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Diageo, the global spirits giant, has a tough balancing job on its hands at United Spirits (USL, part of the UB Group), within three months of taking strategic management control of the latter, the country’s largest company in the segment.
Diageo is moving rapidly to push its premiumisation platform. Yet, if it goes all out on this, the sale volumes at USL, which has a little over half the market share at 123 million cases (a case of nine litres has 12 bottles of 750ml each) annually, is expected to fall. For, 75 per cent of the USL volumes come from the mass segment.
USL itself has been trying to shift for some years to focus more on its ‘millionaire brands’. Currently, it has 21 brands where sales are more than a million cases each year; in five of these, it’s more than 10 million cases each.
It also has nine brands selling between half a million to a million cases a year. The share of these brands in the overall USL strategy has been growing; these account for close to 25 per cent of the volumes sold, from the earlier 20 per cent.
‘Less for more’
“We believe Diageo’s focus on premiumisation will lead to it cutting ‘unprofitable’ brands in the regular segment. We expect USL’s volumes to be down by (at least) 20 per cent on account of this over the next one to two years,” says analyst Nikhil Vora, managing director of IDFC Securities. “We do believe Diageo will bring down volumes of USL over the next eight to 12 months, with the portfolio mix as the key driver for it. While this would impact reported sales, we believe the profit impact will be positive, as the contribution of premium brands is two to three times the regular segment brands. Even at 90 million cases, we believe USL can comfortably generate (annual) profit of Rs 350 crore."
While Espirito Santo Securities expects the prestige segment to grow at a compounded annual rate of 15 per cent until 2016, above the expected market growth of eight per cent, it is important to see how the two companies handle the low-end segment’s trimming. USL had been keeping the low-end brands under a slow fire, slowly tweaking its strategy to avoid a shock in the market. Sources say some of the low-end brands have already been taken off retail shelves in a couple of states, including Kerala, one of the largest liquor markets in India. Diageo and Pernod Ricard are said to be taking their low-end products out of the Delhi market.
Vivek Veda, analyst at Espirito Santo Securities, says Diageo might not exit the mass segment of USL’s brands on a large scale in this country. “India is a very complicated market to operate in and global strategies cannot be replicated here with the same success and ease,” he says.
Legal complexities
Sale of alcohol is regulated in most states here and the revenue from alcoholic beverages is said to be the second-largest for them, after value-added tax.
As a result, state governments have tightened their reins on the alcobev industry. Tamil Nadu, one of the top three liquor markets in India, has imposed a capacity restriction on USL in the state.
Edelweiss’ Abneesh Roy adds, “In Kerala, only two price hikes have been successfully implemented in many years and with the rising inflation in the cost of molasses, input costs have risen. The government’s push to add ethanol to petrol has made the procurement of molasses more expensive.”
Compliance policy
Diageo’s increased focus on compliance is also expected to play out in USL, as stated by Diageo’s Asia-Pacific (APAC) head, Gilbert Ghostine, last month.
“The top three priorities for us are compliance, culture and performance. It is important for us that USL, as a publicly-quoted company in India, operates at the highest standards of controls, governance and compliance.”
Industry analysts say the volumes could get hit over this factor, too. However, the impact is expected to be a small share of volumes, about five per cent of the entire industry, that the maker of Johnnie Walker and Smirnoff Vodka will not hesitate to sacrifice for the sake of proper accounting practices. A spokesperson for Diageo said, “We will work with USL to define and adopt operating principles and processes which meet both Indian and international requirements. This is standard practice as part of our integration process for acquisitions.”
The excise department of each state comes into the sale process from the very start, first taking stock of capacity at each distillery before issuing a licence to produce.
Based on the size and capacity of the distillery, a team of officials is stationed there through the process of manufacturing. What is produced can be taken out only after a transport permit given by the excise officials, after an examination at the time of exit.
An industry veteran says some small distilleries in India often reveal lower produce to save on excise duties. Diageo might look at scaling the USL business differently, to rely more on its own distilling units than those of third parties, for the sake of more control and better regulation. USL has 26 distilling units of its own and about 30 belonging to contractors and associates.
Financial/management changes
Diageo has also begun comprehensive efforts to restructure USL’s debt-laden balance sheet. The latter has debt of close to Rs 7,000 crore, with a gearing of 1.5 times.
Diageo is said to be looking at refinancing as much as Rs 3,500 crore of that. Investment bankers with knowledge of the matter said the company wa in talks with a host of bankers.
The UB Group’s sale of a 25.02 per cent stake to Diageo had infused as much as Rs 2,800 crore into the balance sheet of USL; Rs 1,600 crore has already been used to pare debt from the earlier Rs 8,200 crore, which had pegged the leverage at 1.67 times by end- March.
Diageo has also exercised its right to nominate the chief executive officer of USL.
