well as Som Distilleries Pvt. Ltd. (SDPL). For the compensation, the promoters decided to pay him his remuneration only from SDPL. Such an arrangement indicates that the promoters of the SOM group manage all the companies of the group as different parts fitting in their common vision for the group instead of maximizing the resources and returns for any one company and their shareholders like for SOM Distilleries & Breweries Ltd.

The promoter of the company, Mr J.K. Arora returned to SOM Distilleries & Breweries Ltd as CMD in FY2017 and Mr Surjeet Lal was assigned as a Director of the company.

Upon reading the FY2017, FY2018, FY2019 and FY2020 annual reports of SOM Distilleries & Breweries Ltd, an investor notices that Mr J.K. Arora did not take any remuneration from the company for all these years. The company proposed to start paying remuneration to Mr J.K. Arora in the AGM in 2020.

FY2020 annual report, page 16:

To approve payment of Remuneration to Mr. Jagdish Kumar Arora, Chairman & Managing Director as per the provisions of the Companies Act, 2013, applicable SEBI Regulations

Therefore, an investor would appreciate that the promoters of the SOM group keep moving resources from one group company to another as they deem fit. The management personnel keep handling responsibilities of the listed company (SOM Distilleries & Breweries Ltd) as well as other promoter group companies as per the requirements of the promoters. The promoters use the resources of one company to pay salaries to compensate for the managements’ efforts on multiple group companies.

We discuss different implications of this approach of the promoters of SOM group of intermixing the resources of the public listed company with other group companies later in the article.

Nevertheless, while ascertaining the succession planning for the publicly listed company, SOM Distilleries & Breweries Ltd, even though, an investor may feel that currently, only one member of the promoter family, Mr J.K. Arora (age 65 years) is present on the board of directors. However, the presence of other members of the younger generation of the promoters’ family as executive members of the SOM group of companies may show visibility of succession planning for the investors.

The presence of younger family members at executive positions within the group, while the senior members are still handling responsibilities, looks like a structured succession plan. This is because the young members can learn about the fine nuances of the business under the guidance of senior members until the seniors decide to take retirement.

Further advised reading: How to do Management Analysis of Companies?

2) Multiple instances of the arrest of promoters of SOM Distilleries & Breweries Ltd:

While reading the various news developments related to the promoters of SOM Distilleries & Breweries Ltd, an investor notices that the promoters of the company have been arrested by law enforcement agencies multiple times in the past.

In the latest such instance, in July 2020, the promoters, Mr J.K. Arora and Mr S.K. Arora were arrested by GST intelligence officers when Directorate General of GST Intelligence (DGGI) officials found evasion of GST payments by a promoter group company, SOM Distilleries Pvt. Ltd (SDPL) on the manufacture of sanitizers. (Source: GST intelligence officers arrest SOM distilleries CEO in over Rs 30 crore tax evasion case: Business Insider, July 13, 2020).

As per the news article, SDPL manufactured about 4.9 million litres of hand sanitizer and sold it in the market without payment of GST.

The Directorate General of GST Intelligence (DGGI) officials had already arrested liquor baron and promoters of the firm — Jagdish Arora, his brother Ajay Arora…

“After accounting for the declared sale as per invoices the sanitizers found on stock, it is estimated that about 49 lakh litres of hand sanitizers with an estimated value of Rs 187 crore and involving a GST amount of Rs 33.53 crore was removed clandestinely and/or without payment of taxes by M/s SDPL,” it said.

“M/s SDPL has voluntarily paid GST amounting to Rs 8 crore in cash on 09.7.2020. The total estimated GST evasion on hand sanitizers is estimated to be Rs 33.53 crore,” it said.

As per the media reports, the promoters had to stay in jail from the date of their arrest, July 9, 2020, to August 19, 2020, when the MP High Court granted them bail (Source).

An investor may track the investigations in this case to understand more about the role of SDPL and the promoters in the alleged evasion of GST.

On reading more about the news coverage of the promoters of SOM Distilleries & Breweries Ltd, an investor notices that this was not the first incidence when the promoters of the company were arrested by law enforcement agencies.

Previously, in 2001, Mr Jagdish Arora was arrested in a case of an attack on income tax officials to snatch the documents seized by them from Mr Arora’s residence. (Source: MP liquor baron held, remanded: The Tribune, March 12, 2001).

Liquor baron of Madhya Pradesh Jagdish Arora has been remanded by a Bhopal court to judicial custody till March 22. The police had arrested for his alleged involvement in the attack on the Income Tax officers to snatch the documents, which the officers had seized from Mr Arora’s residence on January 11.

Early this year the IT Department raided various premises of Mr Arora and was said to have recovered a large number of incriminating documents. As the IT officers were leaving with the documents around 3 a.m., they were ambushed by more than a dozen persons who attacked them and snatched the documents from them.

The article also highlights the political influence of Mr. Arora. The article also mentions a previous case when the promoters have submitted a fake demand draft as a deposit for the auction of liquor shops in Raipur.

Mr Arora, who was once literally dictating the Digvijay Singh government on excise matters,

he became the benami owner of all liquor shops in Bhopal

Mr Arora and his group of industries had hogged the headlines last year for submitting a fake draft for Rs 3 crore as deposit for the auction of liquor shops in Raipur.

In light of the above incidences, an investor may search more about the media coverage of the promoters of SOM Distilleries & Breweries Ltd and also increase her own due diligence while doing the management analysis of the company.

From the above incidences, an investor would appreciate that the promoters of SOM Distilleries & Breweries Ltd have had multiple instances of investigations from law enforcement agencies. Moreover, while reading the annual reports of the company, the investor notices that in the mandatory section in the annual reports about disclosure of legal disputes, the company has stated that it has ongoing legal disputes as a normal course of business.

The company has repeated the below disclosure in each of its annual reports from FY2015 to FY2020.

FY2020 annual report, page 83:

The company’s pending litigations pertain to claims and cases occurring in the normal course of business. The company has reviewed its pending litigations and expects that the outcome of the proceedings will not have any material effect on its financial position

In light of the above discussion, an investor may do deeper due diligence while doing the analysis of SOM Distilleries & Breweries Ltd.

3) Using resources of one group company for another:

From the above discussion, an investor would remember that the promoters of SOM Distilleries & Breweries Ltd use all of their companies whether it is publicly listed or is a privately held promoter entity, as parts of their common group strategy. They seem to use the manpower as well as the financial resources of each company for use by other companies as they deem fit.

In the discussion on succession planning, an investor noticed how the promoters had one person, Mr Surjeet Lal as the MD of public-listed company, SOM Distilleries & Breweries Ltd, as well as the CMD of the privately held promoter entity SOM Distilleries Pvt. Ltd (SDPL). At the same time, Mr Lal worked for the public-listed company as well as the promoters’ personal company.

While analysing SOM Distilleries & Breweries Ltd, an investor got to know many other instances where it becomes difficult for the investors to ascertain whether the resources and shareholders’ interest of the public-listed entity can be segregated from the issues of other promoter entities.

3.1) Promoter entity, SOM Distilleries Pvt. Ltd (SDPL) selling same IMFL brands as public-listed company, SOM Distilleries & Breweries Ltd:

While analysing the business of promoter group entities, when an investor reads the credit rating rationale of the promoter entity, SOM Distilleries Pvt. Ltd (SDPL) prepared by Brickwork in May 2018, then she notices that SDPL sell many IMFL brands. The investor is surprised to notice that many of the IMFL brands sold by SDPL are the IMFL brands manufactured by SOM Distilleries & Breweries Ltd.

Credit rating report of SOM Distilleries Pvt. Ltd (SDPL), Brickwork, May 2015, page 2:

Som Distilleries Pvt Ltd (SDPL) was incorporated in 1986 at Mumbai. SDPL is part of the Bhopal, Madhya Pradesh based Som Group… The company has established brand names viz., for Whisky- Milestone 100, 2Ist Century Pure Malted Whisky, Gypsy Whisky, Blue Chip, Super Master; for Rum –Black Fort, Super Master and Gypsy; for Vodka – White Fox and Blue Chip and for Gin – Blue Chip Extra Dry Gin and 21st Century Gin.

