This smallcap liquor stock climbed over 180% in just 3 months; should you buy now?

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Shares of a smallcap liquor firm Globus Spirits are on a tear on Dalal Street on the back of strong earnings and expectation of rising demand for premium and high-price alcohol. The scrip has gained 183% to Rs 897.25 on August 12 from Rs 316.05 on May 11. The company is one of the largest grain-based ENA (Extra Neutral Alcohol) manufacturers in India with a capacity of 160 million litres. Globus Spirits is a reputed IMFL (Indian-made foreign liquor) player with a presence in West Bengal, Rajasthan, Haryana, and Bihar.

Latest results

For the latest quarter ended June 30, the company posted 197.38% year-on-year (YoY) growth in net profit at Rs 55.67 crore against Rs 18.72 crore in the same quarter last year. Revenue from operations increased 88.58% YoY to Rs 550.62 crore. The second wave of Covid-19 had a very minimal impact on the company’s business with operations being disrupted for just around 15 days during the quarter.

Market watchers believe that the capacity expansion of 140 KLPD at West Bengal is expected to be commissioned by September 2021 and 140 KLPD at Jharkhand has begun and is expected to be commissioned in FY2023.

Additional 140 KLPD expansion is under evaluation between Bihar and another location and work for the same is expected to start in the second half of FY22.

Globus Spirit’s total capacity will be 920 KLPD (around 300 million litres per annum) on the completion of these expansion projects. New capacity additions are expected to manufacture both ethanol and alcohol. Around 75% of expanded capacity will be utilised to manufacture ethanol and around 25% will be utilised to manufacture alcohol for the consumer business.

“This will help the company to exploit the opportunity in the government’s plans to increase ethanol blending to 20% by 2025. The company generated net cash from operations of Rs 148 crore during the quarter. Return ratios registered improvement with ROE and ROCE at 35% and 42%, respectively, during the quarter, up from 24% and 29%, respectively, in FY2021,” Sharekhan said.

What should investors do?

Brokerages retained their bullish view on the company despite an over 150% rise in the share price in just 3 months. ICICI Securities said that Globus Spirits has been a beneficiary of the changing dynamics in the liquor space (inflation in ENA prices and growth in IMIL space due to better quality, higher strength and attractive product positioning).

“The management has been at the forefront to capture the opportunities. We remain positive on the stock and maintain our ‘Buy’ recommendation with a target price of Rs 1,050,” ICICI Securities said in a report.

Commenting on the key triggers for future price performance, ICICI Securities added that Globus Spirits has a product range across two ends of the liquor segment including manufacturing extra neutral alcohol (ENA) to contract bottling of Indian made foreign liquor (IMFL), to marketing, selling IMIL, several by-products. It further said that the company captures premium price points in IMIL space via higher strength liquor and the government expedited a 20% blending target to 2025, leading to higher diversion of ENA towards ethanol. The company is also nearing net-debt free status with return ratios reaching over 25% levels.

On the other hand, Sharekhan sees over 20% upside in the stock over the next 12 months. “The company will be one of the key beneficiaries of the changing ethanol policy, which will lead to consistent revenue growth and margin expansion over the next 4-5 years,” it said.