3 December 2012
Update | Sector: Consumer
Alcoholic Beverages
Cheers!
Gautam Duggad
(Gautam.Duggad@MotilalOswal.com) + 91 22 3982 5404
Sreekanth P.V.S.
(Sreekanth.P@MotilalOswal.com) +91 22 3029 5120

Consumer | Alcoholic Beverages
Consumer | Alcoholic Beverages: Cheers!
Page No.
Summary
..............................................................................................................................
3
UNSP-Diageo deal can change dynamics of IMFL industry
.......................................
4-11
India an attractive market for spirits
..............................................................................
12
Diageo in India: Strong in international spirits segment
.........................................
13-16
United Spirits: The party has just begun
...................................................................
17-26
Radico Khaitan: Premiumization strategy working
.................................................
27-32
Tilaknagar Industries: Emerging player
.....................................................................
33-34
Annexure 1: Key drivers of IMFL demand
.................................................................
35-36
Annexure 2: Spirits - sales mix to gradually shift in favor of IMFL
..........................
37-38
Annexure 3: Key segments of IMFL industry
.............................................................
39-42
Annexure 4: High entry barriers to work in favor of existing players
..........................
43
Annexure 5: Distribution system - gradually tilting in industry's favor
.................
44-45
Annexure 6: Complex taxation/duty regime
..................................................................
46
3 December 2012
2

3 December 2012
Update | Sector: Consumer
Alcoholic Beverages
Cheers! Improving outlook as MNCs gain control
Reiterate Buy on United Spirits and Radico Khaitan
The recent agreement under which Diageo has acquired ~28% in United Spirits (UNSP)
will result in Diageo gaining management control of India's largest spirits company.
Over 50% of the IMFL market will be controlled by MNCs, which should result in greater
transparency, operational discipline and more efficient deployment of resources.
IMFL stocks have run up considerably post the deal announcement. We expect the re-
rating to sustain, given the potential sector-wide benefits following the deal.
We recommend Buy on United Spirits and Radico Khaitan and upgrade our target prices.
We introduce Tilaknagar Industries (Not Rated).
UNSP-Diageo deal can change dynamics of IMFL industry
The UNSP-Diageo deal will result in Diageo gaining management control of UNSP.
Given Diageo's focus on the premium/super-premium segments, the industry trend
towards premiumization will be further boosted. Post the deal, over 50% of the
IMFL market will be controlled by MNCs. This should result in greater transparency,
operational discipline and more efficient deployment of resources. With the shift
in competitive landscape, we expect advertising spends and brand investments to
go up considerably. Also, the passage of management control of the industry leader
to a foreign company could pave the way for lower import duties.
United Spirits: The party has just begun
Post the deal , United Spirits (UNSP) stock has been re-rated on the back of expected
balance sheet improvements following management control by Diageo. Though
the IMFL sector offers an attractive long-term opportunity, there are also challenges
pertaining to regulations, duties/taxes, and ban on advertising, none of which will
change immediately. The benefits will, therefore, be back-ended. Nonetheless,
we expect the stock re-rating to sustain - a precedent exists in the deal between
Heineken and United Breweries (UBBL). We reiterate
Buy,
with a revised target
price of INR2,490.
Radico Khaitan: Premiumization strategy working
Radico Khaitan (RDCK) has demonstrated its ability to drive premiumization - the
salience of premium brands has risen from 8% of total volumes in FY09 to 16% in
1HFY13. Also, the IMFL pricing environment is turning favorable, which should enable
margin expansion. We expect RDCK to deliver strong 23% earnings CAGR over FY12-
15, led by 230bp margin improvement. The stock has appreciated ~25% since our
initiation on 31 October 2012 and subsequent announcement of the Diageo-UNSP
deal. We reiterate
Buy,
with a revised price target of INR181 - 24% upside.
Tilaknagar Industries: Emerging player
Tilaknagar Industries' (TLNGR) robust financial performance in the last five years
highlights its ability to capitalize on the rapidly premiumizing IMFL industry. Its
strength in South India and manufacturing network makes it an attractive partner
for foreign liquor companies. It has announced a strategic bottling agreement with
Pernod Ricard India. The stock trades at 13.6x FY13E and 10x FY14E earnings
(Bloomberg consensus).
Not Rated.
3
Investors are advised to refer
through disclosures made at the
end of the Research Report.
3 December 2012

Consumer | Alcoholic Beverages
UNSP-Diageo deal can change dynamics of IMFL industry
To hasten premiumization; brand investments to accelerate
The recent agreement under which Diageo has acquired ~28% in UNSP will result in
Diageo gaining management control of India's largest spirits company.
Given Diageo's unwavering focus on the premium/super-premium segments, the growing
industry trend towards premiumization would be further boosted.
With the resultant shift in competitive landscape, we expect industry advertising spends
as well as brand investments to go up considerably.
The passage of management control of the industry leader to a foreign company could
also pave the way for easing of import duties in future, in our view.
Diageo to gain management control of UNSP
Diageo Plc, United Breweries Holdings (UB) and United Spirits (UNSP) announced
agreements under which Diageo will acquire 27.4% stake in UNSP. Post this, Diageo
will launch a mandatory tender offer (open offer), at a price of INR1,440/share.
However, post the announcement of the deal, UNSP shares have rallied significantly
and have crossed the open offer price. If Diageo's open offer is fully subscribed, it
would eventually own 53.4% of UNSP at a total consideration of INR111.7b. While its
gaining majority shareholding in UNSP now appears difficult, Diageo has secured
board/management rights as part of the deal conditionalities.
Details of the deal
Diageo will acquire 19.3% interest in UNSP's current share capital at a price of
INR1,440/share from the UB group, the UNSP Benefit Trust, two subsidiaries of
UNSP - Palmer Investment Group and UB Sports Management, and the SWEW
Benefit Trust.
Of the 19.3%, 12.8% will come from UB, which post the stake sale will own 14.9%
of UNSP's current share capital. The balance 6.5% will come from treasury shares
- UNSP Benefit Trust, two subsidiaries of UNSP and SWEW Benefit Trust.
UNSP will also make a preferential allotment of 10% of the post-issue capital base
to Diageo at a price of INR1,440/share.
The above transactions will result in Diageo acquiring 27.4% stake in UNSP at a
total consideration of INR57.3b, triggering an obligation on Diageo to launch a
mandatory tender offer (open offer).
Diageo will launch a tender offer to acquire a maximum of 37,785,214 shares (26%
of the enlarged share capital) at a price of INR1,440/share.
Assuming the open offer gets fully subscribed, Diageo will own 53.4% of UNSP at
a total consideration of INR111.7b.
The deal values UNSP at an EV of 20x FY12 EBITDA.
Dr Vijay Mallya will continue in his current role as Chairman of UNSP and UB.
Deal conditionalities
Share acquisition from UB is subject to the release of all security interests
(pledging, etc) over the UNSP shares to be acquired by Diageo.
3 December 2012
4

Consumer | Alcoholic Beverages
The receipt of mandatory regulatory approvals (including competition approvals)
in India and elsewhere.
If the preferential allotment is not successful (including where it is not approved
by the shareholders of UNSP), UB has agreed to sell additional shares in UNSP to
Diageo at a price of INR1,440/share to ensure that Diageo has a minimum
shareholding of 25.1%.
If the share purchase agreement, the preferential allotment and the tender offer
do not result in Diageo holding a majority interest in UNSP, UB has agreed to vote
its remaining shareholding in UNSP as directed by Diageo for a four-year period.
UB will also vote its UNSP shares to enable Diageo to ensure that its nominees are
appointed to the UNSP board.
Diageo will have the right of first offer over UB's remaining stake if a member of
the UB group proposes to transfer any UNSP shares other than to a permitted
transferee.
UB will also have an option to put some or all of its remaining stake in UNSP to
Diageo at a price of INR1,440/share, provided no further mandatory tender offer
is triggered; this put will start once Diageo has first consolidated a full financial
year's results for UNSP and terminate on the 7th anniversary of that date.
Premiumization to get further boost
Rising state-level excise duties, sustained inflation in input costs and elevated
competitive intensity have impacted operating margins of IMFL companies, driving
the shift towards premiumization. Supportive macro factors - rising disposable incomes
and affluence, growth in middle class households, favorable demographics and
changing social attitude toward liquor consumption amongst urban upper middle
class families have also aided the shift. Diageo gaining control of the market leader,
UNSP, which holds 41% volume share, can help accelerate this shift, in our view.
Increasing excise duties and inflationary RM environment has impacted operating margins; driving need for premiumization
Excise duty has gone up for UNSP ...
... and RDCK
Source: Company, MOSL
3 December 2012
5

Consumer | Alcoholic Beverages
Input cost also gone up
EBITDA margins have declined for UNSP....
... while it has remained stable for RDCK
Source: Bloomberg, Company, MOSL
More than 50% of MRP goes towards duties and taxes
Item
Price of Liquor
Bottling and labelling
Packaging charges
Hologram fixation
Ex Factory price (without duty)
Excise duty
Ex Factory price (with duty)
Ex Factory price at Distillery gate
Profit @ 3% of distillery
Ex-Distiller price (with profit)
Freight
Godown expenses
Wastage @0.5% of Ex-dist cost
Wholesale cost price
Incidence of licensee fees
Profit @1% of wholesale cost price
Optimal Wholesale price
Proposed Maximum Wholesale price
Wholesaler's margin
Incidence of retailers licence fees
Retailer's profit and expenses
Optimal margin for retailers
Optimal retail price
Proposed MRP
3 December 2012
2011-12
9.5
6.7
1.1
0.3
17.6
140.0
157.6
157.6
4.7
162.3
1.5
1.2
0.8
165.7
1.7
1.7
169.1
169.1
6.8
18.7
19.2
37.9
207.0
210.0
2012-13
9.5
6.7
1.1
0.3
17.6
141.8
159.4
159.4
4.8
164.2
1.5
1.2
0.8
167.6
1.7
1.7
171.0
171.0
6.8
19.6
19.2
38.8
209.7
210.0
Source: Company, MOSL
6

Consumer | Alcoholic Beverages
While the Premiumization theme is already underway
Growth in Prestige Plus segment higher than overall industry average
Source: Company, MOSL
UNSP brands have underperformed Pernod Ricard
All the key brands of Pernod recorded 20% plus volume CAGR
Source: Company, Industry, MOSL
Pernod Ricard India's volumes up 2.2x since 2007
Source: Company, Industry, MOSL
3 December 2012
7

