Pioneer Distilleries Ltd Management Discussions.



Global Economy: Before the outbreak of COVID-19 pandemic, global growth was projected to rise from an estimated 2.9 percent in 2019 to 3.3 percent in 2020 and 3.4 percent for 2021. This reflected negative surprises to economic activity in a few emerging market economies, notably India, which led to a reassessment of growth prospects over the next two years. On the positive side, market sentiment had been boosted by tentative signs that manufacturing activity and global trade are bottoming out, a broad-based shift toward accommodative monetary policy, intermittent favorable news on US-China trade negotiations, and diminished fears of a no-deal Brexit, leading to some retreat from the risk-off environment.

Trade policy uncertainty, geopolitical tensions, and idiosyncratic stress in key emerging market economies continued to weigh on global economic activity – especially manufacturing and trade – in the second half of 2019.

In the third quarter of 2019, growth across emerging market economies (including India, Mexico, and South Africa) was weaker than expected, largely due to country-specific shocks weighing on domestic demand. Furthermore, the COVID-19 pandemic is inflicting high and rising human costs worldwide, and the necessary protection measures are severely impacting economic activity. As a result of the pandemic, the global economy is projected to contract sharply by 3 percent in 2020, much worse than during the 2008-09 financial crisis. In a baseline scenario which assumes that the pandemic fades in the second half of 2020 and containment efforts can be gradually unwound – the global economy is projected to grow by 5.8 percent in 2021 as economic activity normalizes, helped by policy support.


(Source: IMF Global Economic Outlook, Jan.20/ Apr.20)

Indian Economy: Indias GDP growth moderated to 4.8 per cent in H1 of 2019-20, amidst a weak environment for global manufacturing, trade and demand. In 2019-20, fiscal deficit was budgetedat 7.04 lakh crore (US$ 99.56 billion) (3.3 per cent of GDP), as compared to 6.49 lakh crore (US$ 91.86 billion) (3.4 per cent of GDP) in 2018-19. Inflation increased from 3.3 per cent in H1 of 2019-20 to 7.35 per cent in December 2019-20 due to temporary increase in food inflation. Reforms undertaken during 2019-20 to boost investment, consumption and exports:

Speeding up the insolvency resolution process under Insolvency and Bankruptcy Code (IBC).

Easing of credit, particularly for the stressed real estate and NBFC sectors.

The National Infrastructure Pipeline for the period FY 2020-2025 launched.

By integrating "Assemble in India for the world" into Make in India, India can raise its export market share to about 3.5 per cent by 2025 and 6 per cent by 2030 creating 4 crore well-paid jobs by 2025 and 8 crore by 2030.



In wake of Covid, several leading agencies have projected a sharp dip in Indias GDP growth. World Bank puts Indias GDP growth forecast in the range of 1.5 – 2.8%; IMF has projected a growth forecast of 1.9% for F20 followed by a quick turnaround and growth of 7.4% in F21 on a distorted base of fiscal 2020. Oxford Economics expects Indias GDP for calendar year 2020 to contract by 1% followed by quick spur in 2021 of 8.9% on the contracted base.


India is one of the fastest growing alcohol markets in the world. Alcohol consumption in India amounted to about 5.4 billion liters in 2016 and was estimated to reach about 6.5 billion liters by 2020. The steady increase in consuming these beverages can be attributed to multiple factors including the rising levels of disposable income and a growing urban population among others. Although the average per adult intake of alcohol was considerably low in India when compared to other countries such as the United States, heavy drinkers among young Indians were more prevalent. This provides tremendous opportunity to drive growth of alcobev industry on the back of its rising working-age population. It is expected that per capita consumption will increase with changes in life style and aspiration of the population.


(Source: statistics/727026/consumption-of- alcoholic-beverages-india/)


Industry performance: The alcobev industry in India has been growing at more than 12% CAGR for the decade starting 2001 making it one of the fastest growing markets in the World. In 2019, the industry experience significant headwinds on back of slower economy growth. The impact of this slowdown has aggravated by the increasing raw material prices.

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.

Consumption pattern: The states of Karnataka, Maharashtra, West Bengal, Odisha, Telangana, Delhi, Haryana, Punjab etc. 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. Constantly changing regulatory environment: Recently, Government in the State of Andhra Pradesh has changed the route to market by setting up state managed retail outlets and discontinuing private retailers. In contrast, State of Chhattisgarh has rolled back from Govt. controlled to private parties which is expected to flourish the industry.

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 seen to grow 1.5x GDP when GDP growth picks 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.


Regulatory oversight of both central and state governments encompass 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 alcobev players to set-up owned or contract manufacturing setups in every state. Licenses are required to produce, bottle, store, distribute or retail all alcobev products. Distribution is also highly controlled, both at the wholesale and retail levels. In states with government control on pricing, price increase 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 for our products. These regulations make operations restrictive for the industry 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 off setis 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.

? Pricing Challenges over Materials:

Pricing continues to remain a challenge for the category since with continuous increase in excise duties, and raw material prices, end consumer prices continue to experience upsurge with no benefit to your company.

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.


