The integration of United Spirits' balance sheet by global spirits major Diageo starting August 1, 2014, is expected to kick off on a weak note as the Indian distiller is still grappling with a number of problems.
In addition to the increased provisioning which United Spirits may have to consider on the Rs 1,300 crore loan given to UB Holdings as well as on the credit extended to dealers and stockists, Diageo will be looking at how to derive more value from leading USL brands that are facing increasing competition.
The overall spirits market in India is slowing, too, growing a mere 1.2% last fiscal to 310 million cases. United Spirits is also facing increasing competition from the likes of Pernod Ricard in the premium categories as well as from aggressive home-grown players such as Allied Blenders & Distillers.
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Then there is the problem USL faces in Tamil Nadu, where the company’s operating margins as well as market share have been declining. According to United Spirits' regulatory disclosures, the EBIDTA margin from a level of 13 per cent in 2009-10 and going up to 15 per cent in 2010-11, has fallen to a level of 5 per cent.
"The Tamil Nadu State Marketing Corporation (TASMAC) which operates as a sole buyer of alcoholic beverages products from the manufacturers and since December 2012, has been giving less ordering preference to the company's (United Spirits) national brands by favouring local offerings thereby affecting the company's market share as well as profitability," USL said.
USL's market share from its core McDowell's No.1 family of spirits has dropped to 12% from the earlier share of 40% over a 3-4 year period, while brands such as Prestige and above have seen their market share erode to 14 per cent from 47 per cent.
As a result, United Spirits recently exited its direct operations in Tamil Nadu, selling its assets to a local company and will be operational in the state only through a royalty agreement. "We have not given up hope on that market. We have enabled a Call Option as well as Right of First Refusal on the asset and as and when we feel it is time to get back in directly, we have that option," a senior USL official told Business Standard.