An investor notices that out of the above mentioned IMFL brands of SPDL, Milestone 100 (Whisky), Gypsy (Whisky and Rum), Blue Chip (Whisky, Rum, Vodka and Gin), and White Fox (Vodka) are the same brands that are sold by the public listed company SOM Distilleries & Breweries Ltd as well.

An investor gets to know the brands sold by SOM Distilleries & Breweries Ltd in its annual reports.

FY2020 annual report of SOM Distilleries & Breweries Ltd, page 12:

The Company’s flagship brands include Hunter, Black Fort, Power Cool and Woodpecker in the Beer segment and Milestone 100 whisky and White Fox vodka in the IMFL segment. Other popular IMFL brands of SOM include Legend, Genius, Sunny, Gypsy and Blue Chip.

When an investor notices common brands in the liquors sold by the public listed company SOM Distilleries & Breweries Ltd as well as the promoter-owned entity SDPL, then she faces multiple questions.

• She would want to know who owns these brands. Is it the public listed company, SOM Distilleries & Breweries Ltd, or the promoters or anybody else?
• How the promoters distribute the business, sales, and revenue earned from the sale of these brands among different entities?
• How can a public investor be certain that the public listed company SOM Distilleries & Breweries Ltd is able to get the maximum benefit that it can achieve by selling these IMFL brands and the promoter-owned entity SDPL is not competing with it for the same set of customers?

An investor may contact the company directly for clarifications in this regard.

In addition, during the analysis of annual reports of SOM Distilleries & Breweries Ltd comes across another promoter group company, Legend Distilleries Pvt. Ltd (LDPL), which is engaged in the same business activities as SOM Distilleries & Breweries Ltd. In FY2014, the promoters tried to merge LDPL with SOM Distilleries & Breweries Ltd.

FY2014 annual report, page

Merger of Legend Distilleries Private Limited: ln March 2014, a board resolution was passed to merge Legend Distilleries and SDBL. As both the companies are engaged in similar business activity, it is expected that this merger will result in significant synergies in the operations.  The objective of the merger is to achieve economies in various aspects of operations and management such as marketing, purchases, accounts, legal services, secretarial, finances and borrowings.

Legend Distilleries is based out of Biaspur in Chhattisgarh with an annual bottling capacity of 6.5 lakh cases per annum and blending capacity of 8lakh cases per annum.

SOM Distilleries & Breweries Ltd provided some updates about the progress of the merger with LDPL for some of the subsequent annual reports. E.g. FY2016 annual report, page 25:

In respect of Merger of Legend Distilleries Private Limited in the company, court convened meetings of members, secured creditors and unsecured creditors were held at Delhi on 03.03,2016 whereas the merger proposal was approved at the three meetings and such approval was reported to the court for further action.

However, thereafter, the company stopped providing updates about the merger with LDPL.

Currently, when an investor tries to find the details of Legend Distilleries Private Limited (LDPL), then she notices that LDPL exists as an independent company and the promoters of SOM Distilleries & Breweries Ltd, Mr Jagdish Kumar Arora and Mr Ajay Kumar Arora are the directors of the company. It may mean that the merger of LDPL with SOM Distilleries & Breweries Ltd did not succeed.

Details of Legend Distilleries Private Limited from corporate database Zaubacorp:

Therefore, from the above discussion, an investor would observe that the promoters run different companies in the same business activities as the public listed company, SOM Distilleries & Breweries Ltd. In such a situation, an investor bears the risk that the promoter-entities may compete for business opportunities with the public listed company. Also, in case the promoters come across any new business opportunity, then they may attempt to give the business to their own company instead of the public listed company.

Therefore, an investor should be very cautious while analysing companies where promoters have competing entities doing business in the same industry. This is because the investor would not get to know when the promoters lose their commitment to the listed company and start focusing more on their personal companies and by the time, an investor is able to conclusively decide that the promoters are no longer committed to the public listed company, it might have already been very late.

Read: How to know if Promoters are Losing Commitment to the Company

3.2) Promoter-owned entities freely using the money of public listed company, SOM Distilleries & Breweries Ltd and vice-versa:

While reading the annual reports of SOM Distilleries & Breweries Ltd, an investor notices that for a long time, the company freely shifts money to and from another promoter-entity, SOM Distilleries Pvt. Ltd (SDPL). The auditor of the company highlighted to the shareholders in the annual reports that the give and take money transactions of SOM Distilleries & Breweries Ltd with SDPL are very frequent, just like a current account with a bank.

FY2008 annual report, page 23:

the Company has an account in the nature of a current account with another Company under the same management. The maximum amount due at any time during the year was Rs. 13,30,97,158, and the year end balance was Rs. 13,30,97,158.

While reading the FY2008 annual report further and analysing the related-party-transactions section, an investor gets to know that the promoter entity under question is SDPL.

FY2008 annual report, page 33:

Advances include…Rs.11,41,90,917 due to Som Distilleries Private Ltd., (previous year due from at Rs. 13,30,97,158) towards trading and current account.

When an investor analyses more annual reports of SOM Distilleries & Breweries Ltd, then she notices that the current account of the company with SDPL is an interest-free account. It indicates that when the public listed company, SOM Distilleries & Breweries Ltd, gives money to the promoter-entity, SDPL, then it is free of cost money available to SDPL.

FY2013 annual report, page 18 (iii):

lt has been explained to us that since the current account mentioned above is not in the nature of a loan, there are no stipulations for levy of interest.

A reading of additional annual reports of SOM Distilleries & Breweries Ltd, tells an investor that at times, a significantly large amount of money have been given by the company to SDPL. Moreover, at times, SOM Distilleries & Breweries Ltd has borrowed money from lenders to give it to SDPL.

In FY2015, at one point in time, SOM Distilleries & Breweries Ltd has given about ₹46 cr to SDPL as interest-free money.

FY2015 annual report, page 43:

However, the Company has an account in the nature of a current account with a company under the same management. It has been explained to us that the transactions with this company are in the ordinary course of business. The maximum amount due from that company at any time during the year was ₹ 46,24,74,613.

While reading the FY2015 annual report of SOM Distilleries & Breweries Ltd, the investor notices that during the year, the company borrowed about ₹55 cr as its total debt increased from ₹6 cr in FY2014 to ₹61 cr in FY2015. However, the company did only a capital expenditure of about ₹3 cr during FY2015.

However, at the end of FY2015, the advances given by SOM Distilleries & Breweries Ltd to its related party had increased by ₹15 cr, from ₹7 cr in FY2014 to ₹22 cr in FY2015.

FY2015 annual report, page 54:

On page 59 of the FY2015 annual report, in the related-party-transactions section, the company highlighted that ₹22 cr mentioned as an advance to a related party is given to SDPL.

In this light, an investor may conclude that during the year, SOM Distilleries & Breweries Ltd borrowed money from lenders to give interest-free advance to the promoter-entity, SDPL.

While reading the FY2015 annual report, an investor is amused when she notices that the company mentioned high-interest costs as one of the reasons for the decline in profits.

FY2015 annual report, page 13:

There has been an increase in the turnover during 2014-15 over the previous year. However, the profit has declined due to interest cost and higher taxation.

The credit rating agency, ICRA has also highlighted in its report for SOM Distilleries & Breweries Ltd in November 2018 that the company had been giving a significant amount of money to the group companies.

ICRA also takes note of sizeable advances extended to the Group companies in the past for capital expenditure

Nevertheless, an investor may note that the flow of money to SDPL is not a one-way route. When an investor analyses the financial position of SDPL by reading its credit rating reports, then she notices that SDPL has given a lot of money to other SOM group entities.

The credit rating report of SDPL prepared by ICRA in July 2020 mentions that SDPL gave an advance of ₹112 cr to SOM group companies. As a result, its liquidity position was stretched and it has fully utilized its working capital limits.

Full utilisation of working capital limit and sizeable advances to Group companies – SDPL has been fully utilising its working capital limits. Any major deviation in working capital parameters might exert further pressure on its liquidity position. This apart, the company has extended long-term advances to the tune of ~Rs. 112 crore as on December 2019 to the various Group companies, which has kept the liquidity under pressure.

