United Spirits Q1FY13 Earnings Conference Call - July ... - UB Group

United SpiritsJuly 31, 2012Moderator:Ladies and gentlemen good day and welcome to the United Spirits Q1FY13 earningsconference call hosted by CLSA India Limited. As a remainder, all participant lines will be inthe listen-only mode and there will be an opportunity for you to ask questions at the end oftoday’s presentation. If you should need assistance during the conference call, please signal anoperator by pressing * followed by 0 on your touchtone telephone. Please note that thisconference is being recorded. I will now like to handover the conference to Mr. VivekMaheshwari from CLSA. Thank you and over to you sir.Vivek Maheshwari:Thanks Marina. Good evening everyone and thanks for joining us on United Spirits Firstquarter conference call. We have with us from the United Spirits today Mr. Ashok Capoor –Managing Director; Mr. Ravi Nedungadi – Group CFO; Mr. P.A. Murali – CFO and Mr.Suresh Menon – EVP (Planning). We will start the call with brief remarks from the UnitedSpirits management and will open the house for Q&A thereafter. I will handover the floor tofirst Mr. Nedungadi. Over to you sir.Ravi Nedungadi:Thanks Vivek; thanks everybody for joining in on this call. Just a very quick overview from myside as you would have all seen there has been a distinct change in emphasis in the way UnitedSpirits has gone about its business. As Ashok will explain to you immediately after this, hisfocus have moved more and more something that we started years ago, but now the totalemphasis is on operating profitability and improving margins, completely deemphasizing thevolumes. I have seen some of the reports in the media and among analyst drawing attention tothe fact that the headline volume growth seems to be not as in the past in double digits, but asAshok will explain this is part of a deliberate policy when we are looking at a base which is soenormous that USL already has, the more that we talk about percentage growth, moremeaningless that becomes because even a 1% growth on a 125 billion base is an enormousabsolute number with all the pressure that we all know are there in the environment in terms ofthe ability to get pricing in terms of the underlying costs which are creeping inevitably upward.The management has chosen that we believe more rightly to focus more and more only onprofitable and if necessary to sacrifice volumes in certain territories in order to get an improvedproduct mix. Ashok and Murali will also explain how going forward; they will explain howdespite contrary indication we have been able to keep input prices particularly raw materialprices under control. They will explain us some of the investments that we have done recentlyinto primary distillation is only now beginning to tail back and during the rest of the year andgoing forward this will help to further maintain control and input costs which will be the key tofuture profitability. So with this, I will request Ashok to give an overview of the business andthen Murali can talk about the numbers in greater details.Ashok Capoor:Good afternoon everyone, this is Ashok Capoor here, the first quarter as Ravi has rightlypointed out, our volume growth has being 2% which seems very low but there will be overallcontext of large base is reasonable. There has been a distinct shift in our approach in last oneyear more distinctly to move value rather than volume and we have de-focused on brandsPage 2 of 20

United SpiritsJuly 31, 2012which are contributing very low margins to us and we have started focusing purely on thebrands which makes higher margin which is Prestige and above where the growths have been inthe first quarter, more than 17% and we have been able to significantly improve our marketshare position in relevant profitable segments. The revenue growth has been 6.3% and there is atotal 122 crores above last year and is currently 2057 crores. The EBITDA has moved up by 11crores to 351 crores from 339 crores last year. So, overall I think the performance within thecircumstances of very severe cost push, which is thanks to ENA and glass prices, has beenquite satisfying. This is despite certain markets which have not done well, which is TamilNadu, where there has been a disruption in supplies that they have kept our orders to only about8-lakh cases and we do not have adequate capacities to fill up that demand which we are nowworking aggressively and hopefully we should be able to see better volumes in the secondquarter and there is another market called West Bengal where because of very sharp increase inlast year, in excise there has been a drop in volumes which are going to dampen our volumes inthe first six months, but the last six months we will be looking healthier and Bengal by the endof the year will also be showing double digit volume growth. Apart from Orissa also as amarket has taken a slight dip in the first quarter and that is due to disruption in the overallbureaucracy in Orissa, where there has been three changes of excise commissioners andmanaging directors and that had led to some disruption and the industry has taken a 7% degrowthin the first quarter. Otherwise, the product continues to be healthy and spirit cost aredown if you take the full year average. But in the first quarter, basically because UP has startedin full swing and UP rates are relatively stable and below but if we take it compared to the lastyear first quarter it is above last year first quarter and also there is because of this and we havetaken price increases in the first quarter and we plan to take further price increases which arenow hitting us in Kerala and Andhra Pradesh which should substantially improve our margingoing forward because of various factors EBITDA margin is approximately up by 650 basispoints over the immediate preceding quarter and 290 basis points over the average of ‘11-12.The increase is basically a manifestation of the price increases which we have taken at varyingpoints during the ‘11-12 and also during the current quarter and also because of thesepremiumization efforts of our company. As has been the practice in the past, revenueenhancement measures are basically a combination in the increase in billing prices, theintroduction of higher priced, alternative brands and also we have cut what we call as fray 8.20spends which is a local promotion spend. The company's flagship brand is McDowell No. 1which has registered a healthy 16% growth in the first quarter, other brands also which are inthe higher price points are registering healthy growth. Royal challenge has grown by 27%.Signature also has grown in double digit. So, all the Prestige and above brands which is theprofitable part of the business has grown by more than 17% and we have been able to gainshare in all the relevant profitable segments. We also in this quarter introduced Premiumbrandy in Kerala called Louis Vernant where Brandy consumption is very large and the initialresponse is overwhelming in fact we are unable to supply the market. It is growing so well. Weare going through slowly but surely extend these brands into other markets brandy markets ofsouth. This obviously again is continuation with our overall premiumization strategy for USL.Interest costs are up by about 165 crores, is a basically a consequence of increased borrowingsPage 3 of 20

