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UNITED SPIRITS Alcohol Beverage Industry India

UNITED SPIRITS Alcohol Beverage Industry India

UNITED SPIRITS Alcohol beverage industry

INDIAN ALCHOLBEV INDUSTRY

IndianIndian Made IndianIndian Made BeerBeer ForeignForeign LiquorLiquor IndianIndian (IMFL) (IMIL)

IMFL category accounts for almost 72% of the market. Alcohol industry growth rate

Spirits Market in India by Volume

5% 5% 5% 4% 4% 4% 3% 4% 4% 4% 15% 15% 15% 14% 14% 14% 13% 20% 19% 17%

22% 22% 21% 21% 19% 16% 17% 18% 22% 22%

59% 59% 60% 59% 59% 60% 60% 61% 61% 64%

2010 2011 2012 2013 2014 2015 2016 2017 2018 2019

Whisky Rum White Spirits

Spirit Market in India by Value

5% 5% 4% 4% 6% 6% 5% 6% 6% 6% 14% 14% 13% 12% 10% 10% 10% 10% 10% 9% 11% 10% 11% 12% 12% 12% 12% 12% 12% 11%

70% 69% 71% 72% 72% 73% 73% 73% 74% 75%

2010 2011 2012 2013 2014 2015 2016 2017 2018 2019

Whisky Brandy Rum White Spirits

Source: Equrius Report Major players in the industry Major Companies in the Indian Liquor Market

Source: Equrius Report Top liquor brands in India

Source: Equrius Report – India

 World’s second largest liquor company by Volume.

 Subsidiary of Diageo PLC.

 One of the leading players of IMFL in India with a strong bouquet of brands like Mcdowell’s, , etc.

 In 2013, Diageo PLC acquired 10% stake in the company and gradually ramped up its share to 55% by the end of 2014.

 The main inflexion point came in 2015, after the whole company came under the control of Diageo PLC. Brands

Consumer Prices

> Rs. 200 LUXURY , Cîroc, Gordon, Baileys, J&B

Rs. 900-2000 PREMIUM VAT 69, Black & White, Black Dog,

Rs. 350-900 PRESTIGE Mcdowells, Signature, , Royal Challenge,

< Rs. 350 POPULAR Director’s Special, Bagpiper, , Haywards Top brands for United Spirits

 Company has a portfolio of 15 brands in its portfolio, which sell more than a million cases every year.

 Out of the brands 2 brands sells more than 10 million cases each annually.

 McDowell’s No.1, Royal Challenge, Signature, Antiquity, Director’s Special Black, McDowell’s VSOP, , , Old Tavern, Haywards are some of the marquee brands owned by your Company.

 In addition, your Company also imports, manufactures, distributes and sells various iconic Diageo brands such as Gold Label, Captain Morgan, Johnnie Walker, J&B, Baileys, Lagavulin, Talisker, VAT 69, Black Source: Equrius Report & White, Smirnoff and Ciroc in India under different licensing agreements. IMFL players volumes

Brands (mn cases) Company 2015 2016 2017 2018 2019 Officers Choice Whiskey ABD 32.9 32.9 32 34 30.6 Mc Dowell's No 1 Whiskey United Spirits 25.7 26.6 26.4 29 30.7 Imperial Blue Pernord Ricard 17.5 18 19 22.7 26.3 Pernord Ricard 17.3 18 19 22.7 26.3 Old Tavern United Spirits 11 9.9 7.1 6.2 5.3 Original Choice John Distilleries 10.7 10.1 10.3 11.5 12.7 Hayward's Fine United Spirits 7.1 7.9 8.5 9.4 9.6 Blender's Pride Pernord Ricard 5.6 6.2 6.4 7.3 7.7 Director's Special Whisky United Spirits 5 5 4.1 4.2 4.2 8PM 4.1 5.7 7 8.2 8.5 Royal Challenge United Spirits 3.6 4.7 4.5 5.6 5.5 Signature United Spirits 1.5 1.8 2 2.3 2.3 White and Blue Alcobrew 1.2 1.4 1.6 2.1 2.4 John Distilleries 1.1 2.1 3.6 5.2 4.2 Sterling Premium Whisky's ABD 0 0 0 1.2 2.8

