Hidden Gem Series:

This is one of the scrips of the "Hidden Gem Series", which I discovered, as I waded through "Stock Sea", with a strainer in hand. I had recommended this stock earlier also when it rose from Rs.46.50 to Rs.58, in one go....I am recommending this stock again, after it has completed its downward movement cycle. I had asked all to book some profit in this counter at around Rs.56-57, levels as it was expected to come down to around Rs.49-50 (refer my previous mail in the Yahoo groups) to complete the cycle. This time the stock should race past its previous highs made in the last week and surge ahead to meet it target of Rs.110. This is an excellent Brewerie company and a hidden gem in this sector.

Tilaknagar Industries Ltd (BSE Code-->507205):

Buy at CMP--->Rs.49.90. First Target Rs.62. Second Target-->Rs.96. Third Target--->Rs.110. First Resistance--Rs.53. Strong Support--->Rs.49.

The Company is engaged in the business of manufacture, marketing and sale of Industrial Alcohol, Indian Made Foreign Liquor (IMFL), alcohol based chemicals and sugar cubes with IMFL being the core business. The Company has established its distinct identity in IMFL business with steady growth and production of high quality liquor brands.Under the chemical business the company manufactures alcohol based chemicals such as Di-ethyle Oxolate (DEO) which is used as intermediary by pharma companies, Turkey Red Oil etc.The Company also manufactures sugar cubes under its own brand name "SENATE" and on job work basis for others. But this Company is predominantly engaged in the business of manufacture and sale of Indian Made Foreign Liquor (IMFL) and its related product which constitute a single business segment. But this is mainly overlooked by the Bulls due to it maintaining low profile among the brewery companies in India.Tilaknagar Industires Ltd. (TIL), a Public Company promoted by the industrious family of ‘Dahanukars’ of Maharashtra, was previously predominantly engaged in the manufacture of sugar and allied products. Right from its inception, the Company had an unfailing record of profit generation and dividend distribution for nearly 52 years. However, the sugar unit of TIL was co-operativised in and around 1987, in consonance with the policy of the State Government, to have the privately owned sugar units under the control and management of the Co-operative sector.The main focus thereafter shifted from manufacture of sugar to manufacture of spirit and IMFL. Due to its core competency in alcoholic beverages and conscious efforts, the Company swiftly established its distinct identity in the liquor industry. Today its brand portfolio consists of unique brands which enjoy excellent consumer preference solely due to its quality and competitive price structure. Industry Summary: The total IMFL market stands at approximately 100 million cases and has grown at around 9% over the past 10 years. The IMFL market consists of Whisky, Rum, Brandy, Gin and Vodka. Whisky is the largest selling IMFL with around 60% of the market share. The whisky segment is further classified into Scotch, Super Premium, Premium, Prestige/Deluxe, Regular, Medium and Cheap segment. Regular whisky is the single largest segment in the whisky market, comprising approximately 40% of the whisky market. Industry Analysis: While the industry shows the highest demand during the 3rd Quarter, due to combination of festivals, new year and generally cold weather, and slight drop during summer months, the skew in the sales trends is not very significant. The approximate contribution of each of the quarter is as given below: Quarter 1 : 23% Quarter 2 : 25% Quarter 3 : 30% Quarter 4 : 22% Some of its main brands are: Mansion house Brandy, Mansion House Whisky, Classic Vodka, Classic Whisky, Classic Choice Whisky, Savoy Rum, Savoy Club dry Gin, etc.The manufacturing facilities are located at Tilaknagar, in Shrirampur Taluka, Ahmednagar District, in the State of Maharashtra. Last year (October, 2005), the company had approved the proposed a Joint Venture Proposal with M/s. Angostura Ltd, West Indies, for manufacture and distribution of alcoholic beverages in India, and both the parties have signed 'Memorandum of Understanding'. It was decided at that time that Premium Bottled-in-Origin brands belonging to Angostura group companies viz. C L World Brands, Burn Stewart and Belvedere will be directly imported and marketed by the Joint Venture Company and other brands will be bottled at Company's state-of-the-art bottling facility at Shrirampur, Dist. Ahmednagar.The Company has entered into franchise arrangements in some states which is expected to give them huge returns in the coming days.The company for the Quarter Ended June, 30, 2006 came out with a good set of numbers. Net sales of the company surged to Rs.19.4 Cr during the period, from Rs.14.93 Cr in the same period previous year. The net profit of the company for Q1FY—2005-06 surged to Rs.57.7 lakh, from Rs.43.5 lakh in the same period previous year.

The company recently came up with a Rights Issue to part finance the cost of:

a) Installing additional re-distillation plant. b) Working capital requirement. c) Brand positioning and other related expenses. d) Rights issue and other preliminary expenses. The company plans to modernize /upgrade its plant, reduce labour cost and replace high cost debts. Over the years it has built a strong asset base and operates on strong principles with clean image. It has developed loyal distributors and retailers. THE MOST STRIKING FEATURES ARE:

1. The company is mainly engaged in manufacture of IMFL products and the main raw material is molasses, which is by-product of sugar. Due to expected fall in the sugar prices and sugar derivatives due to a number of factors, molasses prices are expected to reamin low which will help the company strengthen its bottom-line. Increase or decrease in the prices of molasses is purely seasonal in nature and the prices generally fall once the new sugar cane crop come during the year. The company in the past to To tide over the situation, of high molasses prces has imported it at competitive price from nearby countries. Molasses, which is the by-product of sugar industries, is the major raw material for manufacture of alcohol. The company is situated in a sugar belt where availability of molasses, alcohol is in plenty. The Company is constantly endeavoring to procure raw materials at the lowest prices using its experience, relationships with the suppliers and economies of scale enjoyed. The Company follows a prudent product pricing policy.

