united breweries ltd share price Management discussions

Management Summary

The financial year 20/21 has seen unprecedented circumstances due to the impact of COVID. This resulted in adverse circumstances for the Company due to lock downs, introduction by various States of COVID related additional taxation and prolonged closure of trade channels, including various restrictions on opening hours. Throughout the year, management focus has been on health & safety of employees and stakeholders, the introduction of socially distanced safe ways of working, reviving demand & keeping consumers engaged, while reducing costs and preserving cash. The Company would like to convey its heartfelt appreciation to its employees and stakeholders for showing resilience and dedication under the challenging circumstances. The Company has also actively supported the communities in which we operate through dedicated COVID relief and on-going CSR programmes.

In an extremely challenging year, we continued to engage our consumers both at home and away from home, we renewed our portfolio to provide a wider choice set and re-energized both our internal and external stakeholders by continuous engagement and inspiration. The ‘Ghar pe Kingfisher campaign, the expansion of our geographic footprint with Amstel, Ultra WitBier, Heineken 0.0 etc. and the integration with our partner ecosystem via the "Back to the Bars" program are cases in point. Our focus on our people was of paramount importance; not only were we able to operate within the strictest safety guidelines but were also able to keep the channels of communication seamless so that we could re-energize everyone and keep the good times going in an unprecedented period of difficulty. During the financial year, the Company witnessed strong progressive demand recovery quarter by quarter. The various measures taken by management resulted in recovery of market shares in the second half of the year, improved underlying profitability and strong free operating cash flow results. With the onset of a second COVID wave at the start of financial year 21/22, the beer industry is again negatively impacted, and the outlook is volatile. The Company continues to put health & safety first and actively manages costs and cash flows. Although the trajectory of COVID is unknown, confidence is derived from the trends after the first COVID wave, whereby consumer behavior towards beer consumption remained intact. While the Company navigates the near term challenging circumstances, the strategy is to remain focused on increasing category penetration, building a strong brand portfolio, managing costs and cash, ensuring further improvements on sustainability, while fostering a highly engaged workforce that is supported by best in class processes.

Industry Overview

Unlike other emerging economies, beer Industry in India continues to remain quite traditional and is controlled by State Governments. It remains highly regulated with high taxation, restrictions on cross border movements, constraints on production, retailing and other barriers. In many parts of the country, wholesale and/or retail distribution is controlled by State Government monopolies. Also, in over 60% of the markets, State Governments directly dictate the price at which beer can be sold. These State controlled regulations are in addition to all other Central legislations that govern any other Industry. Beer has become one of the most popular alcoholic beverages in the country over the past two decades. Beer industry has registered a robust growth during the last one and half decades. From a total industry consumption of about 100 Million cases in 2005, the industry consumption crossed 300 Million cases per annum in 2019 prior to the impact of COVID. Three leading players contribute over 85% of the total industry sales with our Company maintaining its leadership in the Indian beer market. Beer comprises about 12% of the total alcohol consumed in India. While the alcohol beverages industry in India has been dominated by spirits, beer is emerging as the preferred alcoholic beverage for young Indians.

Compared to the global average per capita consumption of about 30 litres, the per capita consumption in India still hovers around 2 litres. However, the scope for growth in India continues to remain positive given the climate, young demographics and increasing disposable income.

Due to COVID, retail was completely shut from March 23, 2020 causing a considerable drop in sales for beer. Till first week of May 2020, dispatches could not be made due to lockdown. The initial months of the new financial year remained very challenging as retail reopened gradually in many states in India only after the 1st week of May. Demand was also negatively impacted due to increased taxation and other regulatory and logistical impediments. Generally, high-end consumer prices due to statutory levies inhibited the sales during the year.

On basis of alcohol content, beer in India can be categorized into Strong and Mild Beers. Strong beer which has an alcohol content between 6% and 8% dominates the beer market accounting for over 80% of the total beer consumed in India. The Super Premium beer segment within both the Strong and Mild beer categories has been growing faster than the overall beer industry. Industry volumes grew at a CAGR of about 7% during 2015 to 2020. However, during 2020-21, the Indian beer market shrunk for force majeure reasons of COVID.

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. A plethora of beer brands are available in India to address the palate of various consumer segments. Majority of beer market growth is driven by young consumers, who consider beer a trendy drink, compared to traditional spirits.

Brew pubs have emerged in large cities such as Bengaluru, Pune and Gurgaon over the last few years. These outlets have introduced consumers to new types of beers for example ‘wheat beer. Our competitors too, have introduced brands from their international portfolio. UBL has been successful in addressing these new consumer trends and has introduced its own ‘Kingfisher Witbier thereby continuing to strengthen its position in the market.

