MANAGEMENT DISCUSSION AND ANALYSIS INDUSTRY OVERVIEW
The per capita consumption of beer in India continues to be very low compared to othercountries. There has been a steady growth in the Indian Beer Industry of about 15% peryear in the last five years, with Industry volumes crossing 200 million cases in financialyear 2009-2010 from about 100 million cases in financial year 2003-2004. Considering theIndian demographics, with around 70% of the population below the age of 30 years, growingincome and increasing international influence, the industry is expected to maintain if notexceed, its growth at present rate. While the Industry grew by 10% in volume terms duringthe last financial year your Companys volumes grew by 20%.
The Indian market infrastructure is a barrier to higher growth. In India, alcohol isavailable in around 65,000 outlets including shops, bars and restaurants which translatesto roughly one outlet for every 18,000 residents, whereas the global average for the sameis one outlet per 250 residents and the corresponding figure for China is one outlet forevery 300 residents. For instance, in urban conglomeration like Greater Mumbai, there arearound 2,500 outlets while in Shanghai, which has similar population base, the number ofoutlets selling alcohol is 18,000. An encouraging development is that in some cities, likeMumbai, the government has started to issue licenses for outlets to sell beer and wineonly, delinking it from the sale of spirits. This development should facilitate futuregrowth.
Taxation is another major factor which adversely affects the Indian brewing industry.In India, all alcoholic beverages are taxed uniformly, irrespective of their alcoholcontent. Consequently, same rate of taxation is applied for spirits, lager beer, strongbeer and other alcoholic beverages, resulting in higher price for beer relative to highalcohol beverages. Across the globe, levies on beer are typically at half the rateapplicable to spirits, providing an incentive for consumers towards lower alcoholbeverages.
Due to the prevalent excise taxation structure, the majority of Indians who consumealcohol prefer to purchase spirits over beer as it contains higher alcohol at a similarprice. Therefore in India, unlike most other countries, consumption of spirits is higherthan beer. Some States have recently started to delink beer taxation from spirits, therebypromoting a logical growth in the future.
Taxation & Regulation of alcohol being a State subject under the Constitution ofIndia, each State has separate set of regulations, restrictions and taxation structure foralcoholic beverages. Some States also impose high export duties and restrictions on theexport of beer outside the State. Even the sales & distribution structure varies fromState to State as some markets are open while in most States primary sale is canalizedthrough State controlled corporations.
Over the last 5 years, a plethora of foreign brands have entered the country as 100%Foreign Direct Investment is permitted thereby increasing the choice of brands andcompetition. All major global brewers are now present in India. Despite this, your Companyhas been able to extend its market leadership position.
Volumes during 2009-2010 were buoyant in the Northern & Western markets, but salesin key Southern States were adversely affected. A change in taxation structure inKarnataka and the voluntary withdrawal of your Companys brands in the first quarterof the year 2009-2010 from Andhra Pradesh, on account of a stand off on pricing betweenbeer producers and the State Government, impacted sales in these key markets.
Your Company has successfully commissioned its largest greenfield brewery with acapacity of 6 Lac HL per annum in the State of Andhra Pradesh which became operational inJanuary 2010. The greenfield brewery has been built to international specifications andhas adopted several international standards like HAZOP for safe operation, and HACCP, theworldwide standard for food certification. The brewery has been built with a commitment tothe environment and your Company has taken various steps to reduce the overall carbonfootprint. The latest equipment has been installed with a vision of productivity andenvironmental conscience. In keeping with its new mantra, Conserve, Connect &Conquer, your Companys unique environmental initiative on inclusive watermanagement, the plant design aims not just to deliver water consumption levels exceedingworld class standards, but also to maintain the water table levels and the greenery aroundthe brewery. In view of production at enhanced capacity at the new greenfield brewery andto achieve economies in scale of operation, the management has discontinued its operationsat its Hyderabad brewery.