Source: Equrius Report IMFL players market share

Brands Market Share Company 2015 2016 2017 2018 2019 Officers Choice Whiskey ABD 23% 22% 21% 20% 17% Mc Dowells No 1 Whiskey United Spirits 18% 18% 17% 17% 17% Imperial Blue Pernord Ricard 12% 12% 13% 13% 15% Royal Stag Pernord Ricard 12% 12% 13% 13% 15% Old Tavern United Spirits 8% 7% 5% 4% 3% Original Choice John Distilleries 7% 7% 7% 7% 7% Hayward's Fine United Spirits 5% 5% 6% 5% 5% Blender's Pride Pernord Ricard 4% 4% 4% 4% 4% Director's Special Whisky United Spirits 3% 3% 3% 2% 2% 8PM Radico Khaitan 3% 4% 5% 5% 5% Royal Challenge United Spirits 2% 3% 3% 3% 3% Signature United Spirits 1% 1% 1% 1% 1% White and Blue Alcobrew 1% 1% 1% 1% 1% Bangalore Malt Whisky John Distilleries 1% 1% 2% 3% 2% Sterling Premium Whisky's ABD 0% 0% 0% 1% 2%

Source: Equrius Report Meet the new United Spirits

UNITED SPIRITS PRE-2015 UNITED SPIRITS POST-2015

BAD CLEAN CORPORATE CORPORATE GOVERNANC GOVERNANCE E

SICK STRONG SUBSIDIARIES DEBT LADEN ACQUISITIONS MANAGEMENT RATIONALISATION

CONTINOUSLY CLEAN HIGH VOLUMES CORRUPT BUT LESS REDUCING DEBT ACCOUNTS MANAGEMENT REALISATIONS

LESS VOLUMES BUT HIGH BAD REALISATIONS ACCOUNTS WHAT CHANGED AFTER 2015? 1. Manufacturing and subsidiaries rationalizations

Subsidiaries

79 78 80 68

Number of Own Manufacturing Plants 46

28 27 22 19 18 20 20

19 19 15 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020

2016 2017 2018 2019 2020 2.Focusing more on realizations than volumes

Volume (cases in mn)

120 123 121 113 117 100 88 93 90 82 80 74 78 66 59 56 51 38 21

2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 9M FY21

3871 3603 3405 3521 2862 2572

1961 1915 1021 1762 760 1053 1524 725 466 339 638 1257 1139 1166 1157 1103 980 1101 854 877 798 913 628 618 636 653 770 479 362 446 309 222 155 170 190 26 18 13 32 66 144 44 72 101 93 89 -11 3 104 110 129

2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 9M FY21

Revenue per Case (in Rs) EBITDA per Case (in Rs) Gross Revenue per Case 3. Increasing focus more on Prestige and Above category

93 94 88 86

59 53

41 42 40 41 37 37 39 34 33 31 27 29

2012 2013 2014 2015 2016 2017 2018 2019 2020 P&A (mn cases) Popular (mn Cases)

52% 49% 49% 63% 59% 78% 76% 73% 74%

48% 51% 51% 37% 41% 22% 24% 27% 26%

2012 2013 2014 2015 2016 2017 2018 2019 2020

P&A Volume Contribution Popular Volume Contribution 3(a). Prestige and above category brands

30.7 Volume (in mn cases) 29 25.7 26.6 26.4

5.6 6.1 3.6 4.7 4.5 1.5 1.5 2 2.3 2.3

2015 2016 2017 2018 2019

Mc Dowell's No 1 Whisky Royal Challenge Siganture

Brand wise Contribution to P&A Segment 83% 78% 78% 71% 73%

12% 14% 12% 15% 15% 5% 4% 5% 6% 5%

2015 2016 2017 2018 2019

Mc Dowell's Royal Challenge Siganture 3 (b). Category wise turnover

6919 6358 5685 5910 5968 4966 5128 4601 4257 3650 3894 3852 3580 3463 3431 3357

2013 2014 2015 2016 2017 2018 2019 2020

P&A Turnover (Rs Crores) Popular Turnover (Rs Crores)

46% 44% 40% 37% 36% 66% 60% 61%

54% 56% 60% 63% 64% 34% 40% 39%

2013 2014 2015 2016 2017 2018 2019 2020

P&A Contribution to Total Revenue Popular Contribution to Total Net Revenue 3 (c). Prudent focus shift

