A Detailed report on Indian Liquor Industry

Industry Overview:
The Indian liquor industry is divided into two broad segments: Indian Made Foreign Liquor (IMFL) and countrymade liquor. IMFL comprises alcoholic beverages that were developed abroad but are being made in India (whisky, rum, vodka, beer, gin and wine), while country-made liquor comprises alcoholic beverages made by local breweries. While many Indian and MNC players were present in the IMFL segment, the unorganized sector accounted for almost 100% of the country-made liquor segment. Indian Liquor Industry with estimated market value of INR 340 bn is growing at 1215% over the last two years. The Indian IMFL market is dominated by low-priced whisky. The whisky segment constitutes almost 60% of the total IMFL market. 17% & 18% is brandy and Rum and the rest 5% is white spirits. Per capita beer consumption in India is 0.5 litres. The sector is expected to maintain its CAGR of ~15% while the premium segment Wine and Vodka is expected to grow at a higher rate. With consolidation and foreign acquisitions gaining steam the sector is about to witness next phase with realization rising in line with that of their foreign counterparts. There are 325 distilleries in India, with an installed capacity of about 3.58 billion litres of liquor. However, production rate is about 40% of total licensed capacity as total requirement of liquor stands at 1.3 billion liters. Exhibit 1

* Indian Made Foreign Liquor (IMFL) Liquor: Market Market: 58 million cases. Past growth: 15% CAGR per annum. Brown Spirits particularly whisky, rum & brandy account for over 75% of this market. South & North share 60% of the market. Major brands (manufacturers): Signature, Blue Riband (UB Group), Aristocrat (Jagatjit Industries), Smirnoff, Gilbeys Green Label, Malibu, Archers Peach Schnapps (International Distilleries India), Passport (Seagrams), VAT 69, Black & White, Black Dog (United Distilleries India).

Market Characteristics

Preference for brown spirits (molasses flavor) in Indian market Liquor packed in 180, 375, 500, 750 and 1000 ML bottles - glass and plastic bottles. 180 ML and 750 ML are fast moving Guala caps on bottles to prevent bootlegging Brand building very important Yet avenues limited - advertising of liquor banned in most media Promotions, sponsorships, surrogate advertising (sometimes) done to build brands Open market : Maharashtra, J&K, Goa, Orissa Auction market : Uttar Pradesh, Rajasthan, Madhya Pradesh, Bihar, Punjab, Chandigarh Government Controlled : Tamilnadu, Karnataka, Delhi, Kerala Prohibition States : Gujarat, Manipur, Mizoram, Nagaland There are over 22000 liquor retail outlets spread across the country Movement of IMFL products regulated across states Entire process of manufacturing to distribution and sales attracts taxes a plenty. Sales tax (ad valorem), Bottling Fee, Litre Fee, Vend Fee, Gallonage Fee, Privilege Fee, Import/ export Pass duty etc.are some of them. In Karnataka some of the taxes levied are : Excise Duty : Liquor from spirits - Rs. 45/- bulk litre; Premium Malt Whisky - Rs. 60/- bulk/ litre; Litre Fee - Rs. 20/- bulk litre; Sales tax : 60%; cess 5% Import duty on whisky, rum, gin & vodka, liqueur - 230 % + SAD : 4 %

Trade

Regulations

Duties & Taxes

Liquor Industry Segmentation:

Exhibit 2

Category Whisky Brandy Rum White Spirits Total

Cases in Mn 103.5 35.5 34.1 9.1 182.2

% contribution 57% 19% 19% 5% 100%

Growth 8% 4% 1% 45%

Figure 1 Exhibit 3

Players McDowell - UB Shaw Wallace - UB Herbetson - UB Radico Khaitan Mohan Meakins Jagatjit Industries Others Total

Million Cases 38 16 4 10 7 1 14 90
Exhibit 4

Market Share 42.20% 17.80% 4.40% 11.10% 7.80% 1.10% 15.60% 100%

Comparative Analysis of Distilleries & Breweries (Listed Companies)

