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United Spirits, India's largest spirits company 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. The company has been alleging that it is facing discrimination as government agencies in the state are preferring certain other brands over USL.
"For the past 8-9 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 states such as Tamil Nadu, Andhra Pradesh, Karnataka and Kerala control distribution and or retailing almost completely, giving little leeway to players like United Spirits to take cost escalations depending on the various levers of business. 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 that USL is selling has a capacity for one million cases a month, and was acquired by United Spirits nearly five years ago from Balaji Distillers. The asset has now been 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.