Consumer | Alcoholic Beverages
Salience of prestige and above sub-segments went up recently
Segment/brand
Whisky
Scotches
Super-premium
Premium-whisky
Prestige-whisky
Delux- whisky
Upper regular- whisky
Regular- whisky
Medium-whisky
Total-whisky
Rum
Premium- rum
Delux-rum
Regular-rum
White rum
Total-rum
Brandy
Premium- brandy
Semi-premium- brandy
Delux- brandy
Regular-brandy
Total-brandy
Gin
Regular-gin
Medium-gin
Total-gin
Vodka
Premium- vodka
Semi premium- vodka
Regular- vodka
Total- vodka
All india
Price point
(INR)
>1000
600-700
500-600
400-500
300-400
250-300
Uptp 250
<200
Market
Leader
100 piper
Antiquity
Blender Pride
Royalstag
MCD No.1
Imperial Blue
Bagpiper
Haywards
Segmentwise distribution
2011-12
2012-13-H1
All India
All India
0.6
0.3
2.7
6.1
6.9
7.4
29.2
4.7
57.8
0.2
0.1
14.6
0.5
15.4
0.4
0.9
9.0
11.5
21.8
0.1
1.2
1.4
0.5
0.4
2.8
6.2
7.7
7.8
28.2
5.7
59.3
0.2
0.0
10.9
0.4
11.5
0.6
1.3
8.9
13.1
23.9
0.2
1.6
1.7
>400
350-400
<300
150-500
Bacardi
Celebration rum
Bacardi,Contessa
>500
350-500
300-350
<300
Morpheus
Courier Napoleon
Mansion house
Old Admiral
250-300
<225
Aristrocrat
Blue riband
>500
350-500
<-350
Smiranoff
Magic Moments
White mischief
0.4
0.3
1.0
1.1
2.2
2.2
3.6
3.6
100.0
100.0
Source: Company, MOSL
Deal to drive premiumization
(an extract from our Inititating Coverage report dated 31 October 2012 on Radico Khaitan)
If Diageo acquires strategic stake in UNSP, we expect a further shift in focus of
industry players towards premium IMFL segments. Diageo's India portfolio is
geared to capitalize on the unfolding premium IMFL consumption story in India.
Post the acquisition, it will be able to drive its premium/super-premium brands
through a wider distribution footprint.
Given the lackluster growth in mature markets and its underperformance v/s
Pernod in India, we expect disproportionate focus from Diageo to enhance its
market footprint in India. The combination of improving pricing environment and
shift in focus of the industry leader towards realizations/profitability could help
drive sector profitability and margins in our view.
3 December 2012
8

Consumer | Alcoholic Beverages
Brand investments to accelerate
We expect industry advertising spends as well as brand investments to go up post the
Diageo transaction. In the post-deal conference call, the Diageo management indicated
that it intends to focus on premium brands. We expect disproportionate spends on
premium brands, as Diageo sets out to correct the underinvestment in some of UNSP's
premium brands such as
Black Dog.
In our view, UNSP has under-invested in premium
brands owing to its weak balance sheet position. Also, the earlier management was
more focused on driving volumes.
Rising competitive intensity - as evidenced by Pernod Ricard's strong market share
gains and financial performance in India - is another reason why we expect brand
investments to accelerate. Pernod Ricard has almost doubled its operating profits in
India in two years.
UNSP's domestic ad-spends as % of sales….
Pernod Ricard India's strong financials
(INR m)
Sales
PBT
PBT margin (%)
Tax
Tax rate (%)
PAT
PAT margin (%)
FY10
20,740
3,847
18.5
1,327
34.5
2,520
12.2
FY11
27,720
5,078
18.3
1,728
34.0
3,350
12.1
YoY(%)
33.7
32.0
30.2
32.9
Source: Company, MOSL
Might pave the way for easing of import duties
International spirits are subjected to 150% import duty plus several state level duties.
Consequently, international spirit penetration in India is low (Scotch represents only
1% of total whisky consumption in India, compared to 85% in France, China and Russia).
Scotch forms ~1% of India's whisky demand
Low Per capita consumption of Scotch
Source: Industry, Company, MOSL
3 December 2012
9

Consumer | Alcoholic Beverages
IImported spirits constitue just 1% of total IMFL
Source: Industry, MOSL
One of the understated benefits of the UNSP-Diageo transaction for the industry in
general and Diageo in particular, is the potential relaxation in import duties on
international spirits. UNSP, being the domestic market leader, was the obvious
beneficiary of high import duties and would have resisted any adverse changes. With
management control passing on to Diageo, the probability of import duties being
lowered has increased.
For many years, talks between India and UK, EU and WTO have hovered around
securing a free trade agreement and relaxing the import tariff on spirits. India and EU
have been negotiating a comprehensive Free Trade Pact, officially known as Broad-
based Bilateral Trade and Investment Agreement (BTIA), since June 2007. The India-
EU FTA seeks to open up markets in goods, as well as services and simplify investment
rules to boost bilateral trade that crossed USD90b in 2010-11. India exported goods
worth USD46.8b to the EU and its imports from the region were USD44.5b.
Spirits and Wines, which enjoy high tariff protection in India, are the two sectors
where the EU has been promised increased market access by India in exchange for
lower duties for a host of items including textiles, garments, leather, and agriculture
products. In December 2011, the media had speculated about reduction in import
duty on spirits from 150% to 50%.
INDIA: Wine, spirits import duties to be cut
By just-drinks.com editorial team | 23 December 2011
India's Government is set to reduce the import duty on wine and spirits from 150%
to 50%.
The reduction, announced this week by the Prime Minister's office, is expected to
take effect from February, according to lobbyists in the country. No formal date has
been confirmed yet for full implementation.
3 December 2012
10

Consumer | Alcoholic Beverages
In order to protect local producers, the Government has agreed to a duty-cut on
high-end wine and Scotch whisky brands that do not offer direct competition. Wines
expected to benefit from the move would be Chardonnays, as India does not use
the grape varietal to produce the same quality as Europe.
Negotiations on a free trade agreement between the European Union and India
had been expected to complete in the first quarter of 2012. Last month, the Scotch
Whisky Association (SWA) launched a lobbying mission in the country against the
import tariff barriers.
The duties will come down once the EU-India free trade agreement is in place. As and
when it happens, Diageo can take advantage of UNSP's distribution strengths in India.
The benefits for UNSP shareholders can be through some sort of distribution fee
arrangement, assuming UNSP is not merged with Diageo's local operations. Diageo
can share a certain percentage of sales/profits it earns from the imported super
premium spirits brands with UNSP.
UNSP: Premium valuations can sustain
P/E (x)
P/BV (x)
Source: Bloomberg, MOSL
Comparative valuation
CMP
(INR)
Consumer
Asian Paints
Britannia
Colgate
Dabur
Godrej Consumer
GSK Consumer
Hind. Unilever
ITC
Marico
Nestle
Pidilite Inds.
Radico Khaitan
United Spirits
4,328
496
1,442
128
735
3,690
538
298
222
4,765
214
146
1,992
Reco
EPS (INR)
P/E (x)
EV/EBITDA (x)
RoE (%)
EPS Gr. (%)
FY12 FY13E FY14E FY12 FY13E FY14E FY12 FY13E FY14E FY12 FY13E FY14E FY12 FY13E FY14E
35.6
27.0
36.0
29.3
33.4
35.1
34.7
31.5
34.3
42.4
25.3
21.1
66.4
30.3
21.0
31.0
23.3
26.5
30.1
29.8
26.3
26.9
35.6
21.0
16.3
34.0
26.8
22.7
33.4
26.2
30.5
27.9
34.8
25.1
30.4
29.9
21.0
14.1
27.7
22.4
17.4
26.8
21.3
23.5
23.8
27.4
20.5
22.0
25.6
16.0
11.8
26.3
18.5 36.0 34.7 33.8 17.3
12.6 34.9 35.1 37.9 28.5
22.6 109.4 114.7 108.7 10.9
17.2 37.9 34.7 35.8 14.6
18.3 18.7 23.1 24.9
5.7
19.8 31.0 32.3 31.6 18.5
23.5 74.6 72.1 63.4 19.5
16.9 32.8 33.2 33.4 22.3
17.6 28.0 20.9 21.5 34.2
21.0 95.7 71.6 63.5 21.7
12.9 26.9 24.7 25.0
8.7
9.9 11.9 12.5 14.4 10.9
19.4
4.9
4.3
7.8 -30.9
17.8
17.7
21.8
16.5
42.5
24.5
30.3
20.0
25.1
6.3
18.3
14.6
53.6
17.6
28.7
16.4
25.8
26.0
16.5
16.2
19.8
27.4
19.3
20.7
29.2
95.3
11
Neutral 103.1 121.5 142.9 42.0
Sell
15.6 18.4 23.7 31.7
Neutral 32.8 40.0 46.5 43.9
Neutral
3.7
4.4
5.5 34.2
Neutral 15.5 22.0 27.8 47.5
Buy
84.5 105.2 122.6 43.7
Neutral 11.9 15.5 18.0 45.2
Buy
7.9
9.5 11.3 37.8
Buy
5.2
6.5
8.3 42.8
Neutral 105.7 112.3 133.9 45.1
Buy
7.2
8.5 10.2 29.9
Buy
6.0
6.9
8.9 24.2
Buy
19.5 30.0 58.6 102.0
3 December 2012

Consumer | Alcoholic Beverages
India an attractive market for spirits
Likely to continue growing at ~10%
1.4m relevant urban consumers enter the legal drinking age every year in India
19 million
new LDA +
consumers
4.3 million
TBA +
drinkers
14.7 million
non-
drinkers
1.4 million
urban
consumers
2.9 million
rural
consumers
4.6 million
urban and 10.1
million rural
non-drikers
IMFL market has witnessed strong volume and value growth over the years
IMFL value growth over the years
IMFL volume growth over the years
Source: Company, Industry, MOSL
3 December 2012
12

Consumer | Alcoholic Beverages
Diageo in India: Strong in international spirits segment
However, overall presence weak; UNSP deal a strategic coup
Though Diageo has a strong presence in the niche segment of international spirits, its
overall presence in India is limited.
It controls less than 1% of the IMFL market as against the 9% controlled by its MNC
competitor, Pernod Ricard.
Management control over UNSP, the market leader in India and the world's largest liquor
company by volumes, would be a strategic coup for Diageo.
Strong in niche segment of international spirits
Diageo has strong presence in the niche segment of international spirits (scotch,
ultra-premium vodka and rum), which constitutes just 6% of the industry.
…with strong India presence in niche segment of
international spirits (%)
Diageo: Scotch leader globally…
Source: Diageo, MOSL
Growth in scotch and vodka is a function of increasing penetration and preference for
premium liquor, which in turn is driven by favorable macro factors.
The scotch category in India, currently ~ 1.5m cases, is expected to grow at 22% CAGR
for the next five years and outperform the industry. This, according to Diageo's
management, will be driven by continued premiumization and growing penetration.
Diageo's India revenues are also driven by the duty-free business, which continues to
perform well and now contributes ~31% of Diageo's overall India business. It has
outperformed competition, and has 70%+ share in the scotch segment and 80%+ share
in the super-deluxe blended scotch segment.
Brand footprint
Johnnie Walker:
Leader in deluxe and super-deluxe scotch; growing much faster
than the 25% overall scotch category growth
VAT 69:
Re-launched recently; growing at 52%, more than twice the 22% category
growth
Smirnoff:
Dominates the international vodka segment
3 December 2012
13

Consumer | Alcoholic Beverages
Distribution footprint
Reaches 70% of the outlets through own Route to Market and intends to expand
reach further
Market leadership in premium scotch with strong growth over the years
Blended Scotch
Price Segments
USD73 and Above
USD61 - 72
USD30 - 35
USD20 - 26
Diageo Brands
JW Blue Label
JW Gold Label
JW Black Label
J&B
JW Red Label
Black & White
VAT 69, Haig
F10 - F15
CAGR %
34
38
25
20
Diageo Share (%)
FY11
FY15
67
71
60
59
25
64
65
33
Source: Diageo, MOSL
Diageo has largest number of brands in top 100 premium spirits
Source: Diageo, MOSL
Diageo's global brand architecture: Leading global spirits player
3 December 2012
14

