Pioneer Distilleries Ltd Management Discussions.



Global economy: Global economy has slowed down in the FY 18 (3.7%) vs. FY17 (3.8%) driven by the negative effects of tariff increases enacted in the United States (US) and China earlier this year. The softned momentum worldwide in the second half of 2018 - including Germany with the introduction of new automobile fuel emission standards and Italy where concerns about sovereign and financial risks have weighed on domestic demand. In addition, weakening financial market sentiment as well as a contraction in Turkey are now projected to be deeper than anticipated. Growth in India continue to increase slightly to 7.5% in FY19 (vs. FY18 of 7.3%). Advanced economies were led by a strong pick-up in spending. Emerging Market and Developing Economies grew on a stronger footing primarily supported by an acceleration in private consumption. Global growth is expected to scale up to 3.5% & 3.6% in 2019 and 2020 respectively, strengthened by strong momentum, favourable market sentiment, accommodative financial conditions, and expanding fiscal policy in

US which is expected to boost both domestic and international markets.

(Source: IMF Global Economic Outlook, Jan.19)

Indian economy: Indias economy is poised to pick up in 2019, benefiting from lower oil prices and a slower pace of monetary tightening than previously expected, as inflationpressures ease. As per the second advanced estimates issued by the Central Statistics Organisation (CSO), Indias GDP at constant prices is expected to grow by 7.2% in the financialyear 2018-19 as compared to 7.1% in the financial year 2017-18. The governments impetus on ‘Make in India, investment in infrastructure and creation of smart cities, rising disposable incomes, implementation of the Seventh Pay Commission, recovery in exports and lower inflationcumulatively contributed to growth. As per Harvard University report, India topped the list of the fastest growing economies in the world for the coming decade with growth expectations of 7.9% annually till 2026, ahead of China and US. The positive effects of Governments economic actions are also reflected in the fact that India was ranked 77th in ‘Ease of Doing Business ranking amongst 190 countries as per World Bank, jumping 27 positions from the previous year. The economic growth is expected to gradually rise with continued implementation of structural reforms that raise productivity and incentivise private investment. According to IMF, the Indian economy is expected to be the fastest growing major economy in the World with

. 73%growthinthefinancial year 21 2019-20and 7.5%inthe financialyear 2020-


(Source: imf- cuts-india- growth-forecast-to-73-for-2019-20/ article26782899.ece/)


India is one of the fastest growing alcohol markets in the world. Rapid increase in urban population, sizable middle-class population with rising spending power, and a sound economy are certain significant reasons behind increase in consumption of alcohol in India. Technology boom and increasing number of multinational companys expanding presence in India has led to increased disposable income and prevalence of Western culture of social drinking, which is boosting alcohol consumption. India is expected to be the third largest consumer economy as its consumption is expected to triple to US$ 4 trillion by 2025, led by shift in consumer behaviour and expenditure pattern. With nearly 62% of population younger than 35 years, India is a young country with median age of 27.9 in 2018. This provides tremendous opportunity to drive growth of alcobev industry on the back of its rising working-age population. The nation is expected to add almost 10-12 million people to its workforce every year over the next two decades, with the working-age population crossing 1 billion mark by 2030. The per capita consumption of alcohol in 2018 is estimated at 11.8 litres which is considerably lower than the regional average of 20.9 litres per capita amongst Asian countries. It is expected that per capita consumption will increase with changes in lifestyle and aspiration of the population.

(Source: home/20181112005505/en/Indian-Alcohol-Consumption-



Industry performance: The alcobev industry in India has been growing at more than 12% Compounded Annual Growth Rate (CAGR) for the decade starting 2001 making it one of the fastest growing markets in the World. In 2018, the industry bounced back to about 3-4% growth after experiencing sharp decline of about 2.7% in 2017 (some of the causes like Supreme Court-order banning sale of alcohol near highways and distribution changes in some states like in West Bengal, Chhattisgarh and Jharkhand contributed to this decline)

Market segmentation: The Indian alcobev industry is segmented into IMFL (Indian Made Foreign Liquor), IMIL (Indian Made Indian Liquor), Wine, Beer and imported alcohol. The heavy import duty and taxes levied raised the prices of imported alcohol to a large extent. IMFL category accounts for almost 72% of the market.

