Diageo has made an open offer to all public shareholders of United Spirits (USL) to acquire an additional 26 percent stake in the company, which will increase Diageo's holding in USL to 54.78 percent. The open offer has been priced at Rs 3030 per share, which is a 22.5 percent premium to the price at which Diageo last acquired USL shares on January 31, 2014.
With Diageo displaying an increased level of confidence in United Spirits, growth prospects of Indian liquor business can be looked into. Abhijeet Kundu, FMCG Analyst, Antique Broking and K Laxmi Narasimhan, Deputy MD, Tilaknagar Industries , give us an overview.
Kundu feels that individual investors should tender to USL open offer as it provides an attractive exit price. With all positives already factored into USL stock, Antique Broking sees a likely re-rating for most liquor companies.
Narasimhan of Tilaknagar Industries, which mainly focuses on brandy and rum, said the Indian liquor industry for long has been under-rated, adding the country's branded liquor business stands around Rs 1.2 lakh crore.
Market leader of brandy in South India, the company's branded liquor sale is over Rs 6,000 crore.
Tilaknagar Industries, which has been maintaining a compounded annual growth rate (CAGR) of around 25 percent for the last four years, sees the alcohol industry growing at 8 percent pace.
Below is the interview of Abhijeet Kundu and K Laxmi Narasimhan with Latha Venkatesh & Sonia Shenoy on CNBC-TV18.
Sonia: A word on what the average retail investor should do with the open offer, do you think the open offer is a good exit opportunity or for a long-term investor it is better to stick on?
Kundu: I feel that individual investor should subscribe to the tender to the open offer because it is quite attractive exit price for investors. For a retail investor – if you look at the next three-five years, I believe from the current levels at the current price or the open offer price, I feel all the positives are already factored in. So, for an individual investor it looks a good exit point according to me.
Latha: Our topic is the strength of the spirit market – after Diageo exhibited so much confidence in buying the United Spirits' share at a tall premium to the prevailing market price. Our question is, what are the prospects in the alcohol and spirits market, what is the rate of growth of this entire sector?
Narasimhan: You have asked two questions – you said that what the outlook for the spirit market is given that Diageo has demonstrated the confidence by giving a price of 3,000 plus, a very legitimate and a valid observation. Second, you have assumed that this has to do with growth and so you are asking about growth.
Absolutely, the first part is – your observation is correct, the liquor industry in India has been for long a much underrated industry due to possibly a volume game and pedantic detachment to profit making. I think that will change and industry works the way the market leader makes it work. Diageo's entry is a welcome change in setting a lot of things correct and lot of corrections will come in. If I may point out - about four-five years there was a news article that McDowell or United Spirits was the largest FMCG Company in India and that is a fact and it is undisputed but if you contrast it – earlier the market capitalisation use to be Rs 6,000 crore or Rs 7,000 crore before Diageo came in and I am not at all surprised that water has found its level and capitalisation now seems to be something like Rs 45,000 crore – that is one part of the story.
United Spirits is only part of the market. An offhand calculation, the rest of the 50 percent should also be – if not Rs 45,000 crore another Rs 30,000 crore. So, the size of price is there, was always there. It was not been subscribed to and the confidence of the market was not demonstrated earlier for very many reasons, some legitimate, some not. So, I think there will be a trickle down effect for many other players and who will be able to hang in strongly and consolidate themselves in this industry. There are certain pluses for the incumbent players because there are only four listed companies in India other than United Spirits and there are two more unlisted, so totally it's a game between six players. The total size of MRP trade in India is Rs 120,000 crore for branded liquor that is USD 20 billion.
Coming to the second part – as far as growth is concerned, I do not think it is so much about growth. It is more about fair share.
Sonia: You said USD 20 billion is the branded liquor business in India. What percent of this business do you enjoy, what is the market share that Tilaknagar Industries has?
Narasimhan: Our branded liquor sale is upwards of Rs 6,000 crore but that is the travesty of the whole thing. What a consumer pays 60-70 percent accrues to the government, another 20 percent accrues to the trade and the trade partners in the chain because a lot of market is corporation, auction and so many other things where a minuscule part accrues to the manufacturers and that will change because there has been a fair share model in anything.
Latha: What is the rate of growth of this industry?
Narasimhan: Rate of growth is 8 percent.
Latha: You mean in volume or value?
Narasimhan: When we say, it's both value and volume for the manufacturers.
Sonia: For a company like Tilaknagar Industries what could be the growth trigger from hereon, in the quarter gone by you saw a fabulous volume run rate of more than 20 percent. Is that a sustainable run rate and what are the growth triggers for Tilaknagar?
Narasimhan: When we talk about Tilaknagar, it is our growth in the past four-five years have been at the rate of 20 percent plus compound annual growth rate (CAGR), much more than that I think, its now 25 percent; I am not able to get the exact number but the one part of it is the volume growth. Second part of it is our profitability and the EBITDA margins. I have said this many times and I might now sound very boring when I make this statement – were we to sell dollar 99 cents, we can have all the growth in the world but whatever we sell, what part of it accrues to the enterprise and shareholders. So, Tilaknagar has 22 percent. I would be far more comfortable talking about the EBITDA margins over and above the growth.
Growth is a very hygienic factor, it is for the future but what are you doing with the volume. Currently we are having 22 percent of our net sales revenue (NSR) as EBITDA margin and I am happy with what is happening through Diageo because even with the company with 12-13 percent return on capital employed (RoCe) and 12-13 percent EBITDA margin the market is showing thumbs up for this industry in general.
Latha: Mr. Narasimhan has laid out the growth and the dynamics of the industry. Now with United Spirits getting a much better valuation, do you think this will percolate to the other spirit companies?
Kundu: Yes, with the rerating of United Spirits that we have seen, the rerating in valuation that we have seen because of Diageo coming in, we believe that the same would spillover to other players like Tilaknagar and Radico Khaitan . Therefore, that rerating in the sector has to happen. Till date we have not seen much of a rerating so going ahead we could see some amount of rerating happening or some catching up in valuations happening for other players as well.
Sonia: There has been a lot of interest that global players have showcased in Indian liquor makers, are you open to selling stake in your business to a foreign player, if need be?
Narasimhan: We have been very categorical in our reply that we have been talking to very many people and some time back on your channel I had said we been having lunches and dinners. There is always an enterprise and business opportunity. If you see some time back we have done an acquisition in the east and there are number of opportunities available and the opportunities need cash. Cash will come from either equity or debt and both are available options and if there is a strong sense to go down on equity and create something that is very high on EBITDA or profitability, we will explore that.
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