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United Breweries Limited (BSE:UBL), is India's largest producer of beer with a market share of around 48% by volume.^[1] Its flagship brand Kingfisher was ranked amongst the top 10 fastest growing brands in the UK.^[2]In India, alcohol market is a state subject. Each state has different tax rates of up to 45%. Due to this different tax structure, free movement of alcoholic beverages across the states is not possible. UBL has a network of 23 distilleries across the country to meet the requirements at the regional level giving it an unparalleled distribution reach within India.^[3] From FY2004 to FY2008, its sales revenues grew from Rs 452 crore to Rs 1,370 crore, at average annual rate of over 50%; whereas net profit grew by a 538% average annual growth rate from Rs 2.77 crore to Rs 62.47 crore.^[4]

UBL has also entered into mutli-faceted strategic alliance with Scottish & NewCastle Plc (S&N), an international brewery major, with $6 billion in revenue and a market capitalization of $5.4 billion.^[5] This alliance, has allowed S&N to market it International brands like Kronenbourg in India, while allowing UBL to use S&N's global network to further globalize the Kingfisher brand.^[6]

Business Overview

UBL undertakes the production and marketing of beer. Its products are available in 52 countries across the world.^[2] It has a installed capacity of 6,025,000 hecto liters/annum and it produces around 3,133,684 hecto liters/annum.^[7] This capacity is divided amongst a network of 23 units in different states of India.^[3] The lower capacity utilization of 52% is due to the ban of free movement of beer across state boundaries. A distillery can only be used to supply to a state where it is located.^[8] In order to keep up with the increase in demand, the Company has plans to expand capacity covering 8 key markets across the country. A total of 14.75 lac hecto liters/annum capacity will be added by Dec 2011.^[9] In addition to this the company also has plans to set up two new greenfield breweries, located at Mallepally in Andhra Pradesh and Nanjangud in Karnataka.^[9] The capital for this expansion is planned to be met with the proceeds of a right Issue.^[9]

Business and Financial Metrics

United Breweries Revenues and PAT^[4]

United Breweries Revenues and PAT^[10]

UBL has had a highly leveraged capital structure with debt to equity ratio as high as 12.85 in FY2005.^[11] The high leverage was the result of expansion activities that the company was undertaking. The debt to equity ratio was reduced to 1.92 in FY2006 by issue of new shares.^[12] The company has managed to reduce the long term debt to equity ratio to 1.19 in FY2008; but this has been done by increase in its short-term debt.^[13]

From FY2004 to FY2008, sales revenues have grown from Rs 452 crore to Rs 1,370 crore, at average annual rate of over 50%.^[4] In the same period, net profit grew by a 538% average annual growth rate from Rs 2.77 crore to Rs 62.47 crore.^[4] From FY2004 to FY2007, the operating margin has been increased from a low of 6.72% to 13.49%.^[10] Over the same period, the corresponding the net profit margin has been increased from 0.58% to 6.1%.^[10] This was done by continuous efforts in increasing the operating efficiency. One of the indicators of increased efficiency, the inventory turnover has increased from 14.26 to 23.32.^[10] In FY2008 the operating margin fell to 12.8% and the net margin fell to 4.49% because of the increase in raw material cost.^[14]

Share holding pattern: The promoters, namely United breweries Holdings limited,owns 37.49% of UBL; foreign corporate bodies also own 37.49% of the company. FII's own another 16.59%.Fidelity India Special Situations Fund and Franklin FMCG Fund are the mutual funds invested in the firm, with 2.6% and 0.16% ownership respectively.^[15]

Business segments

UBL has 9 brands under management which include Kingfisher, UB Export, London Pilsner, Premium Ice and Kalyani Black Label.^[17] Apart from maintaining a balanced portfolio of brands in Mild and Strong Beer, the company plans to focus more on premium beer.^[9] In May 2008, it announced plans to launch low alcohol flavored beer brands and develop a new segment.^[18]

Since the company is focused on production and marketing beer, all its revenues are from the beer and aligned activities. The table below gives the breakup.

