Allied Blenders and Distillers Limited analyst Q&A

Thank you very much sir. We will now begin the question-and-answer session. The first question is from the line of Hiten Boricha from Sequent Investments.

I have a couple of questions. First is on the revenue side , just a small clarification. We have a revenue of around Rs. 760 crores, and we have a breakup into P&A and Mass Premium revenues. So, when you add this P &A revenue and Mass Premium revenues, Rs. 322 crores and Rs. 376 crores, it comes anywhere between Rs. 698 crores. So, there's a difference of Rs. 60 crores in this quarter and what is the difference if you can explain me on that?

Can I request Ramki to just look at these numbers and respond please?

So, what we have captured there is only the P&A what do you call the Prestige and Above and the Mass Premium segment. We have other categories in the breakup on sale which includes ENA sale, byproduct sales, export entitlement, scrap and others. So, all these together aggregate for the balance.

Other question is on the gross debt. What is our current gross debt and what will be the finance cost in FY25 as you mentioned we have repaid all our debt in this year from the IPO proceeds?

We repaid around Rs. 800 crores of gross debt which was there from the IPO proceeds. As on date we have around Rs. 325 crores of working capital debt which is a fresh debt after repayment of all the debt. And this debt has been raised at a lower cost which is at around 8.5% as compared to the earlier cost of around 10%-10.5%.

So, this Rs. 325 crores include long term debt as well, right?

No. It's only working capital debt.

We don't have any long-term debt now.

My question is on the receivable. So, your slide #6 mentioned we have delayed in our receivables from some of our key markets, so just wanted to understand what is the update on that and if you can quantify that number?

The delay ed receivable is largely from one of the government markets which is the state of Telangana which is impacting the entire industry. We have seen some improvement in the payment cycle, but our view is that it takes maybe another quarter before we can see the receivables to fall in line with the agreed numbers.

But can you quantify the number?

Number in terms of total receivable?

Yes.

Or in terms of number of sales?

Alok, in case you want I can reply. The total receivables from Telangana outstanding as on 30th June is around Rs. 384 crores which is overdue.

Does that answer your question, the overdue amount is roughly 380 crores as shared by Ramki?

Yes.

The next question is from the line of Dhiraj Mistry from Antique Stock Broking Limited.

First question is on volume that if there had been no working capital issue from the state from Telangana State Government, what could have been the volume growth trajectory in this quarter? And is it safe to say that our aspiration of double-digit volume growth on overall basis both in regular segment and in P &A segment for FY25 should be maintained , would remain there?

First of all, thank you for your compliments. And yes, our outlook for a double-digit growth for the Financial Year FY25, we are of the view that we are on the right track.

And had it been no working capital issue in this quarter, what could have been the volume growth in this quarter?

So, if you look at the volume growth in Q1 FY25 over Q4 FY24 it’s about 2.7%. I would like to believe that if you have the right working capital access in Q1 which of course has been resolved post the IPO, we should have been in a double-digit growth. We should have been able to post a double-digit growth. A larger challenge has been demand servicing which is what we are from Q2 that is getting addressed.

I was looking at your volume performance, the volume decline which is there in Mass Premium segment and in P&A segment, there's a stark difference in that. Is it that you have preferred the growth or working capital funding was much more skewed toward P&A brand rather than Mass Premium end, is my understanding correct for this quarter?

The way we look at our working capital deployment is to have a both , short term and a long- term view of the market in terms of what is our eventual market share aspiration and clearly in line of the premiumization agenda, the P&A segment in the right markets need to have the full access to working capital. So, I think it's a balance between short term and long term. But I think the objective of premiumizing continues to be one important facet of what we are doing.

In your opening commentary you highlighted that there was a price hike which you have got in select states. Can you mention that state and what kind of price hike you have received at a portfolio level and at a state level as well?

There are multiple states from where price increases have been received and the total aggregate price increase on an annualized basis, Ramki can I leave on you if my number is off, but I think it's just about Rs. 40 crores on an annualized basis. Ramki can you just reconfirm this number?

