Indian Spirits Market

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27 September 2012 Europe Equity Research Beverage (Food Producers & Processors/Personal Care & Household Products/Beer & Alcoholic Beverages) / UNDERWEIGHT/OVERWEIGHT

Indian Spirits Market Research Analysts INDUSTRY PRIMER Alex Molloy 41 44 333 05 83 [email protected] Indian spirits: All aboard Charlie Mills 44 20 7888 0325 ■ The India spirits market is huge – number 3 globally by volumes, boasts [email protected] some of the largest brands in the world, growing mid-teens last 5 years and Nicolas Sochovsky showing healthy signs of premiumising. It has been largely inaccessible to 44 20 7883 8075 [email protected] foreign players due to punitively high import tariffs. The market is highly

Sanjeet Aujla complex with local and national taxes and operates more like 28 separate 44 20 7888 0353 markets. However its potential seems clear, and any signs of deregulation [email protected] would represent a material opportunity to the global spirits players. Jimmie Bork ■ 44 20 7883 9941 Pernod: Though India only represents 6% of Pernod’s sales, it is probably [email protected] closer to 20% of the group’s organic growth. Pernod’s track record in the Michael Bleakley region has been very strong indeed and its business there is perhaps the 44 20 7888 0336 hidden jewel in the Pernod crown. [email protected] ■ Diageo: The news that Diageo is in discussions about taking a stake in the industry leader, United Spirits (44% market share), has understandably been well received. We await details of quite what shape this might take. If fully consolidated the potential impact on the shape of Diageo’s key financial metrics outweighs its near term financial impact - United Spirits has close to 120m cases sold (vs Diageo’s 157m), but an EBITA equal to just 4% of Diageo’s EBITA. We continue to rate Diageo and Pernod as Outperform, with 1,900p and EUR100 target prices, respectively. Figure 1: India is the 3rd largest market by volumes 40%

35%

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0% China Rus India US S Korea Japan Brazil Thai Phil Germ Source: IWSR 2010 (size by volume)

DISCLOSURE APPENDIX CONTAINS ANALYST CERTIFICATIONS AND THE STATUS OF NON-US ANALYSTS. U.S. Disclosure: Credit Suisse does and seeks to do business with companies covered in its research reports. As a result, investors should be aware that the Firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision. CREDIT SUISSE SECURITIES RESEARCH & ANALYTICS BEYOND INFORMATION™ Client-Driven Solutions, Insights, and Access

27 September 2012 The story in 6 charts..

Figure 2: India is the 3rd largest market by volume…. Figure 3: ….and one of the fastest growing major market 40% 20% 35% 15% 30% 10% 25%

20% 5%

15% 0% 10% -5% 5%

0% -10% China Rus India US S Korea Japan Brazil Thai Phil Germ China India US S Korea Brazil Russia Source: IWSR 2010 (size by volume) Source: IWSR 2005-2010 CAGR (growth by volume)

Figure 4: It is principally made up of Whisky rum and Figure 5: The market has been premiumising, 2005-10 brandy, 2005-10 70% 30%

60% 25%

50% 20% 40% 15% 30% 10% 20%

10% 5%

0% 0% Whisky Rum Brandy Vodka Other Value Total Mk Low Price Standard + Source: IWSR, Credit Suisse research Source: IWSR, Credit Suisse estimates

Figure 6: USL is the market leader in total spirits, 2010 Figure 7: ….and in whisky, 2010 Other Other John Distillers 14% 29% USL 7% USL 44% 44%

John Distillers Jagatjit 5% 9%

ABD Jagatjit 11% 6% ABD Pernod Pernod 7% 9% 15% Source: IWSR, Credit Suisse estimates Source: IWSR, Credit Suisse estimates

Indian Spirits Market 2 27 September 2012

Diageo DGE.L Price (25 Sep 12): 1,754.00p, Rating: OUTPERFORM, Target Price: 1,900.00p Income statement (£ m) 06/12A 06/13E 06/14E 06/15E Per share data 06/12A 06/13E 06/14E 06/15E Sales revenue 10,762 11,470 12,174 12,938 No. of shares (wtd avg) 2,503 2,472 2,412 2,356 EBITDA 3,572 3,940 4,258 4,586 CS adj. EPS (p) 92.45 103.89 118.35 132.48 Depr. & amort. (411) (438) (465) (494) Prev. EPS (p) — — — — EBIT (CS) 3,161 3,502 3,793 4,092 Dividend (p) 43.50 46.98 50.74 54.80 Net interest exp. (397) (444) (396) (382) Dividend payout ratio 47.05 45.22 42.87 41.36 Associates 213 245 269 296 Free cash flow per share 59.65 90.21 109.19 122.26 Other adj, — — — — PBT (CS) 2,977 3,303 3,667 4,007 Key ratios and 06/12A 06/13E 06/14E 06/15E Income taxes (1,038) (595) (660) (721) valuation Profit after tax 1,939 2,708 3,007 3,285 Growth(%) Minorities (130) (140) (152) (164) Sales 8.3 6.6 6.1 6.3 Preferred dividends — — — — EBIT 9.6 10.8 8.3 7.9 Associates & other 505 — — — Net profit 11.1 11.0 11.2 9.3 Net profit (CS) 2,314 2,568 2,855 3,122 EPS 11.0 12.4 13.9 11.9 Other NPAT adjustments (409) — — — Margins (%) Reported net income 1,905 2,568 2,855 3,122 EBITDA margin 33.2 34.4 35.0 35.4 EBIT margin 29.4 30.5 31.2 31.6 Cash flow (£) 06/12A 06/13E 06/14E 06/15E Pretax margin 27.7 28.8 30.1 31.0 EBIT 3,161 3,502 3,793 4,092 Net margin 21.5 22.4 23.5 24.1 Net interest (391) (444) (396) (382) Valuation metrics (x) Cash taxes paid (521) (514) (595) (660) EV/sales 4.7 4.4 4.1 3.9 Change in working capital (529) (135) (150) (165) EV/EBITDA 14.2 12.9 11.8 10.9 Other cash & non-cash items 218 376 562 613 EV/EBIT 16.0 14.5 13.3 12.3 Cash flow from operations 1,938 2,785 3,215 3,498 P/E 19.0 16.9 14.8 13.2 CAPEX (445) (555) (581) (618) P/B 6.4 5.9 5.2 4.6 Free cash flow to the firm 1,493 2,230 2,634 2,881 Asset turnover 0.48 0.50 0.51 0.52 Acquisitions (1,420) — — — ROE analysis (%) Divestments 51 — — — ROE stated-return on 29.8 36.3 37.0 36.6 Other investment/(outflows) — — — — ROIC 14.6 19.2 20.1 20.9 Cash flow from investments (1,814) (555) (581) (618) Interest burden 0.94 0.94 0.97 0.98 Net share issue/(repurchase) 1 (1,150) (1,150) (1,250) Tax rate 33.7 18.0 18.0 18.0 Dividends paid (1,036) (1,172) (1,250) (1,318) Financial leverage 1.3 1.2 1.1 1.0 Issuance (retirement) of debt — — — — Credit ratios (%) Other (4) — — — Net debt/equity 110.9 104.2 91.5 79.1 Cash flow from financing (1,039) (2,322) (2,400) (2,568) Net debt/EBITDA 2.1 1.9 1.7 1.5 Effect of exchange rates (27) — — — Interest coverage ratio 8.0 7.9 9.6 10.7 Changes in Net Cash/Debt (942) (92) 234 313 . Net debt at start 6,611 7,553 7,645 7,411 Source: FTI, Company data, Thomson Reuters, Credit Suisse Securities Change in net debt 942 92 (234) (313) (EUROPE) LTD. Estimates. Net debt at end 7,553 7,645 7,411 7,098

