Detailed Rationale

CRISIL Ratings has revised its outlook on the long-term bank facilities of Tilaknagar Industries Ltd (TIL) to ‘Positive’ from ‘Stable’ and reaffirmed its rating at ‘CRISIL A-’.

 

The revision in outlook factors in significant improvement in the financial risk profile, with progressive repayment of debt and healthy cash generation, making the company net-debt free as on September 30, 2024. The rating action also factors in the expectation of sustained growth in revenue and operating margin. The rating factors in the established track record, vintage and experience of the promoters in the liquor industry. These strengths are partially offset by limited reach in terms of geographic presence and categories, highly regulated nature of the alcohol industry, volatility in input prices and lower pricing power.

 

In the first half of fiscal 2025, net revenue grew modestly by around 4.5% to Rs 688 crore, as compared to Rs 658 crore in first half of fiscal 2024, despite a brief slowdown in growth witnessed during the first quarter, due to the general elections and elections in key state, Andhra Pradesh, where TIL has a strong presence. Revenue growth was driven by an equal mix of volume and realisations. The brandy segment where TIL has a strong market position, formed nearly 94% of total volume sold in fiscal 2024 (93% in fiscal 2023), followed by around 4.3% from rum and the balance from vodka, gin and whiskey. Sales of brandy is supported by robust demand for flagship brands, Mansion House and Courier Napolean and growth in revenue from recently launched products such as Flandy and Chambers. TIL has a strong presence in southern India, which formed around 86% of the total volume sold in fiscal 2024. Revenue is expected to grow to double digits over the near-to-medium term, driven by strong demand for existing products, uptick in demand from AP (30% of revenue) wherein the government had recently announced privatisation of liquor retail outlets (effective October 2024), higher revenue contribution from new products such as ‘Monarch’ launched in the premium category, and the growing geographic penetration.

 

Operating margin improved to around 16.9% in the first half of fiscal 2025, as compared to 12.9% in the corresponding period of the previous fiscal, driven by expansion in gross margin by around 150 basis points, subsidy of Rs 16 crore received from the government of Maharashtra, and benefits of higher operating leverage. Increase in gross margin was driven by sharp correction in prices of key raw material, extra neutral alcohol (ENA). The margin should sustain at 15-16% over the near to medium term.

 

Financial risk profile has further improved, aided by progressive repayment of debt and healthy cash generation, translating to negative net debt position as on September 30, 2024. With total debt reducing to Rs 92 crore as on September 30, 2024 (Rs 119 crore as on March 31, 2024) and tangible networth improving to Rs 745 crore (Rs 653 crore), gearing has reduced to 0.12 time, from 0.18 time over the same period. Gearing may sustain below 0.1 time over the medium term with progressive repayment of debt and accretion to reserves. Aided by higher profitability and lower interest expenses, interest cover has improved to 16.14 times in first half of fiscal 2025, from 6.30 times in the first half of fiscal 2024. With expected improvement in profitability, interest coverage expected to improve to over 17 times this fiscal and above 20 times over the medium term. Net cash accruals to total debt (NCAAD) likewise which improved to 2.46 times in first half of fiscal 2025 (fiscal 2024: 1.38 times) is expected to sustain above 2 times over the near to medium term

Analytical Approach

To arrive at the ratings, CRISIL Ratings has combined the business and financial risk profiles of TI and its wholly owned subsidiaries, Vahni Distilleries Pvt Ltd, Punjab Expo Breweries Pvt Ltd and Prag Distilleries Pvt Ltd as the entities have similar businesses.
 

Please refer Annexure - List of Entities Consolidated, which captures the list of entities considered and their analytical treatment of consolidation.

Key Rating Drivers & Detailed Description

Strengths:

• Established market position in the brandy segment of Indian manufactured foreign liquor (IMFL): TIL, which was set up as a sugar manufacturing company in 1933, gradually exited the same and started manufacturing and bottling of IMFL since 1974.

 

The company enjoys a leadership position in the brandy segment (94% of total volume) in the IMFL industry, with a market share of nearly 25%, excluding Tamil Nadu. Further, within the prestige and above segment, TIL has around 30% market share. Brandy is the second largest in the spirits category, forming over 20% volume share after whiskey (55%).  South India is a key region for IMFL manufacturers as it accounts for almost 60% consumption. TIL derives 86% of total volume from this region.

 

Prestige and above constitutes only ~34% of overall brandy segment, which is much lower compared to whiskey and vodka. Increasing premiumisation is expected to augur well for the company as more than ~80% of its products are in the premium category. This along with new product launches is expected to drive revenue growth in the near-to-medium term.

 

• Established track record and extensive experience of the promoters: TIL, which was set up as a sugar manufacturing company in 1933, gradually exited the business and started manufacturing and bottling of IMFL since 1974.  The company has a strong distribution network of nearly 40,000 outlets across the country, and sells mainly through state corporations, direct sales, and distributors. It also exports to Africa, Middle East, East and South-East Asia and Europe.

 

TIL is a major player in south India, which accounted for around 86% of total revenue. The promoters have experience of more than five decades and strong relationships with dealers/distributors. Mr Amit Dahanukar, the current Chairman-cum-Managing Director joined the board in 2001 and has been instrumental in guiding the company through its troubled phase and reviving the business prospects.

