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Higher costs to crimp Allied Blenders profits

ABD still expects sales to rise to Rs1,800 cr for the year ending March from Rs1,550 cr last year
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First Published: Mon, Dec 03 2012. 11 06 PM IST
ABD expects profit to grow by just 10-11%, from its earlier expectation of 28-30% says chief executive Deepak Roy. Photo: Mint
ABD expects profit to grow by just 10-11%, from its earlier expectation of 28-30% says chief executive Deepak Roy. Photo: Mint
Mumbai: Allied Blenders and Distillers Pvt Ltd (ABD), the maker of Officer’s Choice whiskey, will not meet its profit target this year despite a strong increase in revenue, as rising costs of spirit and bottling erode margins, a top official said. ABD expects profit to grow by just 10-11%, from its earlier expectation of 28-30%, chief executive Deepak Roy said in an interview.
“This year we won’t be meeting our profit target because of the (input cost) inflation and our inability to pass on price increases in key states like Andhra Pradesh, (and) delay in price increases in Assam and Orissa.” Roy said.
Many states control distribution and selling of liquor in India and distillers cannot increases prices without permission from the respective governments.
“Today, we’re talking of costs of Rs.40-45 per litre from Rs.26-Rs.27 per litre just two years back. Spirit prices have gone up by 10-12% this year. It’s a very tough year for the industry,” Roy said.
“Liquor companies have seen margins eroded by rising costs and higher taxes in key states. On top of that, volume growth for FMCG (fast moving consumer goods) companies including liquor makers has dropped over the past year,” said Sharan Lillaney, an analyst at Angel Broking.
ABD still expects sales to rise to Rs.1,800 crore for the year ending March from Rs.1,550 crore last year, due to strong demand for new products such as Jolly Roger rum and Officer’s Choice Blue, a higher priced variation of the company’s biggest brand. The company will sell close to 21 million cases this year, from 17 million cases last year, Roy said.
While its vodka brand Gorbatschow is struggling due to strong competition from Smirnoff, owned by Diageo Plc, sales of Jolly Roger have grown 35% so far this year, said Roy.
“The biggest success for us in terms of new launches has been Officer’s Choice Blue. In the first year itself, we will be ending with 1.3 or 1.4 million cases. One advantage we have there is the brand equity of Officer’s Choice. Earlier we used to lose customers when they were trading up from Officer’s Choice and they didn’t have an option from us. They used to go to Imperial Blue or McDowell’s No.1,” Roy said.
The company also launched two premium brandies, Kyron and Lord & Master, over the past year. Demand for its core brand, Officer’s Choice—which surpassed United Spirits Ltd’s (USL’s) Bagpiper brand in volume sales last year—is expected to grow 10-12% this year, Roy said.
Within the next three years the new, higher-priced brands will generate at least 25% of ABD’s sales volumes from less than 10% currently, he said. Officer’s Choice still contributes 90% of ABD volumes.
“As far as ‘premiumisation’ goes, smaller companies like ABD will find it difficult to compete with USL after the Diageo deal. Diageo’s expertise in manufacturing and sourcing (of alcohol) gives USL the first-mover advantage in ‘premiumisation’,” Angel Broking’s Lillaney said.
Vijay Mallya’s USL said in November it would sell 53.4% to Diageo in a deal analysts say will significantly raise the quality and price of liquor sold in India as well as improve marketing and branding standards in the liquor industry over the next five years and more.
Roy, an industry veteran who started and then led Diageo’s India operations for nearly a decade after working for Mallya’s liquor business, said ABD was looking to raise Rs.500 crore within the next two years, through equity and debt equally, to build distilleries, increase its spending on promoting its brands and launching new products.
“(We’ll raise the capital) either through private equity or an IPO. For an IPO, the timing is not right just now because markets are depressed and we may not be able to get the full value that we believe we deserve. We’ll take a decision before March (on how to raise equity),” he said.
Roy was once tipped to head USL after Mallya consolidated his spirit companies under one umbrella in 2005. However, Mallya opted to give the top job to Vijay Rekhi, who had worked under him for decades. This prompted Roy to retire temporarily until he was asked by businessman Kishore Chhabria to run ABD in 2007 with the lure of a 5% ownership stake and non-interference in running the company.
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First Published: Mon, Dec 03 2012. 11 06 PM IST
More Topics: Allied Blenders | ABD | Liquor | UB | Earnings |