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, 2019 to March 31, 2020 has been of the order of 121.78 LBL and production of Grain based ENA (GENA) 113.58 LBL.

(ii) Absolute Alcohol (Ethanol): Production of Absolute Alcohol during the financial year April 01, 2019 to March 31, 2020 has been of the order of Nil.

(iii) Malt Spirit: Production of Absolute Alcohol during the financial year April 01, 2019 to March 31, 2020 has been of the order of 19.95 LBL. The Company has set-up a maturation plant and the malt spirit under maturation as of March 31, 2020 is 5.36 LBL.

(iv) IMFL Bottling: 13.66 Lakhs Cases.

(v) CO2: Carbon-di-Oxide Dry Ice: Production of Carbon-di-Oxide Dry Ice during the financial year April 01, 2019 to March 31, 2020 has been of the order of 1378 MT.

(vi) Special Denatured Spirit (SDS): Production of SDS during the financial year April 01, 2019 to March 31, 2020 has been of the order of 4.47 LBL

(vii) Distillers Dry Grain Soluble (DDGS): Production of DWGS during the financial year April 01, 2019 to March 31, 2020 has been of the order of 3033.12 MT. Production of Cattle Feed during the financial year April 01, 2019 to March 31, 2020 has been of the order of 4923.38 MT.


Your company is part of USL-Diageo Group, 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 which will be key to profitability. Your company does not foresee any challenge in terms of demand for its products and has been engaging with third party bottlers to reduce reliance on USL. Disgorging and selling of matured malt stocks was commenced during the year. This ensures stability of margins, reduce working capital requirements. Regulatory overhangs 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.

B. Strengths


Product portfolio and diversity: The Companys product portfolio extends across GENA, MENA, Fresh Malt Spirit, Matured Malt Spirit and IMFL Bottling.

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

C. 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 and sometimes duplicity in regulations and regulators and sometimes inconsistencies in regulations.

D. Opportunities


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

E. Threats

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

The Company believes that in order to be competitive and sustainable it has to focus on 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.

The Company has achieved a turnover of 17154 Lakhs for the financial year ended March 31, 2020 against the turnover of 13838 Lakhs over the previous year. This growth was led by commissioning of several capital expansion projects. The Loss before tax of your Company during the financial year amounted to 8912 Lakhs driven by accrual of subsidy of 1000 Lakhs.

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


Key financial ratios arising from the financialsare given below for the financial year ended March 31, 2020 and March 31, 2019

Particulars F20 F19
Debt-Equity Ratio -2.2 - 10.2
Current Ratio 1.1 1.5
Interest Cover on operational EBIDTA -0.5 0.1
EPS -111.43 - 50.10
P/E Ratio -0.86x - 2.8x
Return on Networth NA NA
Return on Capital Employed -27% - 12%
Inventory Turnover Ratio 1.8 1.9
Receivable Turnover Ratio 0.1 0.4
Payable Turnover Ratio 8.5 5.6
Net profit Margin (PAT/NSV) -87% - 48%
Operating Margin (EBIT/NSV) -37% - 33%

– 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 isnotcomputed.Thishasaffected 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.


Your Company has clearly laid down policies, guidelines and procedures keeping in mind the nature, size and complexity of business operations. Your Company maintains a proper and adequate system of internal controls with well-defined policies, systems, process guidelines, and operating procedures. Your Company ensures strict adherence to various procedures, laws, rules and statutes. Internal Audit is periodically conducted on these areas. The Board closely oversees the business operations on a regular basis. MIS systems are effectively used to keep all expenses within budgetary allocations and corrective measures are promptly undertaken in case of any variance.

COVID-19 crisis and related uncertainty posed unique set of challenges in performance of certain controls and evaluation of their effectiveness which required physical presence of employees for performance of the controls and auditors to observe the operations of the controls. In this context, management has performed alternate and additional procedures in evaluating the effectiveness of internal control over financial reporting.


The company has a family of 148 permanent employees. 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 centered 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. Company is also training the employees on Lean Six Sigma and 5s. Performance appraisals take place every six months, giving every employee sufficienttime to meet his/ in the next six months. There has been no loss of production at the Companys manufacturing unit this due to the relationship that the company has maintained with the employees.


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.


In view of the nationwide lockdown due to the outbreak of COVID-19 pandemic, your companys operations at all of its manufacturing, warehousing and office locations were temporarily stopped from March 23, 2020.

Operations have since resumed from May 4, 2020 with adequate precautions being taken in accordance with Government guidelines, and a majority of the Groups manufacturing locations are operational as at the date of approval of financial results. Management is taking appropriate action, as necessary, to scale up manufacturing operations in due compliance with the applicable laws. As at the date of approval of financial results, sales have also resumed in a staggered manner across the country. Your company has a prudent liquidity risk management policy for maintenance of required cash and/or has access to funds through adequate unutilized sanctioned borrowing limits from banks and is confident of servicing its debt obligations as they fall due. The Company has assessed its existing controls and internal financial reporting processes and made appropriate changes, as required, in view of the situation arising due to COVID-19 pandemic. Company has also reviewed its contracts/ arrangements and does not expect any material impact on account of non-fulfilment of the obligations by any party.