United Spirits marches on with owner Vijay Mallya

United Spirits marches on with owner Vijay Mallya

United Spirits posted another strong rise in sales in its fiscal first quarter and it is hard to see growth abating if the Indian Government's medium-term economic outlook is correct.

United Spirits yesterday (20 July) reported a 18% rise in first quarter sales to INR14.6bn (US$313m).

Volume growth slowed considerably from last year, which reflects practical difficulties in supplying the state of Andhra Pradesh, the firm said. But, it added that India's growing middle class has continued to show that it will pay more for premium drinks.

As drinks sales flounder across Europe and North America, United Spirits has largely breezed through the global economic troubles and the good times look set to continue.

It is testament to India's capacity for alcohol that the firm can now claim to be the world's second largest spirits producer by volume off a predominantly domestic business base - it constitutes around two thirds of India's spirits market, thanks in no small part to its strong national distribution network.       

In other words, United Spirits is in the enviable position of dominating its product category in one of the world's most promising national economies.

While Diageo has put a brave face on the breakdown of tie-up talks with United Spirits last year, the drinks giant must be privately dismayed at its inability to seal a deal. How billionaire Vijay Mallya, United Spirits' owner, must be quietly smug at Diageo's travails with cash-strapped consumers in Europe and the US.

This position is mirrored on a macroeconomic level, where Governments across the western world must glare at India's growth rate for gross domestic product with a dual sense of trepidation and outright jealousy.
 
India's Government said this week that gross domestic product (GDP) is set to grow by 8.5% in 2010, which is more conservative than the International Monetary Fund's (IMF) forecast of 9.4% growth. Both figures represent a strong recovery from the 2008-09 financial year, when GDP growth slipped to just under 7%.

Yesterday, India's finance minister, Ashok Chawla, outlined a plan for the country to achieve a annual GDP growth rate of 10% by 2014 and remain in double digits thereafter. 

If you have been to India, then you will know that nothing about this country is straightforward. There remain short-term risks to the economy and analyst group UBS warned today that further economic slowdowns in Europe and the US could cause turbulence to the rupee and test India's industrial output.

The IMF thinks that India's GDP rate could slow to below 9% next year and remain at around this level until 2012. This, however, would be no economic disaster for the country and the social demographics look extremely strong for drinks companies like United Spirits.  

"We estimate that 100m young people in India will attain legal drinking status in the next five years," United Spirits president Vijay Rekhi said in a speech to the World Whiskies Conference last year. "It is a marketer's delight," he said. 

India's 1bn population is overwhelmingly young, with nearly a third under 14 years old and just under two thirds between 15 and 64 years. The US has a similar proportion of 15-64 year-olds but only a fifth of the population is under 14.

The one concern with United Spirits remains its bottom line and its ability to pay off debt related to the acquisition of Scotch whisky group Whyte & Mackay. The firm yesterday reported a 30% drop in first quarter profits, as a result of one-off gains in the first quarter of last year and charges on borrowings related to the refninancing of acquisition loans.

But, the underlying fundamentals look stronger. Group EBITDA rose by 25% in the first quarter and the firm increased advertising and promotion spend to 9.5% of net sales, from a ratio of 7% last year.   

The company is poised to advance in the year ahead and beyond.