Northern Spirits Ltd Management Discussions

ECONOMY OVERVIEW AND DEVELOPMENT

The global economy paints a sobering picture with multiple crises, jeopardizing progress towards the Sustainable Development Goals (SDGs). Although global economic growth outperformed expectations in 2023 with several large economies showing remarkable resilience, simmering geopolitical tensions and the growing intensity and frequency of extreme weather events have increased underlying risks and vulnerabilities. Furthermore, tight financial conditions also pose increasing risks to global trade and industrial production.

The financial year had to overcome powerful challenges such as Russia?s invasion of Ukraine, Red Sea debacle, widening inflation impacting cost of living and a slowdown in China caused by strong Zero Covid policy adopted by the Chinese government. Despite these gloomy predictions, the global economy remains remarkably resilient, with steady growth and inflation slowing almost as quickly as it rose.

According to the Economic Outlook?s projection global GDP is likely to remain steady at 3.1% in 2024, the same as the 3.1% in 2023, followed by a slight pick-up to 3.2% in 2025.

GDP growth in the United States is projected to be 2.6% in 2024, before slowing to 1.8% in 2025 as the economy adapts to high borrowing costs and moderating domestic demand. In the euro area, which stagnated in the fourth quarter of 2023, a recovery in real household incomes, tight labour markets and reductions in policy interest rates will help generate a gradual rebound. Euro area GDP growth is projected at 0.7% in 2024 and 1.5% in 2025.

Growth in Japan is likely to recover steadily, with domestic demand underpinned by stronger real wage growth, continued accommodative monetary policy and temporary tax cuts. GDP is projected to expand by 0.5% in 2024 and 1.1% in 2025.

China is expected to slow moderately, with GDP growth of 4.9% in 2024 and 4.5% in 2025, as the economy is supported by fiscal stimulus and exports.

Inflation may stay higher for longer, resulting in slower-than-expected reductions in policy interest rates and leading to further financial vulnerabilities. Growth could disappoint in China, due to the persistent weakness in property markets or smaller-than-anticipated fiscal support over the next two years. High geopolitical tensions remain a significant near-term risk to activity and inflation, particularly if the evolving conflict in the Middle East and attacks in the Red Sea were to widen or escalate.

Monetary policy needs to remain prudent, to ensure that inflationary pressures are durably contained. Governments face rising fiscal challenges given high debt levels and sizeable additional spending pressures from population ageing, and climate adaptation and mitigation. Future debt burdens are likely to rise significantly if no action is taken, highlighting the need for stronger near-term efforts to contain spending growth, improve public spending efficiency, reallocate spending to areas that better support opportunities and growth, and optimise tax revenues.

World GDP growth projections for 2024 and 2025 (in %)

INDIAN ECONOMY

Despite challenges posed by adverse weather conditions and a weakening international outlook, the Indian economy demonstrated resilience, maintaining healthy macroeconomic fundamentals. The Indian economy continues to exhibit strong economic performance with broad based growth across sectors. The Country has recovered swiftly from the pandemic, with its real GDP in FY24 being 20 per cent higher than the pre-COVID, FY20 levels.

The Reserve Bank of India, in its latest Monetary Policy Committee meeting, noted the strong growth momentum in the economy and projected real GDP growth for 2024-25 at 7%, driven by a pickup in rural demand and sustained momentum in the manufacturing sector.

Key drivers of this growth momentum include capital expenditure on infrastructure development, rise in private corporate investment, strong service sector performance, and improved consumer confidence. This growth momentum is expected to continue in FY 2025, supported by improved goods exports, increased manufacturing productivity and higher agricultural output.

Moreover, the Interim Budget 2024-25 lays the foundation for achieving the vision of a developed and self-reliant India by 2047. It outlines a comprehensive economic management strategy, including infrastructure development, digital public infrastructure, taxation reforms and proactive inflation management.

Despite volatility in the global macroeconomic environment, the outlook for the Indian economy remains positive. Sustained political stability, enhanced government focus on public capital expenditure, increasing private capital expenditure, growing credit demand, moderating inflation, low corporate debt levels, and deleveraged balance sheets, are all expected to contribute to the economic growth.

INDIAN SPIRITS INDUSTRY

India holds the position of the third-largest market for alcoholic beverages globally. In 2023, the size of the alcoholic beverage market was about USD 55 billion in India. The market size of the alcohol industry is likely to increase at a CAGR of 7% to USD 73 billion in 2027.