Balance sheet (£ m) 06/12A 06/13E 06/14E 06/15E Assets Cash and cash equivalents 1,076 984 1,218 1,531 1694 Accounts receivable 2,103 2,241 2,379 2,528 Inventory 3,955 4,215 4,474 4,754 1494 Other current assets 119 119 119 119 Total current assets 7,253 7,559 8,190 8,933 1294 Total fixed assets 2,972 3,089 3,205 3,329 1094 Intangible assets and goodwill 8,821 8,821 8,821 8,821 Oct-10 Feb-11 Jun-11 Oct-11 Feb-12 Jun-12 Investment securities — — — — Other assets 3,304 3,524 3,766 4,032 Price Price relative Total assets 22,350 22,993 23,982 25,114 Liabilities The price relative chart measures performance against the FTSE ALL SHARE Accounts payable 2,997 3,194 3,390 3,603 INDEX which closed at 3022.74 on 25/09/12 Short-term debt 1,230 1,230 1,230 1,230 On 25/09/12 the spot exchange rate was £.8/Eu 1. - Eu .78/US$1 Other short term liabilities 557 619 684 752 Total current liabilities 4,784 5,043 5,304 5,585 Long-term debt 7,399 7,399 7,399 7,399 Other liabilities 3,356 3,214 3,183 3,153 Total liabilities 15,539 15,655 15,886 16,136 Shareholders' equity 6,811 7,338 8,096 8,978 Minority interest — — — — Total equity & liabilities 22,350 22,993 23,982 25,114 Net debt (£ m) 7,553 7,645 7,411 7,098

Indian Spirits Market 3 27 September 2012

Pernod-Ricard PERP.PA Price (25 Sep 12): Eu88.45, Rating: OUTPERFORM, Target Price: Eu100.00 Income statement (Eu m) 06/12A 06/13E 06/14E 06/15E Per share data 06/12A 06/13E 06/14E 06/15E Sales revenue 8,215 9,035 9,682 10,391 No. of shares (wtd avg) 265 265 265 265 EBITDA 2,114 2,397 2,657 2,916 CS adj. EPS (Eu) 4.53 5.23 6.17 7.06 Depr. & amort. — — — — Prev. EPS (Eu) — — — — EBIT (CS) 2,114 2,397 2,657 2,916 Dividend (Eu) 1.59 1.84 2.16 2.48 Net interest exp. (509) (530) (455) (395) Dividend payout ratio 35.09 35.09 35.09 35.09 Associates — — — — Free cash flow per share 4.26 3.95 5.32 6.49 Other adj, — — — — PBT (CS) 1,605 1,867 2,202 2,521 Key ratios and 06/12A 06/13E 06/14E 06/15E Income taxes (247) (448) (529) (605) valuation Profit after tax 1,358 1,419 1,674 1,916 Growth(%) Minorities (27) (33) (38) (44) Sales 7.5 10.0 7.2 7.3 Preferred dividends — — — — EBIT 10.7 13.4 10.8 9.8 Associates & other (130) — — — Net profit 9.8 15.4 17.9 14.5 Net profit (CS) 1,201 1,386 1,635 1,872 EPS 9.8 15.4 17.9 14.5 Other NPAT adjustments (55) — — — Margins (%) Reported net income 1,146 1,386 1,635 1,872 EBITDA margin 25.7 26.5 27.4 28.1 EBIT margin 25.7 26.5 27.4 28.1 Cash flow (Eu) 06/12A 06/13E 06/14E 06/15E Pretax margin 19.5 20.7 22.7 24.3 EBIT 2,114 2,397 2,657 2,916 Net margin 14.6 15.3 16.9 18.0 Net interest (548) (530) (455) (395) Valuation metrics (x) Cash taxes paid (247) (448) (529) (605) EV/sales 3.9 3.5 3.1 2.8 Change in working capital (94) (231) (109) (113) EV/EBITDA 15.1 13.1 11.4 10.0 Other cash & non-cash items 163 199 213 229 EV/EBIT 15.1 13.1 11.4 10.0 Cash flow from operations 1,388 1,387 1,778 2,032 P/E 19.5 16.9 14.3 12.5 CAPEX (260) (340) (369) (312) P/B 2.2 2.1 1.9 1.7 Free cash flow to the firm 1,128 1,047 1,409 1,720 Asset turnover 0.29 0.31 0.33 0.35 Acquisitions — — — — ROE analysis (%) Divestments — — — — ROE stated-return on 11.4 12.7 14.0 14.6 Other investment/(outflows) (333) — — — ROIC 8.8 9.1 10.0 10.9 Cash flow from investments (593) (340) (369) (312) Interest burden 0.76 0.78 0.83 0.86 Net share issue/(repurchase) — — — — Tax rate 17.4 24.0 24.0 24.0 Dividends paid (411) (421) (486) (573) Financial leverage 0.87 0.80 0.65 0.50 Issuance (retirement) of debt — — — — Credit ratios (%) Other (709) (17) — — Net debt/equity 85.3 77.9 63.1 48.9 Cash flow from financing (1,120) (438) (486) (573) Net debt/EBITDA 4.4 3.7 2.9 2.3 Effect of exchange rates — — — — Interest coverage ratio 4.2 4.5 5.8 7.4 Changes in Net Cash/Debt (325) 608 923 1,147 . Net debt at start 9,038 9,363 8,755 7,831 Source: FTI, Company data, Thomson Reuters, Credit Suisse Securities Change in net debt 325 (608) (923) (1,147) (EUROPE) LTD. Estimates. Net debt at end 9,363 8,755 7,831 6,684

Balance sheet (Eu m) 06/12A 06/13E 06/14E 06/15E Assets Cash and cash equivalents 787 787 787 787 Accounts receivable 1,376 1,477 1,544 1,616 96 Inventory 4,295 4,633 4,868 5,121 Other current assets 115 115 115 115 76 Total current assets 6,573 7,013 7,314 7,639 Total fixed assets 2,126 2,267 2,423 2,506 56 Intangible assets and goodwill 17,360 17,360 17,360 17,360 Oct-10 Feb-11 Jun-11 Oct-11 Feb-12 Jun-12 Investment securities — — — — Other assets 2,316 2,316 2,316 2,316 Price Price relative Total assets 28,375 28,956 29,413 29,821 Liabilities The price relative chart measures performance against the CAC 40 INDEX which Accounts payable 2,161 2,369 2,563 2,774 closed at 3439.29 on 25/09/12 Short-term debt — — — — On 25/09/12 the spot exchange rate was Eu .78 /US$1 Other short term liabilities 1,553 2,291 2,303 2,373 Total current liabilities 3,714 4,660 4,865 5,147 Long-term debt 1,236 1,236 1,236 1,236 Other liabilities 12,453 11,827 10,904 9,757 Total liabilities 17,403 17,723 17,005 16,140 Shareholders' equity 10,803 11,059 12,217 13,470 Minority interest 169 173 191 211 Total equity & liabilities 28,375 28,956 29,413 29,821 Net debt (Eu m) 9,363 8,755 7,831 6,684

Indian Spirits Market 4 27 September 2012 Indian Spirits market Market size, growth India is the third largest Global spirits market by volume in the World, after China and India: One of the largest and Russia - larger than both the United States and South Korea. It is also one of the fastest fastest growing spirits growing over the last decade (+12% CAGR since 2001) and growth has even accelerated markets over the last five years (+17% CAGR since 2005). Only China has grown quicker since 2005 (+18% CAGR) with both markets growing at three times the rate of the global spirits market (+5%) over the same period.

