India's Alcoholic Beverages Industry

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TABLE OF CONENTS

RISK SCORE ................................................................................................................................................................... 5

EXECUTIVE SUMMARY .............................................................................................................................................. 6

OVERVIEW ..................................................................................................................................................................... 8

MACROECONOMIC SCENARIO ............................................................................................................................. 11

Glance at Key Economic Indicator ..................................................................................................................................... 11

Tradeoff between Growth & Inflation ............................................................................................................................... 15

Currency Movement ................................................................................................................................................................. 16

REGULATORY SCENARIO ...................................................................................................................................... 17

Regulatory Framework .......................................................................................................................................................... 17

Government Regulations ....................................................................................................................................................... 17

Role of State Government ...................................................................................................................................................... 18

DEMAND – SUPPLY SCENARIO ............................................................................................................................ 19

Current Scenario ....................................................................................................................................................................... 19

Indian Made Foreign Liquor............................................................................................................................................ 19

Beer ........................................................................................................................................................................................... 20

Country Liquor ...................................................................................................................................................................... 21

Wine .......................................................................................................................................................................................... 22

Demand Drivers ......................................................................................................................................................................... 23

Exports .......................................................................................................................................................................................... 25

Imports .......................................................................................................................................................................................... 26

New Capacity Addition ........................................................................................................................................................... 27



Future Growth Prospect ......................................................................................................................................................... 28

Key Risks to Growth ................................................................................................................................................................. 29

COMPETITIVE SCENARIO ...................................................................................................................................... 30

Nature of Industry .................................................................................................................................................................... 30

Competitive landscape ............................................................................................................................................................ 30

Key trends in Indian Liquor Industry ................................................................................................................................ 32

FINANCIAL PERFORMANCE .................................................................................................................................. 34

Sales Growth ............................................................................................................................................................................... 34

Operating Cost ........................................................................................................................................................................... 35

Profitability ................................................................................................................................................................................. 36

Ratio Analysis ............................................................................................................................................................................. 37

Debt Equity & Interest Coverage Ratio ....................................................................................................................... 37

Other Key Ratios ................................................................................................................................................................... 38



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RISK SCORE

Higher disposable income, increase in consumer base due to increase in young consumer entering legally allowed drinking age as well as increasing consumption among women.

Prohibition drive undertaken by key consuming states like Kerala would impact growth in the sector.

Higher taxes imposed by state governments is leading to an increase in price for consumer.



EXECUTIVE SUMMARY

Indian is third largest liquor market in the world in terms of volume. The sector is made up

for four segments: Indian Made Foreign Liquor (IMFL), Beer, Wine, and Country Liquor.

Beer is the largest segment in terms of consumption volumes while IMFL is the largest in

terms of value.

Alcoholic beverage sector in India is subject to stringent regulations with restrictions in

productions, distribution, and retailing. Being a state subject tax rates and duties for

alcoholic beverages vary from state to state leading to a distortion in pricing

Level of restrictions and government interference in production, distribution, and retailing

varies from state to state. In certain state whole value chain is state controlled while in

certain states it is completely in the hands of private sector. Per estimates, over 70% of the

Indian alcoholic beverage industry is in the hands of parastatal agencies either at the

wholesale or the retail levels or both.

India’s favourable demographic profile (growing young & working population), rising

personal disposable income, changing lifestyle, increasing social acceptance has been

stimulating the growth of alcoholic beverages industry in India.

On the back of these favorable demand factors, revenue generated from the sector has

grown by a CAGR of ~15% during FY 2010-14 to reach INR 601 Bn. However per capita

consumption of various alcoholic beverages (excluding country liquor) is very low at 1.5

liters per annum as compared global average of 27 liters, suggesting further growth

potential.

Indian alcoholic beverage industry can be termed as consolidated with limited number of

players. High entry barriers due to stringent regulations and investments required to set up

distribution network has prevented the entry of smaller players. However growth potential of

Indian market is attracting global companies who are entering India through organic as well

as inorganic route.



United Spirits Ltd, United Breweries Ltd, Tilaknagar Industries, and Radico Khaitan Ltd are

the key domestic players in IMFL, Beer and Country Liquor segments. Sula Vineyards,

Grovers Vineyards and Chateau Indage are the major players in wine segment.

Among multinational players, Belgium based Anheuser-Busch InBev, Netherland based

Heineken, UK based SABMiller Plc and Diageo plc and Denmark based Carlsberg etc also

have presence in India.



OVERVIEW

India is the third largest market for liquor in terms of volume. The country has over 295 distilleries

scattered throughout the country with a combined annual installed capacity of 4,200 Mn liters.

Most of the licensed capacity is concentrated in three states of Uttar Pradesh, Maharashtra, and

Tamil Nadu.

