Voting Advisory 2 September 2013 United Spirits Limited Annual General Meeting (AGM) Company Profile Meeting Date: 24 September 2013, 11:00 AM BSE: 532432|NSE: MCDOWELL-N Proxy Deadline: 22 September 2013, 11:00 PM ISIN: INE854D01016 Industry: Breweries & Notice Date: 19 August 2013 Distilleries Meeting Venue: Good Shepherd Auditorium, Opposite St. Joseph’s Pre-University Index: S&P BSE 100 / CNX 100 College, Residency Road, Banglore – 560 025 Face Value: Rs. 10 Company overview Mkt Price: Rs. 2269.2 Fiscal Year End: March United Spirits Ltd (‘USL’ or ‘the company’) is one of the largest spirits company in the world with a portfolio of more than 140 brands. It exports to over 37 countries. It has established manufacturing and bottling plant in every state of India. Its brands include Promoter: McDowell’s No 1, Bagpiper, Royal Challenge, Antiquity, Old Tavern. Whyte & Mackay and Vijay Mallya Bouvet Ladubay are wholly owned subsidiaries of USL. United Breweries Holdings Ltd. In May 2013, Diageo Plc. through its subsidiary, Relay BV, was allotted 14.5 mn equity shares (10% of equity) on preferential basis. In July 2013, United Breweries (Holdings) Ltd. and other promoter group companies sold 14.98% in the company to Relay BV. 21% 6% 31% Shares owned by the USL Benefit Trust, representing 2.38% of USL could not be purchased by Diageo as some USL’s lenders did not release the pledged shares. Relay BV now holds ~25.0% stake in the company and will now be considered as promoters. 42% Agenda Items IIAS Indicators # Type[1] Description of resolution Recommendation See Legend Promoter DII FII Others 1 O Adoption of FY13 accounts See Analysis (As on 30 June 2013) 2 O Declaration of dividend FOR 3 O Reappointment of Vijay Mallya as director FOR Financials 4 O Appointment of BSR & Co. as statutory auditors FOR Particulars FY13 (Rs bn) 5 O Appointment of Gilbert Ghostine as director FOR Total Income 87.1 6 O Appointment of Ravi Rajagopal as director FOR Net Worth 63.9 7 O Appointment of PA Murali as director FOR Equity 1.3 8 S Appointment of PA Murali as executive director FOR G M R S T V Capital Mkt. Cap 329.8 9 O Appointment of Arunkumar Gandhi as director FOR Overview 10 O Appointment of Sudhakar Rao as director FOR 52 week H/L 2815.0/799.0 11 O Appointment of D. Sivanandhan as director FOR (Rs) 12 O Appointment of Renu Karnad as director AGAINST G M R S T V Current P/E (x) 92.6 13 O Appointment of Paul Walsh as director FOR Current P/B (x) 4.6 14 O Appointment of Vikram Singh Mehta as director FOR Source: IiAS Research Revision of terms of remuneration of Ashok 15 S FOR Capoor Previous advisory 16 S Alteration of Articles of Association FOR December 2012 Postal Ballot [1] O/S: Ordinary/Special Resolution 2012 AGM January 2012 EGM Executive Summary (click on respective category for detailed analysis) Remuneration USL proposes to amend the terms of remuneration of Ashok Capoor, by rectifying the anomaly in special allowance, increasing the personal allowance and making a one time ex-gratia payment. Consequently the Write to us remuneration for FY14 will be higher by a minimum of Rs 7.2 mn. IiAS Institutional Investor Advisory Services observes that Ashok Capoor tenure as MD ends on 1 May 2014. Assuming 15th Floor, West Wing, PJ Tower he will be reappointed, IiAS believes that company should have Dalal Street, Mumbai -400 001 considered revising the terms, except for rectification of special allowance, Email: [email protected] at the time of reappointment in 2014. www.iias.in September 2013 United Spirits Limited 1 | P a g e Voting Advisory Financial Performance (Standalone) (Rs bn) Revenue by Geography Particulars FY11 FY12 FY13 The Company is engaged in the business of manufacture, purchase Total Income 64.7 77.2 87.1 and sale of Beverage Alcohol (Spirits and Wines) including through EBITDA 10.6 11.3 12.3 tie-up manufacturing units/ brand franchise, which constitutes a EBITDA Margin (%) 16.4 14.6 14.2 single business segment. The Company is primarily organised into PBT 5.8 5.0 4.8 two main geographic segments namely India and Outside India. However, the Company’s operations outside India did not exceed PBT Margin (%) 9.0 6.5 5.6 the quantitative threshold for disclosure envisaged in AS-17 on PAT 3.9 3.4 3.2 “Segment Reporting” notified