United Breweries (NSE:UBL)

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Joy Tuscano

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]

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.^[4] 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.^[5]

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 6,110,000 hecto liters/annum and it produces around 3,674,632 hecto liters/annum. This capacity is divided amongst a network of 23 units in different states of India.^[3] A distillery can only be used to supply to a state where it is located.^[6] 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.^[7] 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.^[7] The capital for this expansion is planned to be met with the proceeds of a right Issue.^[7]

Business segments

UBL has 9 brands under management which include Kingfisher, UB Export, London Pilsner, Premium Ice and Kalyani Black Label.^[8] Apart from maintaining a balanced portfolio of brands in Mild and Strong Beer, the company plans to focus more on premium beer.^[7]

Since the company is focused on production and marketing beer, all its revenues are from the beer and aligned activities.

• Beer - 84% of net sales
• Goods Traded - 10% of net sales
• Technical Knowhow & Franchises - 4% of net sales
• Commission - 1% of net sales

Key Trends and Forces

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

Higher prices and short supply of key raw materials like malt, hops and barley can reduce the profit margin and affect operations. Barley and glass bottles constitutes 12% and 40% of the total operating expense of UBL.^[9] Any price increase in this two commodities have a direct bearing in reducing the overall operating margin. 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.^[10] 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. In addition it has extended its own contract farming initiatives in the state of Punjab. The 51% Equity stake in Maltex Malsters Limited, a manufacturer of malt, is also an initiative for vertical integration.

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%.^[11] Since tax on alcohol contributes to over 17% of state revenues, the government is hesitant to change the tax treatment.^[11] 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.^[12] Whereas in states of Rajasthan, Bihar and Himachal Pradesh auction based distribution is used.^[12] Reforms in the distribution system in these states would increase the competitiveness in the market and lead to increased sales. It would also lower the barriers to entry present in the industry and thus bring a more competitive environment in the industry.

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.^[13] Also since alcohol is a state policy, there are restrictions in its movement from one state to another.^[14] This has resulted in to small inefficient distilleries all across the country.^[15]

• 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.^[16]It has also invested in the luxury hotel and attached casinos industry.

• 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.

• 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.

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. ↑ UK Business park, Scottish & Newcastle
5. ↑ Kingfisher world, Organisation
6. ↑ Indian markets,Breweries, overview
7. ↑ ^{7.0 7.1 7.2 7.3} Annual report, Prospectus, Page 4
8. ↑ The UB group, Beverage alcohol
9. ↑ United breweries limited, page 5
10. ↑ Business standard, Barley farming the next big thing
11. ↑ ^{11.0 11.1} One on One, What is the status of the beer industry in India?
12. ↑ ^{12.0 12.1} Ministry of food processing industry, Beer and alcoholic beverages
13. ↑ Scribd, United Breweries Limited, regulations,page 10
14. ↑ India: Alcohol and public health, official response to alcohol problem
15. ↑ India Brew - Beer and India,INDIAN ALCOHOLIC BEVERAGE INDUSTRY STATISTICS: IWSR REPORT
16. ↑ Business week, Sab Miller, Company Description