Diageo has completed the process of cleaning the balance sheet of United Spirits and is all set to accelerate the growth plan of its Indian subsidiary through more investments and rationalisation of its portfolio.
Last month, in a major boost for its integration process, the London-based Diageo was able to get approvals from minority shareholders of United Spirits for several of its key resolutions, which allow it to sell, market and distribute its brands in India.
With this resolution in place, Diageo will be able to merge the portfolio of its brands as well as that of United Spirits, streamline manufacturing processes and the workforce and working as a single integrated company.
The integration is expected to add about ₹650 crore to United Spirits’ EBIT. The UK-based company is banking on premiumisation to increase its margins as well as market share in the country.
It expects the current market share to grow to 40 per cent from 36 per cent (including Diageo) compared with its biggest competitor, Pernod Ricard’s 47 per cent in the premium and above segment.
Overall, United Spirits leads the market with a share of 40 per cent. In volume terms, United Spirits sold 121 million cases in FY14 while Pernod Ricard sold 32 million cases.
However, EBITDA margins are lower than that of Pernod Ricard, a French multinational. It is here that Diageo will have its work cut out in increasing its margin, which is currently at 5.8 per cent compared with Pernod Ricard’s 28.8 per cent, according to an Edelweiss Securities report.
This is largely because of higher saliency of mass brands and gross margin pressure on both mass as well as the prestige and above segments, the report said. However, realisation per case and EBITDA margins are expected to change with Diageo in complete control of United Spirits.
The company has lagged some of its peers on some of these parameters because it entered the premium segment quite late.
While Pernod Ricard’s EBITDA per case stands at ₹388, United Spirits’ is at ₹41. In terms of revenue, 73 per cent of USL’s revenue comes from the regular segment while for Pernod Ricard, 87 per cent comes from the prestige segment.
Cases coming upMeanwhile, at least two key cases related to United Spirits are expected to come up for hearing in the next few months. One relates to purchase of USL shares from UB Holdings, which will come up for hearing in the Supreme Court on April 26.
Another is in connection with six petitions against UB Holdings, which will come up for hearing in the Karnataka High Court on February 26.
Diageo, in a statement, has already said that even if it loses the legal battle, it is confident of holding a majority stake in United Spirits. In the first phase, Diageo acquired a 14.98 per cent stake in United Spirits in July 2013.
A year later, it increased its stake to 54.78 per cent through an open offer. Till now, Diageo has invested about $3 billion in India through United Spirits.