Consumer | Alcoholic Beverages
However, overall India presence limited; some disruptions along the way
Overall, Diageo's presence in India is limited. It controls less than 1% of the IMFL
market vis-à-vis 9% controlled by Pernod Ricard, its MNC competitor in India. Also,
Diageo does not have a pan-India distribution reach; it is not present in all the states,
which has constrained its market share.
In 2002, Diageo had sold a portfolio of Indian whisky, including Gilbey's Green Label,
to its management which subsequently sold it to UNSP. This marked its exit from the
Indian market for domestically produced whisky. Consequently, Diageo's expansion
efforts in India relied on its international spirits brands.
Diageo's India operations were disrupted in 2009-10 due to mismanagement
(inventory mismanagement, inflated promotional expenses and other losses). Diageo
brought Mr Roland Abella as India Head in March 2009 and has worked at getting focus
back on the business in the last 3-4 years.
Also, the US SEC had imposed a fine of USD16m on Diageo for violating the Foreign
Corrupt Practices Act in India, Thailand and South Korea.
Diageo fined $16-million by SEC for Bribing officials in India, Thailand, South Korea
ET Bureau | Jul 30, 2011
BANGALORE: The US Security and Exchange Commission has slapped penalties of
$16 million on Diageo Plc for bribing officials in India and some other countries to
increase its sales and earn tax benefits.
The maker of Johnnie Walker Scotch Whisky and Smirnoff vodka had offered bribes
of $2.7 million across India, Thailand and South Korea, which the SEC said violated
the US Foreign Corrupt Practices Act. A chunk of these payments, amounting to
$1.7 million, were made in India and Diageo did not accurately account for these in
its books by either masking or excluding them, the SEC said.
"Diageo takes the SEC's investigation findings seriously and regrets this matter," a
company statement said on Wednesday.
"Under the settlement, Diageo has agreed to pay $13,373,820 to the SEC in
disgorgement of profits and pre-judgment interest, to pay $3 million (as) penalty
and to cease and desist from committing any further violations of the books and
records and internal controls provisions of the FCPA," the statement said.
The SEC order said Diageo paid Indian government officials during 2003 to mid-
2009, yielding the company more than $11 million in profit. "Systems and controls
have been enhanced to prevent occurrence of such issues and to reinforce a culture
of compliance embodied in Code of Business Conduct," the statement said.
3 December 2012
15

Consumer | Alcoholic Beverages
Currently, Diageo's India operations are focused on
Johnnie Walker
and
VAT 69
blended
scotch and
Smirnoff vodka.
In October 2011, it launched its first Indian-made whisky,
Rowson's Reserve
in the premium segment at INR885 for a 750ml bottle in Maharashtra.
Subsequently, the brand was rolled out in Haryana, Punjab and Karnataka.
UNSP deal a strategic coup; high quality distribution netowrk gained
UNSP is the leading IMFL player, with volume sales of 122m cases, 41% market share
by volume and 22 millionaire brands. It services 64,000 outlets across India and 98% of
the on-and-off-premises network. It has manufacturing and bottling presence in all
states, with 40 owned plants and 42 contract tie-ups. Its deal with UNSP, which gives
it management control over the leader in an extremely attractive sprits market, is
thus, nothing less than a strategic coup. Through UNSP, Diageo becomes the market
leader in India, leaving its MNC competitor, Pernod Ricard far behind in the race.
Also, as and when import duties come down, Diageo will be able to use the largest
distribution network in India to push its premium liquor brands in India.
UNSP: The leading IMFL player in volume terms
2011 Indian volume market share by distributor
UNSP: Category positioning in India
Category
Blended Scotch Whisky
Other whiskies
Brandy
Gin
Vodka
White Rum
Dark Rum
Wine
Total
Rank
3
1
1
1
1
2
1
2
1
Volume share (%)
19.8
41.8
41.2
39.5
47.6
14.8
43.1
13.4
41.3
Source: UNSP, MOSL
UNSP deal: What's in it for Diageo?
Strong market presence:
UNSP is the leading IMFL player, with volume sales of
122m cases, 41% market share by volume and 22 millionaire brands.
Distribution strength:
UNSP services 64,000 outlets, 98% of on-and-off-premises
network.
Manufacturing strength:
UNSP has manufacturing and bottling presence in all
states through 40 owned plants and 42 contract tie-ups.
"The combination of United Spirits' strong business with the capabilities which
Diageo brings as the world's leading premium drinks company will ensure that
United Spirits continues to lead the industry in India."
- Diageo's Chief Executive, Mr Paul Walsh
Through UNSP, Diageo becomes the market leader in India, overnight, leaving its
MNC competitor, Pernod Ricard far behind in the race. It gains access to the largest
distribution network in India to push its premium liquor brands in the long term.
3 December 2012
16

Consumer | Alcoholic Beverages
United Spirits
BSE SENSEX
S&P CNX
19,340
5,880
CMP: INR1,992
TP: INR2,490
Buy
The party has just begun
Re-rating to sustain notwithstanding rich valuations; Buy
Bloomberg
UNSP IN
Equity Shares (m)
130.8
52-Week Range (INR) 2,149/450
1,6,12 Rel. Perf. (%)
65/221/165
M.Cap. (INR b)
260.5
M.Cap. (USD b)
4.8
Valuation summary (INR b)
Y/E March
2012 2013E 2014E
98.4 113.2
12.7 16.2
3.7
7.2
25.3 49.3
33.0 95.3
694
629
78.9 40.4
2.9
3.2
24.7 19.0
3.2
2.7
4.3
7.8
8.5 10.9
Sales
87.8
EBITDA
11.9
NP
2.4
Adj. EPS (INR) 19.0
EPS Gr. (%)
-30.9
BV/Sh. (INR)
398
P/E (x)
104.9
P/BV (x)
5.0
EV/EBITDA (x) 28.8
EV/Sales (x)
3.9
RoE (%)
4.9
RoCE (%)
8.3
Post the announcement of the deal, UNSP stock has been re-rated on the back of
expected improvements in balance sheet (working capital, leverage, and thus, capital
efficiency) post management control by Diageo.
We maintain our positive stance on UNSP - the apparent expensive valuations will be
dwarfed by the attractive and profitable long-term opportunity that IMFL offers.
Though it might not exactly be a like-to-like comparison, a precedent exists in the
deal between Heineken and United Breweries (UBBL). UBBL has continued to trade
at expensive valuations after the Heineken deal in 2009.
We reiterate Buy, with a revised target price of INR2,490.
Deal with Diageo to bring plethora of structural improvements
We believe that the deal is beneficial for UNSP shareholders, as it will bring a
plethora of structural improvements. It will help bring focus back on the core IMFL
business, bring in greater transparency, and result in an improvement in
operational as well as financial discipline. We expect Diageo's unwavering focus
on premiumization to:
Help expand margins gradually - the management mentioned 20% operating
margin as an achievable target
Improve capital efficiency, led by better working capital and judicious capital
allocation decisions
Reduce leverage cost, post the cash infusion
However, we expect advertising and brand building investments to accelerate,
going forward, as Diageo sets out to correct under-investment in premium brands.
We model 15.3% EBITDA margin for FY15, as we expect margin improvement
trajectory to be gradual. We believe our margin assumptions are conservative and
reflect the complexity of the IMFL market. Though we are confident of structural
margin improvement in the business, accelerated brand investments
(management attested to this) will restrict margin improvement in the initial
years. Given the timeframe involved in deal completion and the regulatory
formalities, we expect most of the benefits to start accruing in 2HFY14.
Short-term benefits
Of the INR57.24b consideration received for the 27.4% stake sale, INR33b will
go into UNSP's balance sheet.
The fund infusion will be used to retire UNSP's debt, which currently stands at
INR83b.
This will immediately reduce interest cost by INR3.3b, assuming interest rate
of 10%.
Interest cost has consumed bulk of UNSP's EBITDA over the years.
Prices as on 30 November 2012
Shareholding pattern %
As on
Sep-12
Promoter
27.8
Dom.Inst
4.9
Foreign
51.2
Others
16.1
Jun-12 Sep-11
27.8
28.0
6.1
2.6
54.9
58.2
11.2
11.2
Stock performance (1 year)
3 December 2012
17

Consumer | Alcoholic Beverages
Net debt and leverage position has worsened over the years
Source: Company, MOSL
Interest costs consumed~54% of EBITDA in FY12
Source: Company, MOSL
Cash flows too were impacted with inconsistent FCF generation (INR m)
Source: Company, MOSL
Medium-term benefits
Better focus on core IMFL business:
Though issues surrounding group companies
(Kingfisher Airlines) did not have a direct impact on UNSP's operations, they
sapped top management bandwidth. This resulted in reduced focus on the core
business, which was already facing trade issues in Tamil Nadu, higher excise in
West Bengal, rising input costs, worsening working capital and a leveraged balance
sheet.
3 December 2012
18

Consumer | Alcoholic Beverages
Increased focus on premiumization:
While UNSP has shifted its focus from
garnering volumes towards profitability in the recent past, we believe Diageo's
arrival will hasten the shift. The premium segment of the industry has been
outperforming mid and low-end brands, driven by favorable underlying
consumption drivers - rising incomes, favorable demographics and elevated
aspirations. Rising excise duties in states makes it imperative for UNSP and peers
to drive premiumization to capture better value.
Margin improvement:
UNSP's focus on premiumization should help drive
operating margin, which is currently 13-14%. In the conference call, the
management sounded positive about reaching for the 20% operating margin target
in the medium to long term.
EBITDA margins deteriorated ~600bp in four years
Source: Company, MOSL
Adequate brand investments:
We expect Diageo to accelerate brand investments
in the premium segment to augment its market presence. We believe the UNSP
management has under-invested in premium brands. For example, Black Dog has
not seen sufficient investment support in our view.
Better capital allocation:
We expect improved capital allocation efficiency and
judicious use of the capital, which, in our view, is a key area of improvement for
UNSP.
Working capital improvement:
Combination of improved margin profile and
judicious capital allocation decisions should provide incremental succor to the
working capital position, going forward.
Improved operational discipline and transparency:
Possible adoption of global
best practices by Diageo will provide significant improvement in transparency
levels as well as operational business discipline.
Long-term benefits
Successful achievement of aforementioned positives should help sustain and
augment stock re-rating in our view.
We believe the IMFL opportunity is attractive in the long term. Being the market
leader with 55%+ market share, UNSP should be the key beneficiary.
With improved capital position and focused management, we see strong structural
improvements in UNSP's business model, going forward.
In this context, we note the substantial re-rating of United Breweries post the
Heineken deal in CY09.
3 December 2012
19