At times, the promoters helped the public-listed entity, SOM Distilleries & Breweries Ltd, by infusing interest-free money in the company to meet the funds’ requirement.

The credit rating report for SOM Distilleries & Breweries Ltd prepared by ICRA in November 2018 highlighted that promoters infused interest-free loans of ₹19 cr in the company to meet funds’ requirement of construction of a brewery in Hassan, Karnataka.

The commercial production from the Hassan unit commenced in June 2018. The total project cost of Rs. 122 crore was funded by internal accruals of Rs 78 crore, term loans of Rs. 25 crore and interest-free unsecured loans from promoters amounting to Rs. 19 crore.

From the above examples, an investor would note that the promoters of SOM Distilleries & Breweries Ltd are using money and resources of one group company freely for another, including from public listed company to privately held promoter-entity. An investor may appreciate that despite owning less than 25% of SOM Distilleries & Breweries Ltd (promoter’s shareholding in the company is 24.48% on December 31, 2020, as per BSE), the promoters treat the company and its resources like their other privately held companies.

In light of such incidences of intra-promoter-group transactions, an investor would appreciate that the shareholders of the public listed company, SOM Distilleries & Breweries Ltd get exposed to a higher risk. This is because, if any of the other promoter-entities faces a liquidity crunch, then the promoters may not hesitate to take money out of SOM Distilleries & Breweries Ltd to give it to the troubled promoter-entities even if they have to make SOM Distilleries & Breweries Ltd borrow money to give money to these entities.

In addition, when an investor notices that the SOM group is also active in infrastructure and real estate business via promoter-entities, then she would appreciate that the risk of eventually supporting promoter-entities increases further. This is because the operations of the infrastructure division of the company are running into losses.

Also read: How to do Business Analysis of Real Estate Companies

The credit rating agency, Brickwork, in January 2021, downgraded the credit rating of Aryavrat Tollways Pvt. Ltd., which is the SOM group company active in the infrastructure segment, from B to B-, which represents a high risk. Brickwork highlighted that the company is not doing well and is reporting losses and the cash flow of the company is barely sufficient to meet its debt obligations.

The revision of rating takes into account fall in revenue, losses incurred resulting in deterioration of financial profile in FY20, diversion of traffic in one of the main toll roads affecting toll collection, continued stretched liquidity profile of the company.

Advised reading: Credit Rating Reports: A Complete Guide for Stock Investors

Brickwork has highlighted in its report that until now, Aryavrat Tollways Pvt. Ltd., was able to meet its debt repayment by either operating cash flow or from money infused by promoters. However, going ahead, the debt repayments are going to increase and the company would face difficulties in repayment. The fact that traffic is diverted from its toll road is making it difficult for the company to generate sufficient cash flows.

While, the company was able to meet its debt obligations with existing cash generation and support from promoters, going forward the repayment obligations will increase considerably in line with the debt amortization schedule and the current level of cash generation is not sufficient to meet the same.

Therefore, in the light of frequent intra-group transactions between the public listed SOM Distilleries & Breweries Ltd and other promoter-entities, the risk of SOM Distilleries & Breweries Ltd having to eventually support other financially stressed promoter-entities increases further. Therefore, an investor should increase her due diligence before she makes any opinion about the company.

While ascertaining the support given by the public listed company to other group entities, an investor should also keep in mind that many times the support is beyond the straightforward transfer of money. At times, the support is in the form of a corporate guarantee given by the public listed company, SOM Distilleries & Breweries Ltd, to the bankers of the promoter-entity for the loans taken by the promoter-entity from the bankers. In such a situation, the ultimate risk of repaying the loans shifts from the promoter entity to the public listed company.

In the past, on multiple occasions, SOM Distilleries & Breweries Ltd has given guarantees for the loans taken by promoter entities. For examples in the FY2011 annual report, an investor notices that SOM Distilleries & Breweries Ltd has given corporate guarantee to bankers on behalf of a group company, for ₹6.79 cr in FY2010 and FY2011.

FY2011 annual report, page 29:

At times, an investor would notice that SOM Distilleries & Breweries Ltd gave corporate guarantees to bankers on behalf of others and the same was pointed out by the auditor in its report; however, the company did not disclose it in the table of contingent liabilities like during FY2012 (refer to page 19 and 32 in the annual report).

However, at times, SOM Distilleries & Breweries Ltd refused to share the details of these corporate guarantees with the auditor and the auditor had to include the lack of details in its report e.g. in FY2014.

FY2014 annual report, page 36:

According to the information given to us during the year the Company has given a corporate guarantee for a loan taken by others from a bank ln the absence of necessary information, we are unable to comment as to whether the terms and conditions of such guarantee are prejudicial to the interests of the company or not.

An investor would appreciate that the only reason for an auditor to not get necessary information about a corporate guarantee given by it, is if the company refuses to share the information with the auditor. Otherwise, it is safe to assume that the company would definitely have the information related to the corporate guarantees issued by it.

Therefore, an investor would appreciate that if a company refuses to share information with the auditor, then it becomes difficult for an investor to make any informed opinion about the company. Therefore,  whenever an investor comes across instances of related party transactions between the public listed company and promoter-entities, then it is essential for an investor to increase her level of due diligence.

Apart from loans & advances as well as guarantees, many times promoters make the public listed companies invest in the equity of promoter entities. This route also shifts money/economic interest from the public listed company to the promoter entity.

While reading the FY2005 annual report, an investor gets to know that in the past, SOM Distilleries & Breweries Ltd had given money to one of the promoter-owned entity, Som Power Ltd (SPL) as share application money; however, until then, SPL had not allotted shares to SOM Distilleries & Breweries Ltd.

FY2005 annual report, page 22:

Advances include Rs. 42,67,000 (previous year Rs. 42,67,000) given to Som Power Limited, a company under the same management, towards share application money, for which shares are yet to be allotted.

When an investor reads the subsequent annual reports, then she notices that SOM Distilleries & Breweries Ltd did not receive these shares. The said advance kept appearing in the balance sheet of SOM Distilleries & Breweries Ltd until FY2012 as Share Application Money under section “Advance to a Related Party.” In FY2013, the amount was removed from the annual report.

FY2013 annual report, page 30:

An investor notices that in FY2013, the advance disappeared from the balance sheet; however, she could not find shares of Som Power Ltd under investments.

An investor may contact the company directly to understand this transaction where the money was given to the promoter-entity by the public listed company for buying shares of the promoter-entity. However, in FY2013, the money was removed from the balance sheet, though, apparently, the public listed company did not receive the shares of promoter-entity. She may ask whether the company wrote off the advance given to the promoter entity as a loss/non-recoverable amount.

We believe that whenever an investor comes across instances of related party transactions between the public listed company and promoter entities, then she should do a deeper level of due diligence.

Read: How Promoters benefit themselves using Related Party Transactions

4) Large advances given by SOM Distilleries & Breweries Ltd to retailers and large sales promotions expenses:

While reading the annual reports of the company, an investor notices that over the years, the company’s balance sheet has shown significantly large sums of money as advances to retailers. At times, the amount of advances to retailers has been more than ₹40 cr.

When an investor looks at the normal business practices, then she notes that it is the customer, who buys something from a supplier, usually, pays an advance to the supplier to ensure that the customer will honour its commitment to buy the goods. This normal business transaction of giving advances to the suppliers is visible in the balance sheet of SOM Distilleries & Breweries Ltd in the form of advances to suppliers.

However, when an investor comes across transactions as “advance to retailers” who are the customers of SOM Distilleries & Breweries Ltd, then she is confused. Why is it that SOM Distilleries & Breweries Ltd is giving advances to the retailers who actually buy liquor from the company and then sell it to people? Ideally, the retailers should give advances and deposits to SOM Distilleries & Breweries Ltd to ensure that they will honour their purchase orders given to the company.

An investor gets some information about the nature of the transactions underlying these advances to retailers when she reads the November 2018 credit rating report of the company prepared by ICRA. The credit rating agency has highlighted that these advances are given by SOM Distilleries & Breweries Ltd to the retailers under a marketing agreement.