Figure 8: Indian Spirits mk. third largest in world…. Figure 9: …..and the fastest growing…together with China 40% 20% 35% 15% 30% 10% 25%

20% 5%

15% 0% 10% -5% 5%

0% -10% China Rus India US S Korea Japan Brazil Thai Phil Germ China India US S Korea Brazil Russia Source: IWSR 2010 (size by volume) Source: IWSR 2005-2010 CAGR (growth by volume)

Segmentation Like China (Baiju) and Russia (vodka) the market is dominated by low priced and value Western style spirits brands. However unlike in other big markets, India doesn’t have a dominant indigenous dominate…especially liqueur but instead the popular tipple is locally produced and adapted versions of Whisky European spirits with whisky by far the most important (c.60% of volumes), followed by Brandy and Rum (c.20% each).

Figure 10: ….in India Western style spirits dominate…. Figure 11: …..in particular whisky in both volumes & value 70% 80%

60% 70% 60% 50% 50% 40% 40% 30% 30% 20% 20%

10% 10%

0% 0% Whisky Rum Brandy Vodka Other Whisky Rum Brandy White spirits Source: IWSR 2010 (volume share of Indian Spirits market) Source: Euromonitor 2010 (value share of Indian Spirits market)

A combination of colonial history and trade policies explain this unique situation. A brief glance at the history of United Spirits (USL), the market leader, illustrates this well. The origins of USL date back to McDowell & Co, a Madras trading company established in 1826 to import fine liqueur and cigars. The British Raj set the tone and taste for brown

Indian Spirits Market 5 27 September 2012 spirits (mainly whisky but also rum and brandy) and after Indian Independence USL founder Vittal Mallya acquired McDowells (1951). In the 1960’s he started producing his synonymous brandy (McDowell’s No1 Brandy) and whisky (McDowell’s No1 whisky). Today USL brands make-up six of the top ten in India and are amongst the largest brands in their respective categories globally (by volume). These locally produced versions of Western spirits are known by the acronym IMFL (Indian Made Foreign Liquor). Indian made whisky is not only the biggest market segment (60% of spirits volumes, 70% Indian whisky key local and of value) it is also growing strongly, particularly over the last five or six years, averaging global growth driver.. +15-20% p.a. Locally made Brandy is growing slightly faster but is a much smaller category (20% of market volumes), while Rum is losing out.

Figure 12: ……18% CAGR for Indian Whisky volumes Figure 13: ….only Brandy volumes have done slightly between 2005-2011.. better in India between 2005-11 30.0% 25%

25.0% 20%

20.0% 15%

15.0% 10%

10.0% 5%

5.0% 0% Brandy Whisky Rum Total Mk 0.0% 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 Source: IWSR, company data, Credit Suisse estimates Source: IWSR

India accounts for nearly half of global whisky volumes, which when multiplied by growth rates of 15-20% means that its basically driving nearly all of the category’s Global +7% growth since 2005. The contribution of Indian Whiskies to the global category’s value growth (as opposed to volume) would of course look very different as they would have both a much lower weighting and premiumisation is at a much earlier stage, although as we argue below we could be reaching an inflexion point here.

Figure 14: …India is nearly ½ of global whisky volumes in Figure 15: …and nearly all of the global category growth 2010 between 2005-10 50% 20% 45%

40% 15% 35%

30% 10% 25% 20% 5% 15% 10% 0% 5% India France Japan US UK Other 0% India US France Japan United Kingdom Other -5% Source: IWSR Source: IWSR

Indian Spirits Market 6 27 September 2012

As a result Indian brands dominate the global volume charts, occupying nine of the top ten positions. Of the international brands, only Diageo’s Johnnie Walker can match them on this basis although given the big differences in average selling prices, (probably 4-5x higher) this ranking would look very different if it were done by value.

Figure 16: ….Indian whiskies dominate the global TOP 10 as well….. Brand % global whisky mk No. of cases ('000 9L) brand owner Officer's Choice 6% >16000 ABD McDowells 6% >16000 USL Johnnie Walker 5% >16000 Diageo Bagpiper 5% >16000 USL Royal Stag 4% >10000 Pernod Old Tavern 3% >9000 USL Original Choice 4% >10000 John Distillers Jagatjit Aristocrat 2% >9000 Jagatjit Director's Special 2% >7000 USL Imperial Blue 2% >7000 Pernod Ballantines 2% >5000 Pernod Jim Beam 2% >4000 Beam J&B 2% >4000 Diageo Crown Royal 2% >4000 Diageo Chivas 2% >4000 Pernod Source: IWSR, company data, Credit Suisse research

Segmentation - by price point/origin This brings us nicely to the subject of premiumisation, one of the most important trends in …..and premiumisation just the spirits market globally and one which can influence both growth and profitability. Given beginning the particular structure of the Indian market it is instructive to look at the growth of the most important brands within the key price segments, which is not captured by the IWSR segmentation. On this basis we can see that the main Sub Premium and Premium IMFL (Indian Made Foreign Liquor) brands, such as Blenders Pride and Royal Stag, are growing faster than the key Regular and Economy brands (i.e. USL’s Bagpiper and Director’s Special). The CAGR’s over the last five years are +20% and +16% respectively.

Figure 17: ….more premium local Indian brands growing Figure 18: and International Brands growing faster still faster than the market average….. ……..premiumisation in action…… 25% 30%

25% 20%

20% 15% 15% 10% 10%

5% 5%

0% 0% Regular/Econ Total Mk Sub Prem/Prem Value Total Mk Low Price Standard + Source: IWSR, Regular/Economy is average of Bagpiper, Director’s Source: IWSR, CS estimates Special, Jagatjit, OC. Sub Prem/Prem is Antiquity, Blenders Pride, Imperial Blue, McDowells, Royal Challenge, Royal Stag, Signature

Indian Spirits Market 7 27 September 2012

If we then move onto the IWSR data the Standard and Premium segments are growing faster than both the market as a whole and the big ‘value’ segment. This is capturing the growth in ‘international brands’ like Teachers, Johnnie Walker, Black Dog, which can either be genuinely classified as Scotch whiskies (i.e. Bottled in Origin/BOI) or made from Scotch but bottled in India (BOI, i.e. Teachers). While growth here is impressive it is coming off a very small base and even today is only between 1-2% of the market. In short premiumisation has started in India with more expensive IMFL whiskies growing faster than their cheaper counterparts and the BII and BIO whiskies growing faster still.