Consumer | Alcoholic Beverages
W&M and IPL team stake divestments are possible upside triggers
Diageo will not hesitate to sell UNSP's 100% subsidiary, Whyte and Mackay, if the
regulator requires it to. The management has said that it does not need W&M's bulk
scotch inventory or its brands. Any announcement pertaining to W&M stake sale can
act as a positive trigger for UNSP. Similarly, UNSP's IPL subsidiary, Royal Challengers
Sports can also be sold. The management has, however, clarified that it will continue
with its investments for now.
Whyte and Mackay (W&M)
UNSP acquired Whyte and Mackay (W&M) in May 2007 for GBP595m. Pre-FY11, W&M
was essentially a bulk scotch supplier to global players like Diageo. However, UNSP
did not renew the contract with Diageo when it ended and W&M's EBITDA has since
declined from GBP55m to GBP33m. UNSP's rationale for not renewing the contract
was to use the strategic inventory for in-house brands. Post the UNSP-Diageo deal,
Diageo will control the W&M business and this could lead to anti-trust issues in UK
and EU.
FY08
179.54
99.31
59.54
3.09
42.1
33.2
FY09
176.00
94.34
56.50
0.38
40.6
32.1
FY10
177
93.1
57.7
29
39.5
32.6
FY11
140.88
68.76
30.32
12.43
29.3
21.5
FY12
187.01
85.06
35.91
15.41
26.7
19.2
1Q
33.77
12.00
1.19
(1.83)
14.4
3.5
Source:
FY13
2Q
1H
72.02 105.79
32.88
44.88
20.40
21.59
17.09
15.26
34.3
27.9
28.3
20.4
Company, MOSL
W&M financials since acquisition: EBITDA has almost halved since acquisition
W&M P&L
May 2007 to
(GBP m)
March 2008
Net Sales
157.10
Gross Profit
86.90
EBITDA
52.10
PBT
2.70
Contrib. Margin (%)
42.1
EBITDA Margin (%)
33.2
Diageo has clarified that W&M will not change the contours of the deal and it will
offload W&M stake if required. W&M's brands and scotch inventory are of limited
strategic value to Diageo. Chief Executive, Mr Paul Walsh has been quoted as saying,
"We are somewhat ambivalent and we will look to see how the regulators feel about
this one and make our decision accordingly. W&M is not a swing issue here."
Media speculation about possibility of stake sale in W&M
Whyte & Mackay may be put on block to smoothen Diageo deal
Arijit Barman, ET Bureau | Nov 17, 2012
MUMBAI: Is Whyte & Mackay on the block? Several analysts and industry watchers
believe the deal with Diageo, the world's largest drinks company, may force Vijay
Mallya's flagship United Spirits to sell the Scottish distiller that it bought five years
ago.
They site two reasons: one, the Glasgow-based Scotch maker may not be of strategic
interest to Diageo, the largest Scotch maker; two, anti-trust regulators in the UK
and Europe are expected to review their combined Scotch production capacity and
market share.
3 December 2012
20

Consumer | Alcoholic Beverages
Analysts say that several industry players such as Italy's Gruppo Campari that owns
the Glen Grant brand, Bacardi and Japanese firm Suntory would want to gulp up
Whyte & Mackay (W&M) that owns brands such as Dalmore and Isle of Jura to scale
up their presence in the Scotch market.
Names of buyout PE funds such as Carlyle are also being speculated upon. "Diageo
has the largest share of Scotch production in the world. So it's logical that W&M will
have to be sold for the Diageo-United Spirits deal to go through," Olly Wehring,
managing editor of Just-Drinks.com, an UK-based beverage industry news provider,
said. "But for the moment, all eyes will be on the regulators and it will be premature
to say anything with a degree of finality," he added.
W&M stake sale: EV/EBITDA
of 10x can result in GBP250m
of capital infusion into UNSP
EBITDA
35.9
Multiple
10.0
EV
359
Net Debt
108.2
Equity
250.8
Source: Company, MOSL
W&M's EBITDA has declined from GBP57.7m in FY10 to GBP35.9m in FY12. If W&M
were to be sold, we do not expect it to fetch EV/EBITDA of more than 10x, given its
weak brand positioning. Assuming a 10x multiple, W&M stake sale can result in capital
infusion of GBP250m (INR22.4b at current exchange rates). This coupled with INR33b
of infusion on account of treasury share sale and preferential allotment as part of the
broader Diageo-UNSP deal can bring down UNSP's debt to INR23b. We are not building
in any W&M transaction in our numbers yet.
Royal Challengers Sports (Bengaluru IPL team)
UNSP also owns the Royal Challengers team in IPL through its wholly-owned subsidiary,
Royal Challengers Sports. In the post deal conference call, Diageo's management talked
about continuing its investment in IPL. "The Cricket Team clearly is one of the brand
building mechanisms for Royal Challenge so we envisage it continuing. But clearly,
when we get in and once we complete on this deal, we will look at all of that in terms
of really understanding the most effective way to leverage it." However, the possibility
of sell-out should not be ruled out, in our view.
According to the FY12 balance sheet, book investments in the IPL team stand at
INR1.7b. Term liability towards the team stood at INR2.8b, and is payable over six
years, with INR492.4m payable in FY13. In FY12, the team made a loss of INR70.8m.
Failure of open offer will not have any near-term impact
The failure of the open offer (open offer price way below current market price) will
not have any repercussions on operations, as Diageo has secured board and
management control of the business for the next four years. We do not expect Diageo
to revise its open offer price upwards.
However, if preferential allotment fails, cash infusion into UNSP will be restricted
If the preferential allotment fails, it will constrain infusion of capital for debt reduction
into UNSP. Due to the sharp appreciation in UNSP's stock price post the deal
announcement, there are concerns about the success of the preferential allotment. If
the preferential allotment does not succeed, UB Group will sell additional shares so
as to take Diageo stake to 25.1%, thus triggering an open offer. However, in such an
eventuality, potential cash infusion will be restricted to INR12.24b.
3 December 2012
21

Consumer | Alcoholic Beverages
Will the preferential allotment succeed? Most likely, yes.
According to SEBI (DIP) guidelines, 2000, the issue of shares on a preferential basis
can be made at a price not less than the higher of the following:
The average of the weekly high and low of the closing prices of the related shares
quoted on the stock exchange during the six months preceding the relevant date,
or
The average of the weekly high and low of the closing prices of the related shares
quoted on a stock exchange during the two weeks preceding the relevant date.
The "relevant date" for the purpose of this clause means the date thirty days prior to
the date on which the meeting of general body of shareholders is held, in terms of
Section 81(1A) of the Companies Act, 1956 to consider the proposed issue.
Maintain Buy, with a revised
target price of INR2,490
Target Price
FY15E
EBITDA
20,120
EV/EBITDA
20
EV
402,409
Net Debt
40,681
Equity
361,728
No of Shares
145
Value/Share
2,490
Current Price
1,992
Upside (%)
24.9
Source: Company, MOSL
As per the BSE announcement on 12 November 2012, UNSP has already sent a notice
for postal ballot for the approval of preferential allotment. The document posted by
UNSP on the stock exchanges says, "The "relevant date" for the preferential issue, as
per the ICDR Regulations, for the determination of applicable price for the issue of
the Allotment Shares shall be 14 November 2012, which is the date that is 30 (thirty)
days prior to the date on which results of the postal ballot to be conducted for the
purpose of seeking the approval of members to the proposed preferential issue, are
to be declared, which is deemed to be the date of the General Meeting passing the
resolution in accordance with Section 192A of the Companies Act, 1956 read with the
relevant rules thereunder."
Thus, as per the regulatory requirements, the deal will not face any hurdles, as the
relevant weekly averages prior to 14 November 2012 are below the proposed price of
INR1,440/share.
Global spirits valuation
Annual
EPS Gr. (%)
Performance
FY13E FY14E
Global Alocholic Beverage Cos
Diageo PLC
32.1
11.8
Heineken NV
20.9
18.8
Carlsberg A/S
0.3
12.7
Anheuser-Busch InBev NV
18.2
28.7
SABMiller PLC
27.0
36.8
Takara Holdings Inc
12.1
15.0
Thai Beverage PCL
48.8
18.0
Luzhou Laojiao Co Ltd
5.8
11.3
Pernod-Ricard SA
19.8
14.9
P/E (x)
FY13E FY14E
18.2
18.1
15.6
18.7
19.3
26.5
16.1
10.9
17.3
16.3
15.8
12.9
17.1
17.2
22.3
14.4
8.7
15.2
P/B (x)
FY13E FY14E
6.4
2.7
1.2
3.2
2.7
1.3
3.9
4.6
2.0
5.3
2.5
1.1
2.9
2.5
1.3
3.5
3.4
1.9
Source:
EV/EBITDA (x)
FY13E
FY14E
14.3
10.1
8.8
11.5
14.2
0.0
14.2
7.1
13.0
Company,
13.2
8.7
8.2
9.8
12.9
0.0
13.1
5.5
12.0
MOSL
Maintain Buy, with a revised target price of INR2,490
We maintain our
Buy
rating, with a revised target price of INR2,490 (EV of 20x FY15E
EBITDA). The next few quarters could be challenging on account of sustained pressure
in Tamil Nadu and West Bengal markets coupled with business transition post the
deal completion.
Concerns/risks:
(1) Delay in expected margin improvement, (2) any regulatory
uncertainty pertaining to the deal.
3 December 2012
22

Consumer | Alcoholic Beverages
Re-rating to sustain notwithstanding rich valuations
Post the Diageo deal announcement, UNSP has rallied significantly
Source: Bloomberg
UBBL case study: Rich valuations sustained after Heineken deal
United Breweries' (UBBL) performance improved post the deal with Heineken.
Volumes and profits increased significantly post the transaction. Market share went
up, leverage came down and PAT moved up 3x over FY09-12. Consequently, UBBL got
re-rated.
UBBL's financial performance improved after the Heineken deal…
(INR m)
Volumes (m cases)
Growth (%)
Market share (%)
Net Sales
Growth (%)
EBITDA
Margin (%)
Interest
EBIT
Profit before Tax
Net Profit
Margin (%)
Net Debt
FY07
66
FY08
75
13.9
NA
15,590
30.3
2,157
13.8
576
1,581
850
542
3.5
6,694
FY09
82
9.4
48.0
19,295
23.8
2,807
14.5
1,054
1,752
856
456
2.4
7,138
FY10
101
22.6
50+
22,755
17.9
3,174
13.9
665
2,509
1,469
896
3.9
7,035
FY11
FY12
125
133
24.2
6.0
54.0
54.5
30,598
36,252
34.5
18.5
4,353
4,659
14.2
12.9
779
989
3,574
3,670
2,266
2,182
1,475
1,398
4.8
3.9
6,491
6,995
Source: Company, MOSL
11,968
1,737
14.5
412
1,325
851
550
4.6
4,795
…leading to significant re-rating
P/E (x)
P/BV (x)
Source: Bloomberg, MOSL
3 December 2012
23