As per All India Distillers’ Association (AIDA), approximately 52% of the total alcohol produced is

for potable use i.e. for use in alcoholic beverages and balance 48% is used for industrial purpose.

Alcoholic Beverage sector can be broadly classified into four segments: Indian Made Foreign

Liquor (IMFL), Country Liquor, Wine, and Beer. Among these Beer is the largest segment in terms

of volume while IMFL is the largest segment in terms of value.

Sources: CMIE IAS, D&B Research

Indian Made Foreign Liquor

IMFL can be further divided into two broad segments: brown spirits and white spirits. The Indian

IMFL industry is predominantly a brown spirits market having a share of ~92% while remaining



~8% is White Spirits. Whiskey is the largest selling brown spirit, accounting for 60% of total IMFL

market.

Extra Neutral Alcohol (ENA) manufactured from the rectified spirit is the key raw material used in

the manufacturing of IMFL. Majority of ENA produced in the country, is used in the production

process of IMFL, which again is prepared from two routes viz; Molasses Based & Grain Based.

However, with rising shortfall in molasses supply, grain based distillery is getting competitive.

Beer:

Beer is an alcoholic beverage made by fermentation of malted grains, usually barley, though

wheat, rice, corn and other cereals can also be used. Types of beer commonly consumed around

the world are:

Source: D&B Research

In India, strong beer with alochol content between 5% - 8% is the most widely consumed followed

by mild beer (alcohol content close to 5%). Strong beer account for ~81% of total beer market with

rest accounted by mild beer.

Currently per capital consumption of beer is estimated at just 1.5 liters per annum in India which is

significantly low as compared to global average of 27 liters and as compared to average of 80

liters in US, 74 liters in Europe and about 22 liters in China.

Ale: Ales are brewed at comparatively warm temperature, has fruity

aroma and are popular in colder countries.

Lager: It is a beer with is fermented at a very cool temperature. It is best

suitable for hot climates.

Stout: It is a dark beer with strong malt aroma and brewed with slow

fermenting yeast.

Wheat Beer: It is highly fermented beer with a significant proportion of

wheat in it.

TYPESOF

BEER



Wine

Wine is an alcoholic beverage made from the fermentation of grapes with alcohol content between

8-22%. In India, currently there exists about 92 wineries, mostly located around the Pune-Nashik

belt and Bangalore. Nashik, situated in the state of Maharashtra is considered as the wine capital

of India. Of the total wineries, 36 wineries are in Nashik, 12 in Pune, 13 in Sangli, 5 in Solapur, 4

in Usmanabad, 3 in Buldhana and one in Latur.

Country Liquor

Country liquor (CL) is the cheapest form of alcoholic beverage, essentially made of rectified spirit

which is made by fermentation and rectification of molasses, a by-product of sugar.

Due to the increasing health hazards consumption of country liquor is banned in few of southern

states. This ban has resulted in country liquor losing its market share to other alcoholic

beverages.

.



MACROECONOMIC SCENARIO

Glance at Key Economic Indicator

Indian economy continued to report below 5% growth in FY 2014. At global level, economic

growth performance in major economies continued to play a decisive role in deciding the growth

fortunes of developing countries including India. Indian economic performance was severely

impacted by the sustained weakness in USA, Euro Zone countries and China that are also India’s

major trading partners and source of foreign capital inflows. In CY 2013, world economic growth

slide further to 3% as compared to 3.1% in previous year while US GDP growth slowed down to

1.88% as compared to 2.8% in in previous year and Euro Zone as a whole reported a growth of

about 0.2%. Annual GDP growth of world fastest growing market i.e. China too slowed down from

the level of 10.4% in 2010 to 7.7% in 2013.

At domestic level, India’s investment and industrial growth prospects remained fragile and even

the services sector remained weak. Even though the Indian government took several steps to

arrest the volatility in foreign exchange rate and narrow down the current account deficit in FY

2014 but the growth momentum of the domestic economy faced unrelenting challenges.

Persistence of high consumer price inflation and interest rates, weakening performance of

services and industrial sector has let down all expectation of economic revival in the past fiscal.

Additionally, regulatory hurdles, administrative bureaucracy, and policy delay pertaining to land

acquisition process, obtaining license, and environmental clearance were further impediments to

growth. These factors dampened the country’s position at global level as well due to which, on

“ease of doing business” Index India ranks 134th

amongst 184 countries and lowest amongst

BRICs peers. Lack of consensus on major economic reform and policy paralysis led to a declining

“new-investment” spending for the fourth consecutive year in row since FY 2011.



Source: CSO & D&B Forecast, (PE is Provisional Estimates)

As per provisional estimates on GDP number released on May 30th 2014, India’s annual GDP

growth reported a marginal incremental growth of 0.3% over the previous year and grew at about

4.74% in FY 2014 as compared to 4.47% in FY 2013. Economic activity continued to exhibit

stagnancy on back of slowing industrial sector. Industrial sector growth as measured by the Index

of Industrial Production (IIP), registered a y-o-y decline of 0.1% during FY 2014.

