With a market capitalisation of ₹2,169 crores, Associated Alcohols operates in the highly competitive and regulated beverages sector. The company's Q2 FY26 results reveal a business navigating growth amid mounting cost pressures, with revenue expansion of 9.98% quarter-on-quarter to ₹266.69 crores, yet facing margin compression that raises questions about operational efficiency and pricing power in an intensely competitive liquor market.
Financial Performance: Growth Tempered by Margin Erosion
Associated Alcohols delivered mixed financial results in Q2 FY26. Net sales reached ₹266.69 crores, representing a healthy 9.98% sequential increase from ₹242.48 crores in Q1 FY26 and a 5.92% year-on-year improvement from ₹251.78 crores in Q2 FY25. However, this top-line growth failed to translate into proportionate margin expansion, highlighting cost management challenges.
| Quarter | Net Sales (₹ Cr) | QoQ Growth | Net Profit (₹ Cr) | QoQ Growth | PAT Margin |
|---|---|---|---|---|---|
| Jun'25 (Q2 FY26) | 266.69 | +9.98% | 23.65 | +5.96% | 8.87% |
| Mar'25 (Q1 FY26) | 242.48 | -25.85% | 22.32 | -14.45% | 9.20% |
| Dec'24 (Q4 FY25) | 327.02 | +28.43% | 26.09 | +70.30% | 7.98% |
| Sep'24 (Q3 FY25) | 254.63 | +1.13% | 15.32 | -13.40% | 6.02% |
| Jun'24 (Q2 FY25) | 251.78 | +245.14% | 17.69 | +646.41% | 7.03% |
The company's operating profit (PBDIT excluding other income) stood at ₹37.11 crores in Q2 FY26, up from ₹35.48 crores in the previous quarter but reflecting a margin contraction to 13.92% from 14.63%. This 71 basis point sequential decline in operating margin signals rising input costs or competitive pricing pressures that management has been unable to fully offset. Year-on-year, however, operating profit showed robust growth of 32.06% from ₹28.10 crores, demonstrating the company's ability to scale operations profitably over longer periods.
Employee costs rose to ₹13.05 crores from ₹13.16 crores sequentially, showing marginal efficiency gains. Interest expenses remained stable at ₹1.56 crores, whilst depreciation increased to ₹5.60 crores from ₹5.08 crores, reflecting ongoing capital investments. The effective tax rate of 25.56% remained consistent with the previous quarter's 25.13%, indicating stable tax planning.
Operational Challenges: Margin Pressures Amid Volume Growth
Associated Alcohols faces a critical operational challenge: whilst revenue volumes are expanding, the company is struggling to maintain pricing power or control costs effectively. The sequential decline in operating margin from 14.63% to 13.92% despite a 9.98% revenue increase suggests that either raw material costs have risen sharply, competitive pricing pressures have intensified, or operational inefficiencies have emerged.
Margin Dynamics Under Pressure
The 71 basis point sequential decline in operating margin is concerning given the company's 9.98% revenue growth. This suggests that incremental revenues are coming at lower margins, potentially indicating aggressive pricing to capture market share or rising input costs that cannot be passed through to consumers. For a company with an average ROCE of 18.25%, maintaining margin discipline is crucial for sustaining return profiles.
The company's balance sheet metrics reveal a relatively healthy financial position. With an average debt-to-EBITDA ratio of 0.79 and net debt-to-equity of just 0.17, Associated Alcohols maintains low leverage. The interest coverage ratio of 38.13 times demonstrates strong debt servicing capability, with EBIT comfortably covering interest obligations by a wide margin.
However, the return on equity of 16.30% and return on capital employed of 18.25%, whilst respectable, have not shown significant improvement despite strong revenue growth. This suggests that the company may be deploying capital into lower-return projects or facing structural margin pressures that limit profitability expansion. The sales-to-capital-employed ratio of 1.73 indicates moderate asset efficiency, leaving room for improvement in capital utilisation.
