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Business News/ Companies / News/  United Spirits moves to run Diageo brands in India
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United Spirits moves to run Diageo brands in India

United Spirits will now also distil, import and distribute high-margin brands from the stable of its majority owner Diageo

In a statement to the BSE, United Spirits said its board approved the monetization of surplus assets. Photo: BloombergPremium
In a statement to the BSE, United Spirits said its board approved the monetization of surplus assets. Photo: Bloomberg

Bangalore: United Spirits Ltd is looking to sell two distilleries in Andhra Pradesh and Kerala, both of which are large but low-margin liquor markets. India’s biggest liquor company will now also distil, import and distribute high-margin brands such as Smirnoff vodka and Johnnie Walker whisky from the stable of its majority owner Diageo Plc.

United Spirits, which is investigating its accounting, also said on Monday that it swung to a loss of 55.56 crore for the June quarter because of continued erosion of market share and an additional provision related to the sale of the company’s Whyte and Mackay whisky business.

United Spirits, owner of popular whisky brands such as McDowell’s No. 1 and Bagpiper, was late in reporting its fiscal first-quarter earnings after failing to get its fourth-quarter (January-March 2014) results cleared three times, either by its board or by its independent auditors BSR and Co.

Revenue at United Spirits slumped 11% to 1,923.9 crore in the June quarter. The company has been losing out to rivals Pernod Ricard India Pvt. Ltd and Allied Blenders and Distillers Pvt. Ltd over the past two years, and in the past nine months, its market share losses have accelerated.

Investors shrugged aside the results. United Spirits shares gained 7.45% to end at 2,553.20 as investors bet that the sale of the low-margin businesses and licensing of Diageo brands would boost margins, which have been hammered over the past few years because of high debt and rising material and labour costs.

The BSE’s benchmark Sensex rose 1.23% to 26,429.85 points on Monday.

United Spirits said it would seek shareholder approval to make, license and sell Diageo brands in India. If approved, it is likely to lead to the closure of Diageo’s Indian unit. United Spirits has already been distributing Diageo India brands since October 2013 for a distribution fee.

Ever since Diageo finished buying a 25.02% stake in United Spirits in July 2013, analysts have been predicting that the company will merge its Indian operations with United Spirits, sell money-losing brands and exit states where margins are low.

Diageo, which owns nearly 55% of United Spirits following an open offer which ended in July, sold United Spirits’ distillery in Tamil Nadu earlier this year and signed a licensing deal to sell United Spirits’ brands in that state.

Similarly, the sale of distilleries in Kerala and Andhra would significantly cut the company’s direct operations in these states. United Spirits operates 18 distilleries, out of which it owns nine.

The Kerala government said in August it would shut down the state’s liquor retail outlets in a phased manner over the next 10 years, although the courts could overturn this decision. With the creation of Telangana, there is uncertainty about the liquor business in that state and Andhra Pradesh, from which it was carved out.

Liquor is a state subject in India and laws governing the business vary from state to state.

“The move (to sell the distilleries) could be because the liquor business is very tightly regulated by the governments in Kerala and AP, which reduces Diageo’s ability to increase prices," said Abneesh Roy, an analyst at Edelweiss Securities.

Andhra Pradesh and Kerala are among the top five liquor-consuming states in the country, accounting for a fifth of India’s liquor sales by volume, but companies earn low margins in these markets because a majority of customers buy cheaper brands.

The governments in the two states are also considered to be less friendly towards liquor companies as they also exercise tight control over prices and haven’t allowed companies to increase prices in line with a rise in material and labour costs.

Diageo decided to sell United Spirits’ distilleries in these two states partly because the government wouldn’t allow price increases nearly as often as the company wanted, two people familiar with the matter said, on condition of anonymity. The relative lack of price increases dented United Spirits margins in the two states and made it “unviable" for the company to do business there, the people said.

In a statement to the BSE, United Spirits also said its board approved the “monetization of surplus assets" of the company, without elaborating.

United Spirits’ board approved reporting the company’s accumulated losses and the reduction of more than 50% of the company’s net worth to the Board for Industrial and Financial Reconstruction.

United Spirits said in June that it would write off 3,690 crore, as the proceeds from the sale of its Whyte and Mackay unit were insufficient to repay a loan it had taken to buy the UK-based whisky business.

On 4 September, United Spirits finally published its results, reporting its biggest-ever loss of 5,380.1 crore for the March quarter.

The loss was primarily because of a writedown of 4,321.6 crore that the company recorded.

United Spirits also said then it was conducting a “detailed and expeditious inquiry" that, among other things, will look at the inter-company loans between United Spirits and UB Group entities that were used to prop up the now defunct Kingfisher Airlines Ltd and whether its executives had violated rules by approving those loans.

The inquiry will also cover some agreements allegedly entered into by United Spirits with a Kingfisher creditor and certain claims made by United Spirits debtors, some of whom are now refusing to repay the company.

The inquiry may have an impact on its financial statements, United Spirits’ independent auditor BSR and Co. warned in its report on the company’s first-quarter results. BSR had published similar remarks in its 4 September report.

BSR said it couldn’t comment on the accuracy of United Spirits’ accounting, partly because of the pending inquiry. BSR also brought up the possibility of fraud and said it would only be able to pass judgement on this once the inquiry is complete.

United Spirits said on Monday that it recorded an additional provision of 42.79 crore related to Whyte and Mackay.

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Published: 20 Oct 2014, 03:38 PM IST
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