ICRA also takes note of sizeable advances extended to the Group companies in the past for capital expenditure and to the retailers under a marketing arrangement.

Advised reading: Credit Rating Reports: A Complete Guide for Stock Investors

From the above information, it looks like SOM Distilleries & Breweries Ltd uses retailers for sales promotions and pay them substantial money to promote its goods (liquor). As a result, to ensure that the company would honour its commitment to pay the sales promotion amount, the retailers demand a substantial amount of advances from it.

When an investor analyses the sales promotion expenses incurred by SOM Distilleries & Breweries Ltd over the years, then she notices that the company has spent about ₹30 cr to ₹50 cr in sales promotion expenses every year. The amount of sales promotion expenses seems in line with the amount of advances of about ₹20 cr to ₹40 cr given by it to retailers under the marketing arrangement.

In addition, an investor notices that SOM Distilleries & Breweries Ltd has spent about 11%-13% of its revenue every year as sales promotion expenses. Over FY2011-2020, the company has spent a total of ₹338 cr i.e. 13% of its total revenue as sales promotion expenses.

An investor may think that the company is spending significant money on sales promotions in recent years because it has entered two new markets of Karnataka and Odisha. However, if an investor looks at the history of sale promotions expenses by SOM Distilleries & Breweries Ltd, then she notices that in the period FY2011-2015, when the sales of the company were growing at a very slow pace, even then it was spending about 15% of its revenue on sales.

During FY2011-2015, SOM Distilleries & Breweries Ltd spent a total of ₹147 cr on sales promotions whereas, during this period, the sales of the company increased only from ₹176 cr in FY2011 to ₹206 cr in FY2015.

Therefore, an investor would appreciate that even after spending substantial money on sales promotions (about 15% of revenue) during FY2011-2015; the company could increase its sales by about 4% per annum.

On the contrary, when an investor compares the sales promotion expenses of SOM Distilleries & Breweries Ltd with its competitors and industry peers, then she notices that other companies spend a much lower proportion of their revenue on promotions.

The investor notices that:

• Large companies like United Breweries Ltd and Radico Khaitan Ltd, which are 5 to 10 times bigger in size than SOM Distilleries & Breweries Ltd, spend only about 5%-6% of their revenue on sales promotion.
• Another company, Globus Spirits Ltd, which is double the size of SOM Distilleries & Breweries Ltd, spends about 0.3% of its revenue on sales promotions.
• On the other hand, G M Breweries Ltd, which is similar in size to SOM Distilleries & Breweries Ltd spends merely 0.2% of its revenue on sales promotions.

Therefore, the investor faces many questions regarding the reasons why SOM Distilleries & Breweries Ltd spends a disproportionately large amount of money on sales promotion when compared to its peers. On top of it, SOM Distilleries & Breweries Ltd gives most of the money to be spent on sales promotions to retailers as an advance.

In addition, an investor would also notice that SOM Distilleries & Breweries Ltd continued to spend heavily on sales promotion even in the recent years when it has been facing liquidity stress and fully utilizing its working capital facilities.

Credit rating report of the wholly-owned subsidiary, Woodpecker Distilleries & Breweries Private Limited by ICRA in September 2019:

Full utilisation of working capital limit – The Group has been fully utilising its working capital limits. Any major deviation in working capital parameters may lead to a tight liquidity position.

Credit rating report of SOM Distilleries & Breweries Ltd by ICRA in July 2020:

The liquidity profile of the Group is stretched due to limited cushion available in working capital limits.

Moreover, while reading the FY2019 as well as FY2020 annual reports, an investor gets to know that at the end of FY2018, FY2019 as well as FY2020, the company had pending interest liabilities where the payment had already become due; however, SOM Distilleries & Breweries Ltd had not yet made the payment for the same.

The indebtedness table in the FY2019 annual report on page 13 indicated that at the end of FY2019, the company had an interest of ₹0.7 cr due for payment that it had not paid.

The fact that the company had interest payment due but it could not pay them off might indicate that the company is facing a liquidity crunch and is facing difficulties to arrange for funds for making payment to its lenders.

(Error in the annual report: The indebtedness table shown in the above section also highlights an error in the presentation of the data by SOM Distilleries & Breweries Ltd in the annual report. An investor would observe that in the above table, the total indebtedness (i.e. total debt) at the start of FY2019 is ₹46 cr. During the year, the total debt increased by ₹60 cr. Therefore, an investor would expect that at the end of the year, the total debt would increase to ₹106 cr (= 46 + 60). However, the indebtedness table presented above shows that the total debt at the end of FY2019 is ₹82 cr. In this regard, an investor may contact the company directly to get clarifications about the mismatch/totalling error in the numbers in the table.)

An investor would notice that if any company is facing liquidity stress, then usually, it cuts down its advertising/sales promotion expenses. However, in the case of SOM Distilleries & Breweries Ltd, an investor notices that the company has continued to spend more than 10% of its revenue on sales promotions even when it is going through liquidity stress.

Therefore, an investor notices that SOM Distilleries & Breweries Ltd has been continuously spending a disproportionately large amount of money on sales promotions when compared to its peers. The company has continued to spend a large amount of money on sales promotions even when the results have not been very encouraging (FY2011-2015). The company has continued to spend a large amount of money on sales promotions even when it is facing stress in its liquidity position.

Moreover, the company seems to follow a marketing arrangement where it pays a large amount of advertising budget to retailers. In addition, over the years, it has given a large amount of money as an advance to the retailers.

Looking at all the above observations, if an investor needs clarifications, then she may contact the company directly to understand the nature of its marketing arrangements with retailers. Why the company needs to pay the retailers a large amount in advances whereas it has been in this line of business for many decades. How these retailers provide sales promotions for SOM Distilleries & Breweries Ltd in a manner that it ends up spending comparatively multiple times of the money spent by its peers on sales promotions.

Understanding all these aspects of the significantly large expense of sales promotions is essential for an investor to make an opinion about SOM Distilleries & Breweries Ltd.

Read: 7 Signs to tell whether a Company is cooking its Books: “Financial Shenanigans”

5) Frequent defaults by SOM Distilleries & Breweries Ltd to its lenders:

From the above section on the business analysis of the company, an investor would remember that SOM Distilleries & Breweries Ltd faced a liquidity crunch in the last decade and it defaulted to the lenders.

When an investor reads about the various business decisions taken by the company during that period, then she comes across the following insights.

5.1) SOM Distilleries & Breweries Ltd blamed the bankers for its poor business performance:

In the FY2005 annual report, the company told its shareholders that its business has suffered losses from the last 3 years. The company highlighted that the shape of its business was so poor that it could not even repay its lenders and as a result, it defaulted in its repayments.

FY2005 annual report, page 5:

Default in repayment of dues to Bankers and Financial Institutions are due to losses incurred by the company during last three years. Various efforts are being made to regularize the accounts with Banks and Financial Institutions.

As discussed above, SOM Distilleries & Breweries Ltd blamed the banker for its poor state of business affairs.

FY2005 annual report, page 7:

The Company has clear dependency on its bankers. This confidence was on the basis of long term relationship with the Bankers without realizing that the Bankers provide umbrella for non-raining days only. This dependency on and prolonged persuasion with the Bankers has put the Company into difficult situation where the Company has suffered huge losses due to non-availability of small requirement of working capital since last three years.

Nevertheless, the company could restructure its debt in FY2007-FY2008, with the help of Kotak Mahindra Bank and repaid its debt to the previous lenders.

FY2008 annual report, page 17:

The company has completed the process of restructuring and with the induction of funds from Kotak Mahindra Bank as Working Capital, Company has turned around completely. The Company has also made settlement with the bankers for their dues with the help of Kotak Mahindra Bank.

Advised reading: Understanding the Annual Report of a Company

5.2) The loss of its bankers became the profit of SOM Distilleries & Breweries Ltd:

While doing the restructuring of its debt in FY2007-FY2008, the company negotiated with its bankers and repaid them a lower sum of money than what the actual loan was due. The bankers had to take a loss to the extent of lesser repayment by SOM Distilleries & Breweries Ltd.