United SpiritsJuly 31, 2012for working capital also with the rate increases by lenders as directed by the RBI from time totime. The activities of the emerging market divisions which is conducted through a whollyownedsubsidiary Singapore subsidiary of Whyte & Mackay and we have in country wide plansin place and we are taking baby steps to enter Asia and Africa, this has already started in themonth of April and we hope over a period of time this will become a significant portion of ourbusiness Just given you a brief summary of some of the points relating to the USL performanceand I will now hand it over to Mr. P.A. Murali our CFO and Joint President to give you adetailed break down on various financial parameters. Thank you.P. A. Murali: Thank you Ashok. I will try not to repeat myself. As very sufficiently explained by Mr.Nedungadi and Ashok on the business side. Let me touch upon aspects of volume, value, cost,debt, Whyte & Mackay and probably sort of our focus into the rest of the year in terms ofwhere we expect the cost to be especially ENA and glass so that everybody gets an overallpicture and then we can take questions.As already explained to you backed by a 2% volume growth we have registered a 7% valuegrowth primarily driven by premiumization strategy where Prestige and above brands grew at avery healthy pace of about 17% has already been explained in Tamil Nadu and West Bengalwhich dampened the volume growth. If I were to remove Tamil Nadu and West Bengal, thevolume growth goes up to almost around 6.5-7% and the Prestige and above brands have grownby close to 20% in the last quarter. There have been other markets which probably denied usgrowth levels close to about 10% without Tamil Nadu and West Bengal that is Orissa and UPwhere we found that in UP the difference between country liquor and IMFL widened becauseof the price increases that we have taken and that really had a short term impact on the volumesin the first quarter which we expect to recover through the year. We, on an overall basis on thevolume we are still confident that we should by the year end catch up to about 8-9% comparedto just about 2% at this point in time, but our focus has been on Prestige and above brands andit will continue to be for the rest of the year with irrespective to whatever volume that wewould achieve but the immediate focus has been if you see last two quarter we have beenreturning a margin of just about 10.2 and 10.4% EBITDA margin to NSR and our concentrationhas been as to how to get back to mid teen in terms of margins, so that the expectations of theinvestors or back on even keel in terms of our past performance.Having said that, on the cost front we did find higher cost in terms of raw material last quarterif you had seen the web upload you would realize that on a corresponding basis compared tothe same quarter last year the price has gone up by almost Rs. 5 a case which impacted almostabout 15 crores in terms of cost and compared to the immediate preceding two quarters wherethe average price of ENA is almost about Rs. 163, it has come down by almost about Rs.12which aided in fact partly on the expansion of margins that we have seen.On the other cost front, I mean staff cost A&SP remained at traditional levels of 5.3% and 8%respectively but the most heartening on the riding on the back of premiumization strategy isPage 4 of 20

United SpiritsJuly 31, 2012EBITDA margin going back to 17% levels in this quarter and getting back from the 10.2 and10.4% levels to 17%. Interest cost has in fact grown up compared to a corresponding period oflast quarter which was around 130 crores close to about 165 crores this quarter. But I would sayeither remaining on even terms when compared to preceding two quarters at around 116 and165 crores and therefore there is no apparent increase in the debt level over the last one or twoquarters where the interest charges will remain more or less stable quarter on quarter on arunning basis.On a consolidated basis, the performance which we have seen web upload the EBITDA hasgrown by almost about 15% from about 354 crores in the corresponding quarter of last year toabout 407 crores, what has dampened the results of the PBT level for this quarter has been onaccount of three issues one is on exchange loss which impacted the PBT to about 79 crores forthis quarter and pension gain or loss, last year it was a gain of 15 crores and this year it is aprovision of about 22 crores which on accumulated basis affected the results to the extend ofabout 37 crores and of course interest compared to corresponding period of last year we werealmost about 60 crores or more mainly on account of two issues, one is the refinancing of theWhyte & Mackey happened in July last year and therefore there was no impact of therefinancing cost or the regular increased debt in the first quarter of last year which was there infull swing for this quarter and therefore there is a swing of almost about 50-60 crores on aconsolidated basis and these three line items impacted the PBT to the extend of almost about175 crores and therefore PBT was lower by almost about 150 crores compared to the PBT ofJune ‘11 which was 182 crores we will be 38 crores this year taxation is an aggregation ofvarious things, therefore there is no comparison there. In assets all the profits makingcompanies since taxation was there at its full marginal rate taxation remained around 77 croreslevel compared to the last year result of 72 this year 77 and therefore we have to report a PATof 39 crores loss vis-à-vis 110 crores of profit in the first quarter of last year. But I am very surethat over the year there is a along it will even out and we will be able to better the EBITDAlevel as well as the PBT level mostly depending upon what would otherwise happen to pensionas well as onerous lease provisions which at this point in time looks to be on even keel right.The pension is lightly dampening but onerous lease provision has remained at the same level.So we expect the results to be equal or slightly better at the EBITDA level compared to lastyear as the year goes on. The PBT level depending upon how the pension liabilities play, thePBT level may get impacted. But interest, there can be a slight increase on interest; I don't see ahuge increase on interest at this point in time, because I don't see much of increase on the debtlevel, which I will explain to you when I come to the debt number. That is on the consolidatedbasis on the P&L.Coming to the balance sheet on the consolidated debt level, the consolidated debt as of 30 Juneis about 8063 crores vis-à-vis 770 crores at the net debt level compared to March to June theincrease of about 290 crores is on account of two aspects. 252 crores is on account of exchangetranslation dispense which in fact is more notional and its does not impact the interest chargesand the balance about 40 crores is a real increase which is on account of increased workingPage 5 of 20