Regulatory backdrop Different taxation regimes apply to locally manufactured spirits (IMFL) and imported spirits. …..federal excise tax of 150% on imported • Local spirits are essentially taxed by the individual states spirits…… • Imported spirits are taxed at both the federal (import duties) and state level. The current system of taxation on imported spirits, both BIO (Bottled in Origin) and BII (Bottled in India) dates from 2001. Prior to this, as with many consumer goods, imports were simply restricted through a licensing system, essentially excluding all but a small quantity of imported spirits. Post an EU challenge to the WTO, India removed these quantitative restrictions but introduced the new measures with similar aims and results. • There are 28 states and taxation levels and methods vary significantly. As such India is often referred to as 28 separate markets, all with their own systems, and movement of liquor between states is not easy.

Figure 19: Taxation regime for spirits in India since 2001…. Spirit Produced in Spirits imported in Spirits imported in bulk India bottle (BIO) (BII) Basic Customs Duty (BCD) No Yes - 150% Ad Valorem Yes - 150% Ad Valorem

Additional Duty (AD) No Yes - sliding scale: No

0-10 USD per 9L case 150% 10-20 USD per 9L case 100% 20-40 USD per 9L case 50% 40+ USD per 9L case 25%

Extra Additional Duty No Yes - 4% Yes - 4% (EAD)

State taxes (excise duty) Yes No Yes

State taxes (other) Yes Yes Yes Source: EU Trade Section As a starting point all imported spirits have to pay 150% import duty. This is implied on either the finished product if this is BIO (Bottled in Origin), for example Chivas or Johnnie Walker, or on the bulk spirit if BII (Bottled in India), for example Teachers (Beam). After that the treatment of BIO and BII varies slightly, with the so called Additional Duty (AD) applied to BIO but not to BII, but on the other hand individual states have the right to levy their own excise duties on BII product but not on BIO. So in summary BIO has to pay 3 types of import duty (BCD, AD, EAD) which can add up to between 250% and 550% depending on the value of the product (lower percentage the

Indian Spirits Market 8 27 September 2012 higher value the item) as well as indirect state taxes. BII has to pay 2 types of customs duty (BCD and AD) which adds up to 160%, state excise tax and indirect state taxes. Note that the duties are calculated off a so called CIF value per 9L case, essentially the taxable value of the case. Got all that? Despite occasional press stories that negotiations with the EU would lead to the reduction ….import duties here to of these excise duties (i.e.Times of India Dec 2001, Economic Times Nov 2011), to date stay?....probably for now they remain firmly in place and this should remain the case until the EU and India can reach a free trade agreement, with the EU looking for tariff reductions on products like Spirits and India looking for increased access to EU markets for areas like agricultural exports and services. While there was a flurry of optimism last year that headway could be made, bilateral talks were unsuccessful and in our view the current environment is not particularly conducive to an agreement. The EU has well known internal problems while United Spirits (whose Chairman VJ Mallya is also a member of the India Parliament) faces issues in other parts of its empire. …..then different state taxes…….and these apply to locally produced spirits too… On top of this the individual states have their own distribution and related tax structures. In some taxes are applied ad valorem, others are specific taxes linked to the volume, alcohol content or price of the products concerned. Even for IMFL the overall level of taxation varies considerably, from state to state.. As stated above the Constitution of India does not grant the Indian States the authority to apply excise duties on BIO products, only on BII and IMFL spirits, but many States do apply other indirect taxes to BIO products, such as sales taxes, VAT, special duty.

Supply structure The India market is dominated by United Spirits which has a 44% share ahead of Pernod’s 8-9%. Pernod’s value share would likely be significantly higher given the positioning of their major brands (more on this below).

Figure 20: USL is No1 in the total market but losing share, Figure 21: …through a clear focus on local whisky.. (2010) Pernod No.2 and gaining share… in 2010 Other Other John Distillers 14% 29% USL 7% USL 44% 44%

John Distillers Jagatjit 5% 9%

ABD Jagatjit 11% 6% ABD Pernod Pernod 7% 9% 15% Source: IWSR, Credit Suisse estimates, company data Source: IWSR, Credit Suisse estimates, company data The key brands in the market are highlighted in the figure below.

Indian Spirits Market 9 27 September 2012

Figure 22: …TOP 10 Indian Spirits brands dominated by Figure 23: ….Pernod has two of the TOP 10 Indian whisky whisky and by USL brands…… Brand % total mk brand owner Brand % Indian whisky mk No. of cases ('000 9L) brand owner Officer's Choice 7% ABD Officer's Choice 11% >16000 ABD McDowells 10% >16000 USL McDowell's Whisky 7% USL Celebration Rum 6% USL Bagpiper 10% >16000 USL Bagpiper 6% USL Royal Stag 8% >10000 Pernod McDowell's Brandy 5% USL Old Tavern 8% >9000 USL Original Choice 5% John Distillers Original Choice 7% >10000 John Distillers Royal Stag 4% Pernod Jagatjit Aristocrat 6% >9000 Jagatjit Old Tavern 4% USL Director's Special 5% >7000 USL Director's Special 3% USL Imperial Blue 5% >7000 Pernod Jagatjit Aristocrat 3% Jagatjit Hayward 3% >4000 USL Source: IWSR, Credit Suisse research, company data Source: IWSR, Credit Suisse research, company data We estimate that Pernod has gained c.+400-500 bps of volume share in whisky over the since 2005, with all three of their major brands (Royal Stag, Imperial Blue, Blenders Pride) showing solid gains. The growth of Blender’s Pride, Pernod’s most premium IMFL whisky is particularly impressive (+44% CAGR since 2005), growing at more than twice the category rate.

Indian Spirits Market 10 27 September 2012

Summary – the India market So here is, in summary, how we see the Indian market: • Indian market is 3rd largest in World (after China and Russia) • It is fast growing (mid-teens in volume terms) • The market is beginning to show signs of premiumisation • With taxes at both State and Country level, Indian is often better viewed as a collection of 28 markets rather than a single market. • There are big barriers to entry (both 150% import tariffs and local tariffs, along with the regional structure, difficulty in moving/selling across State, need for local production, etc.). Taxes on spirits in India are amongst the highest in the World. • United Spirits leads the market with a 44% share. Its leading brand (McDowells) sells more than Johnnie Walker • United Spirits far behind Pernod (#2 in India with 9%) in premium, and is more skewed to regular and economy segments. Pernod boasts 25% margins in the region, United Spirits mid-teens

Indian Spirits Market 11 27 September 2012 United Spirits: Diageo opportunity? Diageo has confirmed in a press release on 25th September 2012 that it is in discussions with United Spirits and United Breweries for Diageo to “acquire an interest in United Spirits Ltd”. At this stage there is no indication how large that interest might be, whether Diageo would want control, or how such a deal might be constructed. Background on United Spirits United Spirits (USL) is the largest player in the Indian market, with 44% market share and 6 of the top 10 brands. The company is controlled by VJ Mallya, son of the founder, a well- known businessman and a member of the Indian parliament and although USL and the wider UB Group (UB is United Spirits controlling shareholder) has faced some challenges recently, USL is still the dominant player in the Indian spirits by some distance. USL sold over 112m cases in 2011 (Diageo sold circa 121m cases of spirits). USL’s portfolio is well entrenched across all price points and categories, with the McDowell’s brand covering all three of the key categories, whiskey, brandy and rum, selling a total of 43.5m cases, making it the largest spirits brand in the world. USL’s volume growth has averaged 13% over the last five years in line with its ten year CAGR. In 2011, volume growth slowed sharply to 3% after a 20% rise in prices. Total sales growth has averaged over 26% on five and ten years.