However, the company included the savings due to lesser repayment to the bankers as its income.

FY2008 annual report, page 34:

During the previous year, Kotak Mahindra Bank Ltd. (KMBL), had taken over the total outstandings of the Bank of Baroda and Bank of India by way of assignment of those liabilities. Accordingly the Company had transferred the liability towards these banks to KMBL.

During the year the Company has started repayment of the assigned liabilities to KMBL. Therefore, the difference between the assigned liability and the amount settled with KMBL has been shown in the Profit and Loss Account as “Bank Loan Settlement.”

In FY2008, the company showed an income of ₹8.8 cr as “Bank Loan Settlement”

Therefore, an investor would note that due to the debt restructuring in FY2007-FY2008, the bankers of SOM Distilleries & Breweries Ltd had to take a loss of about ₹8.8 cr and the company recognized a profit of ₹8.8 cr at the cost of its bankers.

5.3) SOM Distilleries & Breweries Ltd had disputes with Kotak Mahindra Bank Ltd as well:

In the FY2011 annual report, when the company had turned around and had started reporting profits, the auditor of SOM Distilleries & Breweries Ltd intimated to the shareholders that the company is not paying Kotak Mahindra Bank Ltd regularly. The auditor highlighted that there are some disputes between SOM Distilleries & Breweries Ltd and Kotak Mahindra Bank Ltd and the auditor is not able to ascertain the delays in the payments.

FY2011 annual report, page 17:

As per its records, the repayment of the loans from the Kotak Mahindra Bank Ltd., (KMBL) has not been in accordance with the initially accepted terms. As per the explanations given to us, this is due to the difference of opinion on certain matters between the Management of the Company and KMBL. We are therefore unable to determine the period of default, if any

In the same annual report, the management of the company intimated the shareholders that it is trying to arrive at a mutually agreeable solution with Kotak Mahindra Bank Ltd for the money due to the bank.

FY2011 annual report, page 26:

The Company in an advanced stage of finalization of the terms of repayment of the outstandings of Kotak Mahindra Bank Ltd. (KMBL). The management is hopeful of mutually acceptable solution, which is likely to fructify shortly.

An investor may contact the company directly to understand whether this renegotiation of the terms with the bank was another episode of debt restructuring.

5.4) SOM Distilleries & Breweries Ltd defaulted in payments to Madhya Pradesh State Industrial Development Corporation Ltd., (MPSIDC):

While reading the annual reports of the company, an investor gets to know that the company got an inter-corporate deposit (ICD) from MPSIDC and it had to repay this ICD to MPSIDC; however, it stopped making repayments of ICD from 2002.

In FY2005, SOM Distilleries & Breweries Ltd applied to MPSIDC for a one-time settlement (OTS), which effectively meant that the company appealed to MPSIDC for a reduction in the interest rate and repayments. However, what comes as a surprise to the investor is that in its financial statements, SOM Distilleries & Breweries Ltd started showing lower interest rate obligations/expense even when the OTS proposal was not approved by MPSIDC.

The auditor of the company highlighted it in its report in the annual report.

FY2005 annual report, page 23:

The Company was unable to meet its commitments towards the Inter Corporate Deposits (ICD) obtained in the earlier years from the Madhya Pradesh State Industrial Development Corporation Ltd., (MPSIDC). Subsequently, during the year, in accordance with the One Time Settlement Scheme (OTS) of MPSIDC, the Company had submitted a proposal for a downward revision of interest and repayment of the outstandings in suitable installments. Pending the formal acceptance of the OTS proposal, interest on the ICD has been accounted for, up to 31.03.2005, in accordance with the said OTS guidelines. The Company may be deemed to be contingently liable to the extent of the difference in the contracted rate of interest and that as per the OTS guidelines of MPSIDC.

An investor would appreciate that in the case of such requests for OTS, it is up to the govt. authority like MPSIDC to accept or reject the proposal and any company may not take a decision in its favour as guaranteed.

After 4 years, in FY2009, SOM Distilleries & Breweries Ltd intimated its shareholders that it has now sent a fresh request to MPSIDC for OTS. It may mean that the previous request for OTS submitted by the company to MPSIDC in FY2005 was not entertained.

FY2009 annual report, page 29:

The Company is taking up the matter afresh for settlement of its outstandings with the Madhya Pradesh State Industrial Corporation Ltd. (MPSIDC) as per the policy of MPSIDC in this regard….The unprovided interest at the contracted rate (compounded annually) amounts to Rs. 7,56,27,382 upto 31.03.2009 (previous year Rs. 5,28,59,242). The Company may be deemed to be contingently liable to that extent.

After two more years, in FY2011, the company had to again submit another fresh proposal for OTS to MPSIDC, which was almost after 6 years after the submission of the first request for OTS in FY2005. Finally, in FY2011, MPSIDC seemed to have agreed to OTS and accepted a token payment.

FY2011 annual report, page 26:

The Company has made a fresh offer for settlement of its outstandings with the Madhya Pradesh State Industrial Development Corporation Ltd. (MPSIDC) as per its policy in this regard. The Company had also made a token payment which has been realised.

Finally, in FY2014, after more than 12 years of the start of the default in FY2002, SOM Distilleries & Breweries Ltd settled the inter-corporate deposit (ICD) taken by it from MPSIDC.

FY2014 annual report, page 43:

The unsecured Inter Corporate Deposit outstanding as on 31st March 2013 has been paid off during the year 2013-14.

An investor may note that the request for the OTS was finally accepted by MPSIDC in FY2011 when it agreed to accept the token repayment. However, SOM Distilleries & Breweries Ltd started recognizing the lower interest rate under OTS from the FY2005 itself when it had first applied for the OTS to MPSIDC.

Recognition of a lower interest rate on the inter-corporate deposit without approval from MPSIDC had the impact of lowering the interest expense in the profit and loss statement (P&L). This decision of the company increased the amount of profits by that amount.

Read: How Companies Inflate their Profits

6) Capital expenditure of ₹24 cr done by SOM Distilleries & Breweries Ltd in FY2012:

When an investor analyses the capital expenditure done by the company and the increase in its production capacity, then she gets the following insights.

• Until FY2007, the company had a production capacity of 23,800 KL of beer
• In FY2008, the company increased its capacity to 29,200 KL of beer. To increase the capacity by 5,400 KL of beer, it spent about ₹8 cr (FY2008 annual report, page 29).
• In FY2011, the company increased its production capacity to 59,200 KL of beer. The company spent ₹29.6 cr to increase its capacity by 30,000 KL of beer (=59,200 – 29,000).

FY2011 annual report, page 9:

The company has added to the production capacity 30,000 KL of beer with a capital investment of around Rs.296 million.

The installed capacity of your Company for production of beer has now been increased to 59,200 KL in year under consideration.

In the same year, FY2011, SOM Distilleries & Breweries Ltd intimated its shareholders that it now plans to further increase its capacity by another 40,000 KL of beer and plans to complete it within one year i.e. by FY2012.

FY2011 annual report, page 9:

In view of the increase in demand for the Company’s products and expanding the marketing area of the products in India and abroad, your Company is prompted to go for yet another expansion. The expansion of capacity by another 40,000 KL is under way and is expected to be commissioned by the end of the F.Y. 2011-12.

In the next year, FY2012, the company intimated that the construction of the new production capacity to increase its capacity to 99,200 KL is underway.

FY2012 annual report, page 8:

The expansion of the company is underway from the existing capacity of 59,200 KL to 99,200 KL due to wide acceptance of our products, the full effect of which will be seen in the financial year 2012-2013.

When an investor analyses the FY2012 annual report to find out the amount of capital expenditure done by it for the new plant, then she notices that the company spent about ₹23.8 cr on fixed assets. As per the schedule containing details of tangible fixed assets, out of this expenditure, assets worth ₹23.4 cr were completed and functional whereas ₹0.4 cr were still under execution i.e. in capital work-in-progress (CWIP).