United SpiritsJuly 31, 2012capital requirements during the quarter. We have taken many steps to ensure that during thecurrent year there is not much of an expansion in working capital by tightening our bills interms of credit controls etc; we expect almost about 150-200 crores of debtors has to be I meanmonitored and reduced during the current year, so that that much of money can flow into thesystem for managing the working capital much better and so that there is no increasedborrowing on account of working capital. That is what we are tying to do we are put in placevery stringent credit control and I am sure that it will stand in as good stead as we go alongduring the year.Coming to the main subsidiary Whyte & Mackay you would see Whyte and Mackey net salehas dropped to 33 million, from about 37 million and EBITDA has dropped to about 1.9million pounds from 4 million pounds and PBT is loss against break-even last first quarter. Thisis more a timing issue, I would like to reiterate that over the year Whyte & Mackay will getback to the EBITDA level anywhere between 30-35 million pounds I mean during the currentyear also. We have been selling very small parcels of bulk which were there last year andwhich will be there this year with succession of timing and therefore I wouldn't go, I mean, toomuch into the first quarter results of Whyte & Mackay at this point of time and I am alsoconfident that I will go along from second and third quarter onwards we will get back to ourcontribution levels of 26% as compared to 14% that is reported in the first quarter and theEBITDA margin will definitely improve beyond the 11%, I mean, that is the stated year. Sothat is more on the timing issue. But as long as the stock level in Whyte & Mackay isconcerned they still hold almost about 96 million liters of alcohol which as of June almostabout 97 million liters of alcohol as of 30 th June, valued at 531 million pounds by an externalvaluer which shows almost about 81% growth over the stock level on per OLA basis comparedto the value of liquid in May 2007 when we acquired Whyte & Mackay. So there has been anintrinsic growth in the value of the liquid even though we have sold very valuable liquid toDiego in between which was under a contract and therefore this shows that there is an intrinsicvalue growth as far as the liquid is concerned even though the average age of the liquid mighthave come down after we sold valuable liquid in between under contracts That is about theoperating performance of first quarter of USL and its main subsidiary and on the debt level. Asregards the current year outlook as Mr. Capoor explained yes we have taken some priceincreases during the first quarter but we have not taken all of the price increase we probablyhave taken our plan is to take price increase to the extend of almost about 370 crores during thecurrent year out of which probably about 70-80 crores of price increase is yet to be taken andmost of the 270 crores price increase has taken between May and June for the full import of theprice increase will be felt in the quarters going forward and this price increase is as Ashok saidwithout talking about Andhra and we expect Andhra and Kerala price increases to fructify. Infact Kerala, has notified the price increase yesterday about 6% price increase that was onexpected level. In Andhra it is expected to declare the price increases towards the end of thisquarter. So we should have better realization and through price increases during this yearcompared to last year. We have taken almost about 25% more price increases this yearPage 6 of 20

United SpiritsJuly 31, 2012compared to that year and therefore that should stand as good stead around 300-370 crores ofprice increase compared to last year.As long as outlook on cost side on ENA is concerned, yes the first quarter was being benign,we expected the same, the trajectory to continue but now that the monsoon failed we don'tknow what impact it is going to have in the third and fourth quarter. But in 2009 whenmonsoon failed we did not see much of the impact on the price. So going by that experience weexpect that it should not impact too much, but nevertheless one does not know the governmentpolicies if in case the lack of monsoon and lack of products impact on the availability of liquid,we still expect the prices not to be worse than last year in the third and fourth quarter which isabout 160-163 level. Otherwise, we expect a better ENA price which at this point in time weare unable to predict given the current situation in terms of monsoon etc, we would be in abetter position to give you a reasonable estimate of how this is going to be when the crushingstarts in the third quarter, by the end of the second quarter when we speak about the secondquarter results we should be in a fairly better position to predict how the ENA prices willbehave for the next two quarters. But however, the current quarter is going to be a tough onewith the expectation of failed monsoon etc, prices where tending to go up as we speak, butnevertheless we are watching it closely as of now as against the last average of about Rs. 150etc we are almost about Rs.3-4 more at this point in time; we expect that to continue for the restof the quarter and as regards to glass, we don't expect any huge price increase in fact we areexpecting some reduction if in case because the new furnaces are being fired out-late and thereis some capacity which has come up in Andhra which should stand us in good stead in terms oftrying to negotiate prices better as we go along. Nevertheless, I don't expect a huge priceincrease on glass. So with glass and ENA the position that they are in we don't expect huge costpush, otherwise from other material packing material or consumable and therefore almost aboutin excess of 15-16% of Prestige and above brand growth with price increase which easilycontributes almost about 4% of net sale revenue compared to earlier year; we expect a decentmargin growth to be maintained during the rest of the period current year and we should endthe year with much healthier than the 14% that we reported in terms of the EBITDA margincompared to last year full years margin.That is the commentary on the financials and the outlook for the current year. We can takequestions and remarks.Moderator:Thank you very much. Ladies and gentlemen we will now begin the question and answersession. The first question is from Abneesh Roy from Edelweiss. Please go ahead.Abneesh Roy:My first question is on the gross margin expansion, what are the margins in below Prestigesegment and what is the capacity utilization we have in the factories currently. Last 3 or 4quarter, volume growth has been in single digit. So can this number go down further, so someclarity on what exactly you mean by premiumization and why we are doing that. That is thefirst question sir.Page 7 of 20

