United Spirits Ltd commands 55% of the country’s Indian-made foreign liquor (IMFL) market, which consists of 159 million cases. Seagram India Pvt. Ltd has a 9% market share and Radico Khaitan Ltd comes third with 8%, the rest being much lower. United Spirits has 19 brands, which sell more than a million cases every year.
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The company leads in virtually all the segments—whisky, vodka, brandy and gin—though Mohan Meakins Pvt. Ltd leads in the rum segment. United Spirits’ brands comprise Royal Challenge, Signature, Antiquity, Director’s Special, Bagpiper, McDowell No. 1 and Romanov. The McDowell No. 1 umbrella brand sold 31.5 million cases of whisky, rum and brandy in FY09. Bagpiper is India’s largest whisky, which sold over 16 million cases in FY09. United Spirits’ top four brands have retail sales value exceeding $2.5 billion.
But there are restrictions on distribution, inter-state movement of spirits and high taxes. Strong entry barriers make the market more lucrative for existing players. Although we do not expect big changes in distribution, we expect an increase in distribution outlets and rationalization of taxes in the coming years. This would increase liquor demand.
The per capita consumption is only 0.9 litre and the number of people in the legally permissible age range will increase by 150 million in the current decade. The social stigma attached to drinking is fading, leading to higher consumption. This is enhancing sales of segments such as vodka, premium scotches and whisky. IMFL volumes are expected to grow 11-12%, excluding the upside from favourable regulatory changes. State taxes account for 70% of the maximum retail price of liquor and a rationalization will increase demand significantly.
United Spirits is undertaking the following initiatives to maintain an edge:
• It acquired Shaw Wallace, Herbertsons and Triumph Distillers to assume market leadership. Its merger with Balaji Distillery will consolidate its position in south India. United Spirits is part of the UB Group, which is the largest alcoholic beverage group. This provides it bargaining power.
• It launched packaging innovations such as tetra-packs and blister packs for whisky. Its innovative products include Pinky Vodka, Antiquity Blue and low-calorie vodka. The company has launched Blue Riband gin in flavours and a diet version of McDowell No. 1.
• It does surrogate advertising through its IPL team, Royal Challengers, and football club, East Bengal. While the IPL team is named after one of its key brands, the football team retains its original name.
• It acquired Whyte and Mackay, which is among the top five scotch whisky companies in the world. This gave United Spirits a scotch inventory of 108 million litres and brands such as Isle of Jura, Dalmore and Whyte and Mackay.
United Spirits is the best bet on demand for spirits in India. Huge scale, 19 millionaire brands across price points, distribution advantages and assured scotch supply from Whyte and Mackay make it a sustainable monopoly. The worst seems to be over with a capital infusion of Rs25 billion. The sale of 8.4 million treasury shares will enable further debt reduction.
We estimate a margin expansion of 120 basis points over FY10-12, which would translate into 44% profit after tax (PAT) compounded annual growth rate on a consolidated basis. Standalone volumes and PAT will grow at 15% and 32%, respectively, over FY10-12. The stock trades at estimated 26.4x FY11 earnings per share (EPS) of Rs51.10 and estimated 21.8x FY12 EPS of Rs61.90. Therefore, we recommend a buy.
Graphics by Ahmed Raza Khan / Mint