EMPEE Distilleries

Invest subject to post listing strategy

Price band: Rs. 400-440

Business:
Manufacturing of Indian-made foreign liquor (IMFL).
Brands: Old Secret XXX Rum, Power XXX Rum, Power Brandy and Club Royal Whisky.
Facilities: 1) Mevaloorkuppam, in Tamil Nadu, 2) NIDA, Palakkad district, in Kerala.
Kerla and Tamilnadu are government controlled markets. In both the cases the company works through the government agencies and solely a price taker and heavily dependent on government policy

Objectives:
1) Entry in AP & Karnataka market by setting up a 60 kilo litres per day (KLPD) grain-based distillery unit at Nellore district in AP.
2) Setting up blending and bottling IMFL plant (having a capacity of 0.70 lakh cases per month) at Nellore district in AP
3) Setting up a 7.5 MW bio-mass power plant and expansion of its existing distillery plant by increasing capacity from 3.20 lakh cases to 5 lakh cases per month. (Capacity utilization of 100%).
4) Increasing the capacity of its ENA plant from 20KLPD to 70 KLPD.
5) Relocation of unit to Karnataka.
6) Developing 2 lakh sq.ft residential space in Mevalorkuppam in Tamilnadu.

Financials:
A profit making company for more than last 10 years.
The company has grown at 40% CAGR in the recent years. However it is better to speak less about the financials. As the industry is marred by heavy taxation and governed pricing (especially in Tamilnadu where EMPEE operates) things are not really worth discussing.
More of a volume business

Valuation

The company is valued at around 41 to 47 times its FY07 earnings.
Taking into account the entry into new markets and windmill power generation though on a small scale will gradually add value to the company. Company may further get carbon credits which we are not discounting as on date.

The real estate foray will be the real bonus in the times to come. The company seems serious about this business and if it goes through there will be a phenomenal rise in bottomline in FY2010. The profit per square foot is estimated at Rs 2000.

The company looks good as a takeover target for UB group.

Concerns:
Heavy dependence on government policies
Entry of new players can add fire to the competition

You can subscribe if:
1) You are a long term investor
2) You understand momentum and willing to participate in rally post listing, if any. It is rumored that some Mumbai based operators are keen on this counter and you may see the stock offering you 50% in one month post listing. Stop loss is mandatory.

Disclosure: We do not hold any investment in this company and we do not intend to bid in the IPO as we don’t deal in alcohol.