United SpiritsJuly 31, 2012P. A. Murali: See the margins in the below regular segment and below is thin and in some states it is almostmarginal. So we are deliberately in fact not focusing and in fact we have stopped selling certainbrands, which contribute to our volumes but not to our margins. And we are basically theapproach is in the regular and below we are looking at engineering our products to see that ourmargins look at cost cutting measures and post the profitable part of the business it will give usthe supplemental margin going forward. So their margins are very thin and in some states weare almost like very break-even kind of scenario which we are now de-focusing and that is whyyou are seeing a slowing down on growth in fact if we want we can sell we can get 12-15%growth easily but that is not going to make much sense to us in terms of improving our margin.Abneesh Roy:And sir what is the competition doing in the regular and the mass end of the segment?P. A. Murali: I don't know what they are doing but I don't think they are making money because there cannotbe much distance in cost. They must be making losses in my view.Abneesh Roy:Sir earlier we used to get double digit volume growth, so is there a fundamental shift in thepricing of the industry that pricing power has come down?P. A. Murali: there is a shift in our focus is that we are not chasing volumes. I can easily sell 12-15% growtheasily without any problems but I don't want to, because it takes up capital, it takes up my timeand I don't want to chase volumes. It is as deliberate strategy to move away from volumegrowths to value growths.Abneesh Roy:And sir could you comment on the number one war which is going on between you andOfficer's Choice do we intend to get back that.P. A. Murali: We are not chasing volumes, that answers the question and if OC if he wants to make lossesand sell more case he is most welcome.Abneesh Roy:And sir last question is on price hike, you mention Kerala and AP have recently taken, you alsosaid 6% Kerala. So, what kind of impact would this can have on our numbers with one quarterlag how much price increase these two states.P. A. Murali: Kerala add to the contribution to bottom-line to the extent of about 20 crores on a 12-monthbasis. So to the extent of 9 months it can be about 15-16 crores this year. Andhra we need towait, because they have still not announced price increase at this point in time and therefore Iwon’t be able to comment on Andhra till we get to know what the government thinks.Abneesh Roy:And sir lastly on the Ad spent could you comment sir, we are premiumizing in terms of grossmargins, but if I see your advertising sales is the cost are limiting any EBITDA marginexpansion in fact the EBITDA margins have come down, so when do we see EBITDA marginexpansion happen will FY13 see that kind of a eventuality here.Page 8 of 20

United SpiritsJuly 31, 2012P. A. Murali: The EBITDA margin compared to which period you are asking, Abneesh?Abneesh Roy:YoY EBITDA margins if you see have come down because of advertising spends being highand employee spends have also increased, YoY sir.P. A. Murali: I don't know where you are getting this numbers from, according to me, last year the samequarter we were at almost about 17.5% and we are at 17 today and the advertisement salespromotion what you are taking as 7.7 and 8.3 we should look at it on an overall basis, becausesometime, due to timing in IPL and due to other, such events, there can spend spreads whichcan go over two quarter so a fair assumption now will be look at margins at the end of the yearquarter 2 where you would have seen 6 months of activity. So, 17.5 and 17 EBITDA in myopinion is on even keel because ASP has gone up by almost about 0.6% doesn't mean that it isimpact, I mean, margin. In fact, in advertisement sales promotion we are trying to see thatqualitatively the spends are more on brand building efforts then discounting and there is adefinitive shift from below the line spends to above the line spirit that is what we areconcentrating on from a qualitative aspect, because when the concentration is on prestige andabove brands, brand building would stand us in better place.Abneesh Roy:Sir could you please explain the reserves in surplus attrition on a sequential basis when theconsole numbers have reported a loss.Moderator:The next question is from Nillai Shah from Morgan Stanley. Please go ahead.Nillai Shah:Sir could you please explain the reserves in surplus accretion on a sequential basis when theconsole numbers have reported a loss?P. A. Murali: I wouldn't be able to explain on the call how and waterfall of our reserve in surplus movementyou can send me an email I can send you the waterfall and how the reserve and surplus move,because we consolidate 76 subsidiaries and therefore over a call it will be difficult for me togive you the number, but I can send you an email if you send me an email in exactly what youneed on that, absolutely no issue.Nillai Shah:The next question is basically on Whyte & Mackay, the margins there on after you have defocussedon the bulk sales to Diageo have actually fallen versus what it was where it wasearlier. I do understand market spends do go up, but I don't understand how with bulk sales themargins have actually fallen versus when were doing with bulk sales. So, could you explain thebranded versus bulk margins.P. A. Murali: Branded sales as we have always said is moving up even up in this quarter as against 10%volume growth between us and licensed branded sales that we do for Russian standard, thevalue growth has been in excess of 30% compared to a 10% volume growth but what I said asfar Whyte & Mackay is concerned when you compare it with last years comparative numbersyou will find that contribution margins have come down on 26 to 14 and EBITDA marginsPage 9 of 20