As seen in the below chart, services sector registered maximum growth over the period FY 2010-

14, followed by the agriculture sector and industrial sector.

8.59%

8.91%

6.69%

4.47% 4.74%5.5%

5.28%

8.23%

2.88%

1.10%

-0.1%

2.7%

FY 2010 FY 2011 FY 2012 FY 2013 FY 2014 PE FY 2015F

Macro Economic Indicator

GDP Growth Rate IIP Growth Rate



Source: CMIE Outlook, RE is Revised Estimated, PE is Provisional Estimate

In FY 2014, services sectors contribution towards GDP stood at 60.1%, followed by industry

(26.1%) and agriculture (13.9%). Also, the share of services to economic output is increasing,

while that of agriculture and industry segment declined over the period FY 2012-13.

The annual growth rate of services sector, industry and agriculture sector stood at 7%, 0.35% and

4.17%, in FY 2014 as compared to 6.96% 0.96% and 1.42% respectively, registered in previous

fiscal.

6,6107,178 7,538 7,645 8,005

FY 2010 FY 2011 FY 2012 FY 2013 RE FY 2014 PE

Agriculture (INR Bn)

12,769

13,733

14,807 14,949 15,002

FY 2010 FY 2011 FY 2012 FY 2013 RE FY 2014 PE

Industry (INR Bn)

25,78228,274

30,13032,227

34,482

FY 2010 FY 2011 FY 2012 FY 2013 RE FY 2014 PE

Services (INR Bn)

4.91%4.11%

7.54%

6.19%

Agriculture Industry Services Over all GDP

CAGR (FY 2010-14)

GDP (Factor Cost, Constant 2004-05 Prices) by Economic Activity



Source: CMIE Outlook

From quarterly trend, growth in agriculture sector expanded from sharply to 6.3% on sequential Q-

o-Q basis in Q4 FY 2014, while service sector economic output slowed down to 6.4% in last

quarter of FY 2014 from 7.2% in previous sequential quarter. Industry segment continued to report

a decline in Q4 FY 2014 on yearly q-o-q basis on the back of contracting economic output from

mining and quarrying and manufacturing segment in all four quarters (excluding Q2:FY 2014).

D&B expects economic growth to recover in FY 2015, albeit at moderate rate and grow at about

5.5%. With formation of a new and stable government, economic growth is likely to get impetus

from improved policy environment, early implementation of long pending reforms and revival of

large stalled projects.

1.8% 1.8%

0.8%1.6%

4.0%

5.0%

3.7%

6.3%

0.3%-0.4%

1.7%2.1%

-0.4%

2.6%

-0.4% -0.2%

7.2%7.6%

6.9%6.3%

7.2%

6.3%7.2%

6.4%Q

1:

FY 2

01

3

Q2

: FY

20

13

Q3

: FY

20

13

Q4

: FY

20

13

Q1

: FY

20

14

Q2

: FY

20

14

Q3

: FY

20

14

Q4

: FY

20

14

Yearly Q-o-Q change in Sectoral GDP (%)

Agricuture Industry Services



Tradeoff between Growth & Inflation

Source: Office of the Economic Advisor; RBI

Monetary authorities kept the interest rate unchanged during April 2012-Dec 2012 as the

inflationary pressure continued to loom over the economy that impacted the fresh investments and

economic growth in FY 2013. In order to revive investment and push liquidity in the economy, RBI

reduced the repo rate thrice during Jan 2013 till May 2013 by 25 basis point each time. However,

with revival of inflationary pressure the repo rate was hiked by 25 bps thrice since September

2013. The latest hike of 25 bps in repo rate was made Jan 28, 2014. Rise in interest rates has

adversely impacted the overall GDP growth on the back of increasing project financing cost for

corporate and deterring the demand growth. India Inc. has been demanding a rate cut to spur

investment and promote growth as the monthly WPI index which measure inflation has shown

some decline trend since November 2013. However, RBI kept the policy rate unchanged in its

latest monetary policy review in August 5d 2014 against the industry expectation. Repo rate

currently stands at 8%.

CRR another monetary tool used by RBI to regulate money supply has been reduced four times

(each time by 25 basis point) since March 2012 in order to infuse the primary liquidity in banking

system and supports the GDP growth. With last 25 basis point cut on 29th Jan 2013, the CRR

currently stands at 4.0% and CRR too remained unchanged in latest policy review.



Currency Movement

After a prolonged period of depreciation, the US dollar stabilized against Indian rupee in the range

of INR 59 – 60. Since exports account for close to 50% of total market the changes in currency

has a profound impact in the sector. Revenue from exports surged during FY 2013 as rupee

reached record lows. However, after hitting ~INR 68 against a dollar Indian rupee has scaled back

to the range of INR 59 – 60, which has limited the export growth.

