The UK-based Diageo’s decision to route all its India business through its subsidiary, United Spirits, is expected to substantially boost the financials of the domestic company, which has been bogged down recently by bad debts and an enquiry into alleged misappropriation of funds.

This arrangement will fetch United Spirits Ltd (USL) around ₹600 crore in revenue and ₹60 crore at the EBIT (earnings before tax and interest) level from the next fiscal. Before this deal was announced, USL was a distribution agent for Diageo’s marquee brands such as Johnnie Walker whisky and Smirnoff vodka. For this operation, USL used to get a 6 per cent gross commission on sales or around 3 per cent net commission.

USL’s revenue in the first quarter of this fiscal was ₹1,955 crore but it posted a loss of ₹56 crore. During the last fiscal, it posted its biggest ever loss of ₹5,103 crore on revenue of ₹8,665 crore.

A USL spokesperson did not comment on the details of the arrangement. The transfer of Indian distributorship rights from Diageo, the world’s top liquor maker, to USL will take place between January and July, 2015. As per the deal, USL will manufacture and distribute VAT 69, Haig Gold Label, and Black & White. It will also import and distribute, Johnnie Walker, J&B, Ciroc, Baileys, Lagavulin and Talisker.

Arrangement

United Spirits, in which Diageo has a 54 per cent stake, has entered into arrangements with Diageo Brands, Diageo North America and Diageo Scotland and a few other related entities to manufacture and distribute various products of these companies. These agreements between the companies are a part of a three-year strategic plan which will help USL become a leader in this segment. The agreement can be cancelled after a 12 month notice period.

The targeted operating profit margin will be based on the projected operating costs and the company’s returns after achieving the targets set by the annual operating plan. The licensing agreements involves the bottled in India arrangement, through which USL will avoid royalty payment but will have to import bulk spirit from Diageo Brands. It will then manufacture and distribute Scotch Whisky brands at market rates.

Arrangements involving royalty payment will be done on a quarterly basis and will have a fixed and a variable component. The royalty payment for the variable component will be set at the start of each year in order to deliver an arm’s length return based on the forward annual operating plan. The royalty, calculated as a percentage of the net sales value of the products manufactured by USL, will be set by the brand owners and the company.

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