Shaw Wallace Acquisition Was a Milestone

In e-mail interview to Forbes India, P.A. Murali, Joint President & CFO, United Spirits (USL), says that none of the company’s competitors has the kind of pan India footprint that USL brands command

By Prince Mathews Thomas
Published: Oct 17, 2011
P.A. Murali, Joint President & CFO, United Spirits (USL)
P.A. Murali, Joint President & CFO, United Spirits (USL)

USL is today the world’s largest spirits company in volumes. What have been the important milestones and decisions that has helped the firm scale this peak?
Our unerring understanding of the complex landscape of the alcobev industry, the emerging trend of the Indian consumers and the vision about the synergies that can be brought to the table by acquiring a fierce competitor are the hallmarks of this journey to global leadership.
In my opinion, our decision to offer top dollar for the acquisition of Shaw Wallace & Company, in 2005, amidst lot of skepticism in the minds of the investors and analysts’ fraternity, was an indelible milestone in our path to achieving not only the increased profitability, but also global leadership by volume.
The Indian liquor market presents significant challenges what with varying state policies, different tax structures and competition in the market. USL has managed to overcome these difficulties. What to your mind has been the key to this success?
Competition especially from multinationals is not new to the Indian alcoholic beverage sector. They have been present in this country for more than 15 years now and have failed to make an impact or counter the scorching growth of USL.
Following are the keys to our success:

  • Having brands which straddle all segments, all flavours and all price points across the spectrum. These are brands which are leaders in their own category. There are ‘21 Millionaire Brands’ in our portfolio which is unparalleled in this industry across the globe. This ensures that we are best placed to retain our consumers (and consequently market shares) when they move across price and flavour segments. None of the competitors have this strength and width in their portfolio.
  • Pan India footprint in manufacturing capacity which ensures more than 90 percent captive consumption.
  • There are very high penetration levels in the front-end wherein 98 percent of points of sale in this country have USL’s products in its shelves.
  • Five out of the top 10 fastest growing brands worldwide comes out of USL’s stable.
Top of mind recall of our brands by consumers across categories is a huge strength in a market where regulations act as a barrier to entry and brand building.
Recently USL stock was downgraded by a few analysts. To your mind, how justified are these concerns and how have you responded to investor concerns?
USL is a solid medium to long term growth story. Any short-term investment into this category would obviously be constrained because of the volatility attached to cultivation of sugarcane and administered pricing of sugar cane/sugar in this country.
We, as market leaders, have put together a backward integration plan which will not only address the volatility by creating a natural hedge through Multi Substrate Feed Stock capable plants but also go a long way in improving our margins going forward by mopping up the arbitrage that  a ‘make vs. buy’ situation offers. The benefits of these investments will be reflected in the future performance and margins of USL once the implementation of backward integration is complete.
USL has driven growth and volumes in the industry. Now in hindsight, would you have done things differently to ensure profitable growth?
This is an erroneous perception. Over the last six years, our EBITDA margin to NSR has doubled and is close to 18 percent today. This wouldn’t have been possible if we had just grown by volume and not by value. Our focus on premiumisation continues to be the centre stage of our growth plan.
McDowell Platinum has been a success. But the fact that it was priced only 10 percent higher than McDowell No.1 and on par with Pernod Ricard’s Royal Stag, do you believe you lost an opportunity in building a premium brand and instead ended up focussing on volumes? Moreover, creating brands in the premium segment would mean altering the organisational DNA. What is USL doing on this front?
Currently, the premium and above segments constitute less than 6 percent of the volume salience and about 20 percent of the value pie. Over the last 10 to 15 years, we have in fact launched several premium and semi-premium brands like:

  • Black Dog
  • Antiquity Blue
  • Signature
  • McDowell Platinum
  • McDowell VSOP
  • Romanov Red
  • Flavours of Vodka and Gin apart from brands from Whyte and Mackay stable
Please note that all the above are success stories.

Please understand that there is empirical evidence that 9 out of 10 brands launched in the FMCG sector are not successful. The fact that we have come up with several brands as listed above which are dominating their own categories demonstrates USL’s ability to understand its consumers as well as the depth of distribution that we have in creating successful brands.
By the launch of McDowell Platinum and repositioning of Royal Challenge, we have brands strategically placed across the price spectrum from the prestige segment to super premium segment which has definitively drawn new consumers to these brands. In the markets where we adopted this strategy, in the first quarter alone, we have gained more than 7 percent market share from competition.
The fact that McDowell Platinum and McDowell VSOP sold more than one million cases and 900K cases respectively in their year of launch speaks volumes of the marketing and distribution strengths of USL.
I can only confirm that our brands cross lined to competition are as profitable if not more in various markets in which they are present. However, none of the competition has the kind of pan India footprint that our portfolio commands. This has a different value proposition on an all India level as opposed to being present only in select markets with the perceived higher profitability.
In an organisation where the pace of growth is at 20 percent year on year, it is only expected that huge investments are expected to be committed to sustain such growth. USL adds about 12 million cases year on year whereas its nearest competitor sells less than 20 million cases in the whole year.
Analysts have also raised doubts on USL’s investment plans, including plans to set up a bottle-making unit. The higher capital outlay for creating assets has affected your return on capital, which is at 15 percent, compared to Pernod Ricard’s 50 percent. Could you please explain the rationale behind these investments?
In fact, at a company level, return on capital of Pernod Ricard is at 8 percent compared to that of USL and amongst the industry peers it is only Diageo which is higher than that of USL.
In the last decade, USL has tried to form joint ventures (JV) with multinational companies including Diageo. We also learn that USL had initiated talks first with Seagram and later with Pernod Ricard to form ventures. Could you please confirm this? Also, what is the rationale for a JV with these multinationals? Why do you believe these talks didn't eventually fructify?

These statements are speculative in nature and therefore, we will not be able to comment on this.

The acquisition of Whyte & Mackay (W&M) was seen as a big strategic step. What are your plans for the brand?
The fact that W&M brands have almost become household names in the last two years in terms of recall goes to substantiate the focus and drive that we are imparting to the scotch category. Our scotch category is growing at about 30 percent year on year and market share of the category is almost at 35 percent and increasing by the day.
USL’s profitability has been affected by high interest payments. What is the current debt level on your books? What is the debt-equity ratio? How do you plan to retire these debts?
The high interest payment is a function of debt contracted for strategic acquisitions and there is a definitive plan to deleverage the debt over a period of time. The current debt level is at about Rs. 7000 crore and the debt equity is at about 1.5. We have assets worth close to Rs. 20 billion in USL’s balance sheet which can be monetised at a time of our choosing to deleverage the balance sheet. These assets are typical cash equivalents domiciled in the balance sheet.
In the last six months, the trade, to quote one of its members, “is increasingly unhappy with USL.” They say the company, as it is the market leader, is not taking into account the interests of the trade. The recent instance of price increase in Maharashtra, which has affected the trade volumes, is one of the examples. The trade alleges that despite of repeated requests from them, USL has not responded either on price cuts or taking up their case with the government. Could you please clarify?
I can only assure you that USL has always worked with its trade partners who have grown with the company over the years. In fact, the recent price hike in Maharashtra was more a function of change of tax slabs and rates by the government as opposed to the misconception that it is to USL’s benefit.
We have made several representations to the state government and have also shared them with the trade partners for their benefit. The fact that almost 74 percent of the end-consumer price in Maharashtra goes in taxes and duties and 14 percent is trade margin leaving only 12 percent for the manufacturer who creates and markets the brands goes to explain the sub-optimal position that we are in.

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