Your Company received the prestigious Water Digest Award for the year 2009-2010 in thecategories of Best Water Conserver Waste Water Management Company, and CorporateSocial Responsibility for water practices supported by UNESCO, PHDCCI and variousGovernment of India agencies. The brewing unit of your Company at Palakkad has beenawarded the State First Prize for Pollution Control and EnvironmentalProtection among medium scale industries in Kerala for 2008. This is the thirdconsecutive year that the unit has received this coveted award. It earlier won the secondprize in the same category in the year 2006 and the first prize in 2007.
Acquisition of land at Nanjangud, Karnataka through KIADB has been completed and yourcompany will commence setting up of a new brewery in this profitable State.
Your Company has shifted from furnace oil fired boilers to solid fuel boilers in mostof its breweries, leading to savings in the cost of fuel. To contain the increase inbottle cost, your Company has introduced dedicated design registered bottles in selectmarkets. We expect the benefits of this initiative materialising from the financial year2010-2011.
Heineken owns breweries in Andhra Pradesh and Maharashtra. Your Company has now thebenefit of utilization of capacity available at these two breweries.
Your Company continues to lead the beer market with a sale of 101 million cases andcombined national market share crossing 50%. The net sales for the year 2009-2010 stood atRs.19,975 million as against net sales of Rs.16,983 million in the financial year2008-2009, registering a growth of 18% over the comparable figure in the previous year.This spectacular result has been achieved despite impasse in supply to the Andhra Pradeshmarket during peak season and excise increases in Karnataka. Your Company has a marketshare that now stands at over 50%, and is twice the size of its nearest competitor. YourCompany along with its associates controls over 63% of the mild beer market and over 46%of the strong beer market in India. The ubiquitous "Kingfisher" brand continuesto be the largest selling beer brand in India while "Kingfisher Strong" hasgrown by 22%.
Region wise, the Northern market grew by 33% particularly due to growth in the Statesof Rajasthan and Uttar Pradesh. The Eastern markets grew by 70% on account of high growthin the States of Bihar, Jharkhand, West Bengal, Orissa and North Eastern States. TheSouthern markets grew by 7% as the growth in the States of Kerala and Tamil Nadu wasoffset by the de-growth of Karnataka market and halting of sales in Andhra Pradesh. TheWestern markets grew by 19% riding on growth in the States of Madhya Pradesh andMaharashtra and a decline in Daman & Diu.
Your Company has launched a new super premium brand by the name KingfisherUltra which has been widely acclaimed in the markets of its launch. Your Company hasalso launched an All Season beer by the name Kingfisher Red in the North andEast markets. Kingfisher Red is developed following a unique process and canbe consumed even at 14 to 17 degrees Celsius, without any change in the taste of beer.
The Brand Kingfisher has been awarded the prestigious Gold Medal in theWorld Beer Championship 2009.
Manufacturing expenses for the financial year 2009-2010 were Rs.10,088 millionconstituting 50.5% of the net sales as against Rs. 8,693 million in the previous financialyear which constituted 51.2% of the net sales.
A significant increase in price of second hand bottles on account of hoarding by bottletraders has adversely affected manufacturing costs. Your Company has recently introducedpatented bottles with a view to gain strategic control of this major item of cost. Sincethe bottles are patented and the name and logo of your Company are embossed on thebottles, they cannot be used by other brewers and are to be necessarily supplied back toyour Company. The cost associated with accelerated investment in new patented bottles isexpected to be recovered by a drop in the price of second hand bottles.
Your Company has entered into long term agreements for securing supply of malt &barley thereby minimizing the fluctuation in price of these ingredients.
Most of the units have installed solid fuel boilers which has resulted in a reductionof fuel cost. The breweries are continuously improving efficiencies in the brewing processas well as in packing thereby reducing the manufacturing costs.
PERSONNEL AND OTHER OPERATING EXPENSES
Personnel expenses of your Company stood at Rs.989 million as compared to Rs.871million in the previous year. This constituted 5% of the net sales as against 5.1% of thenet sales in the previous year. Other operating expenses amounted to Rs.1,094 millionconstituting 5.5% of the net sales. Personnel and other operating expenses were containeddespite increased volumes during the year.