Key Trends and Forces

Decline in raw material cost resulting in to increased operating margin and net profit

Barley production in India^[20]

Higher prices and short supply of key raw materials like malt, hops and barley can reduce the profit margin and affect operations.^[21]. Barley and glass bottles constitutes 12% and 40% of the total operating expense of UBL.^[22] Any price increase in this two commodities have a direct bearing in reducing the overall operating margin. Due to price increase of barley by over 33%^[23] and increase in bottling cost, during FY2008 the net profit margin fell by 26%.^[10] In states like Uttar Pradesh, Rajasthan and Madhya Pradesh which, account for 80.34% of barley production in India, the area under cultivation is shifting to other crops like sugarcane.^[24] As can be seen in the adjoining diagram, the barley production has declined by over 60% from 3135 KMT to 1220KMT from 1975 to 2005. To hedge the risk on rising raw material prices, UBL has entered into long term arrangements for sourcing of the vital inputs.^[21] In addition it has extended its own contract farming initiatives in the state of Punjab.^[21] The 51% Equity stake in Maltex Malsters Limited, a manufacturer of malt, is also an initiative for vertical integration.^[21]

Government controls beer distribution with geographic restrictions and heavy taxation

Alcohol is a state subject and hence each state has it own taxation, pricing and distribution policies. No inter state movement of alcohol is allowed. Also since beer is not delinked from other spirits it is heavily taxed at over 42%.^[25] Since tax on alcohol contributes to over 17% of state revenues, the government is hesitant to change the tax treatment.^[25] Any further increase in taxation on beer would shift consumer preference towards other alcohol products thereby reducing the demand for beer. In states of Delhi, Andhra Pradesh, Karnataka, Tamil Nadu and Kerala government controls the distribution of alcohol.^[26] Whereas in states of Rajasthan, Bihar and Himachal Pradesh auction based distribution is used.^[26] Reforms in the distribution system in these states would increase the competitiveness in the market and lead to increased sales as was demonstrated by the 400% increase in beer sales in the states of Punjab and Haryana after the distribution reforms in July 2008.^[27] It would also lower the barriers to entry present in the industry and thus bring a more competitive environment in the industry.

Entry of new international players in the domestic market increasing competition

With the Indian beer market growing at 15% per annum, global brands like Carlsberg and Budweiser are entering India through the joint venture route.^[28]In Dec 2006, Carlsberg announced a joint venture with The Lion Brewery Ceylon Ltd to build a green field brewery in the state of Rajasthan, India.^[29] The joint venture is called Asia Pacific Breweries and it has taken steps at increasing its market share by acquiring 76% stake in Aurangabad Breweries.^[30]On June 2006, it also entered in to joint venture with Jaipuria Beverages & Food Industries Private Limited to expand in to the state of Andhra Pradesh, the largest beer consuming state.^[31] Cobra beer the largest selling beer in UK is also setting up greenfield breweries in India and actively hunting for takeover opportunities as announced in January 2007.^[32] The entry of the new international players in the beer segment would increase the competitiveness in the market and might reduce the market share of UBL.

Competition

The Indian alcohol market is regulated by the government. The restrictions on alcohol advertisement, brand entry, pricing and greenfield distilleries act as an barriers to entry for any new player.^[33] Also since alcohol is a state policy, there are restrictions in its movement from one state to another.^[34] This has resulted in to small inefficient distilleries all across the country.^[35]

• SABMiller - Headquartered in London, United Kingdom, SABMiller, through its subsidiaries, undertakes manufacturing, distribution, and sale of beverages worldwide. Its products primarily include beer and soft drinks. It also operates as a bottler for Coca-Cola products. The company has a strategic alliance with Castel.^[36]It has also invested in the luxury hotel and attached casinos industry.^[37]

• Mount Shivalik (MOUNTSHIQ-BY) - Based in Alwar, Rajasthan, Mount Shivalik is in the business of manufacturing and marketing beer. The group also has presence in the hospitality business with pubs, motels, beer gardens, and highway restaurants. It has a state-of-the-art brewery in the Alwar district with an annual installed capacity of 300,000 hecto liters. It produces international class beer under technical expertise and tie-up with world leaders like Stroh Brewery, USA & Cobra Beers, UK. The company has its own laboratory at the brewery plant for research and development activities.^[38]