Figure 24: United Spirits sales and cases sold 100,000 120000 90,000 100000 80,000 70,000 80000 60,000 50,000 60000 40,000 RMB mns cases mn 40000 30,000 20,000 20000 10,000 0 0 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011

Sales cases sold (mn) RHS axis

Source: Company data, IWRS USL’s volume growth has been driven by its largest brands. We calculate the six largest brands have enjoyed a volume CAGR of 17% between 2004-10, generating 76% of the group’s growth.

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Figure 25: Growth in cases for United Spirits leading brands, 2004-10 2004 2005 2006 2007 2008 2009 2010 CAGR Chg in % of cases total growth Bagpiper 8180 11240 13300 14290 15750 16265 16895 13% 8715 14.8% Celebration Rum 4900 5400 5975 7250 9670 11150 13825 19% 8925 15.1% Mc Dowells Whisky 5500 6439 7203 9930 12075 12300 13635 16% 8135 13.8% Mc Dowells Brandy 4700 5100 6350 7650 7500 9100 12060 17% 7360 12.5% Old Tavern 360 2050 2500 3050 4800 6600 9050 71% 8690 14.7% Director's Special 4400 4750 4800 3830 5590 6275 7480 9% 3080 5.2% Rest of portfolio 18767 16249 18899 19593 22037 27888 32933 10% 14166 24.0% TOTAL 46807 51228 59027 65593 77422 89578 105878 15% 59071 Source: IWSR, Credit Suisse estimates Recent trading poor as business model changes The slowdown in volume growth is a result of very steep taxation increases in key Indian states like Maharashtra and West Bengal, where the company was forced to pass on steep price hike of over 40% in the past year. As USL has a large portfolio (over 75% of volumes) in the regular segment which is more susceptible to a slowdown, volume growth was impacted significantly. In addition, the company strategy has been focused on driving the premium brands (25% of volumes). And USL had a major issue in terms of not getting orders from one of its largest states Tamil Nadu post the change of government. This strategy is clearly visible in the 1QFY13 results of the company, where prestige and above segment saw 17% volume growth, while regular brands saw 6% volume decline. It is also helping keep the working capital in check, as the key component of working capital for spirits companies is debtor days from the state government bodies which buy IMFL which is linked to volumes of sales. As a result, USL has lost share, particulary in Whiskey largely due to the focus of both Pernod and ABD, the latter of which is almost a one brand company. Officer’s Choice (ABD) has been so successful that recent reports show it has overtaken USL’s Bagpiper as the leading Indian whisky brand.

Figure 26: Volume growth, 1Q10-4Q12 20.00% 18.00% 16.00% 14.00% 12.00% 10.00% 8.00% 6.00% 4.00% 2.00% 0.00% 1Q10 2Q10 3Q10 4Q10 1Q11 2Q11 3Q11 4Q11 1Q12 2Q12 3Q12 4Q12

Source: Company data

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USL EBITA margins progression has been volatile USL margins have been volatile, peaking above 20% in 2007 before falling to under 12% in 2011. Part of the volatilty is due to prices in the main being set by state governments. Therefore USL does not have pricing power in most states as the government needs to approve price hikes. As a result, the company price hikes in states where pricing is free, were not sufficient to offset the increase in crude prices and glass prices.

Figure 27: USL EBITA and EBITDA margin, 2006-11 30.0 24.4 25.0 22.8

20.0 16.8 16.9 17.3 15.6 15.9 14.6 15.3 15.0 12.9 13.3 11.7 10.0

5.0

0.0 2006 2007 2008 2009 2010 2011

EBITDA margin EBITA margin

Source: Company data, average of United Spirits (USL) and Radico Khaitan, Credit Suisse research USL’s margins are lower and more volatile than Pernod’s Indian operation, where EBIT margins are in line with the company average of >25%, due to:

■ The differences in portfolio positioning. Pernod’s exposure is concentrated in ‘sub premium’ and ‘premium’ whereas USL has a large amount of volume, over 75%, in the much less profitable ‘regular’ and ‘economy’ segments. We estimate the average price achieved by USL is around £9.6 per case compared to over £16 per case for Pernod.

■ USL is reliant on outsourcing for distilling. In the recent past, outsourcing accounted for 70% of production The company undertook a major capacity expansion drive for primary distillation including purchase of 3 distilleries. The total purchase of fixed assets was over Rs10bn in the past 2 years. Today production from outsourcing is 55% and should underpin an improvement in margins. ■ In 2007, USL’s split between molasses and grain purchases was 80/20. This meant the group was exposed to the large swings in molasses prices. Since molasses peaked in 2010, management has sort to bring the ratio down to 60/40 with the aim of reaching a 50/50 balance in 2012. Why now? Ownership structure VJ Mallya’s Promoter Group has pledged 32.4m shares in United Spirits, 88% of his 27.78% stake in the company, as a second tier/top up security for the airline business. According to the press, the airline buisness requires $600m in cash in the coming months to keep the planes in the air.

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Figure 28: USL's shareholder structure Resident Individuals GDS 10% 0% Promoter Group Foreign 28% Institutions 5%

Resident Body Corporate 2% Indian Institutions 55%

Source: Company data, Credit Suisse research Whyte & Mackay potential regulatory issues USL acquired W&M in 2007 for an EV of GBP 595mn. The strategic rationale for the deal was USL’s Indian whiskey business dependence on Scotch to blend with Indian malt whiskies. Acquiring W&M provided USL with their own source of Scotch rather than having to buy from the likes of Diageo, Wm Grant & Sons or Pernod. After purchasing the business, USL said it found W&M was too focused on trading in bulk Scotch whiskey rather than building its brands, such as Isle of Jura, Mackinlay’s. And so, at the end of 2010 USL discontinued bulk scotch sales (including a bulk contract with Diageo in 2010) and focused resources on its branded sales. This has hurt near term EBITDA falling to £30-35m from £50-55m in 2011. With Diageo already controlling 35% of the volume share of the global Scotch market. Acquiring W&M would take their share of Scotch production to over 40%. We would envisage the regulators will scrutinise any deal, if signed. If any brands had to be sold, given the long term attractiveness of Scotch category, we would expect much interest. Potentially the largest Scotch market in the world One of the key strategic gains from the recent emerging market acquisitons made by Diageo has been its ability to increase the distribution reach of its international portfolio. Clearly, with the tariffs in place, this will occur more slowly than in other instances. But this is a time for patience, as the long term rewards of utilising the pan national distribution network of United Spirits are potentially huge. In an established whiskey market, which India certainly is consuming over 150m cases, Scotch on average tends to take a 15% share of the market. Applying these maths, India has the potential to be a 20-25m case Scotch market, twice the size of the current largest market by cases in the world, France. In the near term, we would expect Diageo to accelerate the premiumisation of the portfolio. First, giving up more volumes at the bottom end of the price pyramid, which make thin margins and second, pushing their premium portfolio brands into USL’s large sales system. As we show below, although United Spirits only equates to 4% of Diageo’s EBITDA and Enterprise value, in terms of cases sold, United Spirits would account for 44% of combined entity and dilute group EBITA margin by 160bp on our analysis.