United SpiritsJuly 31, 2012have come from 19 to 4% etc, that is predominantly because when you sell bulk that toomatured bulk naturally your margins are much higher I mean on a very low value sale themargins will look to be much higher. Last year in the first quarter, there have been some bulksales which have got in to the first quarter results and therefore you would find that 4-5 millionwhich is lower in terms of sales, which you get almost about 50-60% margin because itdepends upon which vintage that you are selling in terms of bulk and depending upon the costget allocated and therefore that is why I would like to reiterate that you should not judge thefirst quarter results on W&M at this point in time, should give it a couple of more quarters and Iam sure it will bounce back to original levels of 25-26% in terms of contribution as well asEBITDA margin at about 18-19%.Nillai Shah:Sir, but the margins should actually have gone up versus the Diageo bulk sales days, because ifyou focusing on branded sales, the reason for focusing out there was to increase margins.Ravi Nedungadi:Yes, but branded sales gets a long time to build and over a longer period it will go up, but bulksales is immediate profit which gets booked in and if you remove the bulk sales which waslarge portion of Whyte & Mackay profits in the past, it cannot be made up immediately bybranded business. There is a long gestation period to build, overnight cannot substitute the bulksales profits.Nillai Shah:Now that you are removing the marketing spends, but I will take this offline with Mr. Murali.The third question that I have had is basically on the revenue growth for the quarter on astandalone basis at about 7% with 2% volumes means your price and mix improvement is only5%. Against the Prestige and above number that you have reported, this number looks very lowespecially given the price increases that you have taken. So, of this 5% can you give me a broadsplit between pricing and mix impact.P. A. Murali: Price increase will be about 1.5% because most of the price increase has taken towards Mayand June and so the full impact of price increase you won’t have got so balance 3-3.5% is onaccount of product mix.Nillai Shah:And one last question if I may, sir on the distilleries purchase including working capital howmuch have you totally spent?P. A. Murali: The distilleries three distilleries we purchased Tern distilleries, Pioneer and Sovereign, the totaloutlay in terms of enterprise value is close to about 550 crores including debt everything.Nillai Shah:And sir what kind of benefits do you accrue on a per case basis by buying these distilleries andI assume it is about 30% of your overall spirit requirement.P. A. Murali: When they are in full stream they will give us some advantage in the region of about Rs. 8-9 ona bulk liter on an average and Tern is about 30 klpd which can go up to 45 klpd in fact andPage 10 of 20

United SpiritsJuly 31, 2012Sovereign is about 180 klpd and Pioneer is about 160 kiloliters per day. So you can do themath, it is about Rs. 8-9 for bulk liter on an all of them are near to 89-90% capacity utilization.Nillai Shah:And sir it is operational on how many days?P. A. Murali: They will operate for almost about 300 days on an average.Nillai Shah:300 days at 90% capacity utilization. I will do the math. Thank you.Moderator:The next question is from Subramanian PS from Sundaram Mutual Fund. Please go ahead.Subramanian PS:Hi sir my query is form the sales growth on various categories and you said that the emphasis ison growing the Prestige and above categories what we see is that in the second-line andfranchise IMFL the growth has been pretty strong, so is it that in the second-line your marginsare okay but the low contribution is actually on the regular part of the business for us?Ravi Nedungadi:See the second line volumes are very minuscule, so you might get that spike and in certainstates second-line brands are profitable. This would not be an overall thing, yes we have grownon a small base on second-line and on franchise but focus is still not, we are not pushing it.Whatever is happening is on its own momentum.Subramanian PS:Okay, and given your conscious shift towards premiumization could you give us someguidance on how do you think the working capital would look like including the loans andadvances at the end of the year.P. A. Murali: As I said in my opening remarks this year we are trying to look at very tight credit control andthereby we want to mitigate any working capital spikes on account of volume growth as well asPrestige and above brands though. So hopefully, we should not be having a very steep workingcapital expansion at this point in time during the course of current year by operating at verytight credit limits we expect to bring in almost about 200 crores of reduction in debtors whichwill stand as in good state for the rest of the year, that is my plan at this point in time. Seehopefully our working capital expansion in terms of debts should not go up during the currentyear.Subramanian PS:And loans and advances do you see that number going up?P. A. Murali: No we don't because whatever advances we have to give to secure the operations of contractunits have been done during the course of last year. I don't think any fresh thing cropping upthis year.Subramanian PS:So 200 crores decline in debtors on the flattish loans and advances number?P. A. Murali: No, incremental loans and advances.Page 11 of 20

United SpiritsJuly 31, 2012Moderator:Thank you. The next question is from Nishit Shah from Ambika Fincap. Please go ahead.Nishit Shah:Congratulations on good set of numbers and more importantly on expansion in margins and Ihope that this journey on margin expansion continues. Ravi, my question is on whatever you doat the EBITDA level most of it is eaten away by the interest cost. How do you plan to addressthat issue?Ravi Nedungadi:I think that management has said consistently that there are a number of opportunities to look atrecapitalization and de-leveraging the business so at the appropriate time we are very muchconscious of the level of debt and the need to reduce it, just leave with us for a little bit whilelonger and I think you will good news on that front coming along.Moderator:Thank you. Next question is from Vivek Maheshwari. Please go ahead.Vivek Maheshwari:Sir two questions. First on the CAPEX side what is the plan either on primary distillation sideor anything you were looking at in the past in terms of the glass bottle or anything?P. A. Murali: Glass bottle, we are not looking at this point in time, we have kept it on hold given thepressures on the capital. What we are looking at in terms of regular capital expenditure is stillwe are able to correct the debt level as Ravi said our concentration is to have maintenanceCAPEX which would be around 100 crores during the current year if I don't correct the capitalstructure during the current year.Vivek Maheshwari:And on the working capital side you mentioned about the debtors part, what about theinventory? Does that mean that on the fact that you are focusing or you are going to focus onthe profitable brands, does that mean that inventory levels will be under tight control as well?P. A. Murali: Absolutely, we have always been because willy-nilly our capacity to store at the distilleries arevery limited and therefore we need to definitely operate within what we can store at thedistillery level. Even though our capacities and volumes have gone up over the last 3-4 years,we have not expanded our storing capabilities within the distillery and therefore we need tovery carefully manage the stock levels at the distillery appropriately. So I don't expect a hugespike on inventory level as such The only spike that you will get on inventory level will be thebulk stock that we purchase from Whyte & Mackay at the fresh filling level which we keeppurchasing for our future use which may spike to the extent of almost about 80-90 crores ayear. That is the only spike you will see but not at finished goods level or raw material, storagelevel in various manufacturing.Vivek Maheshwari:Okay and so leaving aside the de-leveraging part your working capital is to be under tightcontrol and CAPEX side you plan to send 100 odd crores. So that means that ideally the debtlevels for the company have peaked out at this point of time. Is that fair understanding?Page 12 of 20