Industry Context: Navigating a Fragmented and Regulated Landscape
The Indian alcoholic beverages industry operates within a complex regulatory framework, with each state maintaining distinct taxation policies, distribution controls, and licensing requirements. Associated Alcohols, with its strong presence in Central India, benefits from established relationships with state authorities but faces intense competition from both organised players and regional distilleries.
The company's 5-year sales compound annual growth rate of 19.34% and EBIT growth of 18.68% demonstrate its ability to navigate this challenging environment successfully. However, recent quarterly performance suggests that competitive intensity may be increasing, with players potentially engaging in aggressive pricing to maintain market share during the festive season.
| Metric | 5-Year CAGR | Assessment |
|---|---|---|
| Sales Growth | 19.34% | Strong |
| EBIT Growth | 18.68% | Healthy |
| Average ROCE | 18.25% | Good |
| Average ROE | 16.30% | Decent |
Peer Comparison: Valuation Discount Despite Solid Fundamentals
When benchmarked against industry peers, Associated Alcohols presents an interesting valuation proposition. Trading at a price-to-earnings ratio of 25.25 times trailing twelve-month earnings, the stock commands a significant discount to peers like Allied Blenders (69.60x), Tilaknagar Industries (37.54x), and Globus Spirits (129.68x). Only G M Breweries (19.66x) and Som Distilleries (24.07x) trade at comparable or lower multiples.
| Company | P/E (TTM) | P/BV | ROE | Div Yield |
|---|---|---|---|---|
| Assoc. Alcohols | 25.25 | 4.24 | 16.30% | 0.17% |
| Allied Blenders | 69.60 | 11.59 | 12.63% | 0.56% |
| Tilaknagar Inds. | 37.54 | 11.83 | 19.42% | 0.19% |
| Globus Spirits | 129.68 | 3.31 | 12.17% | 0.24% |
| G M Breweries | 19.66 | 3.00 | 15.70% | 0.61% |
| Som Distilleries | 24.07 | 3.31 | 8.96% | N/A |
More importantly, Associated Alcohols delivers superior return on equity at 16.30%, outperforming most peers except Tilaknagar Industries (19.42%). The company's price-to-book ratio of 4.24 times sits comfortably below Allied Blenders (11.59x) and Tilaknagar (11.83x), suggesting the market has not fully recognised the quality of its return profile. This valuation discount, combined with solid fundamentals, creates an interesting risk-reward dynamic for value-oriented investors.
Valuation Analysis: Attractive Entry Point Despite Near-Term Concerns
Associated Alcohols' current valuation metrics present a compelling case for long-term investors willing to look beyond near-term margin pressures. With an enterprise value-to-EBITDA multiple of 16.73 times and EV-to-capital-employed ratio of 3.78 times, the stock trades at reasonable multiples given its ROCE of 18.25%. The PEG ratio of 0.52 suggests the stock is undervalued relative to its growth trajectory, with the market assigning a lower multiple than warranted by the company's 19.34% sales CAGR.
The stock's dividend yield of 0.17% remains modest, with a conservative payout ratio of 7.14% indicating management's preference for reinvesting profits into business expansion rather than returning cash to shareholders. This strategy aligns with the company's growth phase but may disappoint income-seeking investors.
Trading 22.28% below its 52-week high of ₹1,496.30 and 38.61% above its 52-week low of ₹839.00, the stock has corrected from recent peaks, potentially offering a more attractive entry point. The valuation grade of "Very Attractive" assigned by proprietary models reflects the disconnect between current market price and intrinsic value based on fundamentals.