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Figure 29:Impact on key Diageo metrics Yr end Jun 2012 Yr end Mar 2012 Diageo United Spirits Combined Total cases sold (mn) 155 120 275 % of combined 56% 44% Sales (mn) 10762 1046 11808 % of combined 91.1% 8.9% price per case 69.4 8.7 42.9

EBITDA 3609 139 3748 EBITDA Margin 33.5% 13.3% 31.7% % of combined 96% 4%

EBITA 3198 122 3320 EBITA margin 29.7% 11.7% 28.1% % of combined 96% 4%

Mkt Cap 43,071 1675 44,746 EV 50,592 2501 53,093 % of combined 96% 4%

EV/EBITDA 14.0 17.9 Source: Company data, Credit Suisse estimates

Indian Spirits Market 16 27 September 2012 Pernod India – the hidden jewel? Pernod in India - Market position In our view Pernod’s position in the Indian market is very strong. While they are the Pernod is number 2 in the Number 2 by volume, with around 8 or 9% market share, well behind the market leader Indian market and the only United Spirit’s (44% share), Pernod’s value share would likely be significantly higher given international player currently the positioning of their major brands (more on this below). with a significant position.

Figure 30: USL is No1 in the total market but losing share, Figure 31: …through a clear focus on local Pernod No.2 and gaining share (2010) whisky….where its share is 15% (2010) Other Other John Distillers 14% 29% USL 7% USL 44% 44%

John Distillers Jagatjit 5% 9%

ABD Jagatjit 11% 6% ABD Pernod Pernod 7% 9% 15% Source: IWSR, Credit Suisse estimates, company data Source: IWSR, Credit Suisse estimates, company data

While Pernod has only one brand (Royal Stag) in the TOP 10 when looking across the entire spirits market, the company is almost entirely concentrated in the key whisky category, where its volume share is higher at around 15% on our estimates. In addition, Pernod has been gaining share over the last five or six years, partly at the expense of USL (United Spirits).

Figure 32: Evolution of Pernod’s Indian spirits portfolio 000' 9L cases 2004 2005 2006 2007 2008 2009 2010 2004-10 2004-10 % of total CAGR chg in growth cases

Royal Stag 3100 3500 4100 5300 6400 8050 10000 22% 6900 50.3% Imperial Blue 1800 2200 2400 3100 3900 4930 6050 22% 4250 31.0% Blender's Pride 225 375 600 1030 1475 1870 2325 48% 2100 15.3% 100 Pipers 32 35 70 123 159 193 206 36% 174 1.3% Chivas Regal 30 34 40 50 70 82 93 21% 64 0.5% Ballantines 8 8 7 9 22 29 30 25% 22 0.2% Absolut 28 31 37 40 33 40 38 6% 11 0.1% Rest 102 145 161 193 216 267 307 20% Total 5324 6327 7415 9845 12274 15461 19049 24% 13726 Source: IWSR We estimate that Pernod has gained c.+400-500 bps of volume share in whisky since 2005, with all three of their major brands (Royal Stag, Imperial Blue, Blenders Pride) showing solid gains. The growth of Blender’s Pride, Pernod’s most premium IMFL whisky is particularly impressive (+44% CAGR since 2005), growing at more than twice the category rate.

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Figure 33: ….Pernod has gained +400-500bps share in Figure 34: ….with all brand posting solid gains….with whisky over the last five or six years…. more premium Blenders Pride growing 2x the market.. 16.0% 50% 45% 14.0% 40% 12.0% 35% 10.0% 30% 25% 8.0% 20% 6.0% 15% 4.0% 10% 5% 2.0% 0% 0.0% Blenders Pride Royal Stag Imperial Blue Indian Whisky 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 Market Source: IWSR, CS estimates/company data, % volume share of Source: Company data, Credit Suisse estimates Indian whisky market Unlike the other major market participants Pernod’s portfolio is concentrated (over 95% of ….Pernod’s brand volumes) in the sub premium (Royal Stag, Imperial Blue) and premium (Blender’s Pride) positioning is its real segments. As with any market in the world this helps drive value and mix and in the Indian differentiating factor….. context is an important factor in explaining why Pernod’s profitability is well above the levels of the major competitors, which we discuss further below.

Figure 35: ……segmentation of the Indian whisky market…but note price points vary significantly between states due to different excise regimes…. Foreign Liquor Segment Brand % share of Intl Whisky Dehli price Owner Bottled in Origin Super Premium Chivas Regal 5% Pernod (BIO) (>1300 Rupees/USD 23) Johnnie Walker 19% Diageo JW Red 1350

Bottled in India Super Premium Teachers 22% 1610 Beam (BII) (>1300 Rupees/USD 23) Black Dog 10% USL

Premium (>1000 Rupees/USD 18) 100 Pipers 12% 1020 Pernod

Indian Made Foreign Liquor % share of x Whisky (IMFL) Premium Blenders Price 2% 760 Pernod (650-1000 Rupees/USD 12-18) based on Maharashtra prices Antiquity Blue c. 900 USL

Antiquity Rare c.800 USL

McDowell's Signature 1% c.700-750 USL

Sub Premium Royal Challenge 1% c.600 USL (300-650 Rupees/USD 5-12) based on Maharashtra prices Royal Stag Barrel Select c.550 Pernod

McDowell's No 1 11% 410 USL

Royal Stag 8% 350 Pernod

Imperial Blue 4% 290 Pernod

Regular Bagpiper 10% 260 USL (200-300 Rupees/USD 4-5) based on Maharashtra prices Officer's Choice (OC) 11% 230 ABD

Economy Director's Special 5% 220 USL (<200 Rupees/USD 4) based on Maharashtra prices Jagatjit Aristocrat Whisky 5% 220 Jagatjit Source: Credit Suisse research

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India…Pernod’s 4th largest market…. India is Pernod’s fourth largest market measured by revenues and the fifth largest when measured by profits (EBIT). While Pernod doesn’t disclose growth rates by country as a matter of course, we do know that in 2012 India’s organic growth was +26%, faster than any of Pernod’s other major markets and even slightly ahead of China (+24%).

Figure 36: …..India is c.5% of group sales and EBIT….the Figure 37: …..and in 2012 India was Pernod’s fastest 4th largest market by revenues and 5th largest by profits.. growing major market……. India 30% 6% China 25% 10% 20%

France 15% 10% 10% Other 59% 5% US 0% 15% -5%

-10% India China US France Spain Source: Company data, Credit Suisse estimates Source: Company data, Credit Suisse estimates If you take both the importance of India to Pernod and the impressive growth rate being achieved the result is that India was also Pernod’s second largest growth contributor in 2012, chipping in 20% of the group’s organic revenue growth. This ranks India second only to China (c.30% of group growth in 2012) and puts it on a par with the entire Americas, despite being less than 1/4 of the size (the Americas were 26% of 2012 revenues). The recently reported pick-up in Pernod’s local brand performance (to +8% year ending June 2012) can be attributed largely to India.

Figure 38: ….making India the 2nd largest contributor to Figure 39: ….and 3 out of Pernod’s TOP 10 brands by group organic growth (after China) in 2012 volumes are Indian Whiskies (Royal Stag, Imperial Blue, Blenders’s Pride) 35% 12000 30% 10000 25% 8000 20%

6000 15%

4000 10%

5% 2000

0% 0 Absolut Royal Imperial Ballant Ricard Chivas Malibu Jameson S'gram Blenders China India Rest of Asia LatAm USA Europe Stag Blue Gin Pride Source: Company data, Credit Suisse research Source: IWSR, 000’s of 9 litre cases.