FY2010 (Fig. in crores) Net sales EBIDTA PBT PAT Equity Networth Total Debt EPS BVPS EBIDTA Margin PAT Margin RoCE RoNW D/E Breweries: United Radico Spirits Khaitan 4,928.9 821.0 891.9 137.3 543.7 49.9 376.0 41.5 125.6 26.4 4,785.8 585.9 3,516.1 446.1 32.5 4.0 381.1 44.2 18.1% 7.6% 11.8% 7.9% 0.69 16.7% 5.1% 12.7% 7.1% 1.42 Jagatjit Tilaknagar Inds. Inds. 679.9 351.7 46.9 79.7 4.6 50.0 6.5 33.1 46.2 32.3 176.5 130.2 157.6 446.2 1.5 16.3 38.2 40.3 6.9% 1.0% 7.4% 3.7% 0.66 22.6% 9.4% 18.9% 25.4% 2.87 Som Distilleries 104.8 12.6 10.3 8.4 27.5 57.4 27.2 4.6 20.9 12.1% 8.0% 13.7% 14.5% 0.59 Empee Distill. 822.3 42.4 26.2 17.1 19.0 239.0 87.8 9.0 125.7 5.2% 2.1% 11.7% 7.1% 0.32 GM Breweries 219.6 15.8 10.2 6.7 9.4 56.3 18.5 7.1 60.1 7.2% 3.0% 17.3% 11.8% 0.31 United Breweries 1,997.5 294.9 151.1 97.0 24.0 912.9 671.3 3.7 38.0 14.8% 4.9% 11.7% 10.6% 0.57 Globus Spirits 265.0 51.7 45.9 28.9 19.8 161.4 13.7 17.7 81.7 19.5% 10.9% 37.5% 17.9% 0.14

70 million cases market. Market growing at 10-12 % per annum. South and west zones account for bulk (> 75 %) of this market. Major beer consuming centres - Maharashtra (Mumbai), Karnataka (Bangalore); Tamilnadu (Chennai). Major Beer Brands (Manufacturers): King Fisher, Kalyani Black label (UB Group), Golden Eagle (Mohan Meakins), Haywards (Shaw Wallace), London Pilsner (Associated Breweries & Distilleries). Foreign Brands: Strohs, Fosters

Key Drivers for the growth of Liquor consumption in India

Economic expansion and increasing urbanization is driving the emergence of a larger middle class that increasingly appreciates premium goods and services, including high end spirits and is willing to pay for it. Income Distribution (Million Households)

Figure 2

Income growth India is one of the fastest growing economies in the world with GDP growth of 7.4% in FY10. Per capita income has increased from US$450 in FY01 to US$1030 in FY10. Growth in per capita income to drive discretionary income growth at much higher pace than the GDP growth, boosting demand for lifestyle products including alcoholic beverages. Rural economy is likely to see big upsurge in income levels due to various govt. initiatives. Young Demographics More than 60% of Indias population is in the age group of 15-45. Nearly 485mn people are in the drinking age Another 150mn are likely to be added to this target population in the next 5 years. Following these favorable demographics, demand for alcoholic beverages is set to rise. The outlook for the industry continues to be buoyant fueled by the large and growing number of youth coming into the legal drinking age category. While countries like the USA & China are well past the `demographic' window, India is comparatively a `young' country with over half the 1.2 billion population under 25 years of age. This offers considerable potential for buoyant growth in the future. The prohibition of country liquor will only boost growth in other sectors, notably IMFL.
Source: Mckinsey Report

Top 5 Breweries & Distilleries:

UNITED SPIRITS
Equity (Latest) (Rs cr): 130.79 Face Value (Rs): 10 No. of Shares Outstanding/Free Float (in crore): 125.59/19.86 Reserves and Surpluses (FY2010) (Rs cr): 4660.2 Total Debt (FY2010) (Rs cr): 3516.1 Cash in Hand (FY2010) (Rs cr): 246.5 MCap (as on 28/01/2011) (Rs cr): 16080.0 52 Week High / Low: 1683.80 / 1057.65

