Balaji Distilleries Ltd merged Management Discussions

BALAJI DISTILLERIES LIMITED ANNUAL REPORT 2009-2010 MANAGEMENT DISCUSSION AND ANALYSIS General: The Company manufactures Indian Made Foreign Liquor (IMFL) and beer. The IMFL and Beer manufacturing facility are situated near Chennai. Both these two products together are some times referred as Alcoholic Beverages. INDUSTRY STRUCTURE AND DEVELOPMENT: Indian Made Foreign Liquor (IMFL) and Beer industries are state subject and as such every State has its own policies in respect of this industry. Tamilnadu, the state in which the company operates, has its own policy, both for manufacture as wellasfor marketing/distribution. With the issue of three new licenses by the Government of Tamilnadu for the production of IMFL during the last year, there are 9 Distilleries in the State of Tamilnadu. Out of the new distillery licenses issued, all the three distilleries have started commercial production. There are three breweries in the State of Tamil nadu. In 2008-09, the State Government has also issued one more license for the manufacture of beer and the unit is yet to commence commercial operation. All the products manufactured by these units are sold to Tamilnadu State Marketing Corporation Ltd (TASMAC) and TASMAC in turn sell through TASMAC owned shops. As a preventive measure to curb the menance of unauthorized movement of liquor from the neighboring states, TASMAC has started purchasing the major requirement of IMFL and Beer only from the units situated within the state. From November 2003, the State Government has taken over the retail distribution of IMFL and Beer and accordingly the entire alcoholic beverages are sold through retail outlets owned by TASMAC. This move has benefited the consumers by way of availability of genuine products at government fixed prices. Within the IMFL segment, the demand is split between various products such as Whisky, Brandy, Rum, Gin, Vodka. Within the product segments, the demand is further split between the premium brands, medium brands and lower end brands, which are categorized according to the price. In terms of volume, it is the brandy and the lower end brands sells more than the other products and premium and medium brands. During 2009-10 TASMAC has sold about 412.26 lakhs cases of IMFL registering a growth rate of 14.95% over the last year. During 2009-10 TASMAC has sold about 239.71 lakhs cases of Beer registering a growth rate of 6.42% over the last year. Contribution to the Exchequer: Alcoholic beverages industry is one of the major contributors to the exchequer by way of State excise duty, VAT, Excise Label Fee, etc. During 2009-10, your company has contributed Rs.1,53,231.92 lakhs to the exchequer of the State Government. OPPORTUNITIES AND THREATS OPPORTUNITY: Alcoholic beverages industry probably is the only industry, which posts consistent growth year after year and is not affected by any cyclical factors. With the state governments efforts to eradicate the evil of illicit liquor, the demand for medium and lower end brands are expected to boom in the years to come. Your company has already made in roads into lower segment. THREAT: Even though the entry of foreign players was perceived as a threat long back, it is not considered as a threat today due to high price of the foreign brands, which predominantly target the elitist society. Prohibition is generally perceived as a major threat to this industry. However, with the state governments enjoying high revenue from this industry and with the lesser opportunity to compensate the loss of huge revenue, we do not anticipate any threat on account of prohibition. OUTLOOK: Today, with the acceptance of social drinking, the alcoholic beverages industry is likely to grow with the compounded annual growth rate of 16%. More and more foreign players are expected to come into India, especially in the beer segment and on such foreign players entering the beer market, this segment is expected to grow exponentially. Your Company continues to enjoy a significant market share in Tamil Nadu in respect of Indian Made Foreign Liquor and Beer. Barring unforeseen circumstances, the Company expects to do well in this line of business, in the coming years. RISK AND CONCERNS THE MANAGEMENT PERCEIVE: For alcoholic beverages industry, the significant risk factor is the purchasing power of individuals and non existence of brand loyalty. The company is ensuring that its products are available on the shelf at any point of time. FINANCIAL SUMMARY: The summarised Profit & Loss account of the company is given below: Rs.in lakhs 2009-2010 2008-2009 (financial (financial year ending year ending 31st March 31st March 2010) 2009) Sales and services 2,19,944.45 2,19,640.57 Other income 485.71 486.59 Total income (A) 2,20,430.16 2,20,127.16 Excise Duty and TN Vat 1,52,348.21 1,52,761.73 Cost of Materials 41,522.80 41,742.83 Overheads 23,579.97 23,261.38 Interest 2,746.96 3,531.45 Depreciation 964.05 835.23 Total (B) 2,21,161.99 2,22,132.62 Profit/(Loss) before prior period/ exceptional Items (A-B) (731.83) (2,005.46) Add/(Less) prior period adjustments 1.03 - Add/(Less): Exceptional items 196.11 3,147.09 Less: Provision for Fringe Benefit Tax - 181.93 Less: Provision for Fringe Benefit and Income Tax of