MANAGEMENT DISCUSSION AND ANALYSIS REPORT Your Company is a multi-product company manufacturing Alcoholic Beverages (being Indian Made Foreign Liquor and Country Liquor), Malted Milkfood and Dairy Products. However, as the Alcoholic Beverages business is the major activity, the Management Discussion and Analysis Report is mainly restricted to the Alcoholic Beverages only. A. INDUSTRY OVERVIEW Alcoholic Beverage industry in India comprises of Indian Made Foreign Liquor (IMFL) and Country Liquor. IMFL consists of Whisky, Brandy, Rum, Gin and Vodka etc.. Whisky comprises of a large portion of IMFL market and accounts for nearly 60% of the market followed by Brandy at around 20% and Rum at around 15%. White spirits viz. Vodka, Gin and white Rum account for the balance of 5% only. The total IMFL industry in India is brsently estimated at around 300 million cases growing @ around 8% per annum. The volume-wise increase rate is much higher in the low-priced segment as compared to the upper segment. Country Liquor segment is about 22 million cases per annum in the state of Punjab and your company has around 10% share in this segment. Your Company has a market share of around 6% of IMFL industry with ARISTOCRAT, ARISTOCRAT brMIUM, AC BLACK, BONNIE SPECIAL, BINNIES and AC SEKC as the leading brands available across the Country. The Company has introduced new brands viz. ROYAL PRIDE , KING HENRY Scotch whisky in the Bottled in India Scotch Whisky Segment and IICE Vodka in the brmium Indian vodka range in the brvious years. All the brands are well accepted in the market. Country liquor is manufactured and sold in the State of Punjab and your Company has market share of around 10% in the state of Punjab. The Company also manufactures Malted Milkfood on the Contract Manufacturing basis for the leading manufacturers in this industry. The Company has installed a new plant to enhance its production capacity to meet the increasing demand of the manufacturers. The Industry experienced the effect of the recessionary trend during the brvious years. Inflationary trend eroded the buying power of the general public. However, the things are improving and the prices of main raw materials viz. Mollasses, Grains and Spirit have stabilized. The Company is focusing to increase the production and marketing of more contributory brands which will increase the margins leading to higher profitability of your Company. Further, the outlook of the liquor industry appears to promising. Vodka is a fast growing IMFL segment in India growing @ 1012% per annum. The overall industry is growing @ around 8% per annum and the growth is likely to continue in near future. The consumption of liquor in India has been in an uptrend in the past few years and is expected to improve further. The Glass Container industry has suffered a slowdown during the year due to the increase in natural gas prices and substantial increase of the capacity in north India. Being unviable to continue the operations, the Glass division plant of the Company has been shut down. B. REGULATORY ENVIRONMENT The Indian liquor industry has been experiencing challenges like the policies of states with respect to restricting import & export from one state to the other, production constraints with respect to the pack sizes and type of packaging i.e. prohibition of pet packaging in Uttarakhand and usage of Tetra pack in Karnataka, pricing i.e. state levies & duties. Advertising of alcoholic beverages is not permitted in the Country, which restricts the Industry to reach out to the masses. The incidence of duties is very high and there is no unanimity of policies amongst various states which affect the marketing policies of the Company. C. OPPORTUNITIES AND THREATS The industry suffers due to heavy taxation and over-regulations which have affected the profitability. Heavy Excise Duty levied on the products increases the selling price thus restricting the sales. Exclusion of Alcoholic beverage industry from the proposed Goods and Service Tax (GST), if implemented, will put substantial additional burden on the Industry as the inputs will be subject to GST and will increase the cost of production. The increased cost may not be passed to the consumers, thus reducing the profitability. Further, the competition from domestic, multinationals and unlicensed manufacturers has also increased which is effecting the margins and restricting the sales. In line with its commitment with WTO, the Government of India has been consistently reducing the import duty on spirits, which is also a cause of concern for the liquor industry. The liquor industry is also suffering due to illicit liquor production, whereby not only the industry is suffering but also the State Governments are losing heavily on account of excise duty and sales tax etc. However, the increasing acceptance of alcohol consumption among rich and aspiring middle class coupled with rising disposable income and a large young population indicate high growth potential for the sector. With the trend of shifting from Country liquor to IMFL sector, the Industry is witnessing a strong growth in the middle and lower price segments, where your Company is a leading player. The industry has also been adversely affected by the increase in raw material prices of ENA, Glass and Molasses. However, with favorable demographics, rising disposable income levels and greater acceptance of alcoholic beverages in social circles, the outlook for the Indian alcoholic beverages continues to remain positive. In addition, changing consumer brference towards brmium offerings of IMFL will favour the brmium brands thus increasing the profitability. Your Company is moving towards brmiumization and have entered the brmium segments through its brands like IICE Vodka, Royal Pride & King Henry whisky. D. OUTLOOK The sales of Alcoholic Beverages (IMFL) declined around 9% during the year under review. The Company incurred operational losses on account of closure of Glass division, reduction of sales of IMFL in Andhra Pradesh due to political instability and increase of expenses on sales promotion of various IMFL brands. However, the Company foresees the increasing trend inline with the industry in the current year and years to come. With introduction of new brands and their acceptance in the market, your Company is hopeful to clock higher sales during the current year. With the cost of raw materials expected to be favorable and increasing sales turnover, your company is hopeful of posting better results in the current year and maintain the same in the coming years. The market scenario during the current year also appears to be encouraging and the demand of liquor is improving constantly. To meet its production requirements in IMFL, the Company has also entered into lease and bottling agreements to augment its production capacity. To further improve the market share and the profitability, the Company entered in the brmium segment of Alcoholic Beverages by launching the new brand ROYAL PRIDE which has got encouraging response in the market. The Company has already launched KING HENRY Scotch whisky in Bottled in India Scotch Whisky Segment and IICE Vodka in the brmium Indian Vodka segment and both the products have been well accepted by the public. The Company had to incur substantial amount on the brand building of the new brands introduced in the market. The Company expects that the investment made in the brand building will start yielding results in the coming years leading to higher sales and profits. In view of the increased production capacity of the milkfood products, the Company is expecting increase of production volumes of the malted milkfood products being manufactured by it. This will increase the turnover and the profitability of the Company. The profitability of the Glass division was adversely affected due to the increase in natural gas prices and substantial increase of the capacity in north India. The substantial increase in capacity is the result of cheap natural gas being supplied in the Firozabad area in Uttar Pradesh. Due to this, the production of Glass division became unviable and the Company had to stop the production and the Glass division remained inoperative during the year under review. The production activities of this division have been formally discontinued during the year. This also resulted in the lower sales turnover and incurring of losses by the Company during the year under review. Prices of raw materials continued to put brssure on the margins during the year. Effective measures are being taken regularly to reduce the overheads costs coupled with optimum utilization of resources and better product mix. E. INTERNAL CONTROL SYSTEMS The Company has adequate internal control systems supplemented by internal audits by professional firms commensurate with its size and nature of business to ensure to safe guard and protect the interests and assets of the Company. A strong net work of Management Information System has been implemented to ensure the reliability of the reports and documents and better coordination amongst various departments. |