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Tuesday, January 16, 2007

Alcohol industry in India - High-spirited growth

By Dr. Uday Lal Pai

In a country that still frowns on drinking, about 220 million cases of beer and branded liquor were sold last year and annual sales of alcoholic beverages are growing by about 20 percent annually.

More than half of India's 1.1 billion population is below the age of 25 years and incomes are rising, but strict government controls on advertising, manufacturing capacities, distribution, retail and pricing pose a big challenge to firms seeking growth.

An upwardly mobile young population with a propensity to spend is guzzling booze like never before. Consumption of beer has jumped 51% from 70 million cases in 2002 to 105 million cases in 2006 while consumption of Indian made foreign liquor (IMFL) grew 53% to 115 million cases during the period.

The country has one of the youngest population, with around 50% citizens below 25 years. A free media and increasing exposure to western influences have lifted the stigma off liquor consumption, while rising income is stoking the shift from country liquor to more refined varieties, said a report by SSKI Research.

Wine makes up only a fraction of the $1.8-billion alcoholic drinks market, but is growing nearly three times as fast as whisky or rum, the traditional favorites. India's top three wine makers have more than two-thirds of the market of more than 5 million bottles, valued at $60 million, and they are seeing bigger demand even for pricey sparkling wine. One estimate has it that India's total wine market is around 0.9 million cases. Of this, imported wine constitutes 150,000 cases. In a global perspective, this is really minuscule. The wine market in the US is estimated at 250 million cases and in France, around 320 million cases. To the savvy marketer, this obviously translates into a huge opportunity.

Per capita consumption of beer, at 0.7 litre, is among the lowest in the Asia Pacific, and imported beer brands have less than 0.5 per cent of a market forecast to grow nearly 20 per cent annually to 1.2 million litres by 2010, or worth $22 billion.

However, India has quietly emerged as the largest international whisky market, toppling the US by volume. Industry data for '05-06 suggests that Indian whiskies, non-matured alcohols mostly made from molasses, and hence not considered whisky by the Scotch Whisky Association (SWA), reported depletions of about 60m cases (9-litre each). In comparison, the US recorded combined sales of Bourbon, American and Scotch whiskies at 48-50m cases, putting it one notch below India.

Indian whiskies account for 98% of domestic whisky consumption, reporting 8-10% growth annually, which makes it one among the fastest growing whisky markets anywhere in the world.

The industry's prospects are attractive, given the inherent strengths of the incumbents, the high barriers to entry for new players in terms of procuring licenses and tying up nation-wide bottling arrangements and the long gestation period involved in building brands, especially as there is a ban on direct advertising.

The fast growth in the domestic alcohol market has caught the attention of a number of domestic and international firms. That has already drawn the likes of top drinks maker Diageo, Pernod Ricard, LVMH's Moet Hennessey and SABMiller, with Anheuser-Busch Companies Inc and Danish brewer Carlsberg also firming up entry plans. Liquor major Seagram has most recently entered the locally produced wine segment, while the nascent industry has also seen an increase in private equity interest this year. In the beer business, leading names such as Anheuser-Busch and InBev, to name just two, could be potential entrants, what with several breweries under construction in the northern States. On the spirits side, Diageo, the largest drinks company in the world, has already inked a joint venture with Radico Khaitan for a new line of products. In time, choice, it seems, will be the buzzword for the Indian consumer.

United Spirits is a good play on the Indian consumption theme, more so after the consolidation has bestowed on it significant size and scale. But the stock's sharp run-up in the homestretch to the completion of the restructuring exercise warns to adopt a cautious stance. An entry into the stock on dips from the current level can be made.

The complexion of the liquor business in India changed with the UB Group finally acquiring the spirits businesses of both Shaw Wallace and Herbertsons. These two outfits, along with a few more, have been folded into McDowell's to form United Spirits, which will control about 50 per cent of the total spirits market. Apart from giving the business scale, the acquisition also provides the UB Group combine with enough headway to change it cost structure, be it in rationalizing facilities, phasing out tail-end brands or optimizing advertising expenses.

The UB Group is keen on taking a "re-look" at its manufacturing activities as part of the group's plan to become a global leader in spirit business. According to the President & Chief Financial Officer of the UB Group, Ravi Nedungadi, "We have an aggressive plan in the spirits business. In fact, $1 billion have been earmarked for overseas acquisition." He indicated that the group was considering the possibility of acquiring a scotch whisky-making unit in Scotland. Similarly, it was on the lookout for vineyards in South Africa and Australia.

Investors can consider buying into Radico Khaitan in small lots. The company has made significant strides over the past few years and has a 12 percent market share. Radico Khaitan says that in the current year (2006-07) and next year (2007-08) he expects the topline to grow by 25 percent in turnover, and the bottomline by 20-25 percent. At the moment he has no active plans for manufacturing wine in India; "the wine market is not large, it is only half-a-million cases or 5 percent of the total liquor market which is 100 million cases. In 3-5 years, Radico is to become an Indian company with a very strong global presence.

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