Source: Ministry of Finance, Govt of India

43.5

48.5

53.5

58.5

63.5

68.5

01

/Ap

r/10

01

/Ju

l/10

01

/Oct

/10

01

/Jan

/11

01

/Ap

r/11

01

/Ju

l/11

01

/Oct

/11

01

/Jan

/12

01

/Ap

r/12

01

/Ju

l/12

01

/Oct

/12

01

/Jan

/13

01

/Ap

r/13

01

/Ju

l/13

01

/Oct

/13

01

/Jan

/14

01

/Ap

r/14

01

/Ju

l/14

01

/Oct

/14

Exchange Rate (INR per USD)Inverse Scale

INR Depreciated Against USD

INR Appreciated against USD

Trend Reversal : INR

Gaining Strength Against USD



REGULATORY SCENARIO

Regulatory Framework

Indian liquor market is characterized by stringent regulations.Liquor is a State subject and hence

subject to laws in each state. Alcoholic beverages industry in India is regulated by the states and

not the centre. Intoxicating liquors are specifically covered by Entry 8 of the State List, and this

places all aspects including manufacture, possession, transport, purchase and sale of intoxicating

liquors within the sphere of the state only. Since alcoholic beverages are a state subject, each of

India’s 29 states and 6 union territories has their own rules & regulations and duties & taxes.This

means a company has to have seperate licenses and permissions to operate in each state.

Hence, there are very few players who have pan-India presence.

Independent Licenses are required to produce, bottle, store, distribute or retail all liquor products.

Licenses to produce and bottle are particularly scarce and contract manufacturing is a well-

established market entry strategy. The alcoholic beverages in India is generally sold through

specialty shops which requires proper license issued by the state governments. Super and hyper

markets in some states have started selling alcoholic drinks such as beer and wine

Government Regulations

Highly regulated regime results in a lengthy process to obtain a license for the manufacturing,

distribution, and sale of alcoholic beverages. Movement of liquor between various states in India

is subject to multiple tax laws and many regulations, making sales between states very difficult.

The distribution channel of the industry is also regulated by the state government.

Distribution: All outlets (wholesalers, retailers, bars /restaurants, bonded warehouse operators

etc.) have to be licensed.

Advertising: Direct advertising of alcohol and alcohol-related products is banned and considered

illegal. Companies, however, advertise using surrogate products (like glasses, mineral water,

music items, fashion articles etc.) having identical brand names.

Though India allows 100% FDI for distillation and brewing of potable alcohol through the

automatic route, not many investors have turned up due to restrictions and taxes at the State

level.



Role of State Government

In the states of Tamil Nadu, Kerala and Delhi, wholesale and retail liquor business is under

government control. In Andhra Pradesh, Orissa, Bihar, Chhattisgarh, Rajasthan, Uttarakhand,

Uttar Pradesh, Karnataka and Bihar, state governments control the wholesale business while

retail trade is taken up by private players. Maharashtra’s liquor business, both wholesale as well

as retail is in private hands.

Tamil Nadu State Marketing Corporation (TASMAC), a company owned by the Government of

Tamil Nadu, and Kerala State Beverages Corporation Ltd (BEVCO), a company owned by the

Government of Kerala controls wholesale and retail vending of alcohol in Tamil Nadu and Kerala

respectively. These companies are known as parastatal agencies. As per estimates, over 70% of

the Indian alcoholic beverage industry is in the hands of parastatal agencies either at the

wholesale or the retail levels or both.

The newly formed government of Andhra Pradesh is also contemplating to take over the retail

sale of IMFL to have only government owned shops.

Alcohol revenue for state governments

Alcoholic beverage industry is a major revenue source for the state governments. Every year

excise duty / sales tax on the product is increased leading to higher tax inflow. In June 2014, Delhi

Government increased excise duty on light and strong beer from 120% to 170% and on IMFL from

170% to 225%. This ultimately resulted in 30% hike in Beer prices and ~ 20% hike in IMFL.

Further, state governments are increasingly relying on alcohol revenue which funds roughly one-

fifth of their budgets. With the exception of Gujarat, Nagaland, Mizoram and Manipur, where

liquor is officially prohibited, alcohol revenue takes the second, third or fourth place in terms of

contributions to the States’ coffers. TASMAC’s revenue totalled INR 234 Bn while Bevco garnered

more than INR 80 Bn in FY 2014. Delhi government collected excise revenue of INR 32 Bn from

sale of IMFL, registering 10% Y-o-Y increase in FY 2014.