Consumer | Alcoholic Beverages
Evolution of United Breweries (UBBL)
Until 2003
Three-way JV with S&N and Mr Ravi Jain:
United Breweries (UBBL) had a subsidiary,
McDowell AlcoBev. In 2002, McDowell AlcoBey passed on to a three-way JV
between UB Group company, UB Beer, Scottish and Newcastle (S&N) and Mr Ravi
Jain (through Accra Investments), and was re-named as Millennium AlcoBey. The
three JV partners held equity in the ratio 40:40:20 and Mr Ravi Jain headed the JV.
(In 2006, Mr Jain sold his stake equally to UB Group and S&N for INR180m).
Strategic relationship with S&N:
Scottish and Newcastle (S&N) formed a strategic
partnership with the UB Group by investing INR3.9b in the form of equity shares
and preference shares in UB Beer and McDowell AlcoBev. In UB Beer, S&N invested
INR10m in up to 1% equity shares and INR2b in redeemable optionally convertible
preference shares with a dividend of 8.5% per annum. In AlcoBey, it invested
INR540m to subscribe to 40% of the voting equity shares and INR1.35b to subscribe
to preference shares.
The agreement between UB Group and S&N envisaged marketing of S&N's
international brands in India, including its flagship brands
Kronenbourg, Johnsmith
and
Newcastle Brown Ale.
The UB Group would utilize S&N's overseas network to
market its beer brands, including the flagship brand,
Kingfisher.
2004-05
In December 2004, the UB Group entered into an agreement with Scottish and
Newcastle (S&N), allowing it to acquire 37.5% in United Breweries (UBBL).
S&N received 17.5% of UBBL's equity through a preferential allotment for a
consideration of INR2.17b at INR575/share. It then made a public offer and acquired
another 20% stake at INR575/share. It then invested further INR2.47b through
redeemable preference shares (non-convertible), with a coupon rate of 3%.
After this deal, Millennium AlcoBev was merged with UBBL.
Post 2008 (Heineken-UBBL)
In January 2008, S&N's global operations were jointly acquired by Carlsberg and
Heineken for USD15.4b. Consequently, Heineken got hold of S&N's 37.5% stake in
UBBL.
This was opposed by Dr Vijay Mallya, as Heineken already owned ~44% in Asia
Pacific Breweries (APB). APB used to sell beer brand,
Tiger
in India. Heineken
would, therefore, have dual interest in India - one with APB and one with UBBL.
The UB Group even moved the Bombay High Court to restrain Heineken from
exercising management rights that were accorded to S&N, citing that Heineken
was part of a rival firm, APB.
This issue was resolved in December 2009. Heineken brought APB's assets in India
and transferred them to UBBL. Besides, it transferred rights to brew, bottle and
distribute Heineken brands in India to UBBL and paid a one-time fee of INR3b.
The "peace" deal ensured that Heineken got the same rights - power to nominate
the Chief Financial Officer and equal board representation, which S&N had
enjoyed.
3 December 2012
24

Consumer | Alcoholic Beverages
UNSP: Financials and Valuation
Income Statement
Y/E March
Net Sales
Other Operating Inc
Total Revenue
Change (%)
Total Expenditure
EBITDA
Change (%)
Margin (%)
Depreciation
Int. and Fin. Charges
Other Income - Recurring
Profit before Taxes
Change (%)
Margin (%)
Tax
Tax Rate (%)
Minority Interest
Adjusted PAT
Change (%)
Margin (%)
PAT after Non-rec. (Exp)/Income
2011
68,586
5,175
73,762
15.9
-63,115
10,647
-4.3
14.4
-1,023
-4,985
904
5,543
11.9
7.5
2,098
37.8
-12
3,458
14.3
4.7
5,695
2012
82,141
5,652
87,794
19.0
-75,914
11,879
11.6
13.5
-1,448
-7,525
857
3,764
-32.1
4.3
1,374
36.5
-12
2,390
-30.9
2.7
3,170
2013E
92,364
6,036
98,400
12.1
-85,726
12,674
6.7
12.9
-1,695
-5,925
867
5,921
57.3
6.0
2,250
38.0
-12
3,671
53.6
3.7
3,671
2014E
106,470
6,754
113,224
15.1
-97,047
16,177
27.6
14.3
-1,846
-3,563
886
11,655
96.9
10.3
4,487
38.5
-12
7,168
95.3
6.3
7,168
(INR Million)
2015E
123,699
7,509
131,207
15.9
-111,087
20,120
24.4
15.3
-1,999
-2,866
909
16,165
38.7
12.3
6,223
38.5
-12
9,941
38.7
7.6
9,941
Balance Sheet
Y/E March
Share Capital
Reserves
Minority Interest
Net Worth
Loans
Deffered Tax Liabilities
Capital Employed
Gross Block
Less: Accum. Depn.
Net Fixed Assets
Capital WIP
Goodwill
Investments
Curr. Assets, L&A
Inventory
Account Receivables
Cash and Bank Balance
Bank Deposit
Others
Curr. Liab. and Prov.
Account Payables
Other Liabilities
Provisions
Net Current Assets
Msc Expenses
Application of Funds
E: MOSL Estimates
3 December 2012
2011
1,259
40,527
175
41,961
67,107
-325
108,743
26,972
-7,573
19,399
1,291
44,320
1,544
61,842
21,168
14,825
4,944
1,426
19,479
20,102
13,304
5,026
1,771
41,741
448
108,742
2012
1,259
47,254
200
48,712
88,002
-209
136,506
40,222
-9,020
31,201
1,100
49,797
1,539
74,487
26,218
21,167
5,110
104
21,888
24,236
16,356
6,013
1,867
50,251
2,618
136,506
2013E
1,453
83,264
200
84,917
54,792
-17
139,692
43,472
-10,716
32,756
2,350
49,797
1,539
78,059
29,385
23,454
2,098
477
22,645
27,427
18,602
6,740
2,086
50,632
2,618
139,692
2014E
1,453
89,757
200
91,411
48,582
207
140,200
46,722
-12,561
34,160
1,850
49,797
1,539
83,490
32,261
25,437
315
40
25,437
33,254
23,265
7,755
2,234
50,235
2,618
140,200
(INR Million)
2015E
1,453
98,948
200
100,601
41,372
518
142,491
49,972
-14,560
35,411
1,850
49,797
1,539
91,408
35,947
27,679
997
273
26,511
40,132
28,758
8,987
2,387
51,276
2,618
142,491
25

Consumer | Alcoholic Beverages
UNSP:
Financials and Valuation
Ratios
Y/E March
Basic (INR)
EPS
Cash EPS
BV/Share
DPS
Payout %
Valuation (x)
P/E
Cash P/E
EV/Sales
EV/EBITDA
P/BV
Dividend Yield (%)
Return Ratios (%)
RoE
RoCE
Working Capital Ratios
Debtor (Days)
Asset Turnover (x)
Leverage Ratio
Debt/Equity (x)
2011
28.2
36.6
342.8
2.5
8.9
2012
19.5
31.4
397.9
3.0
15.4
2013E
30.0
43.8
693.7
4.0
13.3
2014E
58.6
62.0
629.0
4.5
7.7
2015E
81.2
82.2
692.2
5.0
6.2
102.0
63.5
3.9
28.8
5.0
0.2
66.4
45.4
3.2
24.6
2.9
0.2
34.0
32.1
2.7
19.0
3.2
0.2
24.5
24.2
2.3
14.9
2.9
0.3
8.2
9.7
4.9
8.3
4.3
8.5
7.8
10.9
9.9
13.4
73
0.7
88
0.6
87
0.7
82
0.8
77
0.9
1.6
1.8
0.6
0.5
0.4
Cash Flow Statement
Y/E March
OP/(loss) before Tax
Int./Div. Received
Interest Paid
Direct Taxes Paid
Incr/Decr in WC
CF from Operations
Extraordinary Items
(Incr)/Decr in FA
(Pur)/Sale of Investments
Msc Exp
CF from Invest.
Issue of Shares
(Incr)/Decr in Debt
Dividend Paid
Others
CF from Fin. Activity
Incr/Decr of Cash
Add: Opening Balance
Closing Balance
E: MOSL Estimates
3 December 2012
2011
10,647
904
-4,985
-2,098
-11,211
-6,742
2,238
-5,452
-279
0
-3,493
-1,173
8,603
-381
1,871
8,919
-1,316
7,686
6,370
2012
11,879
857
-7,525
-1,374
-9,666
-5,828
780
-18,536
5
2,170
-15,581
4,039
20,895
-458
-4,224
20,252
-1,156
6,370
5,214
2013E
12,674
867
-5,925
-2,250
-3,021
2,345
0
-4,500
0
0
-4,500
33,144
-33,210
-610
191
-485
-2,640
5,214
2,574
2014E
16,177
886
-3,563
-4,487
-1,823
7,190
0
-2,750
0
0
-2,750
12
-6,210
-686
224
-6,660
-2,220
2,575
355
(INR Million)
2015E
20,120
909
-2,866
-6,223
-126
11,814
0
-3,250
0
0
-3,250
12
-7,210
-763
311
-7,650
915
355
1,270
26

Consumer | Alcoholic Beverages
Radico Khaitan
BSE SENSEX
S&P CNX
19,340
5,880
CMP: INR146
TP: INR181
Buy
Premiumization strategy working
Reiterate Buy; potential upside of 24%
Bloomberg
Equity Shares (m)
52-Week Range (INR)
1,6,12 Rel. Perf. (%)
M.Cap. (INR b)
M.Cap. (USD b)
RDCK IN
132.6
151/92
17/-5/2
19.4
0.4
Valuation summary (INR b)
Y/E March
Sales
EBITDA
NP
EPS (INR)
EPS Gr. (%)
BV/Sh. (INR)
P/E (x)
P/BV (x)
EV/Sales (x)
EV/EBITDA (x)
EV/Sales (x)
RoE (%)
RoCE (%)
2012 2013E 2014E
11.4
1.7
0.8
6.0
10.9
52.4
24.2
2.8
2.2
14.8
2.2
11.9
10.0
13.0
2.1
0.9
6.9
14.6
58.3
21.2
2.5
2.1
12.4
2.1
12.5
11.0
15.0
2.6
1.2
8.9
29.2
65.7
16.4
2.2
1.8
10.4
1.8
14.4
12.6
Radico Khaitan (RDCK) has demonstrated its ability to drive premiumization - the
salience of premium brands has risen from 8% of total volumes in FY09 to 16% in
1HFY13.
The IMFL pricing environment is turning favorable - RDCK expects price hike from
Andhra Pradesh, its largest market, in November.
We expect RDCK to deliver strong 23% earnings CAGR over FY12-15, led by 230bp
margin improvement.
The stock has appreciated ~20% since our initiation on 31 October 2012 and subsequent
announcement of the Diageo-UNSP deal. We reiterate Buy, with a revised price
target of INR181 - 24% upside.
Premiumization strategy working
RDCK has demonstrated its ability to drive premiumization in its IMFL business,
reflected in the consistent rise in salience of its premium brands from 8% of total
volumes in FY09 to 16% in 1HFY13.
Magic Moments Vodka
has continued to
outperform the segment and has been RDCK's single largest success story in the
last five years.
Morpheus Brandy
is also gaining trade acceptance and has
witnessed 4x jump in its volumes in the last two years, albeit on a low base.
Recent launches have been in premium/super-premium segments
RDCK's launches in the last three years have all been in the premium/super-
premium segments. It launched super-premium
Verve Vodka
in 2QFY13.
Prices as on 30 November 2012
Shareholding pattern %
As on
Sep-12
Promoter
40.6
Dom. Inst
7.8
Foreign
27.5
Others
24.2
Jun-12 Sep-11
40.4
39.9
10.1
15.3
26.4
26.3
23.1
18.5
IMFL pricing environment turning favorable at the margin
Our discussions with industry players suggest improvement in the pricing
environment for the IMFL industry. There has been modest increase in the quantum
of price hikes received by the industry, especially from South Indian states.
Secondly, the time lag between demand and approval of price hike has come
down. RDCK has received price hikes from (1) Kerala in 1QFY13, (2) Madhya Pradesh,
Jharkhand, Bihar, Orissa, and CSD in 1HFY13.
Stock performance (1 year)
Price hike in Andhra Pradesh can provide upside in 2H
Andhra Pradesh, one of the largest contributor for RDCK (11%) has granted price
hike and Karnataka is expected to do the same. This can provide good upside to its
IMFL revenue in 2HFY13. Successful premiumization strategy plus incrementally
better pricing environment augurs well for RDCK's gross and operating margins in
the medium term.
Suitable partner for foreign liquor companies
RDCK's reach, especially in North India and CSD markets, and its position as the
third-largest liquor company in India makes it a suitable partner for any foreign
3 December 2012
27