We expect that India’s contribution to group EBITA growth would have been just as significant but while we know that India’s EBIT margins are line with the group average, the evolution of Indian margins over time is not publicly disclosed. It is also worth noting that Royal Stag, Pernod’s largest brand in India is also the group’s second largest brand globally after Absolut and their largest whisky brand in the world (all by volume). In fact three of Pernod’s top ten global brands are Indian Whiskies (Royal Stag, Imperial Blue and Blenders Pride).

Indian Spirits Market 19 27 September 2012

……Pernod India could be worth 12% of the group’s market cap…… While there is no separate listing for Pernod India, it is interesting to note the multiples that other listed subsidiaries trade at in India. The most obvious of these is United Spirits but we also have the listed subsidiaries of some of the major multinationals, including Hindustan Lever, Nestle India and Colgate India. While these businesses obviously operate in different categories they are benefiting from some of the same underlying growth drivers (higher disposable incomes, urbanisation, premiumisation etc.) are also good growth, good return businesses.

Figure 40: …..Pernod India valued on EUR 2.7bn based on peer multiples, 12% of Pernod’s mk cap….or EUR 10 per share EUR 2013E P/E Value m Sales 523 Hindustan 33x Total (EUR m) 2700 EBIT 140 Colgate 29x Interest -29 Nestle 35x Per share (EUR) 10 Tax -27 USL 33x Net Profit 84 Avge 32x % of Pernod 12% Source: Company data, Credit Suisse estimates, Bloomberg consensus for USL.

Applying the average multiple of these four companies (32x) to our estimate of Pernod India’s net profit, we would get a market value of €2.7bn, roughly 12% of Pernod’s market capitalization, or about €10 per share. Not a bad return, for an asset that was viewed at the time as a distant secondary prize when Seagram was acquired and split up by Diageo and Pernod in 2000. While the multiples we have used undoubtedly look high compared with European Consumer Staples, given the outlook for Pernod in India as we see it, it feels intuitively right to ascribe a significantly higher value to Pernod’s Indian business than a simple weighting of its contribution to group sales and EBITA.

Summary….Pernod India • The effective exclusion of new international entrants from the mainstream market is a great competitive advantage for Pernod in our view. India is currently one of Pernod’s TOP 5 markets by revenues and competing with China for being the major market with the fastest growth at more than 20%. • The portfolio also looks well positioned to us, with strong brands in each of the profitable market segments: Royal Stag in Sub Premium, Blenders Pride in Premium, 100 Pipers in BII (Bottled in India) and Chivas in Super Premium. In addition Pernod are only now starting to apply the marketing strategies that have worked so well in other markets, with the recent introduction of Royal Stag Barrel Select and Blenders Pride Special reserve, premium variants of existing successful brands. This clear brand positioning also plays well with distributors, which will continue to be crucial over time as Pernod expands its geographic coverage over time. • India looks to be a key growth driver for Pernod both now and in the future

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Companies Mentioned (Price as of 25 Sep 12) Colgate-Palmolive India (COLG.BO, Rs1,200.40, UNDERPERFORM, TP Rs1,147.00) Diageo (DGE.L, 1754 p, OUTPERFORM, TP 1,900.00 p) Hindustan Unilever Ltd. (HLL.BO, Rs527.75, OUTPERFORM, TP Rs564.00) Nestle India (NEST.BO, Rs4,342.70, NEUTRAL, TP Rs4,590.00) Pernod-Ricard (PERP.PA, Eu88.45, OUTPERFORM, TP Eu100.00)

Disclosure Appendix Important Global Disclosures The analysts identified in this report each certify, with respect to the companies or securities that the individual analyzes, that (1) the views expressed in this report accurately reflect his or her personal views about all of the subject companies and securities and (2) no part of his or her compensation was, is or will be directly or indirectly related to the specific recommendations or views expressed in this report. See the Companies Mentioned section for full company names. 3-Year Price, Target Price and Rating Change History Chart for DGE.L DGE.L Closing Target 1900 Price Price Initiation/ 1847 1850 Date (p) (p) Rating Assumption 1747 12-Nov-09 X 1647 11-Feb-10 1018 1080 1547 1550 7-Apr-10 1120 1215 1447 26-Aug-10 1050 1200 1400 1347 1-Mar-11 1212 1300 1300 18-Apr-11 X 1247 1215 1200 14-Jun-11 1260 1400 1147 1080 1-Nov-11 X 1047 24-Nov-11 1,297.5 1550 12-Nov-09p 947 18-Apr-11 1-Nov-11 25-Jul-12 1660 1850 23-Aug-12 1698 1900

Closing Price Target Price Initiation/Assumption Rating

O=Outperform; N=Neutral; U=Underperform; R=Restricted; NR=Not Rated; NC=Not Covered

3-Year Price, Target Price and Rating Change History Chart for PERP.PA PERP.PA Closing Target 100 Price Price Initiation/ 98 95 Date (Eu) (Eu) Rating Assumption 93 12-Nov-09 X 88 12-Jan-10 59.28 63 N 83 18-Feb-10 58.29 61 78 O 7-Apr-10 63.8 68 29-Apr-10 64.18 70 73 70 68 68 68 13-Jul-10 65.66 67.5 66 66 NC 3-Sep-10 60.26 66 63 63 61 61 U 15-Oct-10 62.11 61 U 58 N 1-Mar-11 67.65 66 12-Nov-09Eu 53 16-May-12 19-Apr-11 66.7 NC 16-May-12 78.58 95 O X 5-Sep-12 89.85 100 Closing Price Target Price Initiation/Assumption Rating

O=Outperform; N=Neutral; U=Underperform; R=Restricted; NR=Not Rated; NC=Not Covered

The analyst(s) responsible for preparing this research report received compensation that is based upon various factors including Credit Suisse's total revenues, a portion of which are generated by Credit Suisse's investment banking activities. Analysts’ stock ratings are defined as follows: Outperform (O): The stock’s total return is expected to outperform the relevant benchmark* by at least 10-15% (or more, depending on perceived risk) over the next 12 months. Neutral (N): The stock’s total return is expected to be in line with the relevant benchmark* (range of ±10-15%) over the next 12 months. Underperform (U): The stock’s total return is expected to underperform the relevant benchmark* by 10-15% or more over the next 12 months.

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*Relevant benchmark by region: As of 29th May 2009, Australia, New Zealand, U.S. and Canadian ratings are based on (1) a stock’s absolute total return potential to its current share price and (2) the relative attractiveness of a stock’s total return potential within an analyst’s coverage universe**, with Outperforms representing the most attractive, Neutrals the less attractive, and Underperforms the least attractive investment opportunities. Some U.S. and Canadian ratings may fall outside the absolute total return ranges defined above, depending on market conditions and industry factors. For Latin American, Japanese, and non-Japan Asia stocks, ratings are based on a stock’s total return relative to the average total return of the relevant country or regional benchmark; for European stocks, ratings are based on a stock’s total return relative to the analyst's coverage universe**. For Australian and New Zealand stocks, 12-month rolling yield is incorporated in the absolute total return calculation and a 15% and a 7.5% threshold replace the 10-15% level in the Outperform and Underperform stock rating definitions, respectively. The 15% and 7.5% thresholds replace the +10-15% and -10-15% levels in the Neutral stock rating definition, respectively. **An analyst's coverage universe consists of all companies covered by the analyst within the relevant sector. Restricted (R): In certain circumstances, Credit Suisse policy and/or applicable law and regulations preclude certain types of communications, including an investment recommendation, during the course of Credit Suisse's engagement in an investment banking transaction and in certain other circumstances. Volatility Indicator [V]: A stock is defined as volatile if the stock price has moved up or down by 20% or more in a month in at least 8 of the past 24 months or the analyst expects significant volatility going forward.