 

• Comfortable financial risk profile: The capital structure is marked by healthy networth of Rs 745 crore as on September 30, 2024 (March 31, 2024: Rs.653 crore), due to steady accretion to reserve and reduction in debt to Rs 92 crore as on September 30, 2024 (from Rs 119 crore as on March 31, 2024). Gearing has reduced to 0.12 time as on September 30, 2024, from 0.18 time as on March 31, 2024.  Absence of any large, debt-funded capital expenditure (capex) and prudent working capital management should ensure low reliance on bank debt. Total outside liabilities to tangible networth (TOL/TNW) ratio is likely to improve to less than 0.50 time over the medium term. This, coupled with the growing scale and improving profitability should boost the financial risk profile.
   

Weaknesses:

• Limited geographical and category diversification in the highly regulated alcohol industry: The liquor industry is highly regulated with the state government controlling sales and distribution. Any change in government policies, with respect to production and distribution, or significant variation in the duty structure may impact the liquor industry and the players thereon. Further, TIL derives a large percentage of turnover from southern India (86% of total volume), and any unfavourable regulatory policy in these states may adversely impact the business. The company has been taking steps to reduce its geographical concentration by expanding into newer regions.

 

Given the concentration risk arising from brandy alone forming 94% of volume, the company plans to scale up in other categories and reduce its brandy concentration to around 80% over the medium to long term.

 

• Volatility in input prices and limited pricing power: The key raw materials of TIL include ENA and glass (packing material). Profitability of IMFL manufacturers is dependent on price of ENA, as it forms 50% of raw material cost. ENA prices rose by nearly 20% from around Rs 59/litre in fiscal 2022 to around Rs 70/litre in fiscal 2023 and glass prices grew 20-30% in fiscal 2023 and softened in fiscal 2024. As a result, the operating margin declined from 14.7% in fiscal 2022 to 11.8% in fiscal 2023. However, margin has improved in fiscal 2024, partly due to softening of prices. ENA is derived from agro-based products such as grain and molasses, which are impacted by vagaries of monsoon; consequently, their prices remain volatile. The company has limited pricing power as prices in majority of states wherein the company operates (barring Karnataka and Puducherry) are governed by regulatory authorities.

Liquidity: Strong

TIL had cash and cash equivalents of Rs 117 crore as on September 30, 2024. This, coupled with net cash accrual of Rs 180-200 crore over the near to medium term, which be adequate to cover the debt obligation of Rs 25-30 crore over fiscals 2025 and 2026. NCA would also be adequate to meet capex requirements of Rs.20 -25 crore this fiscal and Rs.70-75 crore over medium term. Bank limit utilisation was negligible at 22% in the six months with unutilised limit of Rs 35 crore offering an additional cushion.

Outlook: Positive

CRISIL Ratings believes TIL’s business risk profile will improve over the medium term supported by sustained revenue growth momentum with operating margins sustaining at comfortable levels. Strong brand recall, robust demand and the premiumisation trend, should also benefit the company. Healthy cash generation and absence of any major debt funded capex plans will also keep the financial risk profile comfortable.

Rating sensitivity factors

Upward factors:

• Sustained revenue growth while maintaining operating profitability at 14-15%, ensuring good cash generation
• Sustenance of strong financial risk profile, robust debt metrics and healthy liquidity.
   

Downward factors:

• Sluggish revenue growth and decline in margin below 10-11% on a sustained basis also impacting cash generation
• Higher than expected debt-funded capex or acquisitions or stretch in working capital cycle impacting debt metrics

About the Company

TIL was founded in 1933, as The Maharashtra Sugar Mills Ltd by Mr Mahadev L Dahanukar. In the 1970s, the company shifted its focus to alcohol production, and soon became a prominent manufacturer of alcoholic beverage (Alcobev) brands in India. TIL is the maker of India’s highest-selling premium brandy, Mansion House Brandy. The company offers over 15 different brands of brandy, whiskey, gin, rum, and vodka, with a focus on the ‘prestige-and-above’ segments. Manufacturing operations span 19 units, including 4 owned units and 15 contract manufacturing units. The primary manufacturing facility is in Srirampur, Ahmednagar district, Maharashtra. In Srirampur, TIL has a 100 KLPD grain-based distillery (currently non-operational) and a 50 KLPD molasses-based distillery.

 

Brandy forms ~22% of the overall IMFL market in India. TIL is the largest player in the brandy segment having ~25% market share excluding Tamil Nadu (market dominated by local players). TIL has a strong foothold and brand-recall in South Indian states (AP, Telangana, Karnataka, Kerala and Puducherry). In fiscal 2024, the company sold over 11.2 million cases (1 case = 9 litres), reflecting 16% increase compared to fiscal 2023, with southern states contributing 86% of the volume, followed by the East (2.4%), West (2.9%), canteen store departments (CSD) and exports (8.6%). TIL maintains a robust distribution network across the country, primarily selling through state corporations, direct sales, and distributors.

Any other information: Not Applicable