Brief About the Company: United Spirits Limited (USL) is the largest spirits company in India and second largest spirit company in the world. Besides Whyte & Mackay and Bouvet Ladubay being 100% subsidiaries of USL, the company has 20 millionaire brands (selling more than a million cases a year) in its portfolio and enjoys a strong 59% market share for its first line brands in India. The company operates primarily in the IMFL space. Some of its popular brands are: Mc Dowells No.1, Bagpiper, Signature, Black Dog, Royal Challenge, Romanov, Alcazar, Blue Riband, White Mischief and Directors Special. Key Investment Positives: United Spirits has come within close proximity to being the worlds largest distiller. Increased awareness through exposure gained from the media as also from global travel coupled with increased consumer spending has pushed up the sales at the premium end of the market. The Company is also focusing its branded spirits activity on select geographies including travel retail as against an earlier strategy that attempted a presence in every market. Key Investment Concerns: The Company has witnessed double digits growth in the 1st line range of products. This trend is expected to continue. There is a clear visibility, though slow process of deregulation taking place and over time it is expected that these will result in increased retail penetration as also elimination of several infructuous regulations that add to the costs of doing business. The industry suffers from a twin impact of over regulation and excessive taxation. Valuations: Net profit of United Spirits rose 7.2% on a YoY basis for the quarter ended Sept.2010 and sales increased by 25.4%. At current CMP, the stock trades at 39.4x FY11E, 19x FY11 EV/EBIDTA and 31.2x FY11 EPS.

FY11A Net Sales EBIDTA PBT PAT EPS (Rs) BVPS (Rs) 5634.4 1019.8 591.2 391.4 31.2 -

9MFY11 -

H1FY11 2817.2 509.9 295.6 195.7 15.6 -

FY10 4928.9 891.9 543.7 376.0 32.5 381.1

FY09 4089.5 691.1 459.2 296.7 27.5 306.6

FY11A D/E P/E P/BVPS EV/EBID TA 39.4 19.0

9MFY11 -

H1FY11 78.8 37.9

FY10 0.7 37.8 3.2 21.7

FY09 0.6 44.7 4.0 28.0

Margins EBIDTA PAT Ratios RoNW RoCE

FY11A 18.1% 6.9%

9MFY11 % %

H1FY11 18.1% 6.9%

FY10 18.1% 7.6%

FY09 16.9 7.3%

% %

% %

% %

8.3% 11.8%

11.7% 16.1%

RADICO KHAITAN

Equity (Latest) (Rs cr): 26.50 Face Value (Rs): 2 No. of Shares Outstanding / Free Float (in crores): 13.25/2.3 Reserves and Surpluses (FY2010) (Rs cr): 566.2 Total Debt (FY2010) (Rs cr): 446.1 Cash in Hand (FY2010) (Rs cr): 33.2 MCap (as on 28/01/2011) (Rs cr): 1789.4 52 Week High / Low: 185.95 / 108.60

FY11A Net Sales EBIDTA PBT PAT EPS (Rs) BVPS (Rs) 964.9

9MFY11 723.7

H1FY11 455.6

FY10 821.0

FY09 678.8

153.6 99.2 73.9 5.6 -

115.2 74.4 55.4 4.2 -

72.6 46.9 34.9 2.6 -

137.3 49.9 41.5 4.0 44.2

80.6 12.4 6.5 0.6 21.6

FY11A D/E P/E P/BVPS EV/EBI DTA 26.0 15.2

9MFY11 -

H1FY11 51.9 30.3

FY10 1.4 33.8 3.1 16.0

FY09 2.7 225.1 6.3 27.3

Brief About the Company: Radico Khaitan is one of India's oldest and largest liquor manufacturers. Formerly known as Rampur Distillery which was established in 1943. It was only in 1999, that Radico decided to launch and market its own brands, Brief embarking on a period Empee Distilleries Ltd. therebyAbout the Company:of phenomenal growth. To started over its production capacity of bottled Chennai, for further boost two decades ago in a small way inand branded products, the company has tied up with bottling manufacturing Indian Made Foreign Liquor, has now units in various parts of the country. Radico Khaitan spans expanded substantially with state-of-art manufacturing in the areas ofonly in Tamil Nadu but also in Kerala, facilities not whisky, rum, brandy, vodka and gin under the brands include 8PM Royale, 8PM Bermuda XXX, Karnataka and Andhra Pradesh. The company has entered Contessa, Old Admiral VSOP, Black Cat and Whitefield. into the Beverages and Distillery Industry in the year The Company's plants are located at Uttar Pradesh, 1984 by starting manufacture of IMFL products Haryana. Rajasthan Andhra Pradesh, Uttaranchal and by means of setting up first distillery unit at Mevaloorkuppam, Tamil Nadu with an installed capacity of 2000 cases/day with Key Investment Positives: Radico Khaitan continues to initial production running off on 2 semi expects to see focus on its premiumization strategy and auto lines. Thea company has growth in its mainline brands going strong volume launched its products in the brand name of Marcopolo and Victoria (Marcopolo in 4 flavours of forward. This growth is expected to be driven by ongoing Brandy, Rum, Whisky and Gin & brand, market share momentum in the repackaged 8PMVictoria in 2 flavours of Rum and Brandy). These were brandy segments. gains in the vodka and premiumimmediately followed by Golden Bell Brandy, McLene Brandy, etc. Key Investment Concerns: Key Investment Positives: Valuations: Net profit of Radico Khaitan rose 77.78% to Key Investment Concerns: Rs. 20.48 crore in the quarter ended December 2010 as against Rs. 11.52 crore during the previous quarter ended Valuations: At current CMP, the to Rs. 268.09 crore in December 2009. Sales rose 17.09% stock is trading at 6.8x FY11E, 17x FY11 EPS and 6 x FY11 EV/EBIDTA. the quarter ended December 2010 as against Rs. 228.97 crore during the previous quarter ended December 2009. The stock is currently trading at 26 x its FY11E, 5.6 x FY11 EPS.