DEMAND – SUPPLY SCENARIO

Current Scenario

Indian Made Foreign Liquor

Indian Made Foreign Liquor (IMFL) account for one third of the total liquor consumption in India

and has been growing at a CAGR of more than 10% over the in the last decade. Within IMFL

segment brown spirits comprising whisky, brandy and dark rum account for 92% of the market, by

both volume and value while white spirits with gin and vodka having only 8% market share.

However the International trends are opposite to India where white spirits enjoys prominent

presence.

Production of IMFL reached 549 Mn liters in FY 2014 while consumption touched 538 Mn liters.

Overall production for IMFL segment is estimated to have witnessed a marginal growth of 2% on

an average during FY 2010-14. Apparent consumption also increased at a CAGR of 2% during

the same period. Since FY 2012 both production and consumption of IMFL has declined steadily.

Higher prices due to steady hike in sales tax has tempered demand to a certain extend forcing a

cut down in production.

Source: CMIE IAS



Beer

Beer which has been one of the fastest growing and prominent segment in the Indian alcohol

Industry witnessed decline in production as well as consumption after FY 2011. Consumption of

beer has fallen more sharply as compared to IMFL segments on account of price hikes enforced

by various state governments. Annual production and consumption of beer in India reached 960

Mn liters and 938 Mn liters respectively.

Source: CMIE IAS



Country Liquor

The production of country liquor has declined at a rate of 1% over the period FY 2010-14 as a

result of the ban imposed in southern states and increasing preferences towards other beverages.

Annual production of country liquor reached close to 154 Mn liters in FY 2014.

Source: CMIE IAS



Wine

Indian wine industry is still nascent when compared with global wine industry. However, the

domestic wine consumption is witnessing a robust growth as companies and wine boards in

Karnataka and Maharashtra are undertaking various measures to promote a wine drinking culture

in the country.

Despite decline in production and consumption trends across major alcohol beverage segments,

overall market size of the industry is estimated to have grown at a CAGR of 15% to reach INR

601Bn during FY 2014. The steady growth in revenue is accounted for by the periodical increase

in retail prices and by increasing alcohol consumption in the state. The growth is also driven by

product innovation and value added product segment by major companies in the industry.


345

426

520

572 601

FY 2010 FY 2011 FY 2012 FY 2013 FY 2014

Market Size of Indian Alcoholic Beverages Industry (INR Bn)



Demand Drivers

KEY DEMAND DRIVERS

Growth in

Existing

Consumer Base

In India alcohol consumption has been highest among men with male

population in the working group of 25 – 59 being the largest consumers.

India is in the midst of a demographic shift wherein the population (including

both male & female) in working age group of 25 – 59 is becoming the

largest segment. This would automatically increase the traditional consumer

base.

Increasing

Consumption

Consumption among women (primarily in cities) is on the rise, adding a new

class of consumers. Primary reason behind this trend is increasing personal

freedom enjoyed by women as a result of improved access to education



among Women and employment. Higher levels of personal freedom along with exposure to

lifestyle in advanced economies have changed the consumption patterns

among women.

Efforts to develop

wine culture

Wine boards in Karnataka and Maharashtra are undertaking various

measures to promote a wine drinking culture in the country. Wine

companies are also aggressively exploring options such as wine tours, wine

tasting festivals and increasing distribution network in order to generate and

develop wine drinking culture in India

Changing lifestyle

& higher

disposable

income

Indians are joining the work force sooner than in the past and together with

changing lifestyles, dismantling of social barriers to consumption of

alcoholic products and the change in mind sets – living for today compared

to the earlier generation which believed in saving for later years. Further

disposable income is witnessing an increase as growth in service sector

has created large number of jobs pushing the overall income higher.



Exports

Exports of beer have grown at a CAGR of 29% while that of IMFL increased at a rate of 28% over

the period FY 2010-14. Higher export growth in FY2014 has been beneficial for the sector on

account of higher export realizations due to steep rupee depreciation. UAE accounted for 20%

exports followed by Ghana with a share of 12% in FY 2014. The top five countries altogether

accounted for 55% of exports of alcoholic beverages.

Exports of Alcoholic Beverages

Source: Ministry of Commerce

706

847

1,3

11

1,7

39

1,9

25

4,1

98

5,1

11

7,1

67

8,9

49

11,3

60

FY 2010 FY 2011 FY 2012 FY 2013 FY 2014

Alcoholic Beverages - Exports (Rs Mn)

Beer IMFL

UAE 20%

Ghana 12%

Angola 10%

Singapore 7%

Nigeria 6%

Others 45%

Major Export Partners (FY 2014)



Imports

While domestic demand during FY 2010-14 remain muted, the demand for imported brands has

remained robust during most of the period. Imports of beer increased at a CAGR of 32% while

that of IMFL increased at a rate of 41% over the period FY 2010-14. For India, UK is the largest

import source of alcoholic beverages, accounting for ~43% of the country’s total import of

alcoholic beverages. The next four countries Nepal, USA, France, and Brazil together accounted

for ~37% share in alcoholic beverages imports to India.