It named Anand Kripalu, former president at Mondelez International (India and South Asia) and an ex-managing director of Cadbury India Ltd. Three members, including Diageo’s APAC head, Ghostine, and former chief executive Paul Walsh, have also been named to the board of directors at USL.
Diageo is moving rapidly to push its premiumisation platform. Yet, if it goes all out on this, the sale volumes at USL, which has a little over half the market share at 123 million cases (a case of nine litres has 12 bottles of 750ml each) annually, is expected to fall. For, 75 per cent of the USL volumes come from the mass segment.
USL itself has been trying to shift for some years to focus more on its ‘millionaire brands’. Currently, it has 21 brands where sales are more than a million cases each year; in five of these, it’s more than 10 million cases each.
| UPPER-CLASS TASTE |
USL’S VOLUME STORY
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‘Less for more’
“We believe Diageo’s focus on premiumisation will lead to it cutting ‘unprofitable’ brands in the regular segment. We expect USL’s volumes to be down by (at least) 20 per cent on account of this over the next one to two years,” says analyst Nikhil Vora, managing director of IDFC Securities. “We do believe Diageo will bring down volumes of USL over the next eight to 12 months, with the portfolio mix as the key driver for it. While this would impact reported sales, we believe the profit impact will be positive, as the contribution of premium brands is two to three times the regular segment brands. Even at 90 million cases, we believe USL can comfortably generate (annual) profit of Rs 350 crore."
While Espirito Santo Securities expects the prestige segment to grow at a compounded annual rate of 15 per cent until 2016, above the expected market growth of eight per cent, it is important to see how the two companies handle the low-end segment’s trimming. USL had been keeping the low-end brands under a slow fire, slowly tweaking its strategy to avoid a shock in the market. Sources say some of the low-end brands have already been taken off retail shelves in a couple of states, including Kerala, one of the largest liquor markets in India. Diageo and Pernod Ricard are said to be taking their low-end products out of the Delhi market.
Vivek Veda, analyst at Espirito Santo Securities, says Diageo might not exit the mass segment of USL’s brands on a large scale in this country. “India is a very complicated market to operate in and global strategies cannot be replicated here with the same success and ease,” he says.
Legal complexities
Sale of alcohol is regulated in most states here and the revenue from alcoholic beverages is said to be the second-largest for them, after value-added tax.
As a result, state governments have tightened their reins on the alcobev industry. Tamil Nadu, one of the top three liquor markets in India, has imposed a capacity restriction on USL in the state.
Edelweiss’ Abneesh Roy adds, “In Kerala, only two price hikes have been successfully implemented in many years and with the rising inflation in the cost of molasses, input costs have risen. The government’s push to add ethanol to petrol has made the procurement of molasses more expensive.”
Compliance policy
Diageo’s increased focus on compliance is also expected to play out in USL, as stated by Diageo’s Asia-Pacific (APAC) head, Gilbert Ghostine, last month.
“The top three priorities for us are compliance, culture and performance. It is important for us that USL, as a publicly-quoted company in India, operates at the highest standards of controls, governance and compliance.”
Industry analysts say the volumes could get hit over this factor, too. However, the impact is expected to be a small share of volumes, about five per cent of the entire industry, that the maker of Johnnie Walker and Smirnoff Vodka will not hesitate to sacrifice for the sake of proper accounting practices. A spokesperson for Diageo said, “We will work with USL to define and adopt operating principles and processes which meet both Indian and international requirements. This is standard practice as part of our integration process for acquisitions.”
The excise department of each state comes into the sale process from the very start, first taking stock of capacity at each distillery before issuing a licence to produce.
Based on the size and capacity of the distillery, a team of officials is stationed there through the process of manufacturing. What is produced can be taken out only after a transport permit given by the excise officials, after an examination at the time of exit.
An industry veteran says some small distilleries in India often reveal lower produce to save on excise duties. Diageo might look at scaling the USL business differently, to rely more on its own distilling units than those of third parties, for the sake of more control and better regulation. USL has 26 distilling units of its own and about 30 belonging to contractors and associates.
Financial/management changes
Diageo has also begun comprehensive efforts to restructure USL’s debt-laden balance sheet. The latter has debt of close to Rs 7,000 crore, with a gearing of 1.5 times.
Diageo is said to be looking at refinancing as much as Rs 3,500 crore of that. Investment bankers with knowledge of the matter said the company wa in talks with a host of bankers.
The UB Group’s sale of a 25.02 per cent stake to Diageo had infused as much as Rs 2,800 crore into the balance sheet of USL; Rs 1,600 crore has already been used to pare debt from the earlier Rs 8,200 crore, which had pegged the leverage at 1.67 times by end- March.
Diageo has also exercised its right to nominate the chief executive officer of USL.
It named Anand Kripalu, former president at Mondelez International (India and South Asia) and an ex-managing director of Cadbury India Ltd. Three members, including Diageo’s APAC head, Ghostine, and former chief executive Paul Walsh, have also been named to the board of directors at USL.