Consumer | Alcoholic Beverages
liquor player trying to gain a foothold in India, the fastest growing liquor market in
the world.
Strong earnings CAGR, supportive valuations; Buy
RDCK is an attractive play on the growing IMFL opportunity, underpinned by favorable
demographic factors like rising disposable income, growing youth population, and
changing social attitudes towards drinking. It has 33 bottling units spread across India,
through which it covers 90% of the retail outlets. Its premiumization strategy is working
and we expect the contribution of premium brands to increase from 16% of total
volumes to 20% by FY15. This would be the key driver for a robust 22% CAGR in EBITDA
over FY12-15.
We expect RDCK to deliver strong 23% earnings CAGR over FY12-15, led by 230bp
margin improvement. The stock trades at 21.1 FY13E and 16.3 FY14E earnings. We had
pointed out in our Initiating Coverage report, In High Spirits, dated 31 October 2012,
"Any potential deal involving the sector leader can have a positive rub-off effect on
peer valuations, including RDCK's". Since our initiation and subsequent announcement
of the Diageo-UNSP deal, the stock has appreciated by 25%. We now value the stock
at 18x Sep'14E EPS. Our revised target price of INR181 implies 24% upside.
Buy.
RDCK's premiumization is strategy working
Salience of premium brands rising
Volume growth trend (%)
Source: Company, MOSL
Brand-wise quarterly volumes (m cases)
Brands
Magic Moments Vodka
Morpheus Brandy
Premium Brands
Other Main Line Brands
Total main line brands
Other brands
Total
1QFY11
5.1
0.5
5.6
24.7
30.4
12.0
42.4
2QFY12
4.4
0.6
5.0
22.5
27.5
10.4
38.0
3QFY13
5.0
0.6
5.6
25.7
31.4
9.6
40.9
4QFY14
4.4
0.6
5.0
21.3
26.2
13.5
39.8
1QFY12
6.2
0.7
6.9
27.7
34.6
13.0
47.6
2QFY12
5.2
0.9
6.1
24.5
30.6
11.1
41.7
3QFY12
5.8
1.1
6.9
25.7
32.6
12.6
45.2
4QFY12 1QFY13 2QFY13
5.1
7.3
6.0
0.9
1.1
1.2
6.0
8.4
7.3
24.5
29.9
26.2
30.5
38.3
33.4
11.9
13.3
11.5
42.5
51.5
44.9
Source: Company, MOSL
3 December 2012
28

Consumer | Alcoholic Beverages
Magic Moments: RDCK's key success story in the last five years
RDCK's market share in vodka has improved consistently…
…led by Magic Moments
Source: Company, MOSL
Pricing environment turning favorable
Sl. No. State-Name
Brand-Name
RDCK has received price hikes from several states
1
Karnataka
8PM-Whisky
Old-Admiral Brandy
Crown Whisky
Radico-Gold-Whisky
Royal-Lancer-Whisky
After-Dark-Whisky
Magic-Moments-Vodka
Magic-Moments-Flavours-Vodka
Morpheus-Xo-Brandy
2
Bihar
8PM-Whisky
Magic-Moments-Vodka
3
Jharkhand
8PM-Whisky
Magic-Moments-Vodka
4
Madhya-Pradesh
8PM-Whisky
Magic-Moments-Vodka
Magic-Moments-Flavours-Vodka
5
Chattisgarh
8PM-Whisky
Magic-Moments-Vodka
Magic-Moments-Flavours-Vodka
6
Orissa
8PM-Whisky
Magic-Moments-Vodka
Black Cat Rum
7
Kerala
8PM-Whisky
Contessa-Rum
8 Bermuda rum
m2
OAB
MXO
EXCELLENCY
CWR
BGB
% Increase
6
6
7
6
6
11
33
19
19
18
20
13
13
12
9
12
10
19
14
9
16
6
6
6
6
6
6
6
6
6
Effetive Date
1st-April,2012-Onwards
1st-April,2012-Onwards
1st-April,2012-Onwards
1st-April,2012-Onwards
1st-April,2012-Onwards
1st-April,2012-Onwards
1st-April,2012-Onwards
1st-April,2012-Onwards
1st-April,2012-Onwards
1st-April,2012-Onwards
1st-April,2012-Onwards
1st-April,2012-Onwards
1st-April,2012-Onwards
1st-April,2012-Onwards
1st-April,2012-Onwards
1st-April,2012-Onwards
1st-April,2012-Onwards
1st-April,2012-Onwards
1st-April,2012-Onwards
1st-September,2012-Onwards
1st-September,2012-Onwards
1st-September,2012-Onwards
1st-August,2012-Onwards
1st-August,2012-Onwards
1st-August,2012-Onwards
1st-August,2012-Onwards
1st-August,2012-Onwards
1st-August,2012-Onwards
1st-August,2012-Onwards
1st-August,2012-Onwards
1st-August,2012-Onwards
Source: Company, MOSL
3 December 2012
29

Consumer | Alcoholic Beverages
RDCK's recent launches have been in premium/super-premium segments
Source: Company, MOSL
EBITDA margin to expand 230bp over FY12-15
Source: Company, MOSL
RDCK: Valuations still supportive
P/E (x)
P/BV (x)
Source: Bloomberg, MOSL
3 December 2012
30

Consumer | Alcoholic Beverages
RDCK: Financials and Valuation
Income Statement
Y/E March
Net Sales
Change (%)
Total Expenditure
EBITDA
Change (%)
Margin (%)
Depreciation
Int. and Fin. Charges
Financial Other Income
Profit before Taxes
Change (%)
Margin (%)
Tax
Tax Rate (%)
Profit after Taxes
Change (%)
Margin (%)
Extraordinary Income
Reported PAT
2011
9,469
12.9
7,975
1,494
9.3
15.8
271
293
47
977
94.7
10.3
257
26.3
720
72.4
7.6
8
728
2012
11,445
20.9
9,714
1,731
15.9
15.1
328
611
237
1,028
5.3
9.0
229
22.3
799
11.0
7.0
-163
637
2013E
12,986
13.5
10,842
2,143
23.8
16.5
376
681
169
1,255
22.0
9.7
339
27.0
916
14.6
7.1
0
916
2014E
14,977
15.3
12,409
2,568
19.8
17.1
423
677
153
1,621
29.2
10.8
438
27.0
1,183
29.2
7.9
0
1,183
(INR Million)
2015E
17,191
14.8
14,162
3,029
17.9
17.6
454
537
3
2,041
25.9
11.9
551
27.0
1,490
25.9
8.7
0
1,490
Balance Sheet
Y/E March
Share Capital
Reserves
Net Worth
Loans
Deferred Tax
Capital Employed
Gross Block
Less: Accum. Depn.
Net Fixed Assets
Capital WIP
Investments
Curr. Assets, L&A
Inventory
Account Receivables
Cash and Bank Balance
Others
Curr. Liab. and Prov.
Account Payables
Other Liabilities
Provisions
Net Current Assets
Miscelleneous Exp./Others
Application of Funds
E: MOSL Estimates
2011
265
6,249
6,514
4,935
498
11,947
5,728
1,539
4,189
219
1,207
8,059
1,269
3,191
94
3,506
1,728
840
295
593
6,332
0
11,947
2012
265
6,687
6,953
6,547
563
14,063
6,870
1,847
5,022
48
1,113
10,139
1,774
3,478
218
4,669
2,528
1,187
1,148
193
7,611
268
14,063
2013E
265
7,476
7,742
7,568
689
15,999
7,670
2,223
5,446
300
1,134
11,620
1,920
4,216
283
5,201
2,770
1,212
1,320
238
8,850
268
15,999
2014E
265
8,452
8,717
7,518
851
17,086
8,470
2,647
5,823
200
1,134
12,917
2,218
4,634
282
5,783
3,256
1,443
1,518
295
9,661
268
17,086
(INR Million)
2015E
265
9,680
9,946
7,158
1,055
18,159
9,270
3,101
6,169
200
984
14,312
2,370
5,329
251
6,361
3,774
1,669
1,746
359
10,538
268
18,159
3 December 2012
31

Consumer | Alcoholic Beverages
RDCK: Financials and Valuation
Ratios
Y/E March
Basic (INR)
EPS
Cash EPS
BV/Share
DPS
Payout %
Valuation (x)
P/E
Cash P/E
EV/Sales
EV/EBITDA
P/BV
Dividend Yield (%)
Return Ratios (%)
RoE
RoCE
Working Capital Ratios
Debtor (Days)
Asset Turnover (x)
Leverage Ratio
Debt/Equity (x)
2011
5.4
7.5
49.1
1.0
15.0
2012
6.0
8.5
52.4
1.3
15.4
2013E
6.9
9.7
58.3
1.7
17.6
2014E
8.9
12.1
65.7
0.0
17.6
2015E
11.2
14.6
74.9
0.0
17.6
24.2
17.2
2.2
14.8
2.8
0.9
21.2
15.0
2.1
12.4
2.5
1.2
16.4
12.1
1.8
10.4
2.2
0.0
13.0
10.0
1.5
8.7
1.9
0.0
11.6
10.2
11.9
10.0
12.5
11.0
14.4
12.6
16.0
14.2
47
0.8
42
0.8
45
0.8
43
0.9
43
0.9
0.8
0.9
1.0
0.9
0.7
Cash Flow Statement
Y/E March
OP before Tax
Int./Div. Received
Depreciation and Amort.
Interest Paid
Direct Taxes Paid
Incr in WC
CF from Operations
Extraordinary Income
Incr in FA
Other Assets
Pur of Investments
CF from Invest.
Issue of Shares
Interest Paid
Incr in Debt
Dividend Paid
Others Inflows
CF from Fin. Activity
Incr/Decr of Cash
Add: Opening Balance
Closing Balance
E: MOSL Estimates
2011
930
47
271
293
210
1,256
75
8
-88
13
314
-217
-7
293
474
92
-178
-96
-238
332
94
2012
792
237
328
611
163
1,155
650
-163
971
268
-94
-1,040
-70
611
1,612
108
-308
515
124
94
218
2013E
1,086
169
376
681
213
1,174
925
0
1,052
0
20
-1,072
0
681
1,021
123
-4
213
66
218
283
2014E
1,468
153
423
677
276
812
1,633
0
700
0
0
-700
0
677
-50
161
-47
-934
-1
283
282
(INR Million)
2015E
2,038
3
454
537
347
908
1,777
0
800
0
-150
-650
0
537
-360
208
-54
-1,159
-31
282
251
3 December 2012
32