Imports of Alcoholic Beverages

Source: Ministry of Commerce

UK 43%

Nepal 16%

USA 11%

France 6%

Brazil 4%

Others 20%

Major Import Partners (FY 2014)

93

15

0

17

7

23

7

28

0

3,9

88

6,0

85

9,4

93

12

,88

2

15

,77

9

FY 2010 FY 2011 FY 2012 FY 2013 FY 2014

Alcoholic Beverages - Imports (Rs Mn)

Beer IMFL



New Capacity Addition

The industry is capital intensive due to complex manufacturing process and the need to comply

the requisite sophistication and hygiene standards. In the fiscal year 2014, fourteen new projects

entailing investment worth INR 12 Bn were announced. Though announcement of new

investments declined from FY 2010 to FY 2012, it picked up again in FY 2013 and FY 14

exhibiting confidence in the growth prospects of the industry. Thirty projects worth INR 22 Bn

were under implementation in FY 2014.

INVESTMENT TREND IN ALCOHOLIC BEVERAGES SECTOR

Source: CMIE Industry Outlook

18.5 7.9 4.3 8.9 12.3

12

9

6

10

14

0

4

8

12

16

0.0

5.0

10.0

15.0

20.0

FY 2010 FY 2011 FY 2012 FY 2013 FY 2014

Projects Announced in the Sector

Investment Value (INR Bn) No of Projects

30.1 34.5 17.4 19.8 22.5

33 32

27 27

30

0

7

14

21

28

35

0.0

10.0

20.0

30.0

40.0

FY 2010 FY 2011 FY 2012 FY 2013 FY 2014

Projects under Implementation

Investment Value (INR Bn) No of Projects



Future Growth Prospect

Indian alcoholic beverages industry is well poised to capitalise on the opportunity offered by the

low per capita consumption of alcohol coupled with other key demand drivers such as a young

demographic population. While volume trends in alcohol are expected to remain muted, the

growth in market is largely expected to be driven by improved value proposition and focus on

premium brands by major players. D&B expects the Indian alcohol beverage market to grow by

8% during FY 2014-17 to cross INR 750 Bn in FY 2017.


601 631

682

750

FY 2014 FY 2015 FY 2016 FY 2017

Projected Market Size of Indian Alcoholic Beverages Industry (INR Bn)



Key Risks to Growth

High Working Capital Requirement

The industry is plagued by high working capital requirement. Economies of scale are limited as all

states have to be treated as different markets. Local sourcing and manufacturing requirements

make it an inventory heavy business model and improvement in working capital is an ambitious

target, which in addition is subject to the whims of the state governments as well as the varying

financial requirements of vendors.

Prohibition Drive

Governments have started recognizing health hazards related to alcohol consumption. This is

evident from Kerala government’s decision to achieve 100% prohibition over the next 10 years.

The government is even ready to lose annual INR 80 Bn in revenues from the alcohol beverages

as it is confident that the loss to society in terms of health ruin and manpower loss is much higher

than the revenue loss. This decision if implemented with rigor will result in huge loss for the

industry as Kerala ranks amongst the top alcohol consuming states. Prohibition drives, if

implemented by others states could be disastrous for the industry.

Increasing Prices

Alcohol is one of the key revenue earners for large number of state government. Although alcohol

consumption has moderated in the past year, it was growing strong in prior years. Sustain

demand increase has led government to increase sales tax and other related duties.

Manufacturers have opted to pass on this price hike to consumers leading to increase in prices.



COMPETITIVE SCENARIO

Nature of Industry

The alcoholic beverages industry is fairly organised with limited number of players on account of

heavy initial investment involved in form of obtaining license and other excise duty and taxes,

however industry faces high competition amongst different brands. Region wise, the four Southern

States of Andhra, Karnataka, Tamil Nadu and Kerala represent more than half of the IMFL & Beer

consumption.

Competitive landscape

United Spirits Ltd (USL) is the leading player in IMFL segment while United Breweries Ltd (UBL)

leads the beer segment. USL accounts for 14% of the overall alcoholic beverages market while

UBL corners 7% of the market. In wine segment, Sula Vineyards, Grovers Vineyards are leading

players.Global majors such as Belgium based Anheuser-Busch InBev, Netherland based

Heineken, UK based SABMiller Plc and Diageo plc, Denmark based Carlsberg etc also have

presence in India.

