Globus Spirits Limited (GLOBUSSPR) Earnings Call Transcript

Ladies and gentlemen, good day, and welcome to Q2 and H1 FY '27 Earnings Conference Call of Globus Spirits Limited hosted by MUFG Intime. [Operator Instructions] I now hand the conference over to Mr. Sumeet Khaitan from MUFG Intime. Thank you, and over to you, sir.

Thank you. Good evening, everyone. I welcome you all to the earnings conference call to discuss Q2 and H1 FY '27 results of Globus Spirits Limited. To discuss the results, we have from the management, Mr. Shekhar Swarup, CEO and Joint Managing Director; Mr. Paramjit Singh Gill, CEO, Consumer Division; and Mr. Nilanjan Sarkar, CFO. They will take you through the results and the business performance, after which we will proceed for Q&A session. Before we proceed with the call, I would like to mention that some of the statements made in today's call may be forward-looking in nature and may involve risks and uncertainties. For more details, kindly refer to investor presentation and other filings that can be found on the company's website. With this, I now hand over the call to the management for their opening remarks. Thank you, and over to you, sir.

Good afternoon, everyone. Thank you for joining us for our Q2 and H1 FY '27 earnings call. At the outset, I wish everyone a very happy and joyous festive season. Param and Nilanjan are with me today and I will cover the overall direction of the business. Param will then discuss consumer, followed by Nilanjan on the financials. The first half has seen continued progress in our consumer business and strengthening of our financial position. The P&A business has moved close to EBITDA breakeven, benefiting from growing scale, while regular and others continues to grow year-on-year, supported by great performance in Uttar Pradesh. Manufacturing revenue in Q2 was INR 455 crores with volumes of 55.26 million liters and EBITDA of INR 25.4 crores. EBITDA per liter came at INR 4.6 a liter, reflecting higher grain and fuel costs. Q2 is typically a period of higher raw material and fuel costs ahead of the new crop season as well as scheduled plant maintenance. We therefore, evaluate manufacturing performance across the 12-month period. For H1, EBITDA was INR 5.59 per liter, whilst trailing 12-month figures stood at approximately INR 6.6 per liter. Our operating flexibility extends across both product and feedstocks, ENA and ethanol and maize and rice, allowing us to optimize contribution as market conditions change. Looking ahead to the ethanol supply year '26-'27, which is scheduled to begin later in November, reduced availability of sugar-based ethanol is expected to create greater procurement opportunities for grain-based producers. We expect this to support higher capacity utilizations at Globus and better absorption of overheads. On feedstocks, greater FCI availability is expected to moderate pressures on both rice and maize prices. We also expect enhanced broken rice availability following the reduction in permissible broken grain content in raw rice from 25% to 10% being implemented progressively from the Kharif marketing season '26-'27. Together with our feedstock and product flexibility, long-term offtake agreements with OMCs and the contribution from value-added byproducts such as DDGS and corn oil, these developments support our confidence in maintaining the INR 5 to INR 7 per liter annual EBITDA targets, whilst recognizing that actual allocations, offtake and input prices will determine the outcome. Turning to capital allocation. We completed our INR 200 crore QIP during the quarter. We welcome our new institutional shareholders and particularly value the continued support of existing investors who participated in the fundraise. The QIP enabled us to strengthen our balance sheet further through debt reduction, providing additional room for the consumer business to grow. Nilanjan will cover the detailed financial impact. Our focus remains unchanged to convert consumer growth now into improving profitability, manage manufacturing economics across the cycles and deploy capital with discipline. With that, I hand over to Param.

