Shobhana Subramanian & Varun Sharma
Over the long term, higher per capita income and a younger population will drive the India made foreign liquor industry (IMFL). In the near future, however, the estimated 12 per cent industry growth rate could sober down. Which is why even market leader United Spirits, which saw volumes rise by about 17 per cent y-o-y in the first half of the current year, could feel the effects of a slowdown in consumer spending. Analysts are pencilling in an increasing volumes of just 12 per cent for the current year and it’s possible the growth won’t gain momentum until FY11.
Sure, United Spirits commands a market share of 50 per cent — it sold 74 million cases in FY08 — and also boasts some big brands like Bagpiper and McDowell’s No. 1 whisky in its portfolio of nearly145 brands. It is also well positioned to tap audiences across income classes since it has brands in almost all segments and at several price points. However, of late, the company has focussed on the top end of the market with a view to improving profitability — of the 2.7 million cases added during the September quarter, 2.6 million were high end brands.
In May 2007, the company bought over Whyte and Mackay a scotch maker which brought to the table an inventory of 115 million litres and some international brands.
However, given that these are difficult times even in the global markets even foreign brands could see weaker demand. Whyte and Mackay, however, does have some long term contracts which should help it tide over the uncertain times.
Apart from slower consumption, United Spirits is likely to see its raw materials bill shoot up thanks to rising prices of molasses, neutral alcohol and packaging. As a result the operating margins this year could be weaker at around 20 per cent. The company is expected to end the current year with revenues of Rs 5,300 crore and a net profit of Rs 420 crore, translating into an earnings growth of around 36 per cent. At the current price of Rs 771, the stock trades at 18 times estimated FY 09 earnings.