Key Players in The Sector

Product

Segment

Key Players Leading Brands

IMFL

United Spirits Ltd, Radico

Khaitan Ltd, Pernod Ricard,

Diageo, Mount Shivalik

Breweries Ltd., Globus Spirits

Ltd. Tilaknagar Industries Ltd,

McDowell’s, VSOP

Antiquity Blue, Bagpiper Whisky, Royal

Challenge, Signature Mcdowells No.1

Celebration

Romanov,Vladivar, White mischief, Country

Club, Aristocrate (AC), White House,

Mansion House

Castle Club etc

Country Liquor G M Breweries Ltd, Mount G.M. Santra, G.M. Doctor, G.M. Limbu



Shivalik Breweries Ltd.,

Rangar Breweries Ltd. Lords

Distillery Ltd.

Pani, G.M Dilbahar Saunf

Wine

Indage Vintners Ltd., Grover

Vineyards Ltd., Four Seasons

Wines Ltd. (a United Breweries

Ltd. company)

La Reserve, Chateau Indage, Grover, Sula,

Heritage Port, Vinsura Wines, Nine hills,

Chateau d’Ori

Beer

United Breweries Ltd., Skol Old

Monk Super Strong Breweries

Ltd., Hindustan Breweries &

Bottling Ltd., Lilasons

Industries Ltd., Blossom

Industries Ltd, Mohan Meakin

Ltd. Mount Shivalik

Breweries Ltd, Superior

Industries Ltd.

Kingfisher Blue, Kingfisher Premium,

Kingfisher Ultra, Kingfisher Red, London

Pilsner, Heineken, Golden Eagle

Lager

Golden Eagle Deluxe Premium,

Lager, Gold Lager Beer (Herbal Beer)

Golden Eagle Super Strong Beer

Gymkhana Premium Lager


Inorganic growth through M&A’s and strategic alliances seems to be characteristic of the industry,

with large players acquiring smaller ones to increase their market share, distribution reach, brands

and expand the existing product portfolio. The industry is also witnessing gradual consolidation

across segments with foreign players trying to enter the Indian alcohol beverage market. Key

deals that has happened in the industry include:

World's largest spirits maker Diageo has acquired ~54.8% stake in USL with the help of

an open offer for 26% shares of USL in 2014. Heineken also holds 39% stake in United

Breweries.

Several PE firms are also expressing interest in investing in companies such as Allied

Blenders and Distillers Pvt. Ltd (ABD) and Radico Khaitan Ltd.



Tilaknagar Industries acquired liquor business of IFB Agro Industries Ltd for an

undisclosed amount in March 2014. The company also plans to acquire Tamil Nadu

based IMFL maker Imperial Spirits. Tilaknagar Industries Ltd, owns the Indian rights to

manufacture and sell the popular Mansion House brandy brand, a product equally owned

by ABD and Dutch liquor maker Herman Jansen. ABD is also targeting to acquire stake in

Tilaknagar Industries.

Financial Performance of Major Companies in the Segment

Company Sales % Change over previous

fiscal

Operating Profit & % Change

over previous fiscal

United Spirits INR 84.4 Bn ( 3.0%) INR 11.4 Bn ( 7.6%)

United Breweries INR 41.5 Bn ( 8.5%) INR 6.2 Bn ( 13.1%)

Radico Khaitan INR 13.9 Bn ( 13.3%) INR 2.7 Bn ( 19.3%)

Jagatjit Industries INR 8.9 Bn ( 3.8%) INR 0.1 Bn ( 88.5%)

Tilaknagar Industries INR 5.9 Bn ( 7.4%) INR 1.5 Bn ( 1.0%)

Source: CMIE Prowess

Key trends in Indian Liquor Industry

Currently, though the molasses based IMFL/spirits production account for 90% of the total IMFL

production, the IMFL production through grain based is gaining momentum. Going forward the

share of grain based ENA is going to increase due following reasons:

To meet the international standard: Grain-based spirits are considered superior in

quality as these posses less sulphur content in comparison to molasses-based spirit

which is harmful for human brain. Most of the developed nations use grain based ENA in



preparation of portable alcoholic beverages whereas as molasses based ENA are used in

manufacturing of industrial alcohol. Use of grain based spirit is expected to spurt in order

to meet the international standard of IMFL manufacturing.

Unpredictable Molasses Prices: Sugarcane is a high water consumption crop and

drought conditions in a high sugarcane producing state like Maharashtra reduces the

availability of molasses for the alcoholic beverages industry, leading to some serious cost

increases. Due to erratic nature of molasses, most of the distilleries are looking forward to

grain based spirit as alternative to hedge against the erratic molasses prices which in turn

depend upon sugar prices.

High Prices of ENA: Extra Neutral Alcohol (ENA) or Ethanol, a key raw material for spirit

manufacturing production follows a similar a cyclical pattern shown by molasses

production which in turn follows a sugarcane cycle. Past few years have consistently

witnessed rise in the prices of this key ingredient as a result of a step-up in the Ethanol

Blending Program for petrol and an unfairly remunerative price fixed by the Govt. for this

purpose. This has taken the prices of ENA for the alcoholic beverage industry to a

significantly higher level, thereby putting pressure on margins.