earlier years - 13.52 Profit/(Loss) Before Taxation (535.72) 947.21 Provision for taxation - - Profit/(Loss) after Taxation (535.72) 947.21 EXPANSION DETAILS: Brewery Unit: Expansion of the brewery unit has been completed during the current year and commercial production from the new brew house started with effect from November, 2009. MERGER OF THE COMPANY WITH UNITED SPIRITS LIMITED: During the 2008-09, your Board of Directors have approved the scheme of arrangement interalia envisaging transfer of brewery division of the company to Chennai Breweries P Ltd, its wholly owned subsidiary and merger of residual company consisting of Distillery division into United Spirits Limited (USL). The merger shall be effective from 1st April, 2009, subject to obtaining necessary approvals. The shareholders of USL have also approved the Scheme of Arrangement at their meeting held on 21st April, 2010. However the entire process of merger is delayed due to delayin obtaining the sanction of BIFR for the Scheme. Swap Ratio: The swap ratio in which the shares are proposed to be allotted by USL is given below: Existing Proposed Equity 2 (two) equity shares of shareholders Rs.10/- each of USL for every 55 (fifty five) equity shares of Rs.10/- each held in BDL Preference 1 (One) 12.5% Redeemable shareholders (*) Preference Shares of Rs.10/- each of USL redeemable in March 2014, for every 2 (two) 12.5% Cumulative Redeemable Preference Shares of Rs.10/- each held in BDL OCCRPS 1 (One) 12.5% Redeemable holders (*) Preference Shares of Rs.10/- each of USL, redeemable in March 2014 for every 2 (two) 6% Optionally Convertible Cumulative Redeemable Preference Shares (OCCRPS) of Rs.10/- each held in BDL (*) However your company has redeemed the preference shares. SHARE CAPITAL: On 15.06.2009, your company has allotted 9 crore Equity Shares to the three investors on receipt of Rs.111.618 crores being the balance amount payable on the warrants upon conversion into equity shares. These shares are yet to be listed in the Stock Exchanges and due to which are held in the physical form. On 15.06.2009, your Company has redeemed 4,46,20,900 - 6% Optionally Convertible Cumulative Redeemable Preference Shares (OCCRPs) of Rs.10/- each aggregating to Rs.44,62,09,000/- for Rs.18,02,09,400/- out of the proceeds from the conversion of warrants into equity shares. On 30.06.2009, your Company has also redeemed 15000000 - 12.5% Cumulative Redeemable Preference Shares of Rs.10/- each aggregating to Rs.15 crores for Rs.7.50 crores out of the proceeds from the conversion of warrants into equity shares REFERENCE TO BIFR: The Honble Board for Industrial and Financial Reconstruction (BIFR) has declared the company as sick industrial undertaking in terms of section 3(1)(o) of the Sick Industrial Companies (Special Provisions) Act, 1985 at its hearing held on 20th December, 2006 and appointed M/s. IDBI Bank Ltd as the operating Agency (OA). The OA has submitted the revised Draft Rehabilitation Scheme (DRS) on 5th February, 2009 after taking into account the Scheme of Arrangement approved by the Board of Directors, which interalia interalia envisaging transfer of brewery division of the company to Chennai Breweries P Ltd, its wholly owned subsidiary and merger of residual company consisting of Distillery division into United Spirits Limited (USL). The Honble BIFR has circulated the DRS vide its order dt 19th February, 2010. Mandatory hearings have been held on 10th May, 2010, 26th May, 2010 and 4th June,2010 and no creditor has raised any objection for the DRS. In the meeting held on 4th June, 2010, the Honble BIFR has reserved its order and directed that the order will be pronounced on 24th June,2010 in the Open court. The pronouncement of order was postponed to 30th June, 2010. On 30th June,2010, the Honble BIFR has pronounced the order vide which it has issued certain directions to investors and OA. The Company preferred an appeal against the order of BIFR dated 30.06.2010 with the Honble Appellate Authority for Industrial and Financial Reconstruction (AAIFR) and obtained stay of the said BIFR order. The next hearingofthe case has been fixed for 16.09.2010. INTERNAL CONTROL SYSTEM AND THEIR ADEQUACY: Your company has established its own internal control systems and procedures, which ensures maintenance of proper financial and accounting records. Your company review the policies and procedures on a continuous basis for effective internal control. MATERIAL DEVELOPMENTS IN HUMAN RESOURCES, INDUSTRIAL RELATIONS FRONT: The company considers the Human Resources as its most important asset and constantly endeavours to retain, nurture and groom talent to meet the current and future needs of the business. The company currently has 593 employees. CAUTIONARY STATEMENT: The statement in this report is based on the experience and information available to the company in its businesses and assumptions with regard to economic conditions, Government and regulatory policies. The performance of the company is dependent on these factors. It may be materially influenced by various factors including change in economic conditions, government regulations, tax laws and other incidental factors, which are beyond the companys control, affecting the views expressed in or perceived from this report.