Ventura Securities

Associated Alcohols (Buy)

Target: ₹870

CMP: ₹472.55

Associated Alcohols & Breweries Ltd (AABL) is one of the most undervalued stocks in the listed alcohol beverage industry. Its 5-year revenue CAGR of 9.5 per cent, net earnings CAGR of 32.3 per cent & FCFF CAGR of 31.8 per cent CAGR notwithstanding the pandemic has been nothing but spectacular.

This, coupled with its prudent capital allocation, has resulted in the RoIC expanding to an enviable 41.2 per cent (+1,705 bps since FY16). We expect the momentum to gather further steam with revenues/net earnings/FCF growing at 18.8 per cent/14.6 per cent/19.1 per cent CAGR over FY21-24 while sustaining the high RoIC.

The key drivers of this sustainable growth are: capex of ₹110 crore for a new 30 mn litres per annum ethanol plant in MP; improving revenue share of the high margin IMFL (proprietary as well as USL licensed brands) and outsourced manufacturing that will reduce low value merchant ENA with better margin contribution; and sustenance of margins at elevated levels due to the change in mix. Given the compelling growth story, we believe that the stock is due for a re-rating.

We initiate coverage on AABL with a Buy for a price target of ₹870, representing an upside of 105 per cent over the next 24 months from current market price.