Consumer | Alcoholic Beverages
Tilaknagar Industries
BSE SENSEX
S&P CNX
19,340
5,880
CMP: INR71
Not Rated
Emerging player
Strong presence in South India; robust manufacturing network
Bloomberg
Equity Shares (m)
52-Week Range (INR)
1,6,12 Rel. Perf. (%)
M.Cap. (INR b)
M.Cap. (USD b)
TLNGR IN
120.4
75/35
34/33/130
8.5
0.2
Tilaknagar Industries' (TLNGR) robust financial performance in the last five years has
demonstrated its ability to capitalize on the rapidly premiumizing IMFL industry.
While its geographical presence is limited, its strength in South India and good
manufacturing network makes it an attractive partner for foreign liquor companies.
TLNGR has recently announced a strategic bottling agreement with Pernod Ricard
India.
Stock trades at 13.6x FY13E and 10x FY14E EPS (Bloomberg consensus). Not Rated.
Valuation summary (INR b)
Y/E March
Sales
EBITDA
NP
Adj. EPS (INR)
EPS Gr. (%)
BV/Sh. (INR)
P/E (x)
P/BV (x)
EV/EBITDA (x)
EV/Sales (x)
RoE (%)
RoCE (%)
2010
5.5
0.8
0.3
10.3
77.2
39
22.6
2.1
10.2
1.5
39.1
20.3
2011
6.5
1.2
0.4
3.3
12.9
28
13.9
1.5
9.0
1.6
28.2
15.0
2012
8.4
1.5
0.5
3.8
19.4
34
13.6
1.4
7.9
1.4
33.7
14.3
Strong presence in South India, with diversified portfolio of 40 brands
TLNGR is a South India focused IMFL company, with Karnataka, Andhra Pradesh,
Kerala, Tamil Nadu and Puducherry being its key markets. In FY12, it sold 13.2m
cases. It has historically been strong in the brandy segment. It has a diversified
portfolio of 40 brands, but
Madira Rum
and
Mansion House Brandy
are its flagship
millionaire brands. TLNGR has expanded its distillation capacity 4x in two years.
To increase its market presence in North and East India, it has recently acquired
26% equity stake in Mason and Summers Marketing Services (MSMSPL).
Robust financial performance; focusing on premiumization
TLNGR has grown volumes 10x since FY07, driven by enhanced reach, strong growth
in its core brandy segment and new product launches. Over FY07-12, sales have
grown at a CAGR of 43% and PAT at a CAGR of 40%, with EBITDA margin at 22-27%.
It carries INR5b debt with leverage of 1x. TLNGR has been focusing on
premiumization and has recently launched
Seven Islands Vintage Single Malt Scotch
Whisky, Courrier Napoleon Blue
and
Green Brandy.
In March 2012, it had launched
White House Rum
in Kerala.
Prices as on 30 November 2012
Shareholding pattern %
As on
Sep-12
Promoter
56.7
Dom. Inst
6.1
Foreign
12.4
Others
24.8
Jun-12 Sep-11
56.6
54.3
6.1
3.4
13.2
19.6
24.1
22.8
2QFY13 volumes weak; better mix, price hikes enable robust sales
growth
Volumes grew just 2% in 2QFY13, owing to issues in its key Tamil Nadu market.
However, better mix and price hikes resulted in 22% sales growth. TLNGR expects
price hikes in Karnataka and Andhra Pradesh in 2HFY13, which will drive revenues.
Rising input costs, however, pose a threat to margins, given that over 80% of its
business comes from government controlled markets. The CSD segment continues
to face challenges.
Stock performance (1 year)
Strategic bottling agreement with Pernod Ricard
TLNGR recently announced a strategic bottling agreement with Pernod Ricard India
(PRI). It will bottle PRI's brands at its facilities in Maharashtra and Andhra Pradesh,
thus increasing utilization of its owned facilities. In Maharashtra, it will produce
50,000 cases per month for PRI in FY13, which it intends to increase to 200,000
cases by FY15.
3 December 2012
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Consumer | Alcoholic Beverages
TLNGR's sales and PAT have grown at 43% and 40%, respectively over FY07-12…
Source: Company, MOSL
…driven by 10x jump in volumes
Source: Company, MOSL
Operating margins have been volatile
Revenues predominantly from South India
Source: Company, MOSL
3 December 2012
34

Consumer | Alcoholic Beverages
Annexure 1: Key drivers of IMFL demand
Favorable demographics
The age profile of the Indian population is most conducive for sustained growth in
liquor consumption. People in the age group 20-59 years are considered as primary
consumers of liquor and more than half of India's population is below 30 years. Over
the next 10 years, 150m potential new consumers are expected to come of drinking
age.
4.3m relevant consumers to enter drinking age every year; youth demographics to support IMFL growth
Source: GOI, Company, MOSL
There is today a sea change in social values and attitudes towards drinking. This is
aided by the growing proportion of nuclear families, urbanization and changing social
ethos. All these factors indicate sustained demand growth for the liquor industry in
the coming years. Also, the middle class population is expected to grow from 120m to
600m (45% of total) by 2025, which augurs well for premium spirits.
Rising income levels
India is one of the fastest growing economies in the world, with more than 7.5% GDP
growth in the past three years. Per capita income has increased 3.6x in the last 12
years to INR50k and the long-term outlook appears bullish. With robust economic
growth, an increasing proportion of the population is coming into the consuming
class. Both the affluent and the middle class income groups are expected to account
Rising per capita disposable income (INR)
Source: GOI, MOSL
3 December 2012
35

Consumer | Alcoholic Beverages
for more than 80% of national consumption by 2025. Moreover, we expect discretionary
income to grow at a much faster pace than GDP growth, which will boost demand for
lifestyle products including liquor.
Low per capita consumption
India has very low per capita consumption of liquor in comparison to global standards
at 0.9 liters per annum. This is despite the per capita consumption growing at 22% in
the past five years. The per capita consumption pattern indicates huge potential for
the spirits industry. Even a small increase in per capita consumption can significantly
alter the growth rates and aggregate consumption levels of liquor in the country. As
factors like age composition, income levels and social attitudes are positively inclined,
we expect the Indian liquor industry to report steady double-digit growth in the
coming years.
Per capita consumption of liquor is very low in India
Source: Industry, MOSL
Forecast Sales of Alcoholic Drinks by Category: % Total Volume Growth
2015/16
9.3
7.0
8.5
6.8
8.9
% total volume growth
2011-16 CAGR
10.3
8.0
9.9
6.2
10.0
Source: Industry, MOSL
Beer
RTDs/High-Strength Premixes
Spirits
Wine
Alcoholic Drinks
World market size
India market size
Source: Industry, MOSL
3 December 2012
36

Consumer | Alcoholic Beverages
Annexure 2: Spirits - sales mix to gradually shift in favor of IMFL
The IMFL (Indian made foreign liquor) market is roughly 250m cases (12 bottles of
750ml each) and constitutes 47% of the total liquor market in India. The rest is accounted
for by country liquor, which contributes 53% of the market. The IMFL segment is
growing at 9-10% while country liquor has been growing at 3-4%.
Mix shifting in favor of IMFL
IMFL market share
Whiskey dominates IMFL in India in volumes....
..... and value
Attractive growth ahead for IMFL
Source: Industry, Company, MOSL
3 December 2012
37

Consumer | Alcoholic Beverages
IMFL expected to register 10% CAGR
Source: Company, MOSL
Geographical spread of IMFL
States like Andhra Pradesh, Tamil Nadu and Kerala have banned country liquor. This
stems from poor quality materials, hazardous methods of production and tax evasion
by the local players. The past trend suggests that ban on country liquor leads to
increased demand for IMFL, particularly at the lower end and economy segments.
IMFL has been gaining market from country liquor in the past few years, as younger
population, favorable demographics and rising consumer aspirations have resulted
in higher growth for IMFL. We expect this trend to gain further momentum, with IMFL
growing at 11-12% for the coming few years. This will happen as 12-13% nominal
income growth will increase the discretionary income at much higher level. This will
boost the growth prospects even though increase in demand for IMFL is expected to
be lower than the decline in consumption of country liquor. We the expect share of
IMFL in total liquor market to increase from 31% in FY06 to 37% by FY10.
Source: Company, MOSL
3 December 2012
38

Consumer | Alcoholic Beverages
Annexure 3: Key segments of IMFL industry
Whisky (~57% of IMFL volumes)
Whisky is the largest segment of the IMFL industry and contributes ~57% of the
volumes. The segment has seen acceleration in growth rates from 6-6.5% to current
levels of 8-8.5%. UNSP leads in almost all the Whisky segments except Scotch, which
is dominated by global players. We expect Whisky growth rates to accelerate to
double digits in line with rising growth rates of IMFL. Premium segments in Whisky
have been growing at a faster pace due to low base and rising consumer affluence
even as Regular and Economy segments continue to account for bulk of the volumes.
We expect the trend to continue in the coming years as well.
Whisky market share
Source: Industry, Company, MOSL
Steady growth in Whisky consumption in India....
India accounts for 48% of global whisky consumption
)
Source: Industry, MOSL
Brandy (~20% of IMFL volumes)
Brandy accounts for ~20% of the IMFL and 5.6% of the entire spirits market. Brandy is
perceived to be older people's drink due to health benefits associated with it. Andhra
Pradesh and Tamil Nadu account for more than 80% of Brandy sales, with UNSP's
McDowell No 1
dominating the Regular segment of the market.
3 December 2012
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Consumer | Alcoholic Beverages
Segmental split of Brandy category
Category
Brandy
Mkt share
(%)
6.1
Price
Range
(INR)
600-800
500-575
400-480
300-380
200-280
Key Brands &
Key Players
segment Share
Share
(%)
(%)
Brihans Napoleon-23,
Tilaknagar - 46,
Mansion House - 46
US 30, Radico 46
Bejosis - 76, Joie De Franc - 9
Amrut - 76, US - 9
Honey Bee -22, McDowell No1 - 69 US-91
John Exshaw -31, Golconda - 23,
US- 54, Radico - 32
Old Admiral - 28
Monitor Brandy (47%)
Shivas - 47
Source: Industry, Company, MOSL
Premium
Semi Premium 2.1
Regular
36.4
Medium
25.8
Economy
29.6
Brandy market share....
Tamilnadu accounts for bulk of Brandy consumption
Source: Industry, Company, MOSL
RDCK has emerged as the second largest player in the Brandy market and has
consolidated its position with the acquisition of Brihans. RDCK now controls 46%
market share in the Premium segment and 32% market share in the Medium segment.
We expect the Brandy market to grow at 6-7% per annum in the coming few years.
Rum (~17% of IMFL volumes)
Rum is mostly consumed in South India and accounts for ~17% of the domestic IMFL
market. The market for Rum has been growing in mid single digits. The Regular segment
comprises 72% of the Rum market in India. Mohan Maekin leads the Rum segment,
with its
Old Monk
brand. The growth rates for this product segment have been
accelerating, as the younger population in other parts of the country has also started
preferring rum, on the perception of it being less harsh. Aggressive marketing by
foreign brands like
Bacardi
is also attracting up-market IMFL consumers to the Rum
fold at the premium end. We expect the market for Rum to grow at 8-9% per annum
for the coming few years. Though the Regular segment will continue to account for
bulk of Rum volumes, we expect the Premium segment to grow at high double digit
growth rates.
3 December 2012
40

