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Backed by a five-fold increase in other income and a healthy forex gain, United Spirits Limited (USL), India's largest spirits company, has reported an impressive 2.4 times increase in net profit to Rs 94 crore for the quarter ended September 30, as compared to the corresponding period in the previous year.
The sharp increase in other income compensated for an eight per cent drop in the company’s revenues to Rs 2,057 crore on weak offtake volumes.
USL earned Rs 63 crore as interest during the quarter in lieu of Rs 1,300-crore loan it had extended to UB Group company — UB Holdings Limited (UBHL). The loan is on an eight-year contract with principal kicking in during sixth, seventh and eighth years, starting early 2012-13. Until then on an every quarter basis, USL is expected to earn an interest income of around Rs 30-40 crore.
Volumes in its mass segment range of brands such as Bagpiper range of spirits and others — which account for as much as 72 per cent of its total sales — dropped by seven per cent, and overall portfolio saw a volume drop of little over one per cent as its premium brands such as Black Dog Scotch and Antiquity whisky pitched in strongly to grow by 21 per cent. Total volumes dropped a tad above one per cent at 28 million nine-litre cases with Prestige and above accounting for 26 per cent from the earlier 23 per cent.
Diageo, the global spirits major, which picked up a strategic 25.02 per cent stake early July, has been working on revamping the balance sheet and the expenses have been on a tight leash and being restrained by a good 20 per cent in a highly volatile environment of input costs for alcobev companies in India.
United Spirits had received an infusion of as much as Rs 2,400 crore when Diageo picked up the stake, as close to Rs 1,900 crore, has been paid out to reduce debt, as a result of which the finance costs too have come down.
"Extra Neutral Alcohol (ENA) prices continue to unfavourably impact the business. On an average, the cost of this ingredient has risen by Rs 20 per case compared to Q2 of FY13. Given the huge volume of USL, this translates to approximately Rs 56 crore for the second quarter of current fiscal," USL said.
Ashok Capoor, MD of USL, said while a rise in inputs is the stated reason for this increase, the truth lies elsewhere. "An attempt by the sugar lobby to raise prices on the strength of an alternative high paying customer — oil marketing companies (OMCs) — for their ethanol blending programme. As far as OMCs are concerned, their willingness to pay higher prices to Indian ethanol vendors is linked to the higher costs of imports. This, notwithstanding the fact that ethanol blending programme is not beneficial to consumers in the long run," Capoor highlighted.
Alleging apathy in TN, firm lets go distillery in state
United Spirits, which has been alleging that they are facing unhealthy practices by government agencies in Tamil Nadu, which are ordering certain preferred brands over USL, has decided to transfer its business, activities and operations pertaining to one of its main distillery in Chennai to Enrica Enterprises by way of slump sale on a going concern basis for a consideration Rs 125 crore.
"For the past eight-nine quarters, we have been raising the issue that we are getting affected in Tamil Nadu over skewed order placement by the parastatal buying agency in that State. Additionally, despite inflation and rising cost of inputs, the last price increase granted to manufacturers in Tamil Nadu was in December 2007," USL said.
Governments in Tamil Nadu, Andhra Pradesh, Karnataka and Kerala control distribution and retailing almost completely, giving little leeway for players to take into account cost escalations. The four key southern states account for as much as 60 per cent of spirits consumption in India with Tamil Nadu accounting for a good third of that.
The distilling plant, which USL is selling, has a capacity for one million cases a month, was acquired by United Spirits nearly five years ago from Balaji Distillers and the asset is now sold back to a company owned by Balaji Group in Tamil Nadu.
It is understood that USL was operating this plant at around 55 per cent capacity thus being a drain on the company. United Spirits on a pan-India basis has close to 90 distilling and bottling units of which 32 units are owned by the company, while the rest are with third party vendors.
USL has decided to go in for a franchise agreement with Enrica Enterprises pursuant to which the Enrica will bottle the company's brands, and in consideration for this bottling arrangement, USL will earn royalty income.