United SpiritsJuly 31, 2012P. A. Murali: I don't have the appetite to borrow more at this point in time, concentration is more onincreasing margins and having a tight control on working capital, till we are able to correct thecapital structure.Vivek Maheshwari:Okay and one last question, the focus on the strategy of focusing at the top end is that any riskin this strategy in terms of losing out, obviously there are going to be market share erosion butdoes that have any other implication as much you can think of today?P. A. Murali: I don't see any manager implication because what we are defocusing or basically on brandwhich you are not giving the kind of margin that we expect and even if these are taken away byfringe player which are fragmented player I don't think it will have an impact on the overallprofitability or profits for the company. In fact it can improve the bottom-line.Vivek Maheshwari:I was asking mainly from a competitive perspective, you are okay.P. A. Murali: At the bottom end of the pyramid where you don't make money where it is a commodity type ofbusiness, we are not interest in that play at all.Moderator:The next question is from Varun Lohchab from Religare Capital. Please go ahead.Varun Lohchab:My question is related to the debt part, when I look at the debt position, there is an increase inCAPEX loans of around 190 odd crores and similarly working capital loan of almost 20 croreson Q-on-Q basis. I am sure that given the guidance the CAPEX for this year would be muchlower than that. Could you just explain why there is increase in CAPEX loans and workingcapital loans?P. A. Murali: You are talking about March to June?Varun Lohchab:Yes, from 578 crores CAPEX loans it has gone to 768 crores and I am presuming this would belargely local currency, so the first CAPEX loans within secured loans, from Rs. 5783 million to7689 million.P. A. Murali: These are for what has been spent during the last year, we would have drawn down during thecurrent year and if you see, our other loans have reduced. Fixed deposits have gone down byalmost about 140 crores and unsecured loans have gone down by almost about 50 crores. Whatwe would have done is we would have till we got our sanctions and we had the capitalexpenditure loans in place, we would have used the short term funds to fund the capitalexpenditure and then would have drawn from there and paid off. That is how it is.Varun Lohchab:So Okay, so definitely CAPEX is not to this extent in this quarter.ManagementExcept for one short term to a long term.Page 13 of 20

United SpiritsJuly 31, 2012Varun Lohchab:And sir secondly on the glass project CAPEX which you are planning to do earlier what is thestatus of that, have you deferred it for the time being?P. A. Murali: I will say we have put in on hold, though intrinsically it makes strategic sense for our longterms at this point in time given the constraint in capital we have put in on hold at this point oftime till we are able to correct the capital structure as I said.Varun Lohchab:And sir on their own distilleries you were awaiting a pollution board clearance for one of themwhich was restricting your production. Has that come in and all the three distilleries producingnow at full capacity?P. A. Murali: That came in last week. The Karnataka distillery should start producing within the next week or10 days and that is the 180 klpd plant.Varun Lohchab: So there should be some further benefit in Q2?P. A. Murali: In the second quarter that is what all of us to keep the prices and check compared to marketprices which have gone up by almost about Rs. 4-5 at this point in time.Moderator:Thank you. The next question is from Priya Ranjan from Macquarie. Please go ahead.Priya Ranjan:My question is regarding the goodwill in consolidated balance sheet. How is it increasingquarter-on-quarter every quarter?P. A. Murali: Goodwill in consolidated is mainly on account of exchange difference, Ranjan.Priya Ranjan:But if you look at the last year March ‘11 number, it was something around 4400 crores andnow it has gone up to around 5400 crores. It is completely because of the exchange.P. A. Murali: We have not added any other additions except March ‘11 Pioneer was there probably Sovereignnot much, so there is nothing. So, mostly it will be only exchange difference, nothing else.Priya Ranjan:Another question is on the demand side is, particularly in Andhra Pradesh, after theinvestigation and everything is going on there has been sharp retail drop in terms of volume, sohave you seen an kind of pressure in your volume growth in Andhra Pradesh.Ravi Nedungadi:No there is no drop in volumes. What happens is because of these pressures the inventories atthe shops go down, what has happened is that the ACB, which is the anti corruption bureau hastaken out various ways and where there was overcharging which was happening rampantly hasbeen stopped. So, now all the people in the retail trade have to sell it at the current approvedMRP. In fact what is happened is that slowly but surely growth is happening. We have grownby about 8.5% in the first quarter in Andhra Pradesh despite these problems because if thepeople are selling at the correct prices the retailers make less money but the consumers benefitPage 14 of 20

United SpiritsJuly 31, 2012and that is giving a fillip to the industry. In fact, the industry is actually growing, not declining.The decline is artificial. It may show numbers that is purely because inventories at retail whichused to be earlier holding three weeks stock is now come down to one week stock. In terms ofoff-takes, sectoral off takes they are not down at all. In fact they are growing.Priya Ranjan:Another question is on Whyte & Mackay, what was the total inventory when you havepurchased it in 2007. Right now it was around 97 million liter right?P. A. Murali: That goes to almost about 115 million liters.Priya Ranjan:So, there has been around 18 million liter of sales after that.P. A. Murali: There are productions, there are sale.Priya Ranjan:And what was the volume for this year, FY12 year? Total volume including bulk and?P. A. Murali: Bulk is in liters and volume is in cases, so it will be difficult to give you one number.Combination of own label, I will give the cases volume. We had brand sold about 418,000cases compared to 379,000 cases which is the 10% volume growth and about 287,000 casesown label compared to about 350,000 cases last year which is about 18% de-growth that isbasically because of ______ 53.34 where they had European impact where their off-takereviews but we hopefully should get going towards the rest of the year. So ____ also we havelost about 16,000 cases and there is one other thing of free duty increase buy in March 2012,which impacted the first quarter of this year so that is also one of the reason why it impactedown label sales.Priya Ranjan:So, you have given the figure of price increase around 370 crores for the full year. So in termsof the average price increase, how much it translate into 4-5%?P. A. Murali: You are asking in Indian business?Priya Ranjan:Yes.P. A. Murali: You are asking what would 370 crores mean on an overall NSR basis, that is what you areasking right?Priya Ranjan:Yes, on the blended what will be the price increase?P. A. Murali: It will be around 3.5-4%, closer to 4%.Moderator:Thank you. The next question is from Mayur Gathani from OHM Group. Please go ahead.Page 15 of 20

