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The UB Group has embarked on a major restructuring exercise of all its Companies. The Group structure as envisioned by the Management will be

While the spirits business has been brought under the Mcdowell fold, the company now proposes to demerge its brewery business to a dedicated ‘beer’ company named Brewco.

The entire Beer business of UB will be transferred to the new company, which is a 100% subsidiary of UB. UB will be the holding company, which will own all real estate owned by the Group and the Investment portfolio of UB Ltd, including the 42% stake in Mcdowell - the largest Spirit company in the world. Shareholders will receive 4 Brewco shares for every 10 shares held in UB Ltd. The equity capital of Brewco is currently Rs27.2mn. Post demerger, Brewco equity will increase to Rs178mn, while there will be a corresponding decrease in UB’s equity to Rs226mn. The demerger, subject to relevant approvals will be effective from August 1, 2001.

Brewco will be the largest Brewery in India with 21 Breweries and owning 50% of the brewing capacity of the country. It has a 38% market share in the 70mn case Beer market. Each of the 32,000 beer outlets in India sells at least one UB brand. Its largest brand Kingfisher Lager sells 16mn cases pa and Kingfisher Strong, sells another 4mn cases. UB Ice a beer targeted at the youth has been relaunched in the current year.

UB has offered to divest a strategic minority stake to global brewers. 4 leading international beer majors (Interbrew, Carlsberg, SAB and Heineken) have evinced interest in the proposal and a decision on the same will be taken before the end of the current year. The tieup with UB offers wide distribution and penetration into the Indian market for the global partner. UB hopes to gain through similar access in International markets for marketing its Kingfisher brand.

UB has invested Rs860mn in acquisitions in the last one year. It acquired 65% stake in Associated Breweries & Distilleries, which owns the leading beer brand London Pilsner. A strategic shareholding of 41% was acquired in Inertia Industries , which provided manufacturing capacity in Haryana where the company lacked its own unit and additional capacity in Maharashtra through a brewery unit at Aurangabad.. Entire business of Millenium Alcobev, which marketed UB’s regional brands as well as Inertia’s Sandpiper brand was transferred to Inertia Industries wef March 31, 2001. UB has also acquired 97% stake in Mangalore Breweries and Distilleries, which has brought in a manufacturing facility in Western Karnataka and market share leadership in the local market in that region.

The aggressive investments in expansion and acquisitions are being made with an eye on the future market growth potential. About half a billion population in India today is under 21 years of age. Urbanization, changing lifestyles, exposure to international culture will see more and more youth in the country coming under the consumption fold. Eventually one can expect decontrol on distribution and pricing and lower taxation status for Beer (as is the case in most countries in the world). When this happens, the market would see a demand explosion, for which company is gearing up.

Currently 83% of total income is contributed by Beer sales, while the rest comes from service income, investments and other sources.

Profitability is poor and Return on capital was a low 4.2% in FY01. However the asset profile will change post demerger.

Asset profile (Rs mn)

Over 80% of the fixed asset is represented by land, a large part of which would remain in UB and be used for real estate development and generate returns. Almost the entire investment portfolio would also remain with UB and all none core investments would be gradually divested. UB will also own 42% stake in the largest Spirits Company in the country - Mcdowell & Co Ltd. The Brewery company, on the other hand will have a low capital base and would generate much higher ROCE. We estimate that the ROCE of the standalone brewery business would be atleast three times the current returns.

Sales has frown at a healthy pace of 25% yoy in H1 FY02. However other income declined sharply on a yoy basis as the company had earned huge profits on sale of investments in H1 FY01. Operating margins excluding other income, infact have improved during the year from 4.9% in H1 FY01 to 5.9% in H1 FY02. The lower other income, a sharp increase in interest cost (which includes lease charges for brewing facilities outsourced) led to a loss of Rs137mn in H2 as against a profit of Rs81mn in H1 FY01. Interest also includes amounts accrued, but payable only on 30.6.2003.

We anticipate the financial performance will improve within the next 2 years as

1. The demerged brewery operations will have better operating profitability. For example, in Q2 FY02, PBIDT of standalone brewery operations was Rs194mn, registering a 57% rise as against Rs124mn in H1 FY01. Operatin large extent.

With a strong brand portfolio, dominating presence in the beer market in India, encouraging growth prospects for the business and the benefits expected from the ongoing restructuring, the stock offers an attractive investment opportunity at the current market price of Rs85. The enterprise value of UB’s beer business has been estimated at about Rs10bn by merchant bankers, which is over 3 time its current market cap of Rs3.2bn. Assuming that one is buying into only the beer business of the company, the market cap to sales ratio of the Beer company would be just 0.9x.

The demerged beer company with a high ROCE would certainly get a much higher valuation. In addition, one would also be left with 0.6 shares of the Holding company, which would certainly have some value in it given the investment portfolio and the vast real estate and that it owns.

5Paisa Team

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