Sales and Marketing

During FY21, UBL sales volume declined 38% due to COVID induced depressed market conditions. UBL continues to satisfy its customers with a wide range of quality products and innovative strategies with the ultimate objective of remaining at the fore-front of the highly competitive Indian beer market.

In 2020, the unprecedented extended periods of lockdown in India due to COVID, led our flagship brand Kingfisher to engage with consumers through interactive engagement in the digital medium. We ensured that the brand remained the primary preference among a shared beer audience. The messaging to encourage in-home consumption – ‘Ghar pe Kingfisher – was driven through a series of highly enjoyable and integrated communication pieces. We received multiple industry awards and accolades for the consumer connect we were able to create. The special AR-filter and AI-powered "Build Your Own Beat" campaign; and the "Kingfisher Bird Game"– where one needed to confine the bird within the walls of the home to drive the ‘stay at home message, are cases in point.

Staying agile in rapidly evolving times, Kingfisher launched a campaign when bars started opening up, to help them recover from the lockdown. We focused on three parameters – standing in solidarity with our trade partners; helping them create appropriate ‘social distancing and safety protocols in their establishments; and, in driving footfalls as the lockdown eased. We provided safety equipment including sneeze guards, sanitization stands, masks and gloves and sanitizers to more than 5000 outlets. Footfalls to outlets were driven through targeted digital campaigns. NRAI & INCA recognized UBLs effort with the ‘Back to the Bars campaign and felicitated us with an award.

The 2020 IPL presented a huge opportunity for brands to show consumers they were an authentic part of their real-time experiences during the lockdown, and Kingfisher contextualized and integrated its highly successful "Kya Plan Hai" proposition with a backdrop of ones home, through a multitude of communication touchpoints. A series of short, digital-first video modules were effectively utilized to build consumption occasions for the brand. We also launched ‘Home Packs in the market, enabling consumer to stock up and enjoy responsibly in the safety of their homes. The iconic Kingfisher Calendar continues to maintain its aspirational value, this time conceptualized and creatively manifested in the brands own country, shot against the magical and scenic backdrop of Kerala. The brand drove buzz around this property and leveraged it on digital platforms in a large way, socializing it actively with its digital savvy patrons.

Tapping into the highly-engaged football cohort, Kingfisher created a unique campaign with FC Goa wherein it leveraged the reach of digital media. Fans were asked to cheer for their favourite team and lucky winners were given a chance to have their images on hoardings across Goa. This ‘spectacular opportunity saw high engagement and recall.

Ultra Witbier, UBLs foray into the craft & variety segment, launched in December 2019 in two markets, further expanded its presence into four new markets during the year. Despite the COVID-induced impediments, Ultra Witbier has created an enviable fan following among category consumers. The brand focused on driving awareness through product differentiation and occasion-led communication, engaging with the consumer through topical campaigns apropos to brand tenets. On-ground, at point-of-sale the brand focused on driving clutter-breaking visibility and product trials. Kingfisher Ultra, our premium segment offering, launched its TVC featuring brand ambassador Farhan Akhtar on Digital and OTTs in March. Farhan Akhtars versatility, suave demeanor and sophistication resonated with Ultras brand ethos and values.

On-ground, Ultra continued its association with two prestigious Derby events in Bombay and Bangalore. The events were closed-door & limited capacity ones given COVID guidelines. However, impact was ensured through broad-reaching live-stream features on Facebook and YouTube and through our digital partners.

Music festivals at the end of 2020, the ubiquitous backdrops of year-end celebrations, were cancelled or permitted only for limited audiences. Kingfisher Ultra continued its association with the Satellite beachside music festival and provided its patrons with a safe and premium branded experience, very central to the brands experiential leg. The 4-day festival in Goa connected both on-ground and digitally with 4000+ consumers. Kingfisher Ultra revived its music IP Soul Flyp with a series of 10 metro city-based music events. Keeping in mind the prevailing situation, all events were limited capacity events with adherence to COVID appropriate behaviour. Kingfisher Storm, a smooth, strong beer with bold blue packaging, continued engagement with young consumers with the well-received WOOFER campaign. The brand also extended its footprint entering the Northern markets of Delhi & Rajasthan. In spite of the challenges during this year, Kingfisher Storm was back in off-trade retail outlets with impactful instore promotions & visibility initiatives.