Sure. If we compare the price increase benefit quarter to quarter , the price increase benefit has been around Rs. 18 to Rs. 20 crores in the first quarter as compared to the corresponding quarter.

And is there any state which is likely to give price hike in this Financial Year?

As we speak there are a few states where price increases are yet to come through. We are all reading newspapers about possibility of Telangana, West Bengal hopefully and Himachal. So, there are only a few states from where we are expecting a decision this year but yet to have a confirmed price increase from these states.

Lastly on gross margin, there's a good improvement in gross margin but can you split your gross margin expansion or benefit in two parts, on pricing front and also on the raw material front that what is the gross margin expansion because of your raw material price or packaging revamp because of the saving from packaging revamp and for the full year as well as for the next year basis what kind of saving we can expect from the packaging material?

It's around 3.1% on the price and around (+1%) on the overall COGS after netting off the incremental cost.

This is all for the current quarter, right?

That's correct, Quarter 1 of the previous year.

I think the process of mono carton removal has pretty much been completed on brands like Sterling B7 and on Officer’s Choice Blue. Only on ICONiQ for an agreed period of let's say a year or an agreed market share in that market we do keep mono cartons otherwise mono cartons thereafter discontinued. And as the brand is getting nationally rolled out , this phasing will also happen. But on the bigger brands like SRB 7 and OC B, the entire mono carton e xercise is complete.

But would you like to quantify what kind of saving we can have from ICONiQ White discontinuation or large part is already been realized?

Your question is that on ICONiQ what is the incremental saving that will accrue towards this year on account of removal of the mono carton, is that your question?

Yes.

Ramki do we have a ready number on this?

Alok, it should be a range. I would put a range of anything between Rs. 6 to Rs. 8 crores.

The next question is from the line of Bhaskar, who's an individual investor.

I want to ask how much interest cost we will save on yearly basis after paying as you mentioned Rs. 800 crores from IPO proceeding you have paid ? Second one, is effect of interest cost in a Quarter 2 we can see in our P&L side and how much?

For annual basis the interest cost from what was earlier to what would be in the current year would be lower by around 50%. So, that is one thing. And on a quarterly basis the same trend would continue because in the first quarter we had to pay then the loans were paid in the month of July. And the current cost of borrowing what we are having is around 8.5% as compared to around 10% plus as earlier for the bank borrowings. So, proportionately the interest cost will come down in this current quarter.

And second one is a working capital as you say that we have , it's before IPO or it's after IPO working capital loan?

Working capital what we repaid has been after the IPO. We got into zero debt position for about some days maybe a week or a fortnight. After that we sourced additional working capital to the extent of Rs. 325 crores.

Next is a follow up question from the line of Hiten Boricha from Sequent Investments.

My question is again on the volume side. As you mentioned we are looking for the double-digit kind of volume in this year. So, if you can give a breakup of it between P&A and Mass Premium because I believe our mass segment has hit a lot. We have so like 15% kind of de -growth in volume in this year. So, maybe you can give some breakup, are we looking for growth in P&A in high teens or Mass Premiumization?

So, our current outlook is that the Mass Premium segment will grow at a single digit and the P&A segment for us will grow at mid double digit. That's our output for the balance three quarters.

So, Mass Premium at high single digit?

Mass premium at a single digit, mid to high single digit. And the P&A segment will grow at mid double digits.

What will be our tax rate this year?

We have opted for the new regime of taxation which is 25%. So, the first year of shift there will be some deferred tax. So, it could be marginally higher by a percent. But after that from March ‘26 onwards it will be 25%.

My last question is on , y ou mentioned sub stantial cost saving initiative you have taken in packaging side. So , if you can throw some more light , what exactly we are doing here what measures we have taken etc.?

So, there are four or five critical initiatives. One is Officer’s Choice which is a Mass Premium brand to move from glass bottle to PET and as things stand roughly 10% of volume is in glass , about 80% in PET.

Sorry to interrupt sir I lost you in between. From glass bottle to what?