Analysts’ coverage universe weightings are distinct from analysts’ stock ratings and are based on the expected performance of an analyst’s coverage universe* versus the relevant broad market benchmark**: Overweight: Industry expected to outperform the relevant broad market benchmark over the next 12 months. Market Weight: Industry expected to perform in-line with the relevant broad market benchmark over the next 12 months. Underweight: Industry expected to underperform the relevant broad market benchmark over the next 12 months. *An analyst’s coverage universe consists of all companies covered by the analyst within the relevant sector. **The broad market benchmark is based on the expected return of the local market index (e.g., the S&P 500 in the U.S.) over the next 12 months.

Credit Suisse’s distribution of stock ratings (and banking clients) is: Global Ratings Distribution Outperform/Buy* 44% (52% banking clients) Neutral/Hold* 42% (50% banking clients) Underperform/Sell* 11% (39% banking clients) Restricted 2% *For purposes of the NYSE and NASD ratings distribution disclosure requirements, our stock ratings of Outperform, Neutral, and Underperform most closely correspond to Buy, Hold, and Sell, respectively; however, the meanings are not the same, as our stock ratings are determined on a relative basis. (Please refer to definitions above.) An investor's decision to buy or sell a security should be based on investment objectives, current holdings, and other individual factors. Credit Suisse’s policy is to update research reports as it deems appropriate, based on developments with the subject company, the sector or the market that may have a material impact on the research views or opinions stated herein. Credit Suisse's policy is only to publish investment research that is impartial, independent, clear, fair and not misleading. For more detail please refer to Credit Suisse's Policies for Managing Conflicts of Interest in connection with Investment Research: http://www.csfb.com/research-and-analytics/disclaimer/managing_conflicts_disclaimer.html Credit Suisse does not provide any tax advice. Any statement herein regarding any US federal tax is not intended or written to be used, and cannot be used, by any taxpayer for the purposes of avoiding any penalties. See the Companies Mentioned section for full company names. Price Target: (12 months) for (DGE.L) Method: Our price target is derived from an APV (adjusted present value) - a hybrid discounted cash flow which splits the value of the tax shield from the operating cash flows Risks: Increased regulation in Europe/US. Level of investment required to build international markets. Competitor activity, excessive excise duty increases Price Target: (12 months) for (PERP.PA) Method: Our target price is set using our APV/DCF model. After the forecast period growth is faded evenly to a Terminal Growth rate of 2.5%. Assumptions for Terminal growth, the cost of debt and the cost of equity are standardised accross our coverage universe. Risks: The key risk to our target price is a worse than expected performance from Pernod's business in Asia. Please refer to the firm's disclosure website at www.credit-suisse.com/researchdisclosures for the definitions of abbreviations typically used in the target price method and risk sections.

See the Companies Mentioned section for full company names. The subject company (DGE.L) currently is, or was during the 12-month period preceding the date of distribution of this report, a client of Credit Suisse. Credit Suisse provided investment banking services to the subject company (DGE.L) within the past 12 months. Credit Suisse provided non-investment banking services, which may include Sales and Trading services, to the subject company (DGE.L) within the past 12 months. Credit Suisse has managed or co-managed a public offering of securities for the subject company (DGE.L) within the past 12 months. Credit Suisse has received investment banking related compensation from the subject company (DGE.L) within the past 12 months.

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Credit Suisse expects to receive or intends to seek investment banking related compensation from the subject company (DGE.L, PERP.PA) within the next 3 months. Credit Suisse has received compensation for products and services other than investment banking services from the subject company (DGE.L) within the past 12 months. Important Regional Disclosures Singapore recipients should contact a Singapore financial adviser for any matters arising from this research report. The analyst(s) involved in the preparation of this report have not visited the material operations of the subject company (DGE.L, PERP.PA) within the past 12 months. Restrictions on certain Canadian securities are indicated by the following abbreviations: NVS--Non-Voting shares; RVS--Restricted Voting Shares; SVS--Subordinate Voting Shares. Individuals receiving this report from a Canadian investment dealer that is not affiliated with Credit Suisse should be advised that this report may not contain regulatory disclosures the non-affiliated Canadian investment dealer would be required to make if this were its own report. For Credit Suisse Securities (Canada), Inc.'s policies and procedures regarding the dissemination of equity research, please visit http://www.csfb.com/legal_terms/canada_research_policy.shtml. Credit Suisse Securities (Europe) Limited acts as broker to DGE.L. The following disclosed European company/ies have estimates that comply with IFRS: DGE.L, PERP.PA. As of the date of this report, Credit Suisse acts as a market maker or liquidity provider in the equities securities that are the subject of this report. Principal is not guaranteed in the case of equities because equity prices are variable. Commission is the commission rate or the amount agreed with a customer when setting up an account or at anytime after that. Taiwanese Disclosures: This research report is for reference only. Investors should carefully consider their own investment risk. Investment results are the responsibility of the individual investor. Reports may not be reprinted without permission of CS. Reports written by Taiwan-based analysts on non-Taiwan listed companies are not considered recommendations to buy or sell securities under Taiwan Stock Exchange Operational Regulations Governing Securities Firms Recommending Trades in Securities to Customers. To the extent this is a report authored in whole or in part by a non-U.S. analyst and is made available in the U.S., the following are important disclosures regarding any non-U.S. analyst contributors: The non-U.S. research analysts listed below (if any) are not registered/qualified as research analysts with FINRA. The non-U.S. research analysts listed below may not be associated persons of CSSU and therefore may not be subject to the NASD Rule 2711 and NYSE Rule 472 restrictions on communications with a subject company, public appearances and trading securities held by a research analyst account. • Charlie Mills, non-U.S. analyst, is a research analyst employed by Credit Suisse Securities (Europe) Limited. • Alex Molloy, non-U.S. analyst, is a research analyst employed by Credit Suisse Securities (Europe) Limited. • Nicolas Sochovsky, non-U.S. analyst, is a research analyst employed by Credit Suisse Securities (Europe) Limited. • Sanjeet Aujla, non-U.S. analyst, is a research analyst employed by Credit Suisse Securities (Europe) Limited. • Jimmie Bork, non-U.S. analyst, is a research analyst employed by Credit Suisse Securities (Europe) Limited. • Michael Bleakley, non-U.S. analyst, is a research analyst employed by Credit Suisse Securities (Europe) Limited. For Credit Suisse disclosure information on other companies mentioned in this report, please visit the website at www.credit- suisse.com/researchdisclosures or call +1 (877) 291-2683. Disclaimers continue on next page.

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2012-09 Indian Spirits Market New Report.doc