Shareholding Pattern: Promoter Confidence Building
The shareholding pattern reveals encouraging institutional dynamics. Promoter holding increased to 61.22% in September 2025 from 59.29% in the previous quarter, representing a meaningful 1.93 percentage point increase. This demonstrates promoter confidence in the business trajectory and willingness to increase their stake at current valuations.
| Category | Sep'25 | Jun'25 | Mar'25 | QoQ Change |
|---|---|---|---|---|
| Promoter | 61.22% | 59.29% | 59.29% | +1.93% |
| FII | 0.48% | 0.63% | 1.06% | -0.15% |
| Mutual Funds | 0.03% | 0.03% | 0.00% | 0.00% |
| Non-Institutional | 38.27% | 40.05% | 39.65% | -1.78% |
However, foreign institutional investors have been reducing their exposure, with FII holdings declining from 1.06% in March 2025 to 0.48% in September 2025. This 0.58 percentage point reduction over two quarters suggests foreign investors remain cautious about the stock's near-term prospects, possibly concerned about margin pressures and competitive dynamics. Mutual fund participation remains negligible at 0.03%, indicating limited institutional interest from domestic fund managers.
The absence of promoter pledging (0% pledged shares) provides comfort regarding financial stability and reduces governance concerns. The promoter group, led by the Kedia family, maintains strong alignment with minority shareholders through their substantial equity stake.
Stock Performance: Strong Long-Term Track Record, Recent Weakness
Associated Alcohols has delivered exceptional long-term returns to shareholders whilst experiencing recent volatility. Over the past five years, the stock has generated a remarkable 363.70% return, dramatically outperforming the Sensex's 98.64% gain by an alpha of 265.06 percentage points. The ten-year performance is even more impressive, with returns of 1,777.24% compared to the Sensex's 216.83%, creating substantial wealth for long-term investors.
| Period | Stock Return | Sensex Return | Alpha |
|---|---|---|---|
| 1 Week | -4.43% | -0.86% | -3.57% |
| 1 Month | +19.03% | +1.57% | +17.46% |
| 3 Months | +11.82% | +3.22% | +8.60% |
| 6 Months | +8.05% | +3.06% | +4.99% |
| 1 Year | +22.56% | +4.62% | +17.94% |
| 3 Years | +149.03% | +36.01% | +113.02% |
| 5 Years | +363.70% | +98.64% | +265.06% |
However, recent performance has been mixed. The stock has declined 4.43% over the past week, underperforming the Sensex by 3.57 percentage points. Year-to-date returns of 5.72% lag the Sensex's 6.50% gain, suggesting investors have become more cautious about near-term prospects. The one-month return of 19.03% indicates significant volatility, with the stock experiencing sharp swings in response to quarterly results and market sentiment.
With a beta of 1.35, Associated Alcohols exhibits higher volatility than the broader market, making it suitable for investors with higher risk tolerance. The stock's volatility of 55.66% over the past year significantly exceeds the Sensex's 12.35%, reflecting the inherent risks in the small-cap beverages segment.
Investment Thesis: Quality Business at Fair Valuation, But Timing Matters
Associated Alcohols presents a nuanced investment case. The company operates a fundamentally sound business with strong long-term growth credentials, evidenced by its 19.34% sales CAGR and 18.68% EBIT CAGR over five years. Its ROCE of 18.25% and ROE of 16.30% demonstrate efficient capital allocation, whilst the debt-light balance sheet provides financial flexibility for future expansion.
However, the investment thesis faces meaningful headwinds. The negative financial trend designation reflects deteriorating quarterly metrics, including margin compression and sequential profit decline relative to trailing averages. The mildly bearish technical trend suggests weak near-term momentum, with the stock trading below multiple moving averages. These factors combine to create a challenging entry point for investors despite attractive long-term fundamentals.
"Whilst Associated Alcohols possesses the ingredients for long-term value creation—strong market position, healthy returns, and reasonable valuation—the near-term margin pressures and negative operational momentum suggest patience may reward investors more than immediate entry."