Glass bottle to PET and as things stand, about 10% of our volume is in glass bottles, about 80% is in PET and we have also successfully transitioned to Tetra the state of Karnataka and UP. So, that's been one significant packaging initiative. Secondly, as you already covered, is removal of mono cartons on the P&A segment brand, which is Sterling B7, Officer’s Choice Blue. And now we have started to do that on ICONiQ as well. Third is in terms of our market bottle utilization. We are this year planning our market bottle utilization at about 20% which was about 12%-13% last year. So, that's about a 7% increase in our market bottle utilization. Third is in terms of re- engineering of our glass bottle and PET bottle weights in terms of grammage. So, these are three or four critical initiatives which has helped us bring down our cost.

So, considering all this cost which is especially the bottling cost, the utilization is going up. So, can we consider margin, which is at 10% level in Q1, it is going to remain at this level anywhere between 10% to 12% for this year?

The next question is from the line of Karan Bhuwania from ICICI Securities.

Firstly, I just wanted to ask about the demand environment. You mentioned that demand environment continues to be soft , given that a lot of F MCG companies have highlighted that there is some recovery happening especially in rural. So, how do you see the demand environment because I think I assume that will be critical for your growth trajectory for the Mass Premium segment? And secondly a follow-up on that would be, you mentioned about the market share gains in the Mass Premium segment. So, what are the steps we are taking towards that? And also, if you could talk about the profitability of the Mass Premium segment, how you are going to improve the profitability going forward?

So, the Q1 for current Financial Year was a bit disturbed , largely on account of restricted movement on back of elections and various new policy initiatives. So , we had a sluggish Q1. The overall industry growth was about 2% or 3%. We are seeing some sign of recovery in early July. So, that's a good sign for us. We are seeing demand growth coming from all markets. So , to that extent that's good news again. From a premiumization perspective , adoption of brands that operate in P &A and premium luxu ry brand is something that we track. There are clearly some green shoots and that over a period of time should create another sort of a growth driver for the P &A segment and the premium segment. As far as the Mass Premium segment is concerned for us it's the Officer’s Choice. Officer’s Choice operates about 40%.

Secondly regarding you mentioned in your opening remarks about the backward integration towards production of ENA , if you could talk a bit about it what would be the CAPEX requirement and what kind of savings we can see through that flowing into the gross margins?

So, currently for every 100 liters of ENA that we need about 30% of captive that comes out from our distillery in Telangana where we produce 60 million liters of ENA , both for captive consumption and some bit third party sales. And we run that distillery at 100% capacity. We need another 300 KLPD worth of capacity which will get us to a near 100% captive ENA. And that should have an impact of about 450 basis point on gross margin and therefore on EBITDA as well. The capital required for this is we believe that what we need are two distillers of 150 KLPD each and the capital required for this will be roughly Rs. 450 crores.

Lastly on ICONiQ White, you mentioned that this quarter also the growth was good. If you could highlight, what kind of growth did you witness this quarter and how do you see what the growth would have been if you didn't have the servicing challenge for this particular brand? And also , if you could give some idea about what are the kind of targets looking in terms of volume growth by FY26?

In the Q1 FY25 the brand is operating at about a 4 million ARR, (+4) million ARR. Since it's a growing brand, growth number for quarter-on-quarter is high. But the important thing is that we exited the last year at 2.2 million , Q4 of last Financial Year the ARR was 3 million cases and Q1 FY24 the ARR currency is nearly 4 million cases. So, that's really the growth trajectory on the brand. We are looking at the brand to more than double its last year volume of 2.3 million cases.

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

So, there's a couple of questions , o ne is the AP policy change. If it happens , can you help understand, how will it benefit us as a Company and what is the salience of EP in our volumes and revenue?

You are talking about the state of Andhra Pradesh, am I right?

Yes.

Andhra Pradesh policies yet to be out . A s and when it is announced it will be effective 1 st October. But from what we understand there are three important elements of the policy. The first element is privatization of retail which is a positive for a Company like ABD. The second is the fact that it will be opened up for national brand. Currently we do not sell ICONiQ in the state of Andhra. Therefore, that's good news for ABD again because we will be able to also introduce ICONiQ in the state of Andhra. So, overall the contour s of the policy are favorable for the industry and for ABD , particularly the fact that retail is getting privatized which means you know brands needs to be sold on merit. And secondly the ability to sell national brand which is an opportunity for ICONiQ to participate in the state of Andhra. We currently do about, last year we did about 1.9 million cases in Andhra. We already seen some positive signs and therefore hopefully we should be able to see significant growth to come out of Andhra at the back of the policy, however we will have to wait for the policy to be announced.