Thank you, Shekhar, and good afternoon, everybody. I will begin with Prestige & Above, where increasing scale is translating into improved operating economics. P&A revenue grew 54% year-on-year to INR 59.9 crores while volumes increased 64% to 0.46 million cases. Sequentially, revenue grew 9% and volumes 10%. EBITDA loss narrowed down to INR 0.2 crores, bringing the segment very close to breakeven. For H1, P&A revenue was approximately INR 114.9 crores with volumes of approximately 0.88 million cases. Importantly, improved economies of scale helped mitigate cost pressures during the quarter. Gross margins remained broadly unchanged sequentially despite input cost inflation, while higher volumes supported better absorption and improved EBITDA -- better cost absorption and improved EBITDA. We now have 5 profitable states across our 12 market P&A footprint, while net sales value trends have stabilized sequentially. Our focus is to deepen established markets and expand selectively where we see a clear path to profitable scale. Our next phase of expansion includes 5 additional duty-free channels and entry into 2 new states during FY '27. Work towards CSG entry is also progressing with entry targeted during Q3, subject to approvals. We have also introduced our new Indian blended luxury whiskey. This has been initially launched in Haryana, Chandigarh and Goa. We intend to build its distribution supported by consumer trials in the initial markets. Turning to Regular and Others. Revenue grew 14% year-on-year to INR 242.8 crores, while volumes increased 16% to 4.24 million cases. EBITDA grew 4% to INR 38.6 crores. For H1, revenue stood at approximately INR 499.2 crores and EBITDA at INR 82.6 crores. Uttar Pradesh continues to expand our growth base, while Rajasthan remains a strong and established market. In Rajasthan, price increases have helped offset input cost inflation during this year. However, lower sequential volumes reduced contribution and fixed cost absorption, resulting in some margin moderation compared with Q1. As Uttar Pradesh grows, R&O is also becoming less concentrated in Rajasthan. Each state has different realization and economics, so the blended margin will reflect this evolving composition. UP margins will strengthen as we continue building on our business and volumes there. Our focus remains on profitable growth within each market. We will continue to deepen markets where we have traction, invest behind brands demonstrating consumer acceptance and keep the path to profitable scale central to our decisions. With that, I will hand over to Nilanjan. Thank you.

Thank you. I'll briefly cover the financial performance and the changes to our balance sheet following the QIP. For Q2 FY '27, revenue stood at INR 758 crores, registering a year-on-year growth of 15%. For H1 FY '27, revenue reached at INR 1,541 crores, reflecting an 11% growth over the corresponding period of the previous financial year. On the profitability front, EBITDA for Q2 FY '27 stood at INR 63.8 crores, representing a year-on-year growth of 2%. For H1 FY '27, EBITDA increased by 17% year-on-year to INR 143.3 crores. While quarter 3 EBITDA growth was relatively moderate, the overall H1 performance reflects a healthy improvement in operating profitability. Q2 FY '27 PAT degrew versus Q2 FY '26 on account of additional depreciation from UP as well as a onetime deferred tax benefit that was taken in Q2 FY '26. Turning to cash flow generation. Cash flow from operating activities for H1 FY '27 stood at INR 139 crores compared to INR 270 crores in H1 FY '26. The moderation in operating cash flow is primarily attributable to an increase in trade receivables driven by higher business volumes during the period. The principal balance sheet development this quarter was the deployment of our INR 200 crore QIP process. By September end, INR 155 crores had been utilized towards repayment of long-term debt, contributing to an overall INR 200 crore reduction in the debt between March and September. Our reported debt-to-EBITDA ratio improved from 2.63x at March end to approximately 2x at September end. Alongside the refinancing completed earlier, the debt repayment has reduced outstanding borrowings and future financing commitments. We estimate interest savings of approximately INR 6 crores in H2 FY '27, equivalent to INR 11 crores to INR 12 crores on an annualized profile basis. The combined effect is a more comfortable debt profile, lower financing costs and greater flexibility to meet working capital requirements and support our consumer growth plans. Our focus remains on disciplined deployment of capital, efficient working capital management and continued strengthening of the balance sheet. Thank you. We now open the call for questions.

[Operator Instructions] Our first question comes from Bhargav Buddhadev with Ambit Asset Management.

If you look at your IMFL business, it's been sort of now growing at a fairly strong pace. So just wanted to know in terms of if you take a 2- to 3-year view, in your opinion, which are the key states which can sort of further accelerate the growth or possibly take you towards your INR 450 crores to INR 500 crores revenue target, if you can highlight that? And then I'll ask the second question.

Param, would you like to take that.

Thanks, Bhargav for encouraging our performance on the call. So at this point of time, obviously, in our current scenario, we are fairly dependent on West Bengal, Delhi, West Bengal as well as -- I mean, UP, West Bengal, Delhi and Jharkhand as key states. And going forward, we are adding a few key states with Orissa being the first one. We see at least 7 to 8 key states, which will all support broad-based growth and reduce our dependency on 3 to 4 states. We earlier had dependency on 1. We made it 2, 4. Now we are at about 4 to 5 state dependency. The whole plan is to make this very broad-based Bhargav. So you expect us to have at least 7 to 8 fairly profitable state businesses growing a broad-based growth. And not only that, we expect that we will have 3 to 4 well firing brands also on the brand parameter, allowing us to support the broad-based growth.