Key Strengths & Risk Factors
KEY STRENGTHS
- Robust Long-Term Growth: 19.34% sales CAGR and 18.68% EBIT CAGR over five years demonstrate consistent expansion capability
- Strong Return Profile: ROCE of 18.25% and ROE of 16.30% indicate efficient capital deployment and value creation
- Healthy Balance Sheet: Low debt-to-EBITDA of 0.79 and net debt-to-equity of 0.17 provide financial flexibility
- Excellent Interest Coverage: EBIT-to-interest ratio of 38.13 times ensures comfortable debt servicing
- No Promoter Pledging: Zero pledged shares reduce governance concerns and demonstrate promoter confidence
- Attractive Valuation: P/E of 25.25x and PEG ratio of 0.52x suggest undervaluation relative to growth and peers
- Rising Promoter Stake: 1.93 percentage point increase to 61.22% signals insider confidence
KEY CONCERNS
- Margin Compression: Operating margin declined 71 bps sequentially despite 9.98% revenue growth, indicating pricing or cost pressures
- Negative Financial Trend: Recent quarters show deteriorating metrics relative to trailing averages, raising operational concerns
- High Volatility: Beta of 1.35 and volatility of 55.66% create significant price swings unsuitable for conservative investors
- Weak Technical Momentum: Mildly bearish trend with stock trading below key moving averages suggests near-term weakness
- Limited Institutional Interest: Minimal mutual fund (0.03%) and declining FII holdings (0.48%) indicate cautious institutional stance
- Regulatory Risks: State-level alcohol regulations and taxation changes pose ongoing business uncertainty
- Low Dividend Yield: 0.17% yield with 7.14% payout ratio offers minimal income for dividend-focused investors
Outlook: What to Watch
POSITIVE CATALYSTS
- Margin Recovery: Successful cost management or pricing power restoration leading to operating margin expansion
- Volume Growth Acceleration: Sustained double-digit revenue growth with improving profitability trajectory
- Market Share Gains: Outperformance versus regional competitors in core Central India markets
- Capacity Expansion: Strategic capital deployment into high-return growth projects leveraging strong balance sheet
- Institutional Accumulation: Increased mutual fund or FII interest following operational improvement
RED FLAGS
- Continued Margin Erosion: Further sequential decline in operating margins below 13% would signal structural profitability challenges
- Market Share Loss: Revenue growth lagging industry peers indicating competitive positioning weakness
- Working Capital Deterioration: Rising inventory or receivables days suggesting demand softness or collection issues
- Promoter Stake Reduction: Any reversal of recent promoter buying would raise governance concerns
- Regulatory Headwinds: Adverse state-level policy changes affecting operations or profitability in key markets
The Verdict: Quality Business, But Wait for Better Entry
Score: 37/100
For Fresh Investors: Avoid initiating positions at current levels. Whilst the long-term fundamentals remain intact with strong growth credentials and healthy return ratios, the negative near-term financial trend and margin pressures suggest better entry opportunities may emerge at lower levels. Consider accumulating below ₹1,050 where risk-reward becomes more favourable.
For Existing Holders: Consider booking partial profits, particularly if holding gains exceed 20-25%. The stock's recent underperformance and deteriorating quarterly trends warrant a cautious stance. Retain core holdings for long-term wealth creation given the company's strong market position and growth trajectory, but reduce exposure to manage near-term volatility.
Fair Value Estimate: ₹1,050-1,100 (10% downside from current levels of ₹1,162.95)
Rationale: Associated Alcohols operates a fundamentally sound business with impressive long-term growth (19.34% sales CAGR) and healthy returns (18.25% ROCE). However, the combination of margin compression, negative financial trend, weak technical momentum, and minimal institutional interest creates near-term headwinds that outweigh the attractive valuation. The stock warrants a SELL rating not due to deteriorating business quality, but rather unfavourable timing and risk-reward dynamics at current price levels.
Note– ROCE= (EBIT - Other income)/(Capital Employed - Cash - Current Investments)
⚠️ Investment Disclaimer
This article is for educational and informational purposes only and should not be construed as financial advice. Investors should conduct their own due diligence, consider their risk tolerance and investment objectives, and consult with a qualified financial advisor before making any investment decisions. Past performance is not indicative of future results. Stock investments carry inherent risks including potential loss of principal. The author and publisher disclaim any liability for investment decisions made based on this content.