FINANCIAL PERFORMANCE

Sales Growth

Sales growth of the companies in sample set declined from FY 2011 to 13 and increased again

FY 2014. Decline in sales growth is attributable to muted growth of the industry over the period.

One of the major constituent of the sample set, United Breweries Ltd had amalgamated three

companies Associated Breweries & Distilleries Limited (ABDL), Millennium Alcobev Private

Limited (MAPL), and Empee Breweries Limited (EBL) with itself in FY 2011. This led to sudden

jump of 56 % in sales growth in FY 2011 for the company and 37% for the sample set. Excluding

the effect of amalgamation, like for like sales growth has been lower than the existing one for FY

2011.

Source: CMIE Prowess, D&B Research, Sample – 11 Companies

37%

19%

5%7%

0%

5%

10%

15%

20%

25%

30%

35%

40%

FY 2011 FY 2012 FY 2013 FY 2014

Y-o-Y Change in Revenue



Operating Cost

Operating Cost Margins

Year Raw Material Power & Fuel Salary & Wage SGA

Expenses

Interest

Expense

FY 2010 26.7% 3.5% 5.0% 19.1% 3.9%

FY 2011 24.7% 4.1% 4.8% 20.8% 3.0%

FY 2012 25.9% 4.4% 4.9% 19.5% 3.7%

FY 2013 25.4% 4.5% 5.4% 19.8% 3.5%

FY 2014 25.7% 3.5% 5.6% 20.6% 3.6%


Raw material accounts for the highest share of costs followed by SGA expenses. ENA produced

from molasses and other grains is the key input used in the IMFL industry, barley for beer and

grapes for wine. Prices of these items remained higher during the period.

SGA expenses accounting for the second largest share in cost structure. Companies face a ban

on advertising alcoholic products including beer in India. Hence, as a surrogate, the companies

brand their products under disguise of mineral water, soda, music CDs etc and advertise them.

Such indirect advertising has been proved costly for the industry. Companies also have to invest

substantial resources in selling and distribution, packaging and transport.

Salary & Wage expenses have also increased over the period on account of inflationary pressure

and moderating sales growth. Interest costs have varied within a comfortable range of 1% over

the period under consideration.



Profitability

Profitability margin in the sample declined due to a mix of moderate sales growth and increase in

raw material, SGA, as well as interest expenses. Companies in the sample set Globus Spirits,

Jagatjit Industries, Pioneer Distilleries and Tilaknagar Industries have registered decline in

profitability. However profitability of major companies such as United Breweries and Radico

Khaitan have remained at same level or increased in the last four years.

PROFITABILITY MARGINS


15.4%

14.9% 14.9%

14.3% 14.3%

FY 2010 FY 2011 FY 2012 FY 2013 FY 2014

Operating Profit Margin

5.2%5.3%

4.3% 4.4%

4.0%

FY 2010 FY 2011 FY 2012 FY 2013 FY 2014

Net Profit Margin



Ratio Analysis

Debt Equity & Interest Coverage Ratio

Debt of the companies in the sample set increased at a CAGR of 13.3% while net worth increased

at a CAGR of 12.6% over the period FY 2010-14. As increase in networth was higher than that in

debt in initial years, it led to decline of debt-equity ratio till FY 2012. After that increase in debts of

major constituents, United Breweries and Tilaknagar Industries led to increase in debt equity ratio.

Interest coverage ratio increased in FY 2011 due to 33% increase in profits as compared to 7%

increase in interest expenses. The ratio declined again in FY 2012 due to 45% increase in interest

expenses as compared to 19% increase in profits.


0.93

0.85

0.83

0.95 0.96

0.73

0.78

0.83

0.88

0.93

0.98

FY 2010 FY 2011 FY 2012 FY 2013 FY 2014

Debt-Equity Ratio

3.95

4.89

4.04 4.08 3.97

0.00

1.00

2.00

3.00

4.00

5.00

6.00

FY 2010 FY 2011 FY 2012 FY 2013 FY 2014

Interest Coverage Ratio



Other Key Ratios

Sample: 11 Companies (Source: CMIE Prowess)

Time Period: FY 2012,13 and 14

Ratios Average Value

Gross Margin 64.9%

Net Margin 4.2%

Current Ratio 1.79

Quick Ratio 1.20

Account Receivables Days 80

Inventory Days 57

Account Payable Days 41

RONW 9.5%

ROA 12.2%

ROCE 17.0%

Long Debt-Equity 0.92

Net worth to Total Liabilities 37.4%

Interest Coverage Ratio 4.03

Fixed Asset Turnover 2.22

Asset Turnover 0.84

WC Turnover Ratio 7.32

Inventory Turnover 7.43

Fixed Assets to Net worth 1.01

Sales to Capital Employed 1.17



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