United SpiritsJuly 31, 2012Mayur Gathani:Sir I just needed some more detailed on this pension expense that is coming there. Will that bethe same for the next coming two-three quarters as well as 27 crores.P. A. Murali: It will be there in every quarter. It depends upon what are the yields in the market and theoutlook is that it would remain at the same level. I don’t think yields are going to be bettergoing forward and therefore I may expect provisioning for pension as opposed to last yearwhere there was a deal.Mayur Gathani:And sir did I hear you correct when you said that contribution margin for WNM would increase26% and EBITDA would come to 11% going forward in Q2 and Q3?P. A. Murali: No I compared it with my full year numbers of Whyte & Mackay last year where I had almostabout 26% contribution margin and about 19% EBITDA margin. What I said was don't go bythe first quarter numbers. There are timing issues in terms of various line items in that P&Lwhich we will catch up during the next two quarters and if you see the end of second quarterand third quarter you will see the contribution margin is going in excess of 20% and EBITDAmargins going in excess of 15%.Mayur Gathani:EBITDA margin going in excess of 15% and contribution will be?P. A. Murali: In excess of 20%.Mayur Gathani:Coming back to Indian business, which states contribute the most to the bottom-line.P. A. Murali: The number state is Karnataka followed by Maharashtra.Mayur Gathani:To the bottom line right?P. A. Murali: Yes.Moderator:Thank you. The next question is from Nikhil Vohra from IDFC. Please go ahead.Nikhil Vohra:Just couple of things. Firstly it is encouraging to know this premium shift that you are look at.What is you sense on is the market at the premium in getting over crowded in the near time orhitting the margins that one has seen in premium historically should prevail as we moveforward.P. A. Murali: No the premium market is not getting overcrowded, in fact we are the only ones who arelaunching new brands and getting success. We have launched 3 or 4 new brands in the last oneand half year actually and surprisingly all of them have worked wonders and have done verywell. We have launched McDowell No. 1 Platinum, which sold million cases in the first yearand continues to grow at a healthy pace. We have launched the Prestige brandy calledMcDowell VSOP brandy which is going about 1.4 million cases this year. We launchedPage 16 of 20

United SpiritsJuly 31, 2012Signature Premier Whisky which again gets about 2 lakh cases in the first year of launch whichis phenomenally good. It has a 4-5 share points across India. So we are the only one who areactually expanding our portfolio and we are gaining share in the Prestige and Premium, both ofwhich are growing also at healthy paces for us and the industry is also growing, but we aregrowing faster than the industry. So with larger disposable incomes are upgrading to Prestigeand Premium offerings, we are able to take larger share of that sort of growth.Nikhil Vohra:So it should be fair to presume that the premium end that we are looking at, would be an extentof an existing brand, so McDowell No. 1 platinum would fundamentally cannibalize McDowellNo. 1 at the mass end.P. A. Murali: No there will be some cannibalization. They are at two different price points, frankly speaking.McDowell No. 1 is at x, Platinum is at x+. What it does is it expands the overall McDowellfranchise and also improves the bottom-lines because the more premium brands we launchedthe better is the margin in the premium end of the business because we are realizing higherprices on platinum being McDowell No. 1. So even if the cannibalization which does happenwhich does happen when you launched your brand extension is at a higher profit.Nikhil Vohra:Just a second part which is more of clarification. Ravi if you can just dwell on all the issues thathas been surrounding the group specifically on United Spirits, but what other liabilities forUnited Spirits be it contingent overall book right now which one should be aware of it now?P. A. Murali: I won't be able to talk about the Group. But I can answer the extent I can.Nikhil Vohra:For United Spirits obviously not for the group but what other liabilities from United Spirit'sbook towards KF be it contingent or just guarantees from United Spirits?P. A. Murali: No there is no guarantee or loan to Kingfisher from United Spirits.Nikhil Vohra:And I am presuming that clearly on the interest cost or bank financing or institutionalfinancing, there would be a constraint given group concentrations.P. A. Murali: That is the normally that happens in any group right? I mean if there is a _____ 1.0.0 in thegroup the bankers are bit cautious when it comes to other entities in the group so that we aregoing through that also. But what we are trying to do from USL side is given the kind ofconstraints that we have on our inability to immediately reduce debt at this point in time due tomarket condition, we are looking at how best we can tighten our bills but at the same timeensure that the margins remain at the levels that it should be and try and see that we reduce theworking capital cycles to ensure that the cash flows into the system to take care of theexpansion in working capital that is what we are trying to do at this point in time.Page 17 of 20