SELLING AND BRAND PROMOTION EXPENSES
During the period under review, your Company has spent 28% of net sales on selling andbrand promotion exercise as compared to 25.2% of net sales spent in the previous year.
During the year, your Company continued its investments in brand building, especiallybehind the Kingfisher Brand. Kingfisher continues its high profile association with fiveof the eight IPL teams as their Good Times Partner. This association waseffectively leveraged both through communication as well as consumer and trade contacts.
Kingfisher further strengthened its association with football by signing on as thetitle sponsor of the Goa Professional League.
Kingfisher continued to leverage on the excitement and glamour of Formula-1 by being avery visible and prominent sponsor of the Force India team.
Kingfisher also continued its association with large city-based sporting events such asthe Mumbai Marathon, Delhi Half Marathon and the World 10K race in Bangalore.
Kingfisher and fashion have been synonymous for over a decade. Kingfisher hasstrengthened its association with fashion by being a key sponsor to the India CoutureWeek, Wills Lifestyle India Fashion Week and the Lakme Fashion Week, apart from thefashion weeks in Kolkata, Chennai and Bangalore.
Music has been another significant platform that Kingfisher has used over the years.During the year, the pub-based rock festival Kingfisher Pubrock Festwas extended to 20 cities and over 75 shows. The Kingfisher Voice of Goa talent hunt hasgrown from strength to strength and has firmly entrenched Kingfisher extremely close tothe hearts of Goans.
The eighth edition of the much awaited and world acclaimed Kingfisher SwimsuitCalendar was released in January to a tremendous response. Your Companysassociation with Indias No.1 Lifestyle TV channel NDTV Good Timescontinued into its third year.
PROFIT BEFORE INTEREST, DEPRECIATION AND TAXATION (PBIDT)
PBIDT for the year under review stood at Rs.2,949 million as compared to Rs.2,675.2million in the previous year, reflecting an increase of 10.2%. This increase in PBIDT isresulting from strong revenue growth and sustained investment behind your Companysbrands.
INTEREST AND DEPRECIATION
Interest paid during the year amounted to Rs.555 million as against Rs.896.4 million inthe previous year. Depreciation for the year was Rs.882.7 million as compared to Rs.762.1million in the previous year.
There has been reduction in the interest cost as compared to the previous year due toexchange gains in the current year compared to losses in the previous year and the paymentof a term loan commitment fee in the previous year. Depreciation has increased on accountof continued investment in production capacities, including the investment in thegreenfield Andhra Pradesh brewery.
PROFIT BEFORE AND AFTER TAXATION
The Profit Before Taxation for the year stood at Rs.1,511.3 million as compared toRs.1,016.7 million in the previous year reflecting an increase of around 48.6%. The ProfitAfter Taxation stood at Rs.969.7 million as against Rs.624.9 million in the previous yearreflecting a growth of 55.2%.
While multinational companies are expected to increase competition in the premium beersegment, established domestic brands, particularly those of your Company have theadvantage of having an established brand equity. Several international brewers havecurrently built brand associations and are marketing their brands aggressively throughvarious point-of-sale promotions throughout their distribution networks. Your Company hasthe benefit of a strong route to market combined with Indias leading brands.
A double digit growth rate is expected for the coming years, resulting from theincrease in disposable income and the growth of consumers entering the legal drinking age.On-trade sales are expected to grow considerably with growing affluence among youngconsumers together with the culture of frequenting pubs and clubs that is now spreading tosecond-tier cities. Off-trade sales are meanwhile expected to be boosted by the gradualderegulation of beer retail through supermarkets/hypermarkets and beer & winelicenses.
In order to augment capacities in critical markets, expansion in Karnataka is expectedto commence in the next financial year.
Besides corporate social responsibility, water conservation has been our key focusarea. Also, with the expected future growth, its importance has considerably increased.Most of our units have a constraint on disposal of waste water, and therefore, the Companyhas embarked upon a plan to install sophisticated equipment and modification process so asto reduce consumption of water and its disposal. This will in turn reduce need foracquisition of additional lands for waste water disposal. As an environmental initiative,your Company has installed bottle washers incorporating the latest technology at all unitsand is encouraging rain water harvesting at these units. Your Company has alsocollaborated with several agricultural universities for cultivation of identified cropswith waste water from the Brewery being used for irrigation on a select basis.