IMFL sales in value grew 6% in the financialyear under review. With consumer demand picking up, the industry is expecting to grow in mid-single-digit in the coming financial year as well


Source: cons-products/liquor/liquor-ban-2017-sales-in-low-spirits- valuations-soar/articleshow/62667737.cms

Consumption pattern: The states of Andhra Pradesh, Telangana, Kerala, Karnataka, Sikkim Haryana and Himachal Pradesh are amongst the largest consuming states for alcobev in India. The most popular channel of alcobev sale in India is liquor stores as its consumption is primarily an outdoor activity and supermarkets and malls are present only in the tier I and tier II cities of India. As per the World Health Organization, close to 30% Indians consume alcobev products out of which 4%-13% are daily consumers. The minimum drinking age varies from 18 to 25 years across states in India, taking the total count of legal drinking age population to approximately 650 million in 2018.

Constantly changing regulatory environment: Recently, Government in the state of Maharashtra has increased the excise duties abnormally which had a cascading impact on the sale of liquor in the state. Further, declaration of General Election in April has also resulted in multiple challenges in terms of effective supply chain since timing of election coincide with annual excise license renewal cycle in majority of states etc. Growth drivers: Indian alcobev industry holds huge growth potential given the low per capita consumption and the demographics and aspirations of the growing younger population. Rapid urbanisation is expected to enhance disposable income, which is favourable for the growth of the industry. The revival in GDP will give a further fillip to alcobev sales as IMFL volumes are up. Favourable demographics with a median age of 27.9 years and growing social acceptability of alcobev consumption are likely to bode well for the industry. The organised players stand to benefit from steady growth in the conversion from country liquor to IMFL given increasing health concerns associated with consumption of country liquor. States like Tamil Nadu and Karnataka have banned the sale of country liquor primarily on account of rising death toll due to consumption of country liquor.

Growing prevalence of premium alcobev: Rapid urbanisation is also leading to spur in aspirational values of people, leading to higher consumption of premium alcobev brands. With more Indians travelling abroad, rising aspirations, favourable environment for imported liquor and higher disposable income, consumers are upgrading towards Premium segments in the country. The rise in premiumisation is clearly reflective in the increased focus of the big players on semi-premium and Premium categories with an increase in launches and increased marketing of these categories. Another trend which is gaining traction in the alcobev space is the growing popularity of grain-based liquor as against traditionally popular molasses-based liquor. As per industry estimates, the Premium and above segment is expected to grow at a faster pace at 14% CAGR over 2016-2021 than the overall industry growth.


Regulatory oversight of both central and state governments encompasses a slew of restrictions on production, movement and sale of alcobev products. Alcobev also falls under the purview of Food Safety and Standards Authority of India (FSSAI). In addition, direct advertising of alcobev products are not permitted in India. Prohibitively high inter-state duties compel national liquor players to set-up owned or contract manufacturing setups in every state. Licenses are required to produce, bottle, store, distribute or retail all liquor products. Distribution is also highly controlled, both at the wholesale and retail levels. In states with government control, pricing action is based on government notifications. In states where retailing is controlled by the state government, there is a specified quota that each player can sell, capping potential to increase market share. These regulations make operations difficult for players.

?? Goods and Services Tax (GST):

As one of companys primary product Molasses based ENA is out of the purview of GST while the primary raw material Molasses is a part of GST, input credit offset is not available resulting in increase in the cost of operations. Your company has been working together to put in place a robust mitigation program to reduce the adverse impact on its Operations

?? Price control over material:

After experiencing benign commodity cycle during last year, in FY18 your company has experienced significant hit on account of increase in prices of molasses largely driven by EBP (Ethanol Blending Policy) announced by Government in December 18. Due to significant reliance on commodity market prices (molasses & grain), profitability of the Company has been unstable. Your company is exploring various options including indexing model pricing with its largest customer to stabilise the margins.


The product wise performance of the Company is given hereunder:

(i) Extra Neutral Alcohol (ENA): Production of Molasses based ENA (MENA) during the financial year

April 01, 2018 to March 31, 2019 has been of the order of 134.34 LBL and production of Grain based ENA (GENA) 102.83 LBL. (ii) Absolute Alcohol (Ethanol): Production of Absolute Alcohol during the financial year April 01, 2018

March 31, 2019 has been of the order of Nil.

(iii) Malt Spirit: Production of malt spirit during the financial year April 01, 2018 to March 31, 2019 has been of the order of 22.59 LBL. The Company has set-up a maturation plant and the malt spirit maturation facility as of March 31, 2019 is 15.50 LBL. (iv) IMFL Bottling: 12.73 Lacs Cases.

(v) CO2: Carbon-di-Oxide Dry Ice: Production of Carbon-di-Oxide Dry Ice during the financial year April

01, 2018 to March 31, 2019 has been of the order of 508.88 MT and CO2 liquid is 1,263.54 MT.. (vi) Special Denatured Spirit (SDS): Production of SDS during the financial year April 01, 2018 to March

31, 2019 has been of the order of 2.59 LBL.