1456 1353 1378 1407 1290 1342 1234 1177

849 858 861 736 723 727 661 660

2013 2014 2015 2016 2017 2018 2019 2020

P&A Revenue per case Popular Revenue per case 4. Change in Management

Mr. Anand Kripalu joined Diageo India in May 2014 as Chief Executive Officer. In his current position his task is to transform the company, making it one of the most Anand Kripalu- MD&CEO ( 2014-20) trusted and respected consumer goods company. His focus has been around transformation of corporate citizenship as well as ethical standards in the industry. Anand has over 30 years of experience in the Indian consumer goods market

Ms. Hina is currently MD, Regional Markets (ARM) at Diageo. She will take over Ms. Hina Nagrajan- MD&CEO as Managing Director and CEO of UNSP and will also join the Diageo Executive ( w.e.f July 2021) Committee, reporting to John Kennedy, President Diageo & India. She has spent over 30 years in CPG businesses and held several senior marketing and general management positions at Reckitt Benckiser, Nestle India and Mary Kay India. 5. Debt reduction

9000 16%

8000 13% 14% 13% 7000 12% 12% 6000 9% 10% 10% 5000 9% 8% 8% 4000 8239 7% 7804 7718 7476 5% 6604 6% 4% 6% 3000 4% 5850 3% 3% 3% 4% 4963 4% 2000 4137 2% 3% 4048 3729 3417 2900 3% 2401 2% 1000 1775 338 334 973 1543 1480 0 0% 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 6M FY21

Total Debt Interest Expense as a % of Sales

D/E 7.6

3.6 3.2 3.3 2.7 2.6 2.3 1.8 1.8 1.7 1.3 1.2 1.1 1.6 1.6 1.4 0.9 0.6 0.5

2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 6M FY21 6. Adopting franchise model

Income from Brand Franchisee (in Rs crores)

185 167 149

95

69 53

2015 2016 2017 2018 2019 2020

 To enhance focus on the premium range, UNSP curtailed production of some low-margin products in select markets and also started franchising popular brands in some markets to local distilleries since FY15.  This helps the company to have its popular range of products in markets lower the working capital requirements and use resources to focus on the core portfolio of brands.  Currently, company has brand franchise agreements (typically for 3-5 years) across 13 states. Uncertain regulations

 The Alcoholic Beverages Industry continues to suffer the twin impact of excessive taxation and over-regulation.

 A favorite of Governments, when they need to bridge their budgetary deficits, they increase the duties.

 In 2017, supreme court banned liquor vendors within 500 m of state or national highway.

 The highway ban lead to closure of 30000 shops but it has been normalized for now

 Black swan events like Liquor ban in .

 Nearly two-third of the street price of a bottle of alcohol goes to the State and local Governments towards taxes and duties.

 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.

 Recently, Government in the state of 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 licence renewal cycle in majority of states etc. (2019 AR) Regulations

80% 70% 3000 68% 68% 68% 70% 64% 66% 58% 2500 60% 55% 2714 52% 2382 2437 48% 49% 1882 2303 2000 50% 43% 41% 41% 42% 1659 39% 40% 34% 34% 34% 1500 1083 1117 30% 908 754 1000 20% 605 393 435 467 246 276 314 500 10% 157 117 0% 0 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 9M FY21

Excise per Case (in Rs) Excise as a % of Gross Revenue

The government is continuously burdening the liquor industry, by increasing the excise duty. Currently it is the highest.

A favorite of Governments, when they need to bridge their budgetary deficits, they increase the excise. Example of how fragmented the market is?

Mc Dowells MRP

900 778 720 720 600 530

380

UP

MRP of McDowell’s No 1 premium whisky ranges from Rs 380-Rs 900 for a 750ml bottle Revenue from operations

12000 0.8 73% 10499 10615 10000 9244 9335 9341 9325 0.6 56% 8495 8818 8591 7376 8000 38% 0.4 6362 5901 5468 25% 6000 18% 0.2 15% 4628 16% 16% 14% 9% 6% 4% 4000 2962 1% -3% 0% 0 2148 -12% -9% 2000 1016 1172 1244 -20%-0.2

0 -0.4 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 9M FY21

Net Sales Growth Y-o-Y

 Although the Revenue is flat over the last 5 years but realizations per case sold has increased.