FY2012 annual report, page 26:

An investor would appreciate that until the time a manufacturing plant is under construction, companies show the money spent on it under CWIP. When the construction is completed and the plant becomes functional, then the companies shift the amount from CWIP to gross fixed assets.

Therefore, when an investor observes an increase in the gross fixed assets by ₹23.4 cr in FY2012, then she analyses the future annual reports of the company to assess the increase in the production capacity of SOM Distilleries & Breweries Ltd due to this capital expenditure.

However, as per the annual report of the next year, FY2013, the company’s capacity did not increase. It was still 59,200 KL of beer; the same level as of FY2011 and the IMFL capacity was 5,400 KL, which is constant since at least FY2004.

FY2005 annual report, page 23:

FY2013 annual report, page 11:

The Company has an installed capacity of 59,200 KL of Beer and 5,400 KL of IMFL after having tripled its capacity in the past two years.

In FY2013, the management of the company highlighted that it has tripled its capacity in the past two years, i.e. from FY2011 to FY2013. However, an investor notices that its beer capacity is at the same level of 59,200 KL since FY2011 and its IMFL capacity is at the same level of 5,400 KL since FY2004. Therefore, an investor is not sure how she should interpret the management claim about “having tripled its capacity in the past two years.”

Read: Why We cannot always Trust What Management Claims

An investor would notice that until FY2018, the company had its production facilities only in one location i.e. in Bhopal, MP. In April 2018, the company started its second production facility in Hassan, Karnataka.

Upon reading the FY2018 annual report, the investor gets to know that the Bhopal plant still has a capacity of 59,200 KL of beer.

FY2018 annual report, page 28:

The Company and its subsidiary have two manufacturing plants in Bhopal, Madhya Pradesh and Hassan, Karnataka. The Bhopal facility has a manufacturing capacity of 7.6 million cases of beer and 0.6 million cases of IMFL per year. The Karnataka facility was commissioned in April 2018 and has a manufacturing capacity of 3.4 million cases of beer and 2.7 million cases of IMFL.

As per the FY2019 annual report of the company, page 21, a case of beer contains 12 bottles of 650 ml each.

In 2018 India accounted for consumption of 2,426 million liters or 311 million cases of beer. (1 case is equivalent to 12 bottles of 650 ml each).

Therefore, if an investor converts the production capacity of the Bhopal plant in FY2018 from 7.6 million cases of beer to Kilolitres (KL), then she gets the data as 59,280 KL (7,600,000 * 12 * 0.650 = 59,280,000 Litres).

Therefore, an investor notices that even though the annual reports of SOM Distilleries & Breweries Ltd shows that in FY2012, the company spent ₹23.4 cr on fixed assets, which were completed and included in its gross fixed assets; however, still, its production capacity did not increase even until FY2018. In FY2019, the company started the project for increasing the capacity of the Bhopal plant.

FY2019 annual report, page 3:

During the year, we also started investment for doubling the capacity of the Bhopal plant based on the opportunities that we foresee from the neighbouring states.

Therefore, an investor may contact the company directly to get clarity about where did the company spend ₹23.4 cr in FY2012, and what assets were created by the company by spending this ₹23.4 cr in FY2012.

7) Weakness in internal systems and processes by SOM Distilleries & Breweries Ltd:

While reading the auditor’s reports in various annual reports of the company, an investor notices that the auditor has repeatedly highlighted aspects of SOM Distilleries & Breweries Ltd, which indicate a weakness in the processes, controls and systems in the company.

7.1) Weakness in the procedures for purchase of inventory:

The first time, while reading the FY2005 annual report, an investor gets to know in the auditor’s report that the processes of purchase of inventory followed by SOM Distilleries & Breweries Ltd are weak and they need to be strengthened.

FY2005 annual report, page 12:

there are adequate internal control systems commensurate with the size of the Company and the nature of its business with regard to purchase of fixed assets and for the sale of goods and services. Such procedures for purchase of inventory need to be strengthened.

The management of SOM Distilleries & Breweries Ltd acknowledged the weakness in the FY2005 annual report and intimated the shareholders that it is strengthening the procedures for the purchase of inventory.

FY2005 annual report, page 5:

Procedures for purchase of inventory are being strengthened.

After reading about the acknowledgement by the management of the weakness in the processes for the purchase of inventory and getting the commitment of the management for strengthening them, an investor would think that these weaknesses would be rectified soon.

However, upon reading subsequent annual reports, an investor notices that these weaknesses continued for more than 10 years. This is because the auditor of the company continued to highlight the weaknesses in the procedures for the purchase of inventory until FY2015.

FY2015 annual report, page 43:

In our opinion and according to the information and explanations given to us, there are adequate internal control systems commensurate with the size of the Company and the nature of its business with regard to purchase of inventory and fixed assets and for the sale of goods and services. However, procedures for purchase of inventory need to be strengthened.

In light of the continued weaknesses in the processes of purchase of inventory, an investor may appreciate that the company may have bought inventory that it did not need or it may have bought inventory without checking whether it already has those goods in the stock or not or it might have overpaid for certain inventory etc. Therefore, when in FY2008, an investor comes across an instance where SOM Distilleries & Breweries Ltd wrote-off inventory worth a significant amount of ₹8.75 cr, then she fears that the weak processes may be one of the reasons behind it.

FY2008 annual report, page 34:

Materials consumed shown in Schedule “H” at Rs. 33,62,01,106 includes obsolete and damaged packing and other materials written off estimated at Rs. 8,75,00,000.

There might be a possibility that if the company had acted on its commitment to strengthening the processes for the purchase of inventory, then this loss could have been avoided.

An investor may contact the company directly to understand what the weaknesses in the purchase processes were that led the auditor to highlight them in its report. What steps did the company take to rectify them? Why did the weaknesses continue even after 10-years from the acknowledgement by the management in FY2005? Moreover, whether the company could have avoided the loss of ₹8.75 cr in FY2008 if it had acted upon the weaknesses highlighted by the auditor earlier.

Read: Operating Performance Analysis: A Simple & Complete Guide

7.2) Absence of internal audit in many divisions of SOM Distilleries & Breweries Ltd:

While reading the FY2005 annual report, an investor notices that as per the auditor of the company, SOM Distilleries & Breweries Ltd lacks internal audit in some of the divisions.

FY2005 annual report, page 12:

As per the information given to us, two depots have been internally audited by the Company’s own staff. In our view, a regular system of internal audit of all areas of the Company’s operations needs to be put in place and implemented.

Just like the acknowledgement of weaknesses in the processes for the purchase of inventory, in the case of internal audit also, in FY2005, the management acknowledged the shortcoming and committed to shareholders that a regular system of internal audit is being implemented in all the areas of the company from FY2015 itself.

FY2015 annual report, page 5:

Regular system of internal audit of all areas of the company’s operation is being initiated from the current financial year.

However, just like the weakness in the processes for the purchase of inventory, in the case of internal audit too, the company did not implement it for many years. Even after 9-years of FY2005, until FY2014, the auditor of the company continued to highlight the need of implementing the internal audit in all the areas of the company’s operations.

FY2014 annual report, page 35:

In our view, a regular system of internal audit of all areas of the Company’s operations needs to be put in place and implemented.

Advised reading: Understanding the Annual Report of a Company

8) Instances of noncompliance with regulatory guidelines by SOM Distilleries & Breweries Ltd:

While reading the annual reports of the company, an investor comes across multiple instances where the company did not comply with the stipulated regulatory guidelines. Let us see some of these instances:

• In FY2020, the composition of the board of directors of SOM Distilleries & Breweries Ltd was not in compliance with the legal requirements for a period of almost 5 months. (FY2020 annual report, page 34):

The composition of Board of Directors was not in compliance in terms of Regulation 17 of SEBI (Listing Obligation & Disclosure Requirement), Regulations, 2015 during the period from August 23, 2019 to January 20, 2020

• In FY2019, the composition of the company’s audit committee, and nomination and remuneration committee was not in compliance with the legal requirements and the company was fined by BSE and NSE for this reason. (FY2019 annual report, page 16-17):

BSE/NSE have imposed fines in regard to non-conformity in constitution of Audit Committee and Nomination and Remuneration Committee during a period. The said mistake has since then been corrected.