United SpiritsJuly 31, 2012Nikhil Vohra:Just lastly Murali, what is the sense in terms of priority for recapitalization within the UnitedSpirits, is it about existing investments that we have on book, be it United brewery and Unitedtreasury or it could be refinancing also.P. A. Murali: See it is a combination of 2-3 items, Nikhil. It can be convertible debt instrument. It can be along term debt instrument. It can be equity infusion which is again a convertible debtinstrument which brings it into equity at a particular point in time in future. So I mean it can bea combination. It may not be one kind of instrument at this point of time. We are looking at andwe are exploring possibilities on all three accounts.Moderator:Thank you. Next question is from Nillai Shah from Morgan Stanley. Please go ahead.Nillai Shah: On the White & Mackay bid again. Coming to your guidance which you had issued about 2years back of 60 million GBP of EBITDA by fiscal ‘15, are you still on track to achieve that oryou think that is going to get delayed by sometime now?P. A. Murali: It might get delayed Nillai because we are still at about 35 level and we are at FY13, to FY15 togo to 60 will be almost about 100% increase at this point in time. But a 10% growth inEBITDA level from here on is a fair expectation at this point in time. We are opened up US andother markets where there is good enough traction for scotch as a product and we expecthealthy growth growing forward especially in markets where we have entered off late. US isone and other emerging markets where we are trying to piggyback. Scotch, there is an emergingmarket division that we have formed as we explained couple of calls earlier where we aretrying to look at premium IMFL also to be packaged along with scotch to be put into theseemerging markets. So we are expecting some healthy gains going forward. But frankly they areasking me whether at FY13 if you are around 35, whether you would be 60 in FY15, we maynot be able to.Nillai Shah:Sir the other question is on loans give, I just heard you said no loans to Kingfisher but Iremember as of FY11 you had some loans given to UB Holdings, any such loans given at anypoint in time in fiscal ‘12.P. A. Murali: Not this year, as of FY12, whatever we disclosed in our audited balance sheet that is there.Nillai Shah:Sir but nothing was repaid before March ending? It is just got extended.P. A. Murali: Yes.Nillai Shah:And in the current fiscal?P. A. Murali: Not yet, nothing has been repaid by them as of now.Nillai Shah:But no loans extended to UB Holdings right sir.Page 18 of 20

United SpiritsJuly 31, 2012P. A. Murali: Not at this point in time, but then there is always a current account because UB global does alot of exports on our behalf and there will always be current account movement between us andUB Global on a regular basis. So I mean there are no definitive loans that would be extended atthis point in time but the current account movement will always be there.Nillai Shah: Any idea what their amount was as of fiscal ‘12?P. A. Murali: About 20-25 crores was the current account movement.Nillai Shah:And sir the last question I have is that given the way you have outlined your plans for marginsmoving forward volumes even working capital and CAPEX, why is there a need in the group toraise capital at this point in time, be it equity or convertible debt or any other instruments?P. A. Murali: No is it question why can’t you carry your 8600 crores of debt in the balance sheet,Nillai Shah:Yes you have mentioned in the past that the group has been willing to lever up for quite sometime and we also have..P. A. Murali: We have always leveled up and we have always demonstrating our ability to level down also.So whether it is Scottish and New Castle that time when we levered up the UB Holding orUnited Breweries Limited to hilt and then levered it down and Scottish and New Castle came inand then we leveraged when we did Shaw Wallace acquisition and then we brought in equityand then we brought the debt down. I mean our EBITDA to net debt was almost about 7.9when we acquired Whyte & Mackey in the year 2007 when we again brought it down to about4.5 to 5 levels when we repaid or prepaid some of our dollar loans to Citibank in between. Butwe now feel that the debt is at a level where we need to bring it down and that is the reasonwhy we said we tightening our belt to manage working capital in a manner that till we are abledo some capital restructuring. Otherwise as somebody said in the call, it will look like we areworking only for payment of interest.Nillai Shah:The FX loss in the consol numbers, what is it largely on account of?P. A. Murali: It is more on account of our consolidation. When we consolidate if there are different currencyloans sitting in different currency balance sheet, the movement we will come into theconsolidated numbers that is about it.Nillai Shah:But sir then you are increasing your debt levels right? So assume all of it is going through ormost of it is going through your balance sheet and not really your P&L because if I see yourrestructured loans of Whyte & Mackey they have gone up significantly over the last three orfour quarter, the £370 million loan.P. A. Murali: The last two quarters are all on account of exchange difference. The last year July quarter isbecause we did a refinance of that debt and we would have had an impact of over £40-50Page 19 of 20

United SpiritsJuly 31, 2012million more but otherwise largely the increase in number quarter-on-quarter on Whyte &Mackey is solely on account of exchange….Nillai Shah:So 40-50 million is the restructuring cost that you paid last year?P. A. Murali: Of course, when we did a restructuring we also took a higher loan to not only get the rise ofDalmore 1.8.8 into Whyte & Mackey from an outside party, plus I mean wanted to have onetime pay. So we had an increase of about £40-50 million at this point in time.Nillai Shah:But, sorry to harp on this again, but I see that your movement of FX at least of your big loan of370 million is flowing through your balance sheet and not through your P&L so what exactly iscontributing to this FOREX loss in the P&L.P. A. Murali: As I Nillai again listen to me carefully. If there is a dollar loan in a pound balance sheet in thatparticular P&L the difference between a dollar and a pound will hit the P&L and it will flow-inin consolidation and there are some dollar loans in some pound balance sheet which might haveflown through. So if you want details of this we can send it by email if you can let me know.Moderator:Ladies and gentlemen due to time constraint that was the last question. I will now hand theconference over to Vivek Maheshwari for closing comments.Vivek Maheshwari:I would like to thank the management team at United Spirits and also all the participants forbeing there on the call. Thank you very much.Moderator:Thank you very much. On behalf of CLSA that conclude this conference call. Thank you forjoining us and you may now disconnect your lines. Thank you.Page 20 of 20