 There has been many regulatory roadblocks over the previous years which has hampered revenue growth.

 The company’s main focus is on premiumisation of offerings. Gross Profitability

Gross Margins 55% 51% 50% 50% 51% 47% 48% 46% 44% 44% 46% 45% 45% 45% 44% 44% 44% 46% 39%

2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 9M FY21

 The raw material prices are very fluctuating which leads to unstable gross margins.  The company cannot pass on the price increases to end customers because of different policy of sale in different states.  For e.g. government during one instance denied the industry even reasonable inflation-linked increases. Major costs

Employee Cost as a % of Sales

12%

8% 8% 8% 8% 8% 8% 8% 8% 7% 7% 7% 7% 7% 7% 7% 7% 6% 6%

2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 9M FY21

Advertisement and Sales Promotion as a % of Sales The new management has

12% 12% 12% made the advertisement 11% 11% 11% 11% 10% 11% 10% 10% 10% 10% spend more effective 9% 9% 8% 7% 8% 8%

2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 9M FY21 Operating Profitability

1600 1517 2 1394 1400 169% 144% 1207 2 1144 1118 1091 1200 1062 717 965 989 1000 127% 1 84% 800 60% 656 1 -2% 600 26% 436 2% 389 3% 9% 0 400 -2% 22% 15% 192 0% 200 56 70 72 33 -50% -1 -63% 0 -1 -200 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 9M FY21 -138 -124% -400 -113% -2 EBITDA Growth Y-o-Y

EBITDA Margins Increase in EBITDA margins is 23% because of increased share of prestige and above category 16% 16% 15% 14% 15% 12% 11% 10% 11% 11% 11% 9% 7% 5% 6% 6%

0% -1% 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 9M FY21 Net profitability

PAT 611 568 652 685 624 301 12 24 6 45 187 143 93 160

2003 2004 2005 2006 2007 2008 2009 2010-23 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 9M FY21 -408 -105

-1687

-4489

PAT Margins

21%

7% 8% 8% 7% 7% 2% 2% 2% 2% 3% 1% 1% 0% -1% 1% -7% 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 9M FY21 -18%

-42% Return ratios

5% 2% 4% 9% 8% 18% 13% 5% 18% 56% 14% 31% 25% 8% 12% 6% 10% 8% 14% 13% 20% 14% 9% 23% 32% 13% 20% 21% 5% -1% -24% -11% 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013-2% 2014 2015 2016 2017 2018 2019 2020

-19% -117% -91%

ROCE % ROE % Efficient manufacturing

Number of Own Manufacturing Plants

28 27

19 19 15 The reduction in the number of owned manufacturing plants and moving towards outsourcing/franchisee has led to significant jump in the asset turnover.

2016 2017 2018 2019 2020

Fixed Asset Turnover

3.0 3.1 3.0 3.1 2.9

1.8 2.0 2.0 1.5 1.6 1.4 1.5 1.2 1.3 1.3 1.1 0.9 1.0

2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 Working capital cycle

610 572

362 298 316 293 277 286 267 259 237 253 216 201 201 198 185202 190 144 202 195 149 158 150 165 153 123 143 140 99 116 122 115 99 83 75 78 95 81 77 84 78 89 68 64 52 55 49 66 59 69 70 68

2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 Debtors Days Inventory Days Payable Days

Working Capital as a % of Sales

41% 38% 37% 30% 31% 32% 33% 32% 28% 28% 27% 29% 29%

9% 11% 8% 2% 5%

2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 Turning cash and FCF positive

Operations back on track with consistent CFO and FCF generation

3583

1723 1969 1980 1591 1617 1050 925 948 898 756 647 783669 530459 523 617 267 235 283317 31 70 40 52 0

-302003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 -85 -116 -116 -518 -552 -196 -753 -1133 CFO FCF Steadily converting operating profits into cash

CFO/EBITDA

278%

198%

121% 133% 128% 102% 111% 81% 86% 90% 67% 63% 67% 37% 47% 49% 16%

2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020

-167%

Prudent cash conversion post 2015, indicates that the operating profit is actually being converted into cash and is not getting stuck in working capital. PEERS- Revenue from operations