Great. And my second question is that, obviously, there has been a recent change in terms of the prices from maize-based ethanol being reduced by INR 3 per liter. So obviously, in your opening remarks, you did mention that Globus has a flexibility to go to rice as well as broken rice. So do you think that this -- despite the INR 3 cut, you still can maintain your INR 5 to INR 7? If you can spend some time on that math, that would be very helpful. And that would be my last question.

So Bhargav, principally, what I have found is changes in ethanol price impact raw material prices directly. When you look at -- we have 3 raw material options, FCI, broken rice as well as maize. This year, the big change over last year on the raw material mix is that there is clarity on how much FCI rice is going to be allocated for ethanol and we have that clarity right in the beginning of the year. Second, we have a much larger availability of broken rice given the change in quality norms of FCI. Based on these 2 factors, I believe maize prices are going to remain lower in the new year, which is yet to start. Combined with our ENA flexibility, we are not seeing much threat on the INR 5 to INR 7 guidance.

Okay. Understood. So you are fairly confident on that number that on an annualized basis, that number can be -- because at times, we have also seen that obviously, the EBITDA per liter could sort of go down drastically. But this time around, you seem to be fairly confident on that.

For the last few quarters, I think now it's been 6 to 8 quarters, the company has been in that zone. Of course, this quarter, we are at about 4.7%, 4.6%. But 5% to 7% is the guidance, and I'm quite confident about it. Yes.

The next question comes from the line of Himanshu Shah with Dolat Capital.

In continuation of previous question, what has led to the sharp drop in EBITDA for retail this particular quarter? Any specific reason?

I covered that, Himanshu, in my opening remarks as well. It's the sort of quarterly changes in commodity prices. If you look at a longer trend, Q2 is usually the time where we have the greatest amount of inflation in raw material and fuel, which starts tapering off in the middle of Q3 and stays pretty depressed for the rest of the year. So it's a play out of that. It's not a concern in the overall business help.

Okay. What would have been the inflation in the raw material prices, grain prices like broken rice or maize during the quarter either or...

I think September end, we should have finished -- should have ended September at about INR 27, INR 28 per kilo of rice and about INR 22 -- it's about INR 23, INR 24 for maize. Of course, these are sort of end Q2 prices, not the average of Q2. I don't have the average figures with me at the moment.

And this would be higher by how much, on a Y-o-Y or Q-o-Q basis?

So Q1, April, May, June, so that's the sort of crop season, right, in Bihar and the East. So Q1, we would have ended at about INR 21, INR 22 of maize and about INR 24, INR 25 of rice.

Okay. Got it. The second question is of the manufacturing volumes annually around 21, 22 crore liters that we must be doing. What would be the share of maize-based ethanol in that bulk alcohol sales on an annualized basis?

So it varies quarter-to-quarter. I don't have that figure with me.

Ballpark range, sir?

Nilanjan, do you have share of ethanol -- maize ethanol in the total sale of ethanol -- total sale of manufacturing?

Yes. On total sale of manufacturing for H1 on maize is almost 60% on the ethanol part.

And how much would be ethanol of the total sales?

Ethanol for H1?

Yes, sir, H1 will also be fine.

60%.

I think -- sorry, I just want to jump in here, Himanshu. I think what you're trying to figure out is this impact of the change in price of maize ethanol. I'm afraid comparing historical maize volumes to what it might be in the future is not representative because we will be changing the product mix from time to time depending on what is most profitable. There is a chance, a pretty good one that maize ethanol is not going to be very profitable in the next year or not as profitable as FCI and broken rice. So H1 might have been 60% of total ethanol, which is maize. I won't be surprised if this number is 30% going forward. I mean I don't know whether it will be 30% or it will be 60% as of now. It depends on raw material scenario shapes up. In either scenario, whether we sell 60% maize or we sell 30% maize or some other combination, we believe that the combination of ENA and ethanol, combination of FCI, damaged grain and maize will give us INR 5 to INR 7 margin per liter.

And lastly, in our R&O volumes, what would be the share of UP in H1 of this year versus last year? On an absolute basis, if you can let me know how much UP would have contributed? Or is it fair to assume the growth entirely in R&O volume is largely driven by UP?

R&O Rajasthan has been growing at the rates it was in the past, which is small single-digit sort of, mid-single-digit volume growth. A lot of the balance growth, in fact, entirely the balance growth has come from UP.

Okay. And R&O volume -- R&O margins have also declined on a Y-o-Y basis by almost 160 basis points. This would also be on account of increase in RM prices, fair to assume that?