Heineken, one of the flagship brands in the portfolio, aimed to garner traction by amplifying its association with the UEFA Champions League Football via #The Kickoff Campaign, to celebrate the return of the pandemic-deferred tournament, commemorating this with an 8-hour live-streamed virtual festival with the worlds biggest house music community – Defected Records – drawing attention from aficionados due to the brands aspirational value and the talent it is associated with. This online event featured DJs from across the world in unique locations, headlined by global star Idris Elba & supported by the likes of Bob Sinclair and Purple Disco Machine.

Heineken went live with its first ingredient-centric campaign to propagate the message of purity and quality, indexing on the presence of pure malt in its brew. On-ground, the brand sponsored Krank & Sisterhood events under its ‘Live Your Music vertical, co-creating limited capacity events with partner-outlets, driving brand recall through platform associations and placement, in a difficult year. The events were amplified through digital channels. All events adhered to social distancing norms under the #SocialiseResponsibly initiative.

Heineken partnered with INCA & NRAI to reunite all stakeholders of the F&B community, to recognize the heroes who supported the industry during the pandemic, celebrating the human spirit, and discussing best practices for a better future in the new normal. Owned social media channels, with broad reach capacity, acted as the platform for Heineken to broadcast its stance on ‘Back to the Bars behaviour. The global campaign was repurposed to help bars during their re-opening by encouraging consumers to #SocialiseResponsibly while providing awareness and visibility to help drive traffic to outlets.

Amstel International Strong Beer continued its footprint expansion despite the operational challenges of navigating through a difficult year. Haryana, Telangana & Maharashtra were added to the list of Amstel markets post the gradual unlock of last year. In a year which posed significant challenges to the country, our organization focused on keeping our employees safe in the face of the raging pandemic and continued to engage with our consumers in a meaningful manner.

Supply Chain

Manufacturing expenses for the FY21 amounted to Rs.20,363 Million, representing 48% of net sales, as against Rs.31,603 Million in the previous financial year, which constituted 49% of net sales. UBL has focused primarily on following COVID safety guidelines at all our breweries prescribed by Ministry of Home Affairs and local administrations. Delivering volumes as per market demand post national lockdown coupled with tight cost control measures, expanding footprint for premium brands and cost-saving initiatives which have helped us achieve this in an environment impacted by uncertainty, lockdowns and disrupted supply chains for bottles and commodities. Capacity expansion was carried out in our breweries in Telangana, Karnataka & Rajasthan. Our Telangana Brewery (UBGD) post expansion is the largest brewery in India with capacity of 3 mio HL/annum. Karnataka Brewery (UB Chamundi) is the largest Brewery (2.0 Million HL) in the state. Expansion of our Unit in Rajasthan with addition of Heineken footprint provides a hub for supply of premium brands in North India. In our quest for sustainability, our total renewable energy usage for FY21 stood at 79.6%. UBLs own units consumed 30.0% electricity generated from renewable sources. To supplement this, 96% of thermal energy came from use of renewable sources. The renewable energy usage is equivalent to carbon footprint of 25,304 tons of CO2 which is equivalent to 1.24 Million trees.

Bottles remain our biggest cost element. Due to constrained domestic capacity prior to start of 2020-21, imports were planned to bridge the gap and cover peak requirement. Volume drop due to COVID resulted in reduction of about 1,00,000 metric tons equivalent of Glass buying 38% which was mitigated by proportionately reducing contracted volumes with all suppliers without any financial impact. Volume drop in CANs by 47% was mitigated by extending hedge coverage into 2021-22 without any penalty on similar terms & conditions. Strategic long-term contracts are in place for new glass & cans which secures our requirement for coming year.

Recycled bottle collection continues to remain key focus area. Old bottle returns were impacted on account of COVID during 2020-21 due to disturbance in the old return supply chain & loss of bottles in few states due to higher cullet prices. Value Engineering related to lower gauge cans, light weight ends and additional source from Ceylon Cans-Sri Lanka established during the year.

Barley-malt, the basic raw material in the manufacture of beer, has seen lower prices due to pandemic which lead to reduced demand from brewing as well as cattle feed sector. The prices of the competitive crops grown in the barley area however were trading at all time high prices. This led to a significant drop in barley acreages and farmers shifted their acreages towards those rewarding competitive crops. We were also able to get the extension of delayed shipments on our imported malt contracts from Australia as well as Europe without any penalty.

In order to make inputs/raw material requirement simplistic across breweries, use of rice flakes was replaced with broken rice. Freight negotiations were routed through auction to contain price push in line with diesel prices.

Research and Development

UBLs Research and Development function continues to support its growth strategy with a focus on new capabilities, development of new products, enhancement of existing products, productivity improvement and cost reduction.