Net Sales (in Rs Crores) 9341 8495 8818 8591 8572 7239 6357 6523

2498 2953 1794 1651 2012 1679 1822 2096 715 704 818 936 Excise duty as a % of Sales

2016 2017 2018 2019 74% 75% 76% 76% 74% 66% 68% 71% 67% 68% 64% 61% 66% 66% Allied Blenders And Distillers Pvt Ltd. John Distilleries Pvt Ltd. 54% 58% 47% 49% 49% India Pvt. Ltd. United Spirits 40% Radico Khaitan

Gross Sales (in Rs Crores) 2016 2017 2018 2019

Allied Blenders And Distillers Pvt Ltd. John Distilleries Pvt Ltd. 28873 25757 26556 23921 Pernod Ricard India Pvt. Ltd. United Spirits 20271 Radico Khaitan 15820 11975 12849 8935 8058 7411 6270 3007 4271 4868 2712 39622833 3396 3949

2016 2017 2018 2019 Allied Blenders And Distillers Pvt Ltd. John Distilleries Pvt Ltd. Pernod Ricard India Pvt. Ltd. United Spirits Radico Khaitan PEERS - Margins

EBITDA Margin 15% 14% 14% 12% 12% 11% 11% 11%

7% 5% 5% 5% 5% 5% 3% 4% 3% 3% 3% 3% Gross Margins 2016 2017 2018 2019 67% Allied Blenders And Distillers Pvt Ltd. John Distilleries Pvt Ltd. 56% Pernod Ricard India Pvt. Ltd. United Spirits 52% 51% 52% 49% 48% 50% 48% 51% 44% 46% 44% 45% Radico Khaitan 39% 40% 35% 37% 37% 32%

PAT Margin 9% 7% 8% 8% 7% 2016 2017 2018 2019 6% Allied Blenders And Distillers Pvt Ltd. John Distilleries Pvt Ltd. Pernod Ricard India Pvt. Ltd.

United Spirits Radico Khaitan 2% 2% 2% 2% 2% 2% 1% 1% 1% 1% 0% 0.2% 0.1%0.4%

2016 2017 2018 2019

Allied Blenders And Distillers Pvt Ltd. John Distilleries Pvt Ltd. Pernod Ricard India Pvt. Ltd. United Spirits Radico Khaitan PEERS- Return ratios

D/E ROCE % 95% 4.2 83% 3.8 81% 69% 2.8 2.6 2.8 2.3

1.4 1.3 1.4 1.2 1.0 0.8 1.0 0.9 20% 20% 20% 18% 21% 19% 0.5 16% 14% 17% 13% 14% 15% 0.3 13% 11% 9% 10% 0.0 0.1 0.0 0.0

2016 2017 2018 2019 2016 2017 2018 2019 Allied Blenders And Distillers Pvt Ltd. John Distilleries Pvt Ltd. Allied Blenders And Distillers Pvt Ltd. John Distilleries Pvt Ltd. Pernod Ricard India Pvt. Ltd. United Spirits Pernod Ricard India Pvt. Ltd. United Spirits Radico Khaitan Radico Khaitan

ROE %

61% 53% 52% 45%

31% 30% 31% 25% 26% 25% 15% 13% 13% 11% 11% 5% 8% 1% 4% 3%

2016 2017 2018 2019

Allied Blenders And Distillers Pvt Ltd. John Distilleries Pvt Ltd. Pernod Ricard India Pvt. Ltd. United Spirits Radico Khaitan SWOT Analysis

STRENGTHS WEAKNESS

 Strong Brand Portfolio.  The company is susceptible to raw material price volatility, which leads to fluctuating Gross  Largest Alco Bev company in India. Margins.

 Diageo Expertise helping United Spirits.  No pricing power even if the raw material price increases.  More than 10 millionaire brands.  Direct advertisement of alcobev products are  Best Margins in the Industry. not permitted in India.

 P&A Category, the largest contributor to Revenue. SWOT Analysis

THREATS OPPORTUNITIES

 Transition from country liquor to IMFL  Excessive regulation risk from both Central and presents a huge opportunity. State Governments.

 Per capita consumption of Liquor is among  Rise in Competitive Intensity from Pernord the lowest in India. Ricard.

 Liquor Ban in any State (E.g. Ban in Bihar in 2017).

 Lower than expected growth in P&A segment could delay margin expansion. To invest with us, Contact :

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