• Even though the company intimated in the FY2019 annual report that it had rectified the non-compliance in the constitution of the audit committee, and nomination and remuneration committee; however, in the FY2020, SOM Distilleries & Breweries Ltd was once again found non-compliant in the composition of the audit committee, and nomination and remuneration committee. (FY2020 annual report, page 34):

Non- conformity in constitution of Audit Committee and Nomination and Remuneration Committee in terms of Regulation 18 and 19 of SEBI (Listing Obligation & Disclosure Requirement), Regulations, 2015 during the period from April 1, 2019 to May 26, 2019

Read: Why We cannot always Trust What Management Claims

• As per recent guidelines, if any shareholder does not claim dividends for seven years, then the companies have to transfer these shares to Investor Education and Protection Fund (IEPF). However, in the FY2020 annual report, the auditor intimated the shareholders that SOM Distilleries & Breweries Ltd has not transferred such shares to IPEF. (FY2020 annual report, page 34):

The company has not transferred the share to Investor Education and Protection Fund (“IEPF”) in respect of which dividend was unpaid/unclaimed for more than seven consecutive years

While reading past annual reports, an investor notices that it is not the first instance where the company has not fulfilled its statutory liabilities. In the past also, at various instances, the company delayed the deposit of undisputed statutory dues to govt. authorities.

• In the FY2012 annual report, the auditor of the company pointed out that the company has delayed the deposit of undisputed income tax of about ₹45 cr for FY2011 (the assessment year 2011-12) for more than 6-months. (FY2012 annual report, page 16):

As per the records of the Company there are no undisputed statutory dues outstanding as at 31.03.2012 for a period exceeding a period of six months from the date they became payable other than Income tax for the assessment year 2011-12 aggregating to Rs. 2,45,62,000.

• Similarly, in the FY2013 annual report, the auditor of the company pointed out that the company has delayed the deposit of undisputed income tax of about ₹43 cr for FY2013 (the assessment year 2013-14) for more than 6-months. (FY2013 annual report, page 18.iii):

As per the records of the Company there are no undisputed statutory dues outstanding as at 31.03.2013 for a period exceeding a period of six months from the date they became payable other than Income tax for the assessment year 2013-14 aggregating to Rs. 2,43,36,500.

Moreover, after reading the annual reports of the company, an investor gets to know that at times SOM Distilleries & Breweries Ltd did delays in intimating the stock exchanges about allotment of shares to the promoters. As a result, in FY2019, the stock exchanges put a fine on the company.

FY2019 annual report, page 16:

There was a delay of 56 days in submitting applications to BSE and NSE for listing of shares in respect of 1288906 equity shares allotted to promoters on 02.03.2019 for which the stock exchanges have levied fine and which has been paid by the company

A similar case of delay in intimation about shares allotted to promoters in FY2011-FY2013 is currently pending before SEBI for adjudication.

FY2019 annual report, page 17:

The matter regarding delays in intimating purchase of Shares by the promoters during 2011-13, though technical in nature is under consideration of Adjudicating officer of SEBI.

Therefore, an investor notices that at multiple times in the past, SOM Distilleries & Breweries Ltd has not complied with the legal requirement like the proper composition of the board of directors or its committees like audit committees. The company has delayed the deposit of its obligations like shares to the IPEF and income tax liabilities to the Income Tax authorities.

While reading the annual reports of the company, an investor also comes across instances where the company has:

• Not conducted familiarization programs for independent directors.

FY2018 annual report, page 34:

No familiarization programmes were arranged for independent directors since there was no such need.

• Not formed any remuneration policy for the management.

FY2018 annual report, page 39:

Affirmation that the remuneration is as per the remuneration policy of the company: No remuneration policy has been framed so far.

• Not linking remuneration of key management personnel with the performance of the company.

FY2015 annual report, page 39:

Comparison of the remuneration of the Key Managerial Personnel against the performance of the company: The remuneration of KMP is not related to company performance at present.

Therefore, an investor would appreciate that while analysing SOM Distilleries & Breweries Ltd, an investor needs to employ a high level of due diligence before making any final opinion.

Going ahead, an investor should keep a close watch on the compliance status of the company with various legal requirements so that she can get to know about any serious lapse in time and thereafter, she may take a decision accordingly.

9) When SOM Distilleries & Breweries Ltd declared that the promoter-entity Som Distilleries Pvt. Ltd (SPDL) is not its related party:

While reading the annual reports of SOM Distilleries & Breweries Ltd, an investor comes across numerous disclosures by the company stating that SOM Distilleries Pvt. Ltd. (SPDL) is a company under the same management. Over time, SOM Distilleries & Breweries Ltd has given numerous loans & advances to SDPL. It also had an arrangement of a current account with SDPL.

SDPL has always been present as a large shareholder under the promoters’ shareholding in SOM Distilleries & Breweries Ltd. On December 31, 2020, SDPL owned a 9.77% stake in the company and was classified under promoter and promoter group (Source: BSE).

Until FY2015, SDPL was clearly disclosed as a related party in the annual report in the dedicated section on related party transactions (FY2015 annual report, page 59).

However, in FY2016, an investor is surprised when SOM Distilleries & Breweries Ltd disclosed that SDPL is no longer a related party.

FY2016 annual report, page 66:

Transactions with Related Parties: During the year SOM Distilleries Pvt. Ltd. ceased to be a related party, hence details of transaction with this company are not given.

While analysing the shareholding pattern of SOM Distilleries & Breweries Ltd on Bombay Stock Exchange during FY2016, an investor notices that SDPL held a 10.93% stake in the company on June 30, 2015 (source), 11.01% on September 30, 2015 (source), 11.01% on December 31, 2015 (source) and 11.01% on March 31, 2016 (source).

Throughout FY2016, the company disclosed SDPL as a shareholder under promoter and promoter group to the Bombay Stock Exchange.

Therefore, it does not look like the relationship of SOM Distilleries & Breweries Ltd and SDPL underwent any change in FY2016 than what it had in FY2015. However, still, in FY2016, SOM Distilleries & Breweries Ltd removed SDPL from the list of related parties and did not disclose its transactions with SDPL in the FY2016 annual report.

In the very next year, in FY2017, SOM Distilleries & Breweries Ltd included SDPL again in the list of related parties. While recognizing SDPL as a related party in FY2017, the company gave the reason that as now Mr J.K. Arora has taken over as CMD of SOM Distilleries & Breweries Ltd; therefore, SDPL is recognized as a related party. However, it disclosed only the transactions with SDPL from February 4, 2017 onwards in the annual report.

FY2017 annual report, page 71:

On February 4. 2017, Mr. J K Arora was appointed Chairman and Managing Director of the Company. Prior to this, on January 27, 2017 he was also appointed Managing Director of Som Distilleries Private Limited (SDPL). Therefore, with effect from February 4, 2017, SDPL became a related party as per AS-I8. Accordingly, transactions entered into between the two companies between February 4. 2017 and March 31, 2017 are given above.

From the above disclosure, an investor would appreciate that SOM Distilleries & Breweries Ltd did not disclose its transactions with SDPL from April 1, 2015, to February 3, 2017 i.e. during the period it did not recognize SDPL as a related party.

An investor may note that Mr J.K. Arora had resigned from the board of SOM Distilleries & Breweries Ltd in FY2009 from March 21, 2009. He was not a part of the board of directors from March 21, 2009, and the company continued to show the promoter-entity SDPL as a related party until March 31, 2015.

An investor may contact the company directly for seeking any clarifications regarding removal and then recognition of SDPL as a related party in FY2016 and FY2017. In addition, she may also seek details of transactions between SOM Distilleries & Breweries Ltd and SDPL during April 1, 2015, and February 3, 2017, the period during which these transactions were not disclosed in the related party transactions of the annual reports.

Read: How Promoters benefit themselves using Related Party Transactions

The Margin of Safety in the market price of SOM Distilleries & Breweries Ltd:

Currently (April 14, 2021), it is not possible to estimate a price to earnings ratio (PE ratio) for SOM Distilleries & Breweries Ltd because the company has reported a net loss of ₹(47) cr on the consolidated basis for 12-months ending December 2020 (i.e. January 2020-December 2020).