And PM, right? I mean the 2 things that have played out -- actually, the one thing that's played out this year, which is unique and not prevalent in the last or the preceding years is the packing material inflation due to the whole oil scenario in the world. A lot of our raw materials are dependent on petroleum prices. So that has impacted our margins to some extent. Of course, the price increase in Rajasthan helps that -- help mitigate that almost entirely. So the balance fluctuation in margin that we are seeing quarter-to-quarter is raw material price movement.

The next question comes from the line of Hitaindra Pradhan with Maximum Capital.

Most of the questions have been answered, but 2 things I wanted to know. First of all, on the R&O, we have seen some depression in the margin and you alluded that to RM -- sorry, packaging material increase, et cetera. But going forward, like what could be the sort of margins that we should work with given that the mix of UP is going to increase significantly, I think, in the coming years. So how should we look at the overall margins in the R&O segment?

So we've always maintained the sort of guidance on R&O margins of between 16% and 18% at EBITDA levels. So we are very much within that zone. I don't see any material sort of change to report in that guidance. 16% to 18% is going to be our range for R&O margins.

And secondly, sir, on the manufacturing segment, just to harp on further. So while you can switch, let's say, from ethanol to ENA to avoid that INR 3 cut. But at the same time, the other players may also want to do it. And as such, there might be a glut, for example, in the ENA itself. So that could cause a lowering of prices of ENA for example. So how confident are we given that sort of a circular loop argument, right? Maize product prices can also...

I would say that circular loop argument is, it's not a perfectly circular loop for a couple of reasons. One is that we do not intend to shift en masse from ethanol to ENA. We intend to shift the raw material or rather the product mix within ethanol between FCI, DFG and maize. We believe there is going to be a much higher supply of damaged grains or broken rice in the year to come because of the change in quality norms that I alluded to earlier. And therefore, broken rice prices are likely to remain a little bit depressed. And of course, FCI supplying its raw material at a fixed price provides, in a sense, a stop loss, right? And prices will not be allowed to move up further because there is this FCI rice supply option that's available. So it's not just a shift to ENA, which gives me this confidence. It's also a shift between raw materials. And the other is the shift to ENA, whereas yes, other people would be thinking the same things. ENA is not a product that is easy to move from state to state. There are state taxes that need to be paid, import duties and export duties as they're called by different terms in different states. And given the way we've strategically located our distilleries in Rajasthan, Haryana, UP, Bengal, Jharkhand and Bihar, I mean, aside from Bihar, where there is no local demand. But the other states, there is a local demand for us to lean on while shifting capacities between ethanol and ENA. In addition to this, there is a very important aspect that is we are expecting higher capacity utilizations going forward because of a lower sugar ethanol demand next year. So higher capacity utilization is also going to help offset fixed costs further and therefore, give us higher margins. So we've been consistently between 80% and 85%. And I believe in the year to come, that number is going to be meaningfully higher.

Okay. And sir, finally on this INR 200 crore QIP money. So I understand that it has been currently used to pay down the debt. But at the end of the day, what is the plan in, let's say, the next remaining 6 months and next year, how exactly are we going to use this INR 200 crores equity money that we have raised to sort of further our business plan?

Right. So this was part of our QIP statements as well. We've discussed this in the past quarters. Happy to go through it again. INR 200 crores was the raise, INR 150 crores or approximately INR 150 crores has been used to pay down debt and the balance amount is currently liquid. This paydown of debt releases a fair amount of cash from the operations, from free cash flows, which can be used to further grow our IMFL business. And the liquidity that's available today can get used for some additional bottling and more whiskey-related expansion. So all of this is to create some financial flexibility in the company to be able to take cash in the IMFL business to grow that business further.

[Operator Instructions] The next question comes from the line of Nitin Awasthi with InCred.

Two questions. Firstly, I wanted to understand what is the amount of orders we received for ethanol in the final tender of the last year, FY '26? And have we delivered all of that quantity or we'll be delivering it in the current month with the extension of the government coming in?

Sorry, Nitin, I don't have with me the final allocation numbers of last year. And there was a secondary allocation that was made midyear as well, which sort of needs to be added to it. I'm happy to share it with you. This is, in any case, available to OMCs as well. So I can share that with you subsequently. So no, we have not completed all our orders. The understanding with the OMCs is that these orders will be completed by around 30th of November. By which time we are hoping that the new tender will also have been concluded.

Fair enough, sir. Understood. Got that. Sir, second, I had a question on particularly the margins within the Regular and Other segment. We are expanding rapidly in Uttar Pradesh, whereas we are stable in the other markets that we are operating in Rajasthan namely. Now because of that, how much is the impact on EBITDA that a person sees on the consolidated front? Are we where we intended to be in Uttar Pradesh? Or are we far away from that? And that's why the margins that one sees in consumer and regular today do not reflect the true picture of the organization?