Secondly what would be our CAPEX in Q1 and guidance for FY25 excluding the new distillery that we are planning for?

Our CAPEX guidance is largely in form of our strategy CAPEX for our distillery in the state of Telangana which is about 15 crores on annualized basis.

So, more like maintenance CAPEX for the distillery of around Rs. 15-20 crores on an average basis.

That's correct.

So, thirdly there has been a media article where we are looking for tie ups with global companies. I forgot the name but one of the Russian and one of the Thai companies for distribution of their brands in India. If we are looking for any such thing, I would like to understand the rationale and why get only into distribution business instead of focusing on our own brands or launching our own brands and how can it benefit us? Just trying to understand the rationale. Are we planning for any such thing?

Just to clarify as regards the specific article , do not want to comment on any speculative news about these two companies. Moving on , we have maintained a position that we are looking for a partnership model and not a distribution model. In the partnership model we are looking at global companies which have serious intent about India as a territory. They are looking for a partner who can give access to pan India distribution and who are willing to participate in the investment that a brand requi res. So, we will continue to focus on the premium and luxury segment through a combination of our own brand and through brands that will partner in India.

And the partnership model still the profitability because the investments might be limited from our companies and it may accelerate the go to market or time to market from a product’s and distribution perspective , try to assume the R OE, ROCE should be similar or even better compared to an organic launch of a brand?

I think one of the benefits of a partnership model is that the brands are globally proven. They come with excellent heritage, they come with a proven track in terms of the blend, the packaging, the consumer acceptance. So, it allows us to participate in the luxury segment more effectively. And like I said the key difference between a distribution model and a partnership model is that we expect the brand owners , the principal owner of the brand to also participate in the market building and brand development exercise. To that extent it is a little, (a) you are looking for the right partner and (b) you are looking for a ready brand and third you are looking for (a) and (b) contributions to come in. So , in a way it accelerates the entry into the premium and luxury segment.

Any particular update on India-UK FTA, any further progress or anything that you can help us out?

India-UK FTA is still at a discussion stage. Of course, the new prime minister of UK has made a positive statement about the FTA but timelines are not yet formed. So, I think we are as eager to hear about the closure of FTA because as India's largest user of bulk scotch other than Pernod and Diageo of course on consumption basis, it has a massive impact on our overall cost of goods. So, we are also hopeful that this will get announced soon. But as of now there are no firm time.

And a color on ENA, w hat has been the ENA inflation both on a Q OQ and YOY basis in Q1 FY25?

As we shared earlier , our outlook was that the ENA prices for FY25 would be range bound. This is the exit price of Q 4 of FY24 which is the last Financial Year and so far, the prices are holding on to that level, maybe marginally lower.

And lastly , we are guiding for a double-digit volume growth, and I believe the receivables challenge still continues in Telangana which is one of our larger markets and it may continue for a quarter or so as outlined by you. In this backdrop are we confident on delivering our guided or stated intent of double-digit growth?

Yes, we are confident, as regard to Telangana, we have already seen directional improvement in the payables in Q1. Also, the industry bodies are very actively engaged with the government of Telangana, both at the policy level and at the ministry level. I think the assurance from the government is that we will start seeing improvement from September onwards month-on-month. So, I would say this is a temporary sort of situation which is impacting the entire industry including ABD. But Quarter 1 has been better than what we experienced in second half of the last Financial Year and this is the assurance being given to us by the government. We expect this issue to resolve over the next quarter or so.

Just last follow up in this backdrop , how has been the current quarter going on July -August quarter to date, maybe some color? Are the trends better than Q1 on a at a Company level or at an industry level on a pan India basis?