Human Resources

Human Resources (HR) develops UBLs most important asset – our people – by engaging and empowering them. At UBL, we recognize that the long-term success and sustainable growth of our organisation depends on our capacity to attract, retain and develop our employees. We are committed to provide our employees all over the country with a safe and healthy work environment and extend our support to ensure a balance of personal and professional life. The organisation fosters an open and transparent culture which drives ownership and nurtures entrepreneurial spirit amongst the employees. The Company believes in celebrating milestones, both big and small and encourages its people to connect, communicate and collaborate through various forums.

UBL has an inclusive culture and takes pride in being an equal opportunity employer. We encourage all forms of Diversity and believe that it adds to building a more engaged workforce thereby contributing to our business performance. Besides the mandated policies to develop a conducive work environment we have a Diversity and Inclusion Council that plays an active role in creating various platforms, opportunities and transparency.

Learning is ingrained in the UBL culture and employees are constantly encouraged and given ample opportunities to upgrade their knowledge and skill. We follow an integrated learning approach where on-the-job is the principal source of learning. The learning initiatives are also curated to build the talent and leadership pipeline to enhance organisational capability to compete and win in the market. Apart from our essential programmes, tailor made customised programmes are also offered to address the specific needs expressed by businesses, aimed at building specific capabilities at various levels of the organisation. The UBL Competency Framework helps in assessing the current and future talent capability. It also helps in highlighting the specific strengths to be further developed and flag critical skills for mitigation.

The organisation believes in ethical governance and abides by the robust policies laid down under Code of Business Conduct. The guidelines laid down in the Code help our employees in handling dilemmas and difficult ethical situations related to the business. Our employees and vendors can report any violation of the code via an online platform named Speak-Up. The platform is managed by a third party to ensure that the identity of the whistle blower is protected. UBL uses technology effectively in all stages of employee life cycle from hire to retire. Instrumenting such technology has resulted in standardized automated processes, improved productivity and enhanced employee experience.

The inputs from our annual employee engagement survey help us in continuously improving our people practices, policies and programs and stay in touch with the expectations of our employees.

Industrial Relations continue to be harmonious and peaceful at all levels and at all locations of the Company. Timely Long-Term Settlements are done to ensure continuity in healthy industrial relations.

All the wage agreements have been renewed in a timely manner and are valid and subsisting. Workers and unions support implementation of reforms that impact quality, cost and improvements in productivity across all locations, which is commendable.

UBL has 3,070 employees on its rolls across all locations. The Company has not offered any stock options to the employees during the year under review.

Total employee benefit expenses for the year stood at Rs. 4,823 Million, as compared to Rs. 4,998 Million in the previous year. This constituted 4.7% of revenue from operations. Your Directors place on record their sincere appreciation to all employees for their contribution towards the continuous success of the organization.

Significant changes in Key Financial Ratios

Following are the Key Financial Ratios, where variance of more than 25% is noticed as compared to the previous financial year: Interest Coverage Ratio: EBITDA is 28 times of interest in 2019-20, has come down to 19 times in 2020-21, on account of EBITDA degrowth by 49% while interest costs came down by 27%.

Debt Equity Ratio: Net debt at year end March 31, 2021 is zero against 6% of Shareholder funds as on March 31, 2020. Net Profit Ratio: Net profit ratio decreased from 2.92% in 2019-20 to 1.11% in 2020-21, primarily on account of reduction in volumes.

Return on Net worth: Return on Net worth decreased from 12% in 2019-20 to 3% in 2020-21.

Impact of COVID

The entire world today is reeling under the threat of the unprecedented COVID pandemic. This had a huge and significant impact on the global businesses all over the world across sectors and economy including India. COVID has impacted businesses globally by disrupting supply chain, travel, production, consumption and services threatening operations and financial markets. Companies find themselves navigating a new reality, addressing issues from crisis response and business continuity to valuations and financial stress.

As a fall out, various state governments have imposed measures which included tax increases negatively impacting the industry. Majority of these tax increases were partly or fully rolled back during the financial year. The nationwide lockdown implemented in March 2020, led to complete closure of all outlets till May 04, 2020. On-trade sale was progressively closed in weeks leading up to March 23, 2020. State by State decisions led to on trade resuming operations from September & October 2020 onwards.

The ripple effect of lockdown will have a key impact on Indias economy as all business sectors get affected, resulting in low revenue generation due to an eventual halt / slump on the sale of products and / or services. UBL is not an exception to this scenario. Given such a scenario, companies will have to operate differently to effectively manage the crisis. COVID has changed the way we live, work and use technology.

Beer companies reeled under pressure as the lockdown came at the onset of summer which comprises the bulk of sales. All these were a dampener, next to partial or full closure of bars & shops in an environment of overall lower economic growth and reduced consumer confidence.