Margins EBIDTA PAT

FY11A 15.9% 7.7%

9MFY11 % %

H1FY11 15.9% 7.7%

FY10 16.7% 5.1%

FY09 11.9% 1.0%

Equity (Latest) (Rs cr): 19.0 Face Value (Rs): 10

% %

Ratios

RoNW RoCE

% %

% %

10.3% 12.7%

4.0% 8.5%

No. of Shares Outstanding / Free Float (in crores): 19.0/5.25 Reserves and Surpluses (FY2010) (Rs cr): 236.9 Total Debt (FY2010) (Rs cr): 87.8 Cash in Hand (FY2010) (Rs cr): 2.3 MCap (as on 28/01/2011) (Rs cr): 218.02 52 Week High / Low: 178.00/104.30

EMPEE DISTILLERIES

FY11A Net Sales EBIDTA PBT PAT EPS (Rs) BVPS (Rs) 806.6

9MFY11 -

H1FY11 403.3

FY10 822.3

FY09 661.9

50.8 30.8 20.6 17.0 -

25.4 15.4 10.3 8.5 -

42.4 26.2 17.1 9.0 125.7

25.7 14.6 10.1 5.0 123.8

FY11A D/E P/E P/BVPS EV/EBI DTA 6.8 6.0

9MFY11 -

H1FY11 13.5 -

FY10 0.3 12.8 0.9 7.2

FY09 0.2 23.0 0.9 11.8

Margins EBIDTA PAT Ratios RoNW RoCE

FY11A 6.3% 2.5%

9MFY11 % %

H1FY11 6.3% 2.5%

FY10 5.2% 2.1%

FY09 3.9% 1.5%

% %

% %

% %

7.2% 11.7%

5.7% 9.9%

UNITED BREWERIES

Equity (Latest) (Rs cr): 24.0 Face Value (Rs): 1 No. of Shares Outstanding / Free Float (in crores): 24.0/2.1 Reserves and Surpluses (FY2010) (Rs cr): 888.9 Total Debt (FY2010) (Rs cr): 671.3 Cash in Hand (FY2010) (Rs cr): 83.3 MCap (as on 28/01/2011) (Rs cr): 10551.6 52 Week High / Low: 536.00/144.00

