Comments
It is rare in takeover situations to see the stock of the acquiring company shoot up in unison with that of the one being bought. But that’s what happened to both United Spirits and Diageo Plc after their deal was made public last week.
Stiff price
Why the United Spirits stock perked up is quite clear. By all conventional metrics, Diageo Plc has paid a stiff price for its stake in United Spirits. The price of Rs 1,440 a share values United Spirits at over 70 times its historic earnings. If one includes loss-making subsidiaries, Diageo has bought into the Indian liquor major at 20 times operating profits and four times its book value (FY-12) — high even by consumer goods standards.
Nor are the financials of United Spirits, uncrowned king of the Indian spirits business, as robust today as one would assume. Its sales have zoomed at a 25 per cent growth rate in the past four years. But profits have been erratic and actually fell by some 60 per cent in FY12. Debt of Rs 8000 crore plus on the balance sheet has led to difficulty in debt servicing too.
But why, then, should Diageo’s investors rejoice at this purchase? That’s because any liquor major hoping to set foot in the Indian market cannot hope to replicate United Spirits’ business anytime soon. With sales of over 122 million cases from over 140 brands of scotch, whiskey, rum, gin and vodka, United Spirits holds an over 40 per cent volume market share of the Indian spirits market.
This market, Diageo knows, is not just growing at 15 per cent plus, it is rapidly ‘premiumising’ as well, with consumers cheerfully shelling out more for premium brands. In a con-call to analysts on the deal, Diageo pointed out that the top fifth of the Indian spirits market was the fastest growing and brought in nearly half of United Spirits (profit) contribution.
Yet, despite its attractions, it is extremely hard for a new player to even set foot in the Indian liquor market. For one, establishing a nationwide presence in this business is close to impossible, with each State writing its own laws on production, distribution and sale of liquor.
In States such as Tamil Nadu for instance, spirits are only sold through the government machinery and procured from manufacturing units licensed within the State. This situation is made more complex by the wide variety of tariffs and excise duty rates. Nor can foreign players simply import and sell their brands. To do this, they will have to shell out import duties of 150 per cent plus and fall in with State laws on imports and distribution. With formidable entry barriers such as these barring the way, the only way for a foreign player to establish a toehold in India is through a domestic buy.
Negotiating the web
And what better candidate than United Spirits, which seems to have mastered the art of negotiating the tangled web of State liquor laws over the years. With 40 manufacturing units and 42 sub-contracting units across India, United Spirits is present in almost every Indian State and has a supply chain that reaches out to 64,000 of 66,000 retail outlets.
If Diageo can just set United Spirits’ house in order through an infusion of working capital, it may have all it needs to make merry in India.
Comments
COMMENT NOW
Comments
Comments have to be in English, and in full sentences. They cannot be abusive or personal. Please abide by our community guidelines for posting your comments.
We have migrated to a new commenting platform. If you are already a registered user of TheHindu Businessline and logged in, you may continue to engage with our articles. If you do not have an account please register and login to post comments. Users can access their older comments by logging into their accounts on Vuukle.