united breweries holdings ltd Management discussions

1. OVERVIEW

United Breweries (Holdings) Limited ("UBHL") is the Investment Holding Company of the UB Group which has over many decades promoted a number of businesses.

In order to realize value from your Company’s strength in building mega consumer brands, your Company organized its investment activities into different verticals, with United Breweries Limited being demerged from the then existing company, to become the apex of the beer business. A similar vertical was formed for the spirits business with United Spirits Limited ("USL") at its apex in 1999. A third vertical, namely Kingfisher Airlines Limited ("KFA") was promoted in year 2004. Apart from this, your Company is also a Promoter of Mangalore Chemicals and Fertilizers Limited ("MCF"), UB Engineering Limited ("UBEL") and McDowell Holdings Limited ("MHL") the other three listed entities.

In each of these identified core business areas, your Company provided substantial financial support to the principal operating entity to facilitate investments and growth.

As Investment Holding Company and the principal Promoter, your Company has always supported its investee Companies both financially as well as through managerial support. While very significant value was created in some business, other ventures were not so successful. However, as the principal Holding Company, your Company tried to ensure that fair business practice is maintained.

2. RISKS, CONCERNS AND MITIGATIONS

(a) (i) Risks & Concerns

Your Company follows a risk management process for identification, categorization and prioritization of various risks like operational, financial, legal and other business risks. The Group Chief Financial Officer aided by the Internal Auditor reviews the effectiveness of the process at regular intervals and reports the same to the Audit Committee and the Board.

(ii) Major risks foreseen

Your Company is exposed to the following risks and concerns:

i) Your Company is exposed to risks due to various legal cases arising out of recovery actions taken by its purported creditors, the details of which have been mentioned in the Report of the Directors.

Your Company assisted by Senior Counsels are taking all necessary steps to protect its interests.

ii) Restrictions imposed by Courts on payment of dividend by certain promotee companies to your Company has affected and will continue to affect the revenue stream till such time the restraints are not withdrawn.

iii) The profitability of the Export Division of your Company UB Global is subject to world economic scenario, volatility of various currencies including Indian Rupee and business decisions of the promotee companies. Property values could reflect overall consumer sentiment. All these factors would have some bearing on your Company’s future profitability.

iv) Some of the Company’s investments in Subsidiary and Associate Companies are under pledge with lending institutions as collateral security and may be invoked by these Lenders to recover their dues in the event of default.

v) Your Company has significant exposure on account of guarantees given to lenders and creditors of an erstwhile Associate Company which could expose your Company to potential pecuniary loss.

vi) One of the principal income streams of your Company is earning rentals from lease of its property in UB City. The Company is constrained from leasing its vacant property as long as the restraint order passed by the Hon’ble High Court of Karnataka continues.

(b) Risk Identification process

Your Company has put in place a risk identification and mitigation process as part of internal financial control mechanism.

(c) Risk Mitigation

The Audit Committee periodically reviews the efficacy of Internal Financial Control Systems and risk mitigation process.

3. INTERNAL CONTROL SYSTEM

The adequacy of the internal control system is reviewed by the Audit Committee of the Board of Directors. The Internal Audit of your Company, carried out by external firm of Chartered Accountants, evaluates the functioning and quality of internal controls and provides assurance of its adequacy and effectiveness. The efficacy of the internal checks and control systems are verified by the Internal Auditors as well as the Statutory Auditors. The Audit Committee reviews the internal audit plan, adequacy and effectiveness of the internal control system, significant audit observations and monitors the sustainability of remedial measures.

Your Board believes that appropriate procedures, controls and monitoring assessment procedures are in place and considered adequate.