FY11A Net Sales EBIDTA PBT PAT EPS (Rs) BVPS (Rs) 2685.0

9MFY11 -

H1FY11 1342.5

FY10 1997.5

FY09 1698.3

445.8 297.2 196.2 7.8 -

222.9 148.6 98.1 3.9 -

294.9 151.1 97.0 3.7 38.0

267.5 101.7 62.5 2.2 34.8

FY11A D/E P/E P/BVPS EV/EBI DTA 56.4 25.0

9MFY11 -

H1FY11 112.7 50.0

FY10 0.6 118.8 11.6 37.8

FY09 0.7 199.8 12.6 41.6

Brief About the Company: United Breweries (UNITEDBREW), incorporated on May 13, 1999, is engaged in manufacture, purchase and sale of beer including licensing of brands which constitutes a single business segment. Earlier known as UB Beer, it got its present name Brief 7, 2002. The company Globus Spirits is amongst on Aug.About the Company:forms the beer division of the UB group, a diverse company with business in North in the leading players in the Alcohol industry interests India. beverage alcohol, engaged in the business of manufacture, The company is aviation, fertilizers, international trading and infrastructure. The company offers leading brands such marketing and sale of Industrial Alcohol comprising as Kingfisher, UB Export, London Pilsner, Premium Ice and Rectified Spirit and Extra-Neutral Alcohol, Country Liquor, Kalyani Black Label. While Kingfisher Strong has emerged and Indian Made Foreign Liquor variants such as as Indias most popular beer, other(IMFL). The company has two distilleries, a super premium product, and the being Kingfisher Ultra, one at Alwar in Rajasthan are also other at Panipat in Haryana. The Company has enthusiastically received by the market. a brand portfolio of their own in the country liquor segment, such as Rana, Key InvestmentGhoomar, Samalkha No an Samalkha ki Rajasthan No 1, Positives: UBL boasts 1, impressive spread ofand in IMFL segment, such as White Lace Gin, Saunfi; own and contract manufacturing facilities throughout the Country. Quality Management Systems laid White Lace Vodka, Samurai Gold Extra Rich Blend out along the lines of ISO 9000 are strictly adhered to, Whisky, Samurai Premium Whisky, 20-20 Premium controlling quality at every stage of Hannibal Legendry Rum. Whisky, GR 8 Times Whisky and production, from raw materials tocater to the Indian brands in the IMFL segment, They also the end product of the company. United Breweries has for the 1st time exceeded 50%Officer'sshare in such as Officer's Choice Prestige Whisky, market Choice the highly competitive brewing space. 1 Brandy and Officer's Classic Whisky, Officer's Choice No Choice XXX Rum. Key Investment Concerns: Key Investment Positives: GSL has a unique business Valuations: At the CMP of Rs.454.15, the four segments. model in the sector which straddles across stock is trading atIt has establishedEPSidentitycompany for the earnings for 74.94x FY11E. its of the in the IMFL segment with steady growth and production of of EV/EBDITA, the stock FY11E is seen at 7.8. On the basis high quality liquor. GSL has revised for FY11E. trades at 25x its planned capacity increase from the earlier 48.6 million litres to 70 million litres at a minimal incremental cost of only Rs.5 crores. Key Investment Concerns: Cost of raw materials rising. Increase in competition from other players. Seasonality of the monsoons. Labour Shortage. Valuations: At the current CMP of Rs.151,the stock is trading at 11.1x FY11E, 13.6x FY11EPS and 6.8x FY11 EV/EBIDTA. Net profit of Globus Spirits rose 20.7% in the quarter ended Sept. 2010 as against the previous quarter ended Sept. 2009. Sales rose 26.8% in the quarter ended Sept. 2010 as against the quarter ended Sept. 2009.

Margins EBIDTA

FY11A 16.6%

9MFY11 %

H1FY11 16.6% 7.3%

FY10 14.8% 4.9%

FY09 15.8% 3.7%

Equity (Latest) (Rs cr): 19.76 PAT 7.3% % Face Ratios Value (Rs): 10

No. / RoNWof Shares Outstanding% Free Float (in crores): 19.76/4.5 % % 10.3% 9.2% Reserves and Surpluses (FY2010) (Rs cr): 141.6 RoCE % % % 11.7% Total Debt (FY2010) (Rs cr): 13.7 Cash in Hand (FY2010) (Rs cr): 20.4 MCap (as on dd/mm/2011) (Rs cr): 298.4 52 Week High / Low: 197.40/85.20
13.5%

GLOBUS SPIRITS

FY11A Net Sales EBIDTA PBT PAT EPS (Rs) BVPS (Rs) 292.8

9MFY11 -

H1FY11 146.4

FY10 265.0

FY09 197.8

43.0 36.0 27.0 13.6 -

21.5 18.0 13.5 6.8 -

51.7 45.9 28.9 17.7 81.7

28.6 19.9 12.9 10.6 48.8

FY11A D/E P/E P/BVPS EV/EBI DTA 11.1 6.8

9MFY11 -

H1FY11 22.2 -

FY10 0.1 8.5 1.8 5.6

FY09 0.3 14.2 3.1 10.2

Margins EBIDTA PAT Ratios RoNW RoCE

FY11A % %

9MFY11 % %

H1FY11 14.7% 9.2%

FY10 19.5% 10.9%

FY09 14.5% 6.5%

% %

% %

% %

26.2% 37.5%

24.3% 33.0%