(vii) Distillers Wet Grain Soluble (DWGS) and Distillers Dry Grain Soluble (DDGS): Production of

DWGS during the financial year April 01, 2018 to March 31, 2019 has been of the order of 768.695 MT. Production of DDGS during the financial year April 01, 2018 to March 31, 2019 has been of the order of

3,095.18 MT.

(viii) Cattle feed (Malt spent grain): Production of Cattle Feed during the financialyear April 01, 2018 to

March 31, 2019 has been of the order of 5148.385 MT.

BUSINESS ANALYSIS Company overview

Pioneer Distilleries Limited (PDL) is a subsidiary of United Spirits Limited (USL), the largest spirits manufacturing company in India, and is a part of Diageo Group, global leader in beverage alcohol with an outstanding portfolio of brands across spirits, beer and wine categories. PDL is a bulk spirits supplier and bottler to USL. In 2011-12, USL acquired PDL and is presently holding 75% shareholding in the Company.

Industry Structure and developments

The Companys business activity falls within a single primary business segment i.e., Potable Alcohol and related products. The Company is running a 160 Kilo Litres Per Day (KLPD) Extra Neutral Alcohol (ENA) manufacturing facility comprising of 100 KLPD of Molasses based ENA and 60 KLPD of Grain based ENA, 12 KLPD Fresh Malt Spirit and 2 Lac cases per month bottling facility at Balapur Village, Dharmabad Taluk, Nanded District, Maharashtra. The other products of the Company are Special Denatured Spirit, commercial grade Carbon-di-Oxide and Distillery Dry Grain Soluble (DDGS) as a by-product of the process. All these facilities are supported by a state of the art pollution control equipment including a multiple effect evaporator followed by a Dryer suitable for a standalone Distillery to ensure zero pollution.


Your company is part of United Spirits Limited (USL)-Diageo Group which is a leader in Indias alcobev industry. Diageo has initiated steps to turnaround the Company with changes at management level, revamp of business process, enhanced supply chain efficiency, engaging with the government and improving work culture. Your Companys focus is to bring in efficiency in production and reduce downtime. This will help the company achieve volumes which will be key to profitability. Your company is prepared to handle any challenge in terms of demand for its products and has been engaging with third party bottlers to sell surplus quantity. Disgorging of matured malt stocks will commence during FY 2020 and your company will start selling these immediately. This is likely to ensure stability of margins, reduce working capital requirements. Frequent regulatory changes will continue to pose challenges for the alcobev industry. As seen in the past, your Company is well equipped to overcome any such challenges.

Your Company plans to carry out detailed technical study of operations/ machinery. Necessary improvements will be carried out to achieve cost reduction, enhance quality, improve safety and reduce carbon footprint.


?? Product portfolio and diversity: The Companys product portfolio extends across Grain based Extra Neutral Alcohol (GENA), Molasses based Extra Neutral Alcohol (MENA), Fresh Malt Sprit, Matured Malt Spirit and IMFL Bottling.

?? People Power: The Companys success is led by an empowered and committed team, who are partnering in the realization of its vision.

Risks & Concerns

The industry is highly regulated by the government with regulations pertaining to licensing, setting up of new or expansion of distilling and bottling capacities; manufacturing processes and sale of products. Heavy taxes and duties levied on spirit manufacturers add to the industry concerns. Apart from Central Government regulations, every state of India has its own set of regulations, tax rates and duties for inter-state movement of liquor. Inclusion of alcohol within the purview of FSSAI to ensure quality standards will lead to further multiplicity in regulations and regulators and sometimes inconsistencies in regulations.



Entry barriers for new players: The alcohol industry in India, being highly regulated, has high entry barriers for new players, thereby creating a favourable environment for the existing players.

Demand for spirits: Indians have higher preference for spirits containing up to 42.8% alcohol content. IMFL category accounts for almost 70% of the Indian Alco-Bev market. Increase in the demand for IMFL year on year has created opportunities for distilleries to produce more and more to meet the demand.


Non-availability of grains due to less production of crop will push the grain prices up, which in turn will affect the margins for GENA and Malt spirit. Similarly, non-availability of Molasses due to government encouraging production of ethanol for blending into fuels will push molasses price which in turn will affect the margins for

MENA. These events put pressure on the profitability of the Company.