• Mohan Meaking (MOMEAKIN-BY)- Registered in Solan, Himachal Pradesh. It manufactures and markets all types of beer and prestigious brands of Indian made foreign spirit (IMFS) besides blended malt whiskies, rum, gin and vodka. In addition to these, the company manufactures juices and canned products, corn flakes, wheat porridge, malt extract, glass bottles, mineral water, castings and other products. It has breweries and distilleries established under collaboration arrangements in various other places in India and Bhutan.^[39]

Financial Comparison of the competitors:

Market share:

Market share of Beer producers in India^[44]

References

1. ↑ Financial express, United Breweries to uncork low alcohol, fruit flavoured beer in India
2. ↑ ^{2.0 2.1} Kingfisher world, Organisation
3. ↑ ^{3.0 3.1} Kinfgfisher world, manufacturing network across the country
4. ↑ ^{4.0 4.1 4.2 4.3} United Breweries limited, Profit and Loss statement
5. ↑ UK Business park, Scottish & Newcastle
6. ↑ Kingfisher world, Organisation
7. ↑ Annual report2008,Quantitative Details,page 43
8. ↑ Indian markets,Breweries, overview
9. ↑ ^{9.0 9.1 9.2 9.3} Annual report, Prospectus, Page 4
10. ↑ ^{10.0 10.1 10.2 10.3 10.4} United Breweries limited, Key financial ratios
11. ↑ rediff money, United breweries, Leverage ratios
12. ↑ Money control, 2005-06 financial report, directors speech
13. ↑ rediff money, United breweries,Liquidity ratios
14. ↑ King fisher world, annual report 2008, page 3
15. ↑ Money control, United Breweries Limited , MFs invested in UBL
16. ↑ , United Breweries Limited share holding pattern, rediff Money wiz
17. ↑ The UB group, Beverage alcohol
18. ↑ United Breweries Plans to Launch Low Alcohol and Fruit Flavored Beers in India
19. ↑ shine.com, Company Overview: United Breweries Limited
20. ↑ Index Mandi, India Yearly Barley Production
21. ↑ ^{21.0 21.1 21.2 21.3} KingFisher world, annual report 2008, Risk and concerns, Page 6
22. ↑ United breweries limited, page 5
23. ↑ Commodity watch, Barley is an important cereal grain with varied uses ranging from human consumption to malting, Indian prices section
24. ↑ Business standard, Barley farming the next big thing
25. ↑ ^{25.0 25.1} One on One, What is the status of the beer industry in India?
26. ↑ ^{26.0 26.1} Ministry of food processing industry, Beer and alcoholic beverages
27. ↑ The Hindu, Policy boosts liquor usage in Chandigarh
28. ↑ Business standard, Indian beer market in high spirits, Aabhas Sharma / New Delhi March 6, 2008
29. ↑ Carlsberggroup, India, Asia Pacific Breweries limited
30. ↑ Drinks business review,Asia Pacific Breweries obtains stake in Aurangabad Breweries
31. ↑ Asia Pacific Breweries Makes Further Strategic Investment in India
32. ↑ Indiainfo.com, Cobra Beer plans to purchase of brewery in India
33. ↑ Scribd, United Breweries Limited, regulations,page 10
34. ↑ India: Alcohol and public health, official response to alcohol problem
35. ↑ India Brew - Beer and India,INDIAN ALCOHOLIC BEVERAGE INDUSTRY STATISTICS: IWSR REPORT
36. ↑ Business week, Sab Miller, Company Description
37. ↑ Finance Yahoo,Company Profile
38. ↑ MyIris, Mount Shivalik Industries Limited, 08-Oct-2008,Business Profile
39. ↑ MyIris, Mohan Meakin Limited, 08-Oct-2008,Business Profile
40. ↑ Money control, United breweries limited, Money control, Competitors
41. ↑ Google finance,SABMiller,
42. ↑ Money control, Mount shivalik, Competitors
43. ↑ Money control, Mohan meakin, Financials
44. ↑ Scribd, United Breweries report, Page 11