The alcoholic beverage sector has a high-growth potential given the favourable demographics and increasing social acceptance. The alcoholic beverages industry in India has experienced remarkable growth in recent years. This growth can be attributed to several factors, such as rapid urbanisation, evolving consumer preferences, a youthful demography, a burgeoning middle-class population with greater purchasing power and the growing preference for premium alcoholic beverages among consumers. Against a backdrop of a 1% volume growth for global total beverage alcohol in 2022, spirits volumes in India increased by 12%, with beer up 38% and wine up by 19%.

India?s excise policy has evolved and so has its retail offer, providing the perfect environment for ongoing premiumization. Haryana has a number of well-lit, attractively fitted and conveniently located outlets, some of them open 24/7 and staffed by well-informed, young employees. Attractive outlets bring more consumers and deliver more revenues, both to the licence-holders and the State.

The states of Karnataka, Maharashtra, West Bengal, Odisha, Telangana, Delhi, Haryana, Punjab, etc. are among the largest consumers of alcohol in India. As far as a financial year is concerned, 2022-23 recorded Rs 22,000 crore liquor sales in Bengal and 2021-2022 Rs 18,000 crore. The last fiscal was the first time that liquor sales crossed the Rs 20,000-crore mark in Bengal.

Currently, the Indian Spirits industry consists of two distinctive markets differentiated based on the target audience, product characteristics and distribution network:

1. Indian Made Foreign Liquor (IMFL) or Premium Segment

2. Indian Made Indian Liquor (IMIL) or Value & Value Plus Segment IMFL is dominated by brown spirits including whisky, rum, and brandy with a small share of white spirits including vodka and gin. This is unlike world markets where white spirits are dominant. Though white spirits in India have shown higher growth for the period between FY 2023 to FY 2028 with CAGR of 19% in volume terms whereas CAGR growth for the same period for the dominant brown spirits in volume terms was 10.2%. IMFL market in India is a concentrated market with top three players controlling close to half of the overall market by volume in FY 2023.

IMIL is made from rectified spirits with alcohol percentage of 30% to 37%. Rectified spirits have lower level of purity as compared to extra neutral alcohol (ENA) used in IMFL. However, recently country liquor companies have started using ENA as raw material. Country liquor market was estimated at 350 million cases in FY 2023. However, the market is projected to reach 445 million cases by FY 2028.

Indian beer market is traditionally a strong beer market with close to 85% of market with strong beers. United Breweries along with AB InBev and Carlsberg hold 80% of the market share. Premium range of beers in both strong and light beer categories are driving growth in beer market in India. The industry has evolved from manufacturing standard beers such as strong and lager beer to flavoured and variety beers in line with trends in other developed countries. Strong lager beers, with alcohol content between 6% and 8%, dominate the market accounting for over 80% of the total beer consumed in India.

The alcohol industry has quickly recovered after lockdown, which is a sign of its robust and sizable consumer base. Numerous home-grown brands have carved out a place for themselves in the segment as alcoholic beverage companies have made their way into the domestic market. They are maximising the potential of digital media, which is assisting the segment?s expansion in numerous ways. In contrary to the past, alcohol brands can now advertise their goods through digital platforms, social media, concerts, events, and a variety of other venues.

Imported wines have also played an important role in development of the wine segment in India. However, unlike other Asian countries including Japan and South Korea, growth of import in wines has been limited and market has been captured by domestic players where they have large variety from still to sparkling.

The Indian regulatory framework is also playing an important role in providing a level playing field for domestic alco-beverage players. Foreign liquor when imported in India is charged a custom duty as per Customs Act 1962. Customs tariff of 150% is applicable on finished product like scotch whisky etc. bottled in country of origin or bulk scotch whisky imported for bottling in India as well as intermediate products like undenatured ethyl alcohol of alcoholic strength by volume of 80% volume or higher which is used for blending with production in India.

Regulated distribution is one of the tools used by state governments to control the sale of alco-beverages. As each state has its own model of distribution, there are multiple modes being used in the country including complete control of distribution network with state run wholesaling and retailing to control over either wholesaling or retailing and in some cases both. However, in some states, distribution is not carried out directly by the state where both wholesaling and retailing are in the hands of private players. States also control distribution by not allowing to open new outlets in their areas. Any movement of alco-beverages outside the manufacturing units is authorized by government officials.