Any drastic change in the policies of the Government and pollution laws can be considered as possible threats to the industry. Water is a key resource in the distillation process and is required for bottling. Poor monsoon, availability/ restriction on usage of water, increase in rate may pose challenges to the operations of the Company. The Company believes that in order to be competitive and sustainable it must focus on efficiency of the plant by upgrading to modern technology. Accordingly, your Company is gearing up itself to exploit the opportunities by constantly modernizing the machinery and developing innovative product applications. Constant efforts are being made to meet the stringent quality requirements. With the dedication of the management towards exploring new opportunities coupled with the Companys competitiveness and product quality, your Company will continue to explore and pursue new opportunities.


The financial statements of the Company are prepared in compliance with the provisions of the Companies Act,

2013 and the Generally Accepted Accounting Principles in India. In terms of the SEBI Listing Regulations, the management accepts the responsibility for the integrity and objectivity of the financial statements and the basis for various estimates used in preparing such financial statements.

Your Company has achieved a gross sales of INR 12,822.44 Lakhs for the financial year ended March 31, 2019 against the gross sales of INR 12,370.03 Lakhs for the financial year ended March 31, 2018. Your Company has reported a loss of INR 9,707.50 Lakhs before tax, this was due to intermittent disruption in its operations owing to frequent breakdowns and repairs. Your Company has carried out several one-off repair activities to stabilise the production. INR 1000 Lakhs provision has been created, from the amount considered earlier, towards Government Grant due to change in terms of Sanction letter for subsidy.

The working capital requirement of the Company is financed by the Deutsche Bank, Bangalore.


Key financial ratios arising from the financials are given below for the financial year ended March 31, 2019 and March 31, 2018

Particulars F19 F18
Debt-Equity Ratio -10.2 12.0
Current Ratio 1.5 1.2
Interest Cover on operational EBIDTA 0.1 -0.4
EPS -50.10 52.29
P/E Ratio -2.8x 3.3x
Return on Networth NA -177%
Return on Capital Employed -12% -14%
Inventory Turnover Ratio 1.9 2.2
Receivable Turnover Ratio 0.4 2.2
Payable Turnover Ratio 5.6 5.9
Net profit Margin (PAT/NSV) -48% 52%
Operating Margin (EBIT/NSV) -33% -34%

- Due to operational challenges on account of intermittent breakdowns, closure of operations, delay in stabilisation of operations resulting in underutilisation of capacity and change in terms of government grant, the Company continued to report operational loss. These losses have resulted in net-worth becoming negative and hence Return on Networth is not computed. This has affected debt-equity ratio, EPS, P/E Ratio,

Return on Capital Employed.

- Due to maturation of malt stocks (above 18 months), inventory turnover ratio has come down.

- Receivable (debtors) turnover ratio has improved as your company has started operating on advance payment or immediate payment basis.

- During FY18, the Company has reported government grant income of INR 167 Crs which is not present in

FY19 net profit. Operationally the Company continues to report losses. Hence, the deviation in Net profit margin. Also, there has been increase in finance cost as the Company has been availing working capital facilities from Bank to support capital blocked in malt maturation and operational expansion. Income from Govt grant & allowance on same has not been considered for computing operating margin ratio.


Your Company has in place well-defined and adequately documented systems, policies, procedures and guidelines that have been reviewed by the Board. The company adhere to the laws, rules and statues of the land. It ensures stringent compliance at all levels, and across all departments, for safeguarding its assets, prevention and detection of fraud and errors, completeness of accounting records and timely preparation of financial statements. The internal control system is supplemented by effective quarterly Internal Audit done by In-House Internal Audit team of United Spirits Limited, holding company of the Company. The company has implemented internal financial controls in a phased manner, and it has been audited by an external independent audit firm. The top management and the Audit Committee of the Board of Directors regularly review the findings, recommendations and functions of Internal Audit team and Internal Financial Control Auditor. Statutory Auditors have also confirmed the same in their audit report on the Financial Statements for the


The company has a family of 163 (including permanent workmen at plant). The Company believes that people are the important assets and hence it is committed to create an open environment and upskilling which encourages the ideas and enriches the organizations collective knowledge pool. The company aspires to evolve into a future-ready organization centred on promoting a collaborative and cohesive culture.

Your Company is now trying to focus on multiskilling to improve the productivity of the employees by giving trainings and changing roles.


This Report contains forward-looking statements that involve risks and uncertainties. Your Company undertakes no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events, or otherwise. Actual results, performances or achievements could differ materially from these expressed or implied in such forward-looking statements. Readers are cautioned not to place undue reliance on these forward-looking statements that speak only as of their dates. This Report should be read in conjunction with the financial statements included herein and the notes thereto.