president & cfo - UB Group

Annexure to Report of the Directors (Contd.)Management Discussion & Analysis ReportA. INDUSTRY OVERVIEW:The Indian Alcoholic Beverages industry is a combinationof branded liquors and the low-priced commoditysegment that is referred to as Country Liquor. Thebranded beverage space is further classified into Spirits,Beer and Wine. The Spirits space consists of Indian MadeForeign Liquor (IMFL), Bottled In Origin (BIO) beveragesand the Bottled In India (BII) spirits.The IMFL industry has been growing at a fast pace of13% and for the year ended March 31, 2009 stood at214 mio cases. Aspiration and higher disposable incomepropels growth at the top end, while new consumersand uptrading from country liquor spurt growth atlower end. Karnataka, where Country liquor was bannedin July 2007 has particularly seen a spurt in volumes ofthe low-end brands.The outlook for the industry continues to be buoyantfuelled by the large and growing number of youth cominginto the legal drinking age category. While countrieslike the USA and China are well past the ‘demographic’window, India is comparatively a ‘young’ country withover half the 1.2 billion population under 25 years of theage. This offers considerable potential for the future.The progressive prohibition of country liquor will onlyboost the growth in other sectors, notably IMFL.B. REGULATORY ENVIRONMENT:Regulation and Taxation of the alcoholic beveragesindustry is a part of List II of the Seventh Scheduleof the Constitution of India which places it in thejurisdiction of the State Governments and not of theFederal Government. While the Federal Governmentis authorized to license greenfield manufacturing unitsand levy customs duties on imports, every other activityincluding those relating to production and sale as alsotaxation are controlled by the State Governments. Withover 28 different markets that a national organizationlike your Company operates in, it is a highly challengingand complex network of regulations and proceduresthat it has to contend with; compounding the problem isthe fact that these undergo frequent changes.In July 2009, the Union Govt. again specifically targetedthe alcoholic beverage sector by amending the law totax manufacturing at contract units. The constitutionalvalidity of this law is being questioned by the industry.C. BUSINESS ANALYSIS:During the fiscal year under review, input costs saw anunprecedented rise over the previous year, in excess ofRs. 3500 million, particularly in the price of key ingredientslike alcoholic spirit Extra Neutral Alcohol (ENA) and glass.The increase in prices of ENA stemmed from a number offactors including reduced sugarcane output, increasedfuel price, unremunerative sugar support prices leadingto delay in crushing and a political stand off with thefarmers. In earlier reports the Company had indicatedthat the price of spirit had increased significantly. In thecurrent year this moved up even further and the sharprise in fuel prices pushed it to an unprecedented level ofRs.160/case and that too in prime crushing season whenprices are traditionally the lowest. Glass prices whichwere also impacted by the rise in fuel costs also saw anincrease. The subsequent reduction in the prices of fuelhas seen a nominal roll- back of the increase grantedearlier.The Company’s main-line brands grew by 19%, whileoverall growth was 20%, despite the selective defocus oflow-end brands in an era of high input costs.D. MARKETING:The Company’s top brands have contributed significantlyto the 20% sales volume growth recorded in fiscal 2009.Signature Whisky, the premium whisky offering enteredthe coveted ‘Millionaires Club’, having recorded a 27%growth to sell over a million cases this fiscal. BlueRiband – for long the touchstone for Gin in India – alsoentered the Millionaires Club this year.At the end of the fiscal year, 19 brands in your Company’sportfolio are members of the spirits Millionaires Club – ahallowed group of brands that sell over a million cases of9 liters each annually.McDowell’s No.1, the largest umbrella spirits brand in theworld, sold over 31.5 million cases in the fiscal year justended which represents a 15% growth over the previousyear. McDowell’s No.1 Celebration Rum at over 10million cases is now the world’s 3rd largest Rum growingin excess of 24% at a time when other Rum brands in thetop 100 have either degrown or at best registered onlymarginal single-digit growth. The third flavor under theMcDowell’s No.1 umbrella – the Brandy - continues at itsperch of the world’s largest selling brandy. Sales of the21 19