However, we recommend that an investor may read the following articles to assess the PE ratio to be paid for any stock, which takes into account the strength of the business model of the company as well. The strength in the business model of any company is measured by way of its self-sustainable growth rate and the free cash flow generating the ability of the company.

In the absence of any strength in the business model of the company, even a low PE ratio of the company’s stock may be signs of a value trap where instead of being a bargain; the low valuation of the stock price may represent the poor business dynamics of the company.

• 3 Principles to Decide the Ideal P/E Ratio of a Stock for Value Investors
• How to Earn High Returns at Low Risk – Invest in Low P/E Stocks
• Hidden Risk of Investing in High P/E Stocks

Analysis Summary

Overall, SOM Distilleries & Breweries Ltd is a company that is has grown its sales at a rate of 11% year on year for the last 10 years. However, the company faced challenging times during its history. The company faced bankruptcy due to poor business performance in the last decade. Moreover, in recent years, the company is again facing a liquidity crunch.

The company does not have any pricing power and the govt. decides the prices of its key products once a year. As a result, the company has to take a hit on its margins if the raw material prices go up. The company’s business suffered badly during coronavirus linked lockdown as its main product, beer, has a low shelf life and the company had to take large inventory losses. The company has reported net losses in the last 12-months ending December 2020 (i.e. January 2020-December 2020).

In the last decade, SOM Distilleries & Breweries Ltd increased its brewing capacity in FY2011. Thereafter, it expanded production capacity from FY2018 by making a new brewery in Karnataka, buying and upgrading a brewery in Odisha and increasing capacity at its Bhopal plant. As per the annual reports of the company, it spent about ₹24 cr in FY2012 in capital expenditure (capex); however, an investor is not able to find any increase in production capacity of the company related to this capex from FY2012 to FY2017.

SOM Distilleries & Breweries Ltd.’s operations are working capital intensive as it needs to invest a significant amount of money in the inventory, packaging, supply chain etc. when it enters any new market. In recent years, SOM Distilleries & Breweries Ltd has entered two key markets of Karnataka and Odisha. As a result, its liquidity situation is stressed, which is indicated by its full utilization of working capital limits, and delayed payments of interest to its lenders. The company opted for a moratorium for all its bank facilities during coronavirus related lockdown.

The capital-intensive nature of the business of SOM Distilleries & Breweries Ltd has made the company raise more debt and dilute its equity (preferential allotment and warrants) to meet its funds’ requirements for Karnataka, Odisha and Bhopal plant expansions. The company has reported a significant negative free cash flow and it seems that on an overall basis, the company’s dividends over last years are funded by debt or equity dilution.

The promoters seem to have put in place a succession plan where the next generation of the promoters is already active in the business.

The company’s promoters seem to run the entire group with a common business strategy where they keep on intermixing the manpower and economic resources of one group company with another. The promoters seem to control the executive position at the group level and the business level executive authority is given to professionals, who at times act as MD/CMD of more than one company of the group. In the past, the MD of SOM Distilleries & Breweries Ltd, Mr Surjeet Lal, also held responsibilities of CMD of SOM Distilleries Pvt. Ltd. (SDPL), a promoter-entity. Mr Lal did not take any remuneration from SOM Distilleries & Breweries Ltd as he took his salary from SDPL.

The intermixing of resources of all the group companies have led to a situation where the public listed company, SOM Distilleries & Breweries Ltd has supported other promoter-entities by way of giving loans & advances, giving corporate guarantees to their bankers, giving money to promoter-entity for share allotment etc. At times, the flow of money among the group companies is so frequent that the account of one company with another acts as a current account. Moreover, there is no interest applicable on such current account type transactions; therefore, the group company used the money of SOM Distilleries & Breweries Ltd without any cost.

The promoters own many entities that are in the same business as SOM Distilleries & Breweries Ltd. A promoter entity, SDPL, claims to sell many liquor brands, which are produced and sold by SOM Distilleries & Breweries Ltd as well. Therefore, there is always a risk that they may prefer growing their own entities to the public listed company.

An investor notices that SOM Distilleries & Breweries Ltd spends a very high amount on sales promotions. Its spending on sales promotions as a percentage of revenue is even higher than its peers who are more than 5-10 times bigger in size. Moreover, SOM Distilleries & Breweries Ltd has continued to spend heavily on sales promotion even when it faced liquidity stress and even when its sales did not grow substantially for almost 5 years (FY2011-FY2015). The company seems to have a marketing arrangement with its retailers where it gives a large amount of advance to retailers who are actually the customers of SOM Distilleries & Breweries Ltd. An investor needs to understand more about this marketing arrangement of the company with its retailers.

In the past, SOM Distilleries & Breweries Ltd has defaulted multiple times in repayments to multiple parties. It defaulted to public sector banks in 2005-2007. It defaulted on the ICDs received from Madhya Pradesh State Industrial Development Corporation Ltd. (MPSIDC). Then, it seemed to have renegotiated with Kotak Mahindra Bank Ltd as well who had helped it in repayments to PSU banks in the past.

The promoters of the company were arrested in July 2020 on charges of avoiding GST payments on the sale of hand sanitizers in their entity, SDPL. Previously, in 2001, the promoter, Mr J.K. Arora was arrested on the charges related to attacking Income Tax officials and snatching documents after they had searched his house.

An investor notices various instances of weaknesses in the processes and systems of the company like processes of purchase of inventory and the need for implementing internal audit in all the operating areas of the company. However, an investor notices that these weaknesses continued for almost a decade before the auditor stopped highlighting them in its report.

The company also seems to have failed to comply with many statutory requirements like the proper composition of the board of directors, audit committee as well as nomination and remuneration committee. The company delayed intimation to stock exchanges about critical matters, which led to fines on the company as well as adjudication proceedings at SEBI.

The company highlighted in its annual reports that it did not have any remuneration policy, the salary of its key management personnel was not linked to the performance of the company. In addition, the company felt that there was no need for any familiarization program for its independent directors.

In the past, SOM Distilleries & Breweries Ltd removed one of the promoter-entity, SDPL, which owned about 10% shares in the company, from the list of related parties. As a result, SOM Distilleries & Breweries Ltd did not report its transactions with SDPL in the annual report from April 1, 2015, to February 3, 2017.

While assessing SOM Distilleries & Breweries Ltd, an investor realizes that she needs to do deeper due diligence before she makes any opinion about the company. She needs to keep a close watch on the profitability margins of the company, its liquidity situation, the conversion of its capital expenditure into an increase in production capacity, and fructification of its sales promotion expenses in increased revenue and margins. She needs to monitor the compliance level of SOM Distilleries & Breweries Ltd with the statutory requirements as well as the progress of the investigation of the GST evasion case against the promoters.

Further advised reading: How to Monitor Stocks in your Portfolio

These are our views on SOM Distilleries & Breweries Ltd. However, investors should do their own analysis before making any investment-related decisions 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”

I hope it helps!

Regards,

Dr Vijay Malik

P.S.

• Subscribe to Dr Vijay Malik’s Recommended Stocks: Click here
• Mumbai “Peaceful Investing” Workshop, July 27, 2025: Register here
• To learn stock investing through videos, you may subscribe to the Peaceful Investing – Workshop Videos
• 25% savings on buying our Stock Analysis Excel Template and all ebooks together: Analysis Package: Excel Template + All eBooks (25% savings)
• To download our customized Stock Analysis Excel Template for analysing companies: Stock Analysis Excel
• Learn about our stock analysis approach in the e-book: “Peaceful Investing – A Simple Guide to Hassle-free Stock Investing”
• To learn how to do business analysis of companies: e-book: Business Analysis Guide
• To pre-register/express interest in a “Peaceful Investing” workshop in your city: Click here

Disclaimer

Registration status with SEBI:

I am registered with SEBI as a research analyst.

Details of financial interest in the Subject Company:

I do not own stocks of the companies mentioned above in my portfolio at the date of writing this article.