Yes, I think on back of the IPO and addressing the issue of working capital , we are already seeing double digit volume growth and more when we sort of talk about the quarter once we have actual quarter end numbers with us. But yes, the volumes and the performance is certainly better than Q1.

The next question is from the line of Harit Kapoor from Investec.

I just had two questions. One was you know how do you think about realization improvements going forward? This quarter P&A has been kind of flattish, Mass Premium has grown a little bit. But in an industry where pricing is 1% to 2% average at best , do we expect mix improvement even within P&A to give us higher than 100% realization? My question is not from a near term perspective more from a 1 to 2 year perspective.

I missed the last two sentences that you said. If you can be a little louder and slower , there's a little bit of lag in volume.

My question was on realization growth , both in P &A and Mass Premium. I just wanted your view on how do we kind of think about this from a 1 to 2 year perspective. Pricing is typically 1% to 2% only on an annualized basis mostly in the industry. So, do we expect kind of mix and improvement in both Mass Premium and P&A going forward to drive some of this realization improvement or how do we kind of think of this?

So. for us Mass Premium which is Officer’s Choice is operating at a gross margin of 40 %, our outlook and our focus would be to maintain that gross margin through a combination of picking up the right state brand mix, the right SKU mix and continuously working towards lower cost of sales. So, as far as the P&A segment is concerned, we see headroom for us which would come on account of (a) high level of market bo ttle utilization, this year we have targeted about 20% market bottle utilization which is up from about 13%-14% last year. And going forward we would like to get this number to about 25%. Second is in terms of maybe lower cost of sales over the next 2 or 3 years on back of better A&P investment. And thirdly once we are able to get to 100% ENA, we see another 2.5% gross margin improvement on back of our own captive ENA. Of course, both Mass Premium and P&A segment both regain from that. So, headroom in the Mass Premium is largely on back of captive consumption , captive capability on the supply chain side. But in the P&A segment we see there is headroom both on account of our own captive ENA and on account of lower cost sales and lower cost of goods.

Just to follow up on the returnable bottled side, is this 20% number that you mentioned, is there set industry average to what returnable bottle mix is or is it very in terms of every Company? I just wanted to understand that is 20% in line with industry average, is it better, is it lower?

No, I think it is in line with the industry. But could it be 25%, the answer is yes.

The other thing was on Karnataka, I just wanted to get a sense on you know with MRPs coming down for the P&A segment, your early thoughts on how this market could shape up especially for your P&A and industry P&A side. And if you could just have some view from your end on this one?

So, certainly, MRP coming down in the P&A segment is very welcome news. However, the gap between the P&A brands in Karnataka and the Mass Premium and the medium segment which is the largest segment there in Karnataka is still very large. It will definitely encourage some upgrades. Our view for now is that, it will not materially impact the structure of the market.

The next question is on the line of Krutika from Sharekhan by BNP Paribas.

For ‘FY25 CAPEX, we guided for a maintenance CAPEX of around Rs. 15 crore s, is that correct?

That is right.

The growth CAPEX for the backward integration, do we have any timelines for that as in when that will come in and how that will be exactly deployed, any guidance on that?

Well, currently it's a very important initiative for us at ABD. So , a lot of work is going on. We have identified the states. In both the states we have also looked at the geographic location, what would make sense in terms of both raw material availability and in terms of logistics cost. We have also in discussion with the EPC partner. So, a lot of progress. So, for now I would say a lot of work is being done. Can I provide you a timeline , well I would see benefits of this coming largely in F Y27 but we are also looking at the possibility of acquiring subject to a right plan t being available, a ready plant being available. If that happens then maybe we can accelerate the savings that we are projecting on account of strategy. But for now, it looks like maybe 18 months to 2 years from today.

Thank you. Thank you everybody for your time and for your questions. Much appreciate the interest that reflects on the quality and the questions being asked. So , thank you again and hopefully we will see all of you again at the end of the Quarter 2.

Thanks everyone for participating in this call. Now we can close this call. Thank you.

On behalf of Antique Stock Broking Limited, that concludes this conference. Thank you for joining us and you may now disconnect your lines.