The Rs 4,000 crore (Rs 40 billion) UB Group would like to merge its two main spirits companies, McDowell and Herbertsons, but there is a hitch.
Kishore Chabbria holds over 50 per cent stake in Herbertson and has to give his nod for the move. Vijay Mallya, the UB Group boss, has been in talks with Chabbria to buy out his stake in Herbertsons but the process has been delayed owing to differences in valuation of the company.
Any agreement will have to be accompanied by an out of court settlement of the case that has been pending ever since Securities and Exchange Board of India asked both the parties to reduce their holding in Herbertsons through public offers.
In an exclusive interaction with Business Standard, UB Group president & chief financial officer Ravi Nedungadi said: "McDowell and Herbertsons are the two main entities in our Spirits Business. It's clearly in our interest to merge these two as soon as it is feasible.
"The management is already tightly integrated between these companies and we have to look at merging the legal entities and taking care of the back-office."
According to UB, the sales and marketing personnel of both - McDowell and Herbertsons - have started working in tandem and this has been showing results.
Going further down this road is necessary because McDowell will be taking a hit of Rs 100 crore (Rs 1 billion) this year on account of rise in costs and profit margins will be pretty thin. "In many respects, this year is a trough for us," he noted.
In a parallel move, the UB Group is also looking at consolidation of its Beer Business, which consists of United Breweries Ltd and McDowell Alcobev - which is a joint venture between UB and Scottish & Newcastle of UK. But "on the breweries side, merging the entities is too early to talk about, although that is the roadmap for us."
The spirits business of the UB Group sold over 38 million cases during 2003-04 thus becoming the fourth largest spirits company in the world. This division has over 50 manufacturing locations across the country and offers 73 brands at varying price points.
In addition to these two companies, the spirits division has a third company -- Triumph Distillers & Vintners -- which is a subsidiary of McDowell.
McDowell has amongst its portfolio one of the largest selling whisky brands - No.1 McDowell, which reportedly controls close to 40 per cent market share in Indian alcoholic beverage industry.
On the other hand, Herbertsons has another top seller, Bagpiper, the fourth largest selling whisky and the largest selling non-scotch whisky brand in the world. Herbertsons has sales of nearly 10 million cases, of which Bagpiper has a share of 6.5 million cases.
Commenting on the rationale for the merger plans, Nedungadi said: "In spite of good volumes, profitability is an issue which we are facing. Realisation per unit is pretty small for us.
"This is because of the tax structure which exists in this industry. For every Rs 100 a consumer pays, 60-65 per cent is levied as taxes and 15-20 per cent goes to trade. The remaining small percentage comes to us manufacturers.
"The cost of bottles and the cost of molasses is on the rise and there has been no significant price hikes. We are thus faced with an awkward situation in managing costs."