Dry yeast recovery has also been earning revenue as an ingredient for probiotics, as amixer with spent grain and pesticides. Going ahead, as an environment friendly initiative,your Company is determined to focus on measures for reduction of process loss duringproduction, reduction of pollutants and other wastages and utilization of natural methodsof root zone treatments such as usage of duck weed / water hyacinth as an economicalmethod for water purification. This is being done in addition to reducing pollutants whichwill in turn reduce load on the effluent treatment facility and thereby assist inconservation of the environment.
Social responsibility is integrated in the corporate philosophy of your Company and wehave been able to positively impact the lives of the communities that we work in. PrimaryHealth, Primary Education and Water are the three key areas for our interventions. Eachinitiative undertaken is long term and sustainable and addresses a specific need of thelocal community. These are implemented and monitored in partnership with representativesof the community. Our teams work relentlessly to ensure that each of these meet the needsof the local people. In Education, the objective is to ensure that quality education isimparted to children from the underprivileged strata of the society. Here yourCompanys representatives work closely with local schools to provide betterinfrastructure, mid day meals, stationery and uniforms as well as deployment of teachersto enhance the quality of education. In primary health, your Companys endeavour hasbeen to ensure that the community has access to primary healthcare. These are either inthe form of Primary Health Centres set up by us or mobile health services where aqualified doctor travels in an ambulance to villages that do not have primary healthfacilities. Your Companys initiatives in water have been to both conserve as well asprovide potable water to the local community. These interventions have earned us the trustand appreciation of the community, local bodies and Governmental agencies. YourCompanys initiatives in Primary Health in 7 locations have benefitted over 6000people. In Education, the interventions have enhanced the quality of education for over1000 students in 7 locations and we have been able to facilitate access to water for over13000 locales in 6 locations.
INTERNAL CONTROL SYSTEM
Your Company has established a robust system of internal controls to ensure that assetsare safeguarded and transactions are appropriately authorized, recorded and reported.Internal Audit evaluates the functioning and quality of internal controls and providesassurance of its adequacy and effectiveness through periodic reporting. YourCompanys internal control systems are adequate and are routinely tested andcertified by statutory and internal auditors. The process adopted provides reasonableassurance regarding the effectiveness and efficiency of operations, reliability offinancial reporting and compliance with applicable laws and regulations.
In order to continuously upgrade the internal control system, to be in line withInternational best practices and to ensure proper corporate governance, your Company hasimplemented risk assessment, control self assessment and legal compliance managementsystems. These have been updated during the year under review.
The internal control system evaluates adequacy of segregation of duties and reliabilityof management information systems, including controls in the area of authorizationprocedures and steps for safeguarding assets. Planned periodic reviews are carried out foridentification of control deficiencies and opportunities for bridging gaps with bestpractices along with formalization of action plans to minimize risks.
Your Company believes that the overall internal control system is dynamic, and reflectsthe current requirements at all times, hence ensuring that appropriate procedures andcontrols, in operating and monitoring practices are in place.
Internal Audit reports to the Audit Committee and recommends control measures from timeto time.
OPPORTUNITIES & THREATS
With growing demand, the domestic production of beer is on the rise. With furtherinvestments, your company has been able to upgrade and expand its capacities and also itsbrands. International brewers have established breweries across India in order to extendtheir brand presence to more States. With these international brands starting domesticproduction in India, indigenous brands such as your companys face increasingcompetition. International premium lager is growing steadily (though on a smaller base) asthe companies have expanded their distribution across India, and have launched several newbrands during the year under review. Despite this influx of new entrants, Kingfisher Lagercontinues to not just maintain market share but indeed increased it beyond 50% during theperiod under report.
India is predominantly a spirits market and beer is a minority preference for those whoconsume beverage alcohol. The low penetration in beer consumption in comparison tointernational levels offers the expectation of substantial and sustainable growth indemand for beer in years to come, particularly given the youthful age of Indiaspopulace. It is expected that gradually there will be a deregulation in the Indian beerindustry too, giving it a boost.