Currently, this industry supports approximately 20 million jobs, and with its growing landscape, further employment opportunities are likely to be created. The alcohol industry is a significant sector of the Indian economy. It not only provides the states with up to 2 lakh crores in revenue, but it also directly supports nearly 40 lakh farmers.

Greater social acceptance for drinking amongst women as well as in Tier II and Tier III towns is expected to open newer profitable consumer segments. Rapid increase in urban population, a sizable middle-class population with rising disposable income, and a growing economy are driving consumption of alcohol in India. These factors will also result in consumers choosing to upgrade to more quality offerings.

India is the largest whisky market in the world by volume. Whisky consumption in FY 2021 was 183 million cases which is estimated to have recovered to close to 243 million cases in FY 2023 making it one of the strongest categories that led to the recovery of the alco-beverage market in India after the impact from COVID-19. Brandy and Rum are other important categories after Whisky in the dark spirit?s market.

Rise in disposable income is leading to consumers upgrading their preferences, resulting in up-trading in from country liquor to IMFL whisky and up-trading within categories of IMFL whisky including popular, prestige, premium, and luxury segments. Rapid urbanisation is also leading to spur in aspirational values of customers. The emergence of new consumers expecting more sophisticated experiences is driving the demand for premium quality whisky with up-trading in each segment.

OUTLOOK

According to a report by the International Spirits & Wines Association of India (ISWAI), India?s alcoholic beverage market is set to boom, reaching USD 64 billion in just five years, solidifying its position as a top five global contributor. The industry, currently valued at USD 52.4 billion (2% of GDP), encompasses both branded and country liquor.

The domestic alcoholic beverages industry is expecting a surge in sales driven by in-home parties and festive celebrations. Industry experts are optimistic about 7-8 per cent growth for the collective liquor industry. Premiumization trends continue to stay strong as Indian consumers are appreciating quality over quantity, as can be seen in an increasing desire for refined experiences and finest offerings. In last few years, there has been a shift in lifestyle with consumers choosing to live a healthier life. This trend has become stronger post COVID-19 pandemic. Customers are ready to pay a premium to move to a higher quality product in each segment. This is going to help up-trading within each segment as well as up-trading from one segment to the other as higher priced products are perceived as healthier.

Technology boom and prevalence of western culture of social drinking is driving premiumization in whisky category. Consumption of alcohol is socially more acceptable among millennials and there is a shift in the way people socialise from late night parties to pubs and lounges and informal food-related occasions at-home.

Retailing of alco-beverages including whisky is going through transition in India. Multiple states through their excise policies have allowed for a better retail experience including larger stores, stores at high retail destinations, evolved merchandising, and product tastings. This is leading to a positive effect and up-trading of brands by the customer.

Considering Indias large number of young people, the industry has numerous opportunities. Young adults are likely to drive much of the expected and projected future demand as they approach the legal drinking age and become more affluent. To capture as much of the younger generation as possible, brand owners are focusing on online marketing and storefronts. The spirits industry is all set for its growth phase, in order to sustain growth, it needs an enabling ecosystem.

However, on the cost and profitability side, inflationary pressure is expected to remain. There are mixed signals regarding the ethanol blending programme, which affects the cost of Extra Neutral Alcohol (ENA), the primary ingredient for alcoholic beverages. Glass prices remain high, which affects the vast majority of alcoholic beverages. Fuel prices are uncertain. The industry is in touch with state governments for compensatory price increases to mitigate the adverse impact on margins, and while some relief is expected, the extent of that is not known at this stage.

Free Trade agreements which under discussion will play a pivotal role on the future of the industry. If India is able to negotiate the removal of non-tariff barriers imposed by countries like the UK and EU on the majority of Indian products, then a surge in liquor export from India can be seen in the future.

RISKS AND CONCERNS

Risk is an integral and unavoidable component of business. Given the challenging and dynamic environment of operations, your company is committed to manage risk for accomplishment of its goals. Though risks cannot be eliminated, an effective risk management program ensures that risks are reduced, avoided, mitigated or shared. Following are the identified key business risks of the Company:

Regulatory risk: Your Company operates in a sector which is highly exposed to the risk of changing regulations.

