Mallya-Diageo’s United Spirits reports 19% slump in Q1 profit

Liquor manufacturer United Spirits Ltd (USL), India's largest spirit seller, posted a dismal performance during the first quarter of the current financial year, with the net profit falling 19 per cent year-on-year to Rs118.13 crore in the quarter ended 30 June.

The company, now co-owned by failed aviation entrepreneur Vijay Mallya's UB Group and Diageo Plc after a stake sale late last year, also disappointed with its revenue, operational and volume performances.

It blamed the slump on escalating raw material prices and increased marketing costs, which caused margin contraction.

Revenues grew by 6 per cent to Rs2,207 crore during the April-June quarter from Rs2,073 crore in the year-ago period. Earnings before interest, tax, depreciation and amortisation (EBITDA) slipped 16 per cent year-on-year to Rs293 crore, and operating profit margin dropped 270 bps on yearly basis to 13.2 per cent.

The management said the results were impacted by a sharp increase in the cost of primary raw material ENA (extra neutral alcohol) year-on-year.
"The increase of nearly Rs20 a case translates to an adverse impact of over Rs61 crore in the cost of goods, which flows down to the operating profit line," the company said in a statement.

United Spirits also said the evident cartelisation by vendors when quoting for ethanol supply tenders of oil marketing companies was another key reason for the increase in price of this ingredient.

Of course, United Spirits makes most of its liquor, including 'malt' whiskies, from raw petroleum-based spirits with flavour added.

Raw material costs rose by 12 per cent year-on-year to Rs1,090 crore while advertising and sales cost jumped 24 per cent on yearly basis to Rs211.6 crore. Employee expenses also increased 18 per cent to Rs129 crore during the quarter, the company said in a statement.

The company also admitted that the flamboyant Mallya's promotion of the Indian Premier League cricket team Royal Challengers had hurt the company's bottom line.

"Higher expenditure on IPL 6 that took place during first quarter has led to a 150 basis points increase in advertising and sales promotion expenditure," the company said in its statement.

Volume growth was flat at 31.34 million cases as against 31.24 million cases in the corresponding quarter last year, mainly due to further slowdown in consumption in states like Tamil Nadu on account of ''state government discrimination''.

"Tamil Nadu continues to be a dampener to the business with the ordering mechanism deliberately skewed in favour of local brands from select vendors. From a situation three years ago where every one of every three bottles sold in TN was from the USL stable, the USL share is now down to one out of every six bottles sold," it said.

Meanwhile, interest costs declined to Rs159.4 crore from Rs165 crore on a yearly basis due to benefits of repayment of Rs1,600 crore worth of loans at the end of May 2013 from proceeds of the issue of preference capital. The company said further interest cost reduction was likely during the year.

In May, the company received Rs2,092.72 crore by allotting more than 14.5 million equity shares at Rs1,440 apiece to Relay BV, an indirect wholly owned subsidiary of Diageo plc on a preferential basis. United Breweries Holdings and other companies sold more than 21.7 million shares to Relay BV at same price in July.

As a result and together with the shares tendered in the open offer by the public shareholders of the company, Diageo plc now holds a 25.02 per cent stake in USL.