Foreign brewers have been eyeing the Indian market for some years now as India iswidely acknowledged to be the last untapped big growth market. However, consistentinvestments by your Company, in the product, packaging and communication, along with wellestablished distribution, puts UB in a strong position, as seen by consistent improvementsto the Companys national market share.
Your Company has evolved a framework for management of Business Risks. Towards this endthe company has identified risk categories under strategic risks, operative risks,information technology risks, financial risks. This is audited regularly by the internalaudit team.
Continuity and sustainability of the business is as important to stakeholders asgrowing and operating the business. Managing risks and protecting the business from theeffects of disasters, failures and reputational damage are focal points on themanagements agenda.
RISKS AND CONCERNS
The Indian beer industry is plagued with myriad taxes & levies that vary from Stateto State. These along with price regulation, inadequate market infrastructure andrestrictions in interstate movement of beer, pose a great challenge for the industry.
Unlike most developed countries where beer is less regulated and available freely, highlevel of regulation and higher end consumer price hampers beer sales in India.
Uniform tax regime for beer in all States will be a boon for the industry. Ifimplemented, it will help the beer industry by rationalizing end consumer prices in allStates, as is in the case of other consumer goods. Globally, the policy of uniformtaxation has been a success because of inherent positive implications on Governmentrevenue. In addition to economic contribution, a uniform tax structure will also createincreased agro linkages that are beneficial to a country like India.
It is important to realize that the beer sector can contribute immensely to theagricultural sector, as beer is an agro-based product. Barley farmers particularly standto benefit from the growth of the beer sector.
Additionally, the continuing control on pricing as exercised by a number of StateGovernments has resulted in our inability to raise prices on roughly 60% of our sales.This has had a direct bearing upon the Companys profitability. As this challengecontinues in the current financial year, it has resulted in a number of key marketsbecoming unattractive from a financial perspective.
Your Company has explored a variety of avenues to contain the risk of continuedincrease in basic costs and has entered into a number of long term agreements for sourcingvital inputs. There has been a continuing review of the long term strategy for procurementat an economical cost.
Excessive regulation and further extensions of Government intervention, in the areas ofdistribution and pricing, is affecting the growth and profitability of the industry aswell as restricting Government revenues. In addition, restrictions on advertising andlicensing of retail outlets continue to present challenges to the Industry.
Inclusion of alcoholic beverages into Goods and Service Tax (GST), is uncertain.Non-inclusion of alcoholic beverages in purview of GST would be against the fundamentalconcept of GST and could have a material negative impact. However, even if it is includedthere may be material negative impact on input cost.
People continue to be the focal point of the organizations development. YourCompany believes in building a stimulating, conducive and transparent culture that driveshigh level of performance. For a high performance organization, it is imperative that ithas right people in the right job equipped with the right set of skills. As such, theemphasis this year was in identifying and developing people capability to ensure that wenot only maintain but accelerate our rate of growth and performance. With this intent, anin-depth evaluation of role requirement vis a vis the individuals strength wascarried out. This was to ensure right deployment of people and also identify theirdevelopmental needs that will strengthen and consolidate our leadership pipeline. Theorganization also completed the succession planning exercise that has also enabled us tofill critical positions internally.
We continued to significantly improve our performance in the areas of productivity andsafety by means of focused initiatives. Your Company maintained harmonious employeerelations during the year. The transition of workforce from the existing plant to the newgreenfield also happened seamlessly.
As on March 31, 2010, the total employee strength at United Breweries Limited stands at1661. Your Directors place on record their sincere appreciation to all employees for theircontribution towards the continuous success of the organization.
Associated Breweries & Distilleries Limited remains a wholly owned Subsidiary ofyour Company while your Company holds 51% of equity in Maltex Masters Limited.
