Premium Portfolio Expansion And Pan India Rollout Will Drive Long Term Earnings Power

Catalysts

About Associated Alcohols & Breweries

Associated Alcohols & Breweries is an integrated alcobev company focused on proprietary IMFL brands, premium spirits and ethanol, with a growing pan India footprint.

What are the underlying business or industry changes driving this perspective?

• Rapid premium portfolio expansion through brands such as Hillfort Whisky, Nicobar Gin, upcoming tequila and future single malt, supported by the new malt plant and cask investments, can lift blended realizations and structurally improve EBITDA margins over the next few years.
• Ongoing geographic roll out from a strong base in Madhya Pradesh and Kerala into large consumption markets like Maharashtra, Uttar Pradesh, Goa and Odisha should compound IMFL proprietary volumes at 30 to 35 percent, driving sustained revenue growth and operating leverage.
• Backward integration via the 6,000 liters per day malt facility and efficient multi source raw material procurement is set to lower input volatility and enhance gross margin stability, supporting higher long term earnings.
• Portfolio broadening into ready to drink offerings and tequila, both aligned with younger and more experimental urban consumers, can open new high growth profit pools, diversify revenue streams and support higher net margins as these categories scale.
• Normalization of byproduct realizations, recovery in cattle feed prices and a richer mix of proprietary brands versus licensed volumes together create meaningful scope for margin recovery from the current 9 to 11 percent EBITDA range toward mid teens, boosting absolute earnings.

Assumptions

How have these above catalysts been quantified?

• Analysts are assuming Associated Alcohols & Breweries's revenue will grow by 9.4% annually over the next 3 years.
• Analysts assume that profit margins will shrink from 7.9% today to 7.3% in 3 years time.
• Analysts expect earnings to reach ₹1.0 billion (and earnings per share of ₹52.99) by about December 2028, up from ₹860.6 million today.
• In order for the above numbers to justify the price target of the analysts, the company would need to trade at a PE ratio of 30.9x on those 2028 earnings, up from 20.1x today. This future PE is lower than the current PE for the IN Beverage industry at 40.7x.
• Analysts expect the number of shares outstanding to grow by 0.75% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 12.76%, as per the Simply Wall St company report.

Risks

What could happen that would invalidate this narrative?

• Premiumization and pan India expansion require sustained heavy marketing, trade schemes and large on ground teams. Management acknowledges these are already pressuring margins and could keep consolidated EBITDA stuck around 9 to 11 percent instead of rising, which would limit earnings growth.
• The shift from higher revenue licensed brands like Bagpiper to lower ticket job work for Inbrew structurally reduces reported sales. The replacement by proprietary brands may take several years, so overall revenue growth could stay near the guided 10 percent rather than compounding faster, which would cap valuation upside.
• Byproduct realizations on cattle feed have already fallen about 37 percent due to a long term increase in ethanol capacity nationwide. If this structural oversupply persists it can offset benefits from lower grain costs, compressing gross margins and net profit.
• New category bets such as tequila, gin and ready to drink products are targeting small but fast growing niches with intense competition. A failure to scale them or secure meaningful share in large states like Maharashtra and Uttar Pradesh could dilute returns on recent capex and marketing, weighing on earnings and return ratios.
• The company is investing heavily in malt capacity, casks and a future single malt portfolio on the assumption of strong premium whisky demand. Any slowdown in high end spirits consumption or delays in achieving pan India distribution could leave assets underutilized and depress return on capital and long term earnings.

Valuation

How have all the factors above been brought together to estimate a fair value?

• The analysts have a consensus price target of ₹1210.0 for Associated Alcohols & Breweries based on their expectations of its future earnings growth, profit margins and other risk factors.
  
• In order for you to agree with the analysts, you'd need to believe that by 2028, revenues will be ₹14.3 billion, earnings will come to ₹1.0 billion, and it would be trading on a PE ratio of 30.9x, assuming you use a discount rate of 12.8%.
  
• Given the current share price of ₹958.15, the analyst price target of ₹1210.0 is 20.8% higher.
  
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.