Mitigation measure: Your Company closely monitors the regulatory environment and prepares for any foreseeable changes. In addition, its team of expert and experienced professionals ensures prompt and appropriate measures to meet the changes in regulatory framework. At all times, the Company ensures strict adherence to laws and policies.

Inflation risk: Your Company like other companies is part of Indian economy and is facing risk of inflation and high fluctuation in commodity prices.

Mitigation measure: The Company?s long-standing relationship with most suppliers ensures steady availability of products at competitive prices.

Economic risk: The performance of the Company is dependent on robust consumption, led by rising income levels. This in turn is dependent on robust economic growth, cost of input and on the basis of disposable income.

Mitigation measure: The Company is focused on driving agility and responsiveness across the value chain.

Attrition risk: Human capital forms a critical pillar of growth, making it essential for the Company to attract and retain top talent to drive strategic business success.

Mitigation measure: The Company has implemented comprehensive HR initiatives to foster a progressive culture and an engaged workforce, prioritising employee well-being, diversity, and career progression.

Cyber security risk: As systems and technologies become more integral to business operations, the significance of information and cybersecurity has grown considerably. Any breach could lead to the loss of sensitive data, financial information, business disruptions, potential fines and harm to the Company?s reputation.

Mitigation measure: The Company has adopted a robust IT system to combat escalating cybersecurity threats, ensuring protection of sensitive data from unauthorized access and leakage.

FINANCIAL PERFORMANCE AND ACCOUNTING TREATMENT

Gross revenues for this financial year stood at Rs. 1,23,530.58 Lakhs as against Rs. 90,566.11 Lakhs in the previous year. After providing for depreciation and taxation the net profit of the Company for the year under review was placed at Rs. 1,657.28 Lakhs as compared to the net profit of Rs. 1,113.37 Lakhs incurred during the previous year registering a steady growth of 48.85%. The Earnings Per Share (EPS) stood at Rs. 10.32 (face value of Rs. 10/- each) for the financial year ended 31^st March, 2024 as against 6.94 (face value of Rs. 10/- each) in the previous year. Company has produced a satisfactory performance both in terms of profitability and turnover inspite of the challenges faced during the year. Company?s prime focus has been on operational efficiency and market diversification.

HUMAN RESOURCE DEVELOPMENT

The Company?s relation with the employees and investors continues to be cordial which are the most valuable resources of our organization.

Company is committed to sustainable work practices and a transparent work culture which helps in attracting and retaining the talented people in the industry. The Company continues to focus on employee core connect, engagement, learning and development to build a workplace that is safe engaging and productive. Employees are presented with various learning opportunities to enhance career growth. Over the years your company has been able to build a team of qualified, dedicated & motivated professionals. The working atmosphere provided to the employees is aimed at creating a sense of ownership which helps them to shoulder greater responsibilities.

The Company firmly believes that its human resources are the key enablers for the growth of the Company and, therefore, an important asset. Taking this into account, the Company continues to invest in developing its human capital and establishing its brand in the market to attract and retain the best talent.

Employee relations during the period under review continued to be healthy, cordial and harmonious at all levels and the Company is committed to maintaining good relations with the employees.

ADEQUACY OF INTERNAL CONTROL SYSTEM

Company maintains an adequate system of internal controls commensurate with the nature, size, and complexity of the business operations. The Company has ensured that stringent and comprehensive controls are put in place to ensure effective and productive use of resources, safeguarding of the

Company?s assets and interests, all transactions are approved, registered, properly reported and checks and balances guarantee reliability and consistency of accounting data.

The Internal Auditor monitors and evaluates the efficacy and adequacy of internal financial control systems in the Company, its compliance with operating systems, accounting procedures and policies at all levels of the Company.

The internal control system facilitates optimum utilisation of available resources to ensure the protection of interest of all the stakeholders. Significant audit observations and the corrective actions thereon are presented to the Audit Committee of the Board. The control framework is established and maintained by the Company. The observations by the auditors is perused by the Management, the Audit Committee as well as the Board for proper implementation. The Company?s internal financial controls have been found to be adequate and effective.

CAUTIONERY STATEMENT

The statements in the above analysis, describing the Company?s projections, estimates, expectations or predictions may be ‘forward looking statements? within the meaning of applicable securities laws and regulations. The actual results may differ from those expressed or implied. Important factors that could make a difference to the Company?s operations include changes in government regulations, tax regimes, economic developments within the country and abroad, and other related factors.