under the Companies (Accounting PAT Margin (%) 6.0 4.4 3.7 Standard) Rules 2006. In view of the above, both primary and EPS (Rs.) 29.5 26.2 24.5 secondary reporting disclosures for business/geographical ROANW (%) 7.8 6.2 5.2 segment as envisaged in AS-17 are not applicable to the Company ROACE (%) 10.4 10.3 9.3 Debt/EBITDA (x) 2.8 3.7 3.6 Source: Company Filings, IiAS Research Top 10 Public Shareholders Shares Holding Sl. No. Name of the Shareholder held (million) as % of total 1 Relay B V 14.6 10.0 2 Morgan Stanley Asia (Singapore) Pte. 4.9 3.4 3 Palmer Investment Group Ltd 4.4 3.0 4 USL Benefit Trust 3.5 2.4 5 CLSA (Mauritius) Ltd 3.0 2.1 6 Merrill Lynch Capital Markets ESPANA SA SV 3.0 2.1 7 The Bank Of Nova Scotia Asia Ltd 2.5 1.7 8 New World Fund Inc. 2.1 1.4 9 Oppenheimer Developing Markets Fund 1.9 1.3 Vanguard Emerging Markets Stock Index Fund A Series of Vanguard 10 1.8 1.3 Intern Total 41.7 28.7 Source: BSE Change in Shareholding Pattern (%) Price Performance Year Promoter DII FII Others Jun-13 21.1 6.0 42.1 30.8 63% Mar-13 22.9 6.0 41.8 30.1 42% Dec-12 27.5 5.1 45.8 20.5 24% 29% Sep-12 27.8 4.9 46.2 21.1 Mar-12 27.8 7.3 47.5 17.4 Mar-11 28.0 3.0 50.3 18.6 -4% -2% 5 Yr Mar-10 29.2 6.8 46.3 17.8 S&P BSE 100 CNX 100 USL Mar-09 36.6 7.4 30.6 25.4 Not annualized. Source: BSE Period ended 30 August 2013 September 2013 United Spirits Limited 2 | P a g e Voting Advisory Category: Accounts Resolution 1: Adoption of FY13 financial statements Financial Performance: The company sold 123.7 mn cases in FY13(120.2 mn cases in FY12) Total income for FY13 has grown by 12.2% to Rs 87.1 bn (Rs 77.2 bn). EBIDTA is higher by 5.4% to Rs 12.3 bn (Rs 11.3 bn). Interest cost increased to Rs 6.6 bn (Rs 5.9 bn) and other expenses increased to Rs 18.4 bn (Rs 16.7 bn). PBT before exceptional items and tax is flat at Rs 5.1 bn. Exceptional items amounting to Rs 216.5 mn (Rs 108.2 mn) is primarily towards diminution of value investments in subsidiaries and provision for doubtful advances in a subsidiary. PAT for the year is lower by 6.4% to Rs 3.2 bn (Rs 3.4 bn). Related party transactions include finance provided to the tune of Rs 9003.6 mn (Rs 4793.0 mn for FY12). This includes Rs 4274.1 mn (Rs 180.0 mn in FY12) to UB (Holdings) Ltd., Rs 1526.4 mn (Rs 2959.3 mn) to USL Holdings Ltd., Rs 1266.6 mn (Rs 615.9 mn) to Royal Challengers Sports Pvt. Ltd. Net ‘guarantees and collaterals given’ outstanding at the end of the year, amounts to Rs 40.6 bn (Rs 42.4 bn). This is primarily to USL Holdings Ltd. Receivables outstanding amounting to ~Rs 57.0 bn (Rs 46.2 bn) includes Rs 41.3 bn (Rs 39.8 bn) from USL Holdings Ltd., Rs 5.0 bn (Rs 0.3 bn) from UB Holdings Ltd. and Rs 2.2 bn (Rs 1.1 bn) from Royal Challengers Sports Pvt. Ltd. Deposits outstanding of Rs 1407.3 mn (Rs 1513.3 mn) includes Rs 1400.0 mn (Rs 1400.0 mn) deposit given to UB Holdings Ltd. The debt/equity ratio is comfortable at 0.7x, interest coverage ratio is 1.8 x. The promoters have pledged 97.0% of their holding as on 31 March 2013 (94.4% as on 31 March 2012). USL has made an open offer to acquire 18.42% equity in Pioneer Distilleries Ltd. at Rs 64.02 per share. Total income on consolidated basis for FY13 is 14.3% higher at Rs 108.5 bn (Rs 95.0 bn) and net profit for the year is (Rs 1.0 bn)versus profit of Rs 1.9 bn for FY12. Business Risk Indicators Leverage Profile Ratio Rs. Bn Parameter FY11 FY12 FY13 4.0 60.0 Cash Flow from 3.0 0.5 0.3 0.9 40.0 Operations/EBITDA (x) 2.0 Exceptional item as % of total 20.0 0.6 0.1 0.2 1.0 income 0.0 0.0 Misc. expenses as % of total income 0.5 0.3 0.3 FY11 FY12 FY13 Contingent liabilities as % of 14.0 79.8 73.8 networth Borrowings Debt/EBIDTA Debt/Equity Interest Coverage Secured loans as % of net block[1] 338.9 263.0 313.5 Percentage of pledged shares 87.5 94.4 97.0 [1] Includes loans against hypothecation of current assets, pledge of certain shares held by the company and held by UBL Benefit Trust and current investments September 2013 United Spirits Limited 3 | P a g e Voting Advisory Related Party Transactions (RPT) Annual transactions FY12 FY13 Comment (Rs.mn) Net purchases 1663.0 328.9 Income from brand franchise, interest income, other operating income, Net receipts 205.1 597.0 guarantee commission received, advertising & sales promotion exp.