The Hindu Business Line : Mallya seen gaining ground in liquor industry

THE year that draws to a close saw the domestic liquor industry's long-running script, which featured Mr Vijay Mallya and the Manu Chhabria family as the lead players, falling apart.

What might necessitate a change in the storyboard is the move by the latter to call for bids from potential suitors for Shaw Wallace & Co (SWC)'s Indian-Made Foreign Liquor (IMFL) business. And adding to the drama is the fact that the UB group Chairman, Mr Vijay Mallya, is expected to top the list of strong contenders for the country's second largest spirits business, which has iconic whiskies such as Royal Challenge, Director's Special and Haywards in its annual depletions close to 15 million cases.

It is learnt that the Dubai-based Jumbo Group, managed by the Manu Chhabria estate, has allowed Mr Mallya into the bidding process after initial reluctance.

If the sale actually goes through - there are many who bet on Jumbo retracting, as a better managed SWC could deliver far higher valuation at a later date - it would effectively mark the bowing out of the Manu Chhabria family from the Indian alcoholic beverage industry.

It sold 50 per cent stake and management control in beer business to SABMiller in 2003.

Earlier this year, Mr Mallya and Ms Vidya Manohar Chhabria, Chairperson of the Jumbo Group and the current head of the Manu Chhabria family, amicably settled a 17-year-old dispute pertaining to the 1985 acquisition of SWC that was being fought in a Hong Kong court.

The legal battle centred on the premise that Mr Mallya was a partner to the acquisition of SWC by the late Manu Chhabria, the founder Chairman of Jumbo Group, from R.G. Shaw and Sime Derby. The settlement came soon after a High Court in Hong Kong declared that Mr Mallya was a partner in the late Chhabria's riveting acquisition of SWC after pipping an aggressive management takeover bid led by Mr S.P. Acharya, the then Managing Director of the company.

Mr Mallya's tussle with Mr Kishore Chhabria, the younger brother of Manu Chhabria who parted ways in the early 90s, for control over Herbertsons Ltd, the third largest domestic spirits company, was also waning into history as the year drew to a close.

Mr Kishore Chhabria is expected to exit the company with BDA Ltd, a subsidiary that owns popular whisky brand Officers' Choice, after selling 49 per cent stake to Mr Mallya and chart his own course in the alcoholic beverage market.

The year clearly couldn't get bigger for the domestic liquor industry, which has been used to the power plays of the Mallya and the Chhabria camps.

On the beer front, Mr Mallya, who controls over 50 per cent of the domestic consumption, inducted UK's Scottish & Newcastle (S&N) as an equity partner in his flagship brewing company, United Breweries Ltd. Following the deal, Mr Mallya and S&N would hold 37.5 per cent stake each in the company.

The transaction saw Mr Mallya opening up his biggest asset, Kingfisher brand, to a foreign brewer. Every third beer sold in the domestic market is a Kingfisher, which towers over rivals in a country where per capita beer consumption is still a fledgling 0.7 litre.

The deal is expected to bolster UB's fight against SABMiller-managed Shaw Wallace Breweries, which accounts for 35 per cent of the domestic beer sales.

Away from the deal making and boardroom moves, the alcobev industry fought heavy odds in the marketplace.

The profitability of IMFL business, the most visible segment in the domestic alcobev sector, came under strain due to the soaring price of Extra Neutral Alcohol (ENA) as a drastically reduced sugarcane crop squeezed the availability of molasses.

The companies across the board were forced to drop low-end labels as they became unviable with ENA price doubled to cross Rs 40 per litre.

Even though the volume sales were largely unaffected (the sales are expected to register 7 to 8 per cent growth and cross 90 million cases in 2004-05), much of the industry's profit pool is expected to vanish as the operating margins of the big companies came under pressure.

On the other hand, the domestic brewers grappled with unprecedented rise in the cost of recycled beer bottles, which pierced the Rs 7-mark as it galloped from the normal rates ranging between Rs 2.75 to Rs 3.

The brewers have been crying foul as the recycled bottle traders allegedly formed cartels at regional levels to enhance their holding capacity in a bid to drive up price to lead to summer months when production peaks.

SABMiller has been at the forefront in galvanising the brewing industry response that has threatened to come up with its own mechanism to get the bottles back to the factory gate. SABMiller also called for strengthening the industry bodies like All India Brewers' Association (AIBA) to push for beer sector reforms.

The country's beer sales, pegged at 83 million cases last year, are tipped to grow between eight to 10 per cent in 2004-05.

In the new year, all eyes will be back on Mr Mallya. A successful bid for SWC's liquor business could see him controlling nearly 60 per cent of the IMFL market, as the UB group through McDowell & Co, Herbertsons and Triumph Distillers & Vintners (TDV) already account for over 40 per cent of the segment.

Ms Komal Chhabria Wazir, the second daughter of the Manu Chhabria family, could unveil an interesting bid for SWC's spirits operations, which could mark her out as a force to reckon with in future.

The other bidders in the race include a consortium of investors led by Mr Ramesh Vangal, who is attempting a comeback to the liquor industry.