Your Company has received approval from the Central Government exempting your Companyfrom attaching the Accounts etc., of its subsidiaries viz. Associated Breweries &Distilleries Limited and Maltex Malsters Limited with the balance sheet of your Company.In terms of the approval so granted by the Central Government, the Accounts, etc., of theabove subsidiaries are not required to be attached with the balance sheet of the holdingcompany. However, these Accounts will be provided on request to any member requiring tohave a copy, on receipt of such request by the Company Secretary at the Registered Officeof the Company.
Statement pursuant to Section 212 (1) (e) also forms part of the Annual Report.
As per the Listing Agreement, Consolidated Accounts conforming to applicable AccountingStandards are attached to this Annual Report.
Your Company has entered into Agreement with National Securities Depository Limited andCentral Depository Services (India) Limited in accordance with the provisions of theDepositories Act, 1996 and as per the directions issued by Securities and Exchange Boardof India.
The Board of Directors of your company has been reconstituted and broad based tocomprise of 12 Directors with a balanced combination of Promoters and IndependentDirectors. Mr. John Hunt and Mr. John Nicolson opted out of the Board. Mrs. Kiran MazumdarShaw and Mr. Madhav Bhatkuly have been inducted on Board as Independent Directors witheffect from October 26, 2009. Mr. Duco Reinout Hooft Graafland, Mr. Sijbe Hiemstra and Mr.Guido de Boer were inducted on Board with effect from December 07, 2009. Mr. StephanGerlich was appointed to the board on July 02, 2010.
The Board places on record the contributions of outgoing Directors during their tenureon the Board of your Company.
Mr. Chugh Yoginder Pal, Mr. A K Ravi Nedungadi and Mr. Sunil Alagh retire by rotationat the ensuing Annual General Meeting and being eligible, offer themselves forre-appointment.
AUDITORS AND AUDITORS REPORT
M/s Price Waterhouse, Statutory Auditors hold office until the conclusion of theensuing Annual General Meeting and are eligible for re-appointment.
There are no qualifications or adverse remarks in the Auditors Report whichrequire any clarification or explanation.
Your Companys Equity Shares are presently listed at the Bombay Stock ExchangeLimited, National Stock Exchange of India Limited and the Bangalore Stock ExchangeLimited. The listing fees have been paid to all the Stock Exchanges for the year2010-2011.
During the year under review, the Securities of your Company have been delisted fromStock Exchanges at Chennai and New Delhi upon application made in terms of specialresolution passed by the members in this regard.
CASH FLOW STATEMENT
A Cash Flow Statement for the year ended March 31, 2010 is appended.
A Report on Corporate Governance forms part of this Report along with the Certificatefrom the Company Secretary in practice.
The Company has not invited any Fixed Deposits.
PARTICULARS OF EMPLOYEES, CONSERVATION OF ENERGY & TECHNOLOGY ABSORPTION, ETC.:
Information in accordance with sub-Section (2A) of Section 217 of the CompaniesAct,1956, read with the Companys (Particulars of Employees) Rules, 1975, forms partof this Directors Report and is annexed. Particulars required under Section217(1)(e) are also annexed.
DIRECTORS RESPONSIBILITY STATEMENT
Pursuant to Section 217(2AA) of the Companies Act, 1956, your Board of Directors reportthat:
in the preparation of the Annual Accounts, the applicable accounting standardshave been followed along with proper explanation relating to material departures, if any.
accounting policies have been selected and applied consistently and that thejudgements and estimates made are reasonable and prudent so as to give a true and fairview of the state of affairs of the Company at the end of the financial year and of theprofit of the Company for that period.
proper and sufficient care have been taken for the maintenance of adequateaccounting records in accordance with the provisions of the Companies Act, 1956, forsafeguarding the assets of the Company and for preventing and detecting fraud and otherirregularities.
the annual accounts have been prepared on a going concern basis.
Your Directors wish to place on record their appreciation for the continued supportreceived from shareholders, banks and financial institutions. Your Directors are alsograteful to the Companys business partners and customers for their continued supportand patronage. Finally, your Directors wish to acknowledge the support and contribution onthe part of all employees who constitute our most valuable asset.
| || ||By Authority of the Board, |
|Bangalore ||Kalyan Ganguly ||Guido de Boer |
|July 21, 2010 ||Managing Director ||Director & CFO |