Dear Fellow Shareholders,
The challenges in the economic environment that prevailed in 2012-13 continued into 2013-14. Towards end of the fiscal year, the country was caught up in anticipation of the general elections and expectations ranged across a wide spectrum from the most pessimistic to the hope of ‘acche din’ (good days). The unequivocal nature of the results entrusting a simple majority to a single party together with a good showing by the winning alliance should augur well for the country. One hopes that the pulls and pressures of multi-party coalition politics will be felt far less in the current regime in view of the reduced reliance on outside support for survival of the Government, unlike what has been the case in the past
The consumer goods sector in India in fiscal 2014 appeared to be in the midst of a demand deceleration with even higher advertisement spends not able to push up consumer demand. That trend seems to be reversing for the consumer goods sector in fiscal 2015 if the indications of Q1 are anything to go by.
For the Alcobev industry too, the slide in overall growth numbers continued for the second year in a row. From a growth of 3.5% in 2012-13, the industry was down to a sub-1% growth rate – a sharp contrast to the double-digit growth rates of just 2-3 years ago. On the positive side however, the continuing trend of premiumisation and people moving up the value chain continued during the fiscal year under review.
The leading brands of your Company particularly at the upper end of the brand portfolio have performed well. Of the 6 fastest growing brands in the world by volume, 3 are from the USL stable. McDowell’s No.1 Whisky broke into the Top 10 brands by retail value, ranking at # 7 with a retail street price just short of US $ 2 billion – together with its sister brands in the rum and brandy flavors, it retailed for even more, at $3.6 billion – the values are as per the listing for calendar 2013 released by Impact International, a leading spirits magazine. Royal Challenge Whisky, was strategically repositioned on the price ladder in the latter half of the year, a move that was widely seen as contrary to the corporate premiumization policy. The repositioning saw the growth rate of the brand double in the relevant period of fiscal – the sharp upturn continues in the current fiscal.
Notwithstanding this, trading conditions continue to be difficult for a variety of reasons including the unreasonable regulation and taxation levels by the states, general inflationary conditions and the use of its political clout by the sugar lobby to force an increase in the prices of ethanol for blending with motor spirit.
From a comfortable ` 27/litre of ethanol, the Oil Marketing Companies (OMCs) floated a fresh tender for ethanol supply. The evident cartelization by the sugar lobby in response to the tender took the matter to the courts. To circumvent probable penalties and to safeguard their position, the OMCs floated a fresh tender thereby inadvertently giving the sugar lobby a chance to enhance its prices from the original ` 27/litre to circa ` 40/litre in the first tender and circa ` 50/litre in the second one. The new Government has announced its intention to move up the mandatory blending to 10% of all motor spirit produced in India. Brazil is often cited as the shining example of how to make and sell ethanol blended petrol ranging from 20% to even 100% with engines suitably modified for the latter. However, the conditions in India are vastly different from those in Brazil. Consumption of sugar in India is neck-to-neck with its production and often any lag is met through imports. Therefore the premise of the ethanol policy that there is surplus sugar production in India which could divert sugarcane to ethanol production is far from being the fact. It is clear that the beneficiaries of a high ethanol blending regime will only be the sugar industry, often at the cost of other stakeholders including the sugarcane farmers and the users of alcohol in the industrial and potable sectors.
Ideally, the unequivocal majority of the federal government should make for pushing through major economic reforms like, for example, the Goods & Services Act (GST). Unfortunately however, press reports seem to indicate that the Alcobev industry will miss the bus in being a part of the major reform as the states seem disinclined to have the federal government dip into what they see as their honey pot. Such opposition seems to stem also from an inaccurate and perceived loss of fiscal autonomy by the states. The truth is that the fiscal control of the states on this sector will continue unhindered in a post- GST scenario. The inclusion of this sector in GST will make for a more holistic tax regime, favourably impact the Revenue Neutral Rate, increase the Gross Domestic Product and remove cascading of taxes, while simultaneously improving compliance and administrative rigor.
Last year I had briefed you on the strategic partnership between your Company and the world’s largest drinks company, Diageo plc. This relationship was further cemented during the course of the year through a sale of shares by various UB Group entities and the issue of preference capital to a nominee company of Diageo plc. The acquisition of these shares triggered an open offer to the public shareholders of your Company that did not meet with a favorable response. Post the end of the fiscal year, Diageo plc’s nominated subsidiary company made yet another open offer to public shareholders of your Company. Based on the shares acquired in the open offers, along with the initial acquisition, Diageo plc’s subsidiary M/s. Relay B.V., Netherlands now holds 54.78% of the share capital of your Company thereby making your Company an ultimate subsidiary of Diageo plc.The change in shareholding pattern in May–July 2013 statutorily required a clearance by the Office of Fair Trading (OFT), UK in view of the substantial interest that your Company has in the UK in Whyte & Mackay. After inviting public representations, the OFT felt that there was a ‘substantial lessening of competition’ through the involvement of Diageo plc in USL and asked for the sale of your Company’s interest in Whyte & Mackay. This process was completed post the end of the fiscal year and at the end of a transparent bidding process, Whyte & Mackay was agreed to be sold to M/s Emperador UK Limited, a subsidiary of Emperador Inc., Philippines.
Last year, I had spoken about consumer confidence being undermined due to a variety of factors including inflation, unstable currencies, etc. I still maintain my confidence that these are mere immediate term issues and that the long-term scenario is extremely encouraging. For the Alcobev sector the vast numbers of Indians joining the work force earlier than their previous generation creates a consumer pull that is the envy of the ageing populations around the globe. The changing consumer attitude towards alcohol consumption and exposure to practices in a shrinking world will only drive up consumer demand for our sector.
During the year Ms Renu Sud Karnad resigned from the Board of Directors of your Company due to a potential conflict of interest with her full time employment. I thank Ms Karnad for her support to the Board during her short association with the Company.
Mr. Ashok Capoor stepped down from the Board after a successful 3-year stint as Managing Director and a stint of over 22 years in various functions within the spirits business of your Company. Mr. Anand Kripalu who came on board in October 2013 as CEO-designate has been appointed Managing Director of your Company for a 5-year term from August 14, 2014 subject to the approval of the shareholders at the ensuing General Meeting. I am sure that Mr. Kripalu’s experience in multinational FMCG companies will be key to taking your Company to even greater heights.
The state of Kerala has announced its intention to gradually introduce a prohibition on the sale of alcoholic beverages over the next ten years. The announcement seems to have been made without being adequately thought through and learning from the experiences of the two sister states that introduced prohibition in the late 1990s. Both the states, Andhra Pradesh and Haryana, had, in the space of two years, repealed prohibition citing their inability to check illicit distillation and smuggling from contiguous states, threats to social peace and harmony and fiscal considerations. In this case too, the long drawn out plans to move to total prohibition will only allow for pulls and pressures from vested interests and effectively put paid to these plans.
I am grateful to all employees and associates for their support and unstinted efforts in delivering the Company’s business objectives. Without their whole-hearted cooperation, the Company would not have been able to attain the numero uno position.