Consumer | Alcoholic Beverages
Segmental split of Rum category
Category
Rum
Mkt share
(%)
0.7
72
25.7
1.6
Price
Range
(INR)
Above 420
300-420
200-250
Key Brands &
Key Players
segment Share
Share
(%)
(%)
Bacardi -73,
Bacardi - 73,
Old Smuggler -16
Allied Dom 16
Contessa-14, Old Monk -43,
Mohan Meakin-43,
McDowell celebration -21
US -42, Radico- 15
Majestic - 21
UB-28
Gold Medal -23, Contessa - 16
US -23, Radico - 16
Source: Industry, Company, MOSL
Premium
Regular
Economy
White
Rising Rum consumption
Source: Industry, Company, MOSL
Vodka (~4% of IMFL volumes)
Vodka is the fastest growing segment of IMFL. It accounts for ~4% of the IMFL market
and has been growing at ~44% in the past few years. According to industry sources,
~8.8m cases of Vodka were sold in India during FY10. UNSP is the largest player in the
Vodka market, with 70% share in the Regular segment, with brands like
Romanov
and
White Mischief. Smirnoff
continues to be the undisputed leader in the Premium
segment, which is 15% of the total Vodka market. Vodka has seen high growth rates
due to consumer preference for white alcoholic drinks and rising affluence. Vodka is
also emerging as a preferred drink for urban women.
RDCK has also entered the Vodka market, with its
Magic Moments
brand positioned
as the first triple distilled grain-based Vodka in the Indian market, at a premium to
Romanov.
UNSP has plans to re-launch White
Mischief Vodka
in new packaging. In
addition, it is launching Mango and Chocolate Thrill flavors in Vodka. We expect the
Vodka market to grow by more than 30% per annum for the coming few years. High
growth in the product category would attract new players. As leading players try to
get market share and mind share in the small but high potential product category, the
Vodka segment will witness the launch of new variants, and various quality
improvement and consumer friendly initiatives.
3 December 2012
41

Consumer | Alcoholic Beverages
Segmental split of Vodka category
Category
Vodka
Mkt share
(%)
Premium
15
Regular
85
Price
Range
(INR)
1,400-1,800
420-500
Key Brands &
Key Players
segment Share
Share
(%)
(%)
Smirnoff-99
TDV -99
Romanov -39, White Mischief -31, US -70
Magic Moments
Source: Industry, Company, MOSL
Vodka has outperformed other IMFL category
Source: Industry, Company, MOSL
Gin (~2% of IMFL volumes)
Gin accounts for 1.8% of the IMFL market and the product category has been more or
less stagnating, with expected growth of 0-1% per annum. UNSP has consolidated its
position in the Gin market, with 66% share in the Regular and 44% share in the Medium
segment, with
Blue Riband
and
Carew
brands. The market has not seen any new
players or launches for quite some time and the product category lacks excitement.
We expect the trend to continue in the coming years with very little volume growth.
Segmental split of Gim category
Category
Gin
Mkt share
(%)
56
44
Price
Range
(INR)
360-475
250-350
Key Brands &
Key Players
segment Share
Share
(%)
(%)
Blue Riband- 66, Aristocrat - 11
US 66, JIL 11
Carew - 34, Marco polo - 19
US -44, Empee 19
Source: Industry, Company, MOSL
Regular
Medium
Gin category is yet to takeoff
3 December 2012
Source: Industry, Company, MOSL
42

Consumer | Alcoholic Beverages
Annexure 4: High entry barriers to work in favor of existing players
Strong entry barriers characterize the Indian liquor industry. These have resulted in
very few new players having successfully entered and established new brands in the
market. The industry is dominated by few players like United Spirits (UNSP), Pernod
Ricard, Radico Khaitan (RDCK), Jagatjit Industries (JGI) and Mohan Meakin (MOHN).
Media advertising of liquor is banned in India. Manufacturers undertake surrogate
advertising and sponsorships of various sports events to create brand awareness.
Surrogate advertising is generally done for soda, bottled water and sports
equipment. This makes it difficult for any player to launch a new brand and make
it a success. This has thwarted the attempts of many global majors to gain a strong
foothold in the Indian liquor industry.
Though one can readily expand existing units, it is difficult to obtain a fresh license
to set up a new unit. This acts as an entry barrier for any new global players.
Taxes and duties constitute more than 50% of the final consumer price. In addition
to excise, there are high taxes on inter-state movement of liquor. There are more
than 100 different types of taxes on liquor in India, which raises the entry barriers
for any new player.
Liquor is subject to 150% import duty and several state level duties, which raises
the price of imported liquor to very high levels. This results in very high prices for
imported liquor, thus limiting their consumer reach.
High taxes on inter-state movement of liquor results in manufacturers having
small bottling units in various states, thus creating inefficiencies in manufacturing.
Operating in India is akin to operating in 30 countries.
3 December 2012
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Consumer | Alcoholic Beverages
Annexure 5: Distribution system - gradually tilting in industry's favor
Liquor is a state subject in India. Consequently, the liquor industry is subjected to
very strict distribution controls by the state governments. There is pricing flexibility
in 32% of the market, while 57% of the market is controlled by government monopolies
and 11% by government sponsored cartels. Currently, three types of distribution
systems are prevalent in India - government controlled, auction market and free
market. Each distribution system has its own characteristics, some of which have
been impeding the growth of the liquor industry in India.
Three distribution systems in operation in India
Wholesaler
Government
State directly or
through its entity
Auction Market
State auctions
distributing rights
to private parties for
selected areas and
time
Private vends
Open Market
Manufacturers sell to
wholesalers/ retailers
State operated
or private
Retailer Margin
12-15%
20%+
Sellers bargaining power Low to average
Very low
Methodology
Annual tender
Private parties
from
negotiate with
manufacturers
liquor companies
Key States Covered
Karnataka, Kerala, Himachal Pradesh,
Tamilnadu, Andhra Bihar, Jharkhand
Pradesh, Orissa,
Andaman,
Pondicherry
Retailers
Private parties obtain
license for nominal fee
8-10%
High
Private wholesalers
directly procure from
manufacturers
UP, Goa, Maharashtra,
Delhi, West Bengal, J&K,
Punjab, Haryana,
Chandigarh, Rajasthan,
Madhya Pradesh
Source: Company, MOSL
Government controlled:
Under the government controlled system, the state
government (either on its own or through an agency) purchases liquor from various
entities through negotiated prices and sells at a mark-up through its own shops. This
system currently exists in southern India. It indirectly imposes limits on the availability
of the product.
Auction market:
Under the auction market system, the state government auctions
the right to sell liquor to various parties for a certain fixed fee annually. The winners
of these contracts then negotiate prices with the liquor companies and sell to the
consumers through their own distribution network. This creates distribution
monopolies in small regions, which results in high consumer prices and fat margins
for the retailers.
Free market:
The open/free market system is most favorable to the trade and industry.
It improves the availability of products and ensures fairness to both the consumer
and retailer. Under this system, interested parties can open liquor shops by taking
licenses from the state for a certain fee. Manufacturers sell the liquor directly to the
retailers at negotiated prices. This ensures fair play for the manufacturer, as no one
retailer can force it to reduce prices.
3 December 2012
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Consumer | Alcoholic Beverages
State-wise distribution systems
Type of market and jurisdiction
Government- controlled markets
AP
Bihar
CSD
Chattisgarh
Karnataka
Kerala
Orissa
Rajasthan
TN
Uttaranchal
Hybrid markets
Delhi
UP
Oligopolistic markets
Chandigarh
Haryana
HP
Punjab
UP
Free markets
Assam
Bihar
Daman
Goa
Jharkhand
Maharashtra
Pondicherry
West Bengal
Wholesale
Government-
Government-
Government-
Government-
Government-
Government-
Government-
Government-
Government-
Government-
controlled
controlled
controlled
controlled
controlled
controlled
controlled
controlled
controlled
controlled
Retail
Free market
Free market
Government- controlled
Free market
Free market
Government- controlled
Free market
Free market
Government- controlled
Free market
Government- controlled
Free market
Private
Private
Private
Private
Private
Oligopoly
Oligopoly
Oligopoly
Oligopoly
Oligopoly
Free market
Government- controlled
Private
Private
Private
Private
Private
Oligopoly
Oligopoly
Oligopoly
Oligopoly
Oligopoly
Free market
Government- controlled
Free markets
Free markets
Free markets
Free markets
Free markets
Free markets
Free market
Free market
Free market
Free market
Free market
Free market
Free market
Free market
Source: Company, MOSL
Key markets with changes in distribution/pricing system
State
Puduchery
Jharkhand
Bihar
Rajasthan
UP
Punjab
Haryana
Madhya Pradesh
Market in 2007
Govt. controlled
Auction
Auction
Auction
Free Market
Free Market
Free Market
Free Market
Market in 2010
Free Market
Free Market
Govt Controlled
Govt Controlled
Auction
Auction
Auction
Auction
Industry Pricing Power
Significantly Improved
Significantly Improved
Improved
Improved
Deteriorated
Deteriorated
Deteriorated
Deteriorated
Source: Company, MOSL
3 December 2012
45

Consumer | Alcoholic Beverages
Annexure 6: Complex taxation/duty regime
The taxation structure for alcoholic drinks in India is complex, with legislation varying
from state to state. The central government issues licenses for establishing
manufacturing facilities, and imposes an import tax on imported alcoholic drinks. On
top of this, state governments also impose excise and sales taxes in their own states.
State governments are also responsible for making decisions on the retailing of
alcoholic drinks. There are also restrictions on setting up liquor shops in the vicinity
of an educational institution, as well in residential areas.
Different legislation in different states leads to anomalies in the taxation structure,
and also restricts the growth of domestic manufacturers in alcoholic drinks in India.
While imported products are subject to customs duty, domestically-produced alcoholic
drinks are subject to different levies in various states, as well as other fees. These
include license fees, vending fees, assessment fees, and sales and transport fees.
The individual states have the authority to impose excise duties on domestically-
manufactured liquor but their jurisdiction does not extend to imported products.
Each state imposes: (1) state excise duty on the production of alcohol in the state, (2)
import duty on any alcoholic products from outside the state, and (3) export duty on
all alcoholic products manufactured in the state for consumption in other states.
The high tax on alcoholic drinks means that these products constitute a major source
of revenue for the central and state governments. States therefore find it difficult
(or, perhaps, counter-productive) to enforce prohibition and even harder to find
alternative revenue sources to replace lost alcohol taxes. Andhra Pradesh, for
example, imposed prohibition in 1994, only to revoke it in 1997 in the wake of
diminishing tax revenues. Gujarat, in West India, enforces total prohibition. However,
the main impact of this is to remove a major income source for the Gujarat
government, while encouraging the bootlegging of spirits. Most organized crime in
the state has its roots in bootlegging, and alcoholic drinks continue to be widely
available.
International trade forums have repeatedly raised the issue of restrictive/
prohibitively high import duties on alcoholic beverages in India. There was a significant
amount of pressure on the central government to reduce tariffs on alcoholic drinks
during the review period, following the entry of India to the World Trade Organization
(WTO).
3 December 2012
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Consumer | Alcoholic Beverages
N O T E S
3 December 2012
47

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