Param, would you want to take that? Yes, maybe Param's line dropped or something. I can take.

No, I'm here. Yes. So Nitin, we are overall expecting the margins to be in the same range of 15% to 18%. Obviously, as we continue to strengthen our presence in UP, it will start improving our gross margins further because as the volumes and the base grows, many of the costs like logistics and other overheads start getting neutralized. But even in the short term, we are holding on to our range of 15%, 16%, 18% regardless of how fast UP moves. So it's not a sort of a flag that deviates us from our part. Obviously, the opportunity is huge as we continue to chug along there.

Understood. However, with the large investment we have made, we would still be having a large differential with our mature market of Rajasthan. That's what would be the understanding, right?

Large is not necessarily the term. There is obviously, as we are investing -- we are investing more heavily into UP at this point of time, like is normal for a state where business is initiated and then built upon. But then that is also the natural path to growth in geographies, isn't it?

No, I completely agree. That's what I was talking about.

The range of margin is still within the same range. So the play is within the range. It's not a play where we see ourselves really falling out of the range just to build a state today, it can be UP and tomorrow, again, as we enter West Bengal in times to come, there will be more geographies. So the intent is not to deviate in a meaningful way from our existing margin trends.

Understood, sir.

So Nitin, I mean, Rajasthan is definitely a little bit higher on that range and UP is a little bit lower on that range. So that's the spread. I mean there's no significant concern on the UP profitability.

No, no, I understand that. There was never a question on whether there will be profitability and how much the profitability will be. It was just the time to reach optimal profitability was the question which was there. I understand that.

Yes. UP will still be on the journey to reach its optimal profitability because we see it getting better and better as we continue to improve our [indiscernible] there.

Understood, sir. Understood. One more question, sir, finally. We are entering a phase which is very different from where you have been as a company operating within the ethanol space. We are entering a phase wherein this year, definitely next year maybe sugar is not going to be allowed in the mix. Now that gives a very big opportunity for everybody who is in the grain universe. Number two, we also have seen at least the trade is very significantly reflecting of this that domestic consumption of ethanol for the chemical industry is shifting to the domestic players and the imports from countries like U.S. have completely dropped. Now that is again something that you guys can cater to, not everybody within the industry can cater to it. Number three is the impact of the first 2 things I spoke upon the ENA prices. Now this situation is something which has not emerged or happened in the past. On ground with figures in play, can you elaborate on this?

So we are expecting a demand of about 900 crore liters for grain-based ethanol from OMCs for grain-based ethanol. There is about 100 crore to 150 crore liters, which the chemical industry uses. And there's about 300 crores to 400 crore liters that the beverage industry uses. There is likely to be a significant growth in the beverage number for this -- in the coming year as well or in the current financial year rather as UP shifts more of its country liquor from molasses-based to grain-based. That said, Nitin, there is a lot of capacity in place in India, as you have correctly identified. The opportunity for distilleries is not homogeneous. There are 2 groups or maybe 3 groups of distilleries. There are players who have long-term offtake agreements with OMCs and then there are players who don't have long-term offtake agreements. And the third group is players who are combination of ENA and [ FUB ], which is a fewer number of players and a smaller amount of capacity. Aside from our Bihar unit, Globus Spirits has long-term offtake agreements at all of its facilities, Bihar and -- pardon me, aside from Bihar, Rajasthan and Uttar Pradesh, where in any case, where in Rajasthan and Uttar Pradesh, there is no ethanol capacity, all other units have long-term offtake agreements. Given that in these units, which are Bengal, Jharkhand and Haryana, we are foreseeing a significantly higher capacity utilization in the coming year. In addition, Behror is largely internal consumption. There is very, very little sales. So I'm going to disregard that unit as part of this discussion. Uttar Pradesh, which is currently not operating at 100% capacity utilization or 85% plus capacity utilization is going to start increasing its capacity utilization. In fact, already in the last 3 or 4 months, we've seen much higher capacity utilizations than the periods before, largely because of the changing policies in UP towards moving away from sugar-based molasses to grain-based -- sugar-based -- molasses-based country liquor to grain-based country liquor. All in all, I do not believe that there is a case for increasing our guidance on the rupee per liter margins that we have because of the large amount of capacity that exists in India. But I am very confident that we'll be able to maintain the guidance or achieve the guidance we have maintained.

Understood, sir. Also, I was not looking for a guidance here on the per liter -- let me just complete this point, if possible.