2. The Company constantly endeavors to procure raw materials and packing materials at the lowest prices using its long term association with the suppliers and developing new sources. The company will also follow prudent pricing policy to keep the costs under check.

3. The company is in the liquor business of over 5 decades and has requisite expertise and ability to adapt to newer generation products and technology. The company is well aware of the development of market prescription, consumer preferences, competition, regulations etc.

4 The company has devised a sound human resource policy to develop and retain its key management personnel and talent and the company has been able to retain the significant part of this manpower, talent and its employee turnover has been very low over the years.

5. In view of favorable market scenario, prospects of liquor industry are very promising. The company, therefore, does not foresee any problem despite competition and entry of multinationals. The company’s products command a good brand equity and has enhanced its market share in the semi premium and regular categories. The company aims to keep growth with the dynamic business strategy and plans to broad-base its product mix by introduction of new products. The Company is now making conscious efforts to enhance the brand positioning and has allocated specific funds for the said purpose. 6. IMFL business is seasonal in nature with the sales volume dipping during the period April to June each year because of summer. Lower sales volumes in the first quarter are compensated by higher sales volumes in remaining quarters / festive seasons. Hence from the next quarter onwards we might see a better balance sheet of the company. 7. The company is also putting in place several measures on the marketing front to sustain its performance. New distributors are being appointed to make the presence felt in the market wherever required. The improvement in product quality is being continuously envisaged. 8. The company has made major breakthrough in exports and is able to seek new markets in Angola, Congo, South Africa and Middle East. With this background the company now wishes to make vigorous efforts to position itself in the market segment by creating a brand value. The market awareness is being increased by way of various initiatives such as advertising, sponsoring some of the major sports and/or cultural events, improvements in packaging, presentations to prospective international clients, importers etc.9. The Rights Issue proceeds was used for installing another re-distillation plant at the existing premises. In terms of the schedule of implementation, the re-distillation plant has started functioning at the earlier part of this year, 2006. 10. A rapidly increasing middle class population, rising income levels, shifting consumer preferences and increase in the number of choices available to the consumer will further improve the above average growth in the regular, prestige and premium segment. Similarly progressive regulations, decline in poverty line population will increase the market for regular and cheap IMFL. MAJOR CUSTOMERS: The major customers of the company are as follows: Ø Andhra Pradesh Beverages Corporation Ltd. Ø Kerala State Beverages Corporation Ltd. Ø Mysore Sales International Ltd. Ø Orissa State Beverages Corporation Ltd. Ø Delhi State Industrial Development Corporation Ltd. Ø Delhi State Civil Supplies Corporation Ltd. Ø Delhi Tourists & Transport Development Corporation Lltd. Ø Karnataka State Beverages Corporation Ltd. Ø Various Depots of Canteen Stores Department Ø Chattisgarh Beverages Corporation Ltd. Ø Ding Dong Liquors-Pondicherry, Mahe Ø Pallavi Wines-Goa Ø Megha Assam – Assam Ø Santosh Marketing, Mumbai Ø Grish Traders, Pune Ø Asian Traders, Kolhapur Ø KSD Traders, Nagpur PRINCIPAL COMPETITORS: Ø Mcdowell & Co. Ltd. Ø Shaw Wallace & Co. Ltd. Ø Radico Khaitan Ltd. Ø Jagatjit Industries Ltd. Ø Seagrams (I) Ltd.Market share and future objectives: The company has enjoyed a very strong base in the South Indian states where Brands of the company are preferred and hold large market share. Business has improved in West and Eastern India and volumes are expected to grow rapidly. The company is in the process of opening up and consolidating the North Indian markets and expect volumes to start growing. The company is constantly growing the CSD and Paramilitary business, and would be registering additional brands in the near future. Export of our products is increasing in view of acceptance and preference in number of overseas markets.

Conclusion: With the globalization and opening of the economy the company might face competition from Overseas brands; but the company is taking adequate measure to mitigate this problem and also the perception of the consumers is gradually changing and the industry is registering a positive growth year on year. Besides with the festive only a walking distance away, would boost liquor sales all over India which is expected to generate both revenues and profits for the company. The fall in Molasses prices is also a major advantage for Alcohol companies. Molasses prices are expected to fall further due to the fall in crude prices and the news that Brazil is expected to reap a bumper Sugarcane crop. Last year the company suffered due to abnormal rise in Molasses prices. The shares should be purchased with a short to medium term perspective with the above price targets in mind. I expect the EPS of the company to improve substantially in the days to come.

Best wishes,

Suman Mukherjee

India.