Alcohol Initiation

INDIAN ALCOHOLIC BEVERAGES INDUSTRY Initiating Coverage on United Breweries Ltd and United Spirits Ltd

July 2, 2019

 GNANASUNDARAM SAMINATHAN  [email protected]  +91 44 4344 0062

Page 1

INDIAN ALCOHOLIC BEVERAGES INDUSTRY The Party has just begun “ There are only two real ways to get ahead today - sell liquor or drink it.” W.C. Fields, Actor

We initiate coverage on United Breweries Limited (UB) with a BUY rating. We have factored in for a revenue and earnings CAGR of ~13% and ~20% from FY19-21 to arrive at our FY21e EPS of Rs. 30.6.. Beer industry volume growth should continue to outpace the overall alcoholic industry volume growth while UB is anticipated to outgrow the category led by it's market leading brand, Kingfisher (KF). A network of 30 manufacturing facilities spread across 20 states is a definitive competitive moat considering the interstate hindrances in the transfer of alcoholic beverages. We note that Heineken NV taking complete control of UB could lead to additional growth and margin levers being unlocked over the medium term. New launches from the global portfolio of Heineken NV into India over the medium term should aid UB in addressing their product portfolio gap at the top of the pricing pyramid by venturing into the emerging craft beer segment. Excise duty changes should continue to be passed on to the consumers, however, inflation in key raw material such as barley and glass should keep gross margins subdued over the near term. Valuing the stock at 50x (10% discount to its 10 years historical P/E), we arrive at our TP: Rs.1531. We initiate coverage on United Spirits Limited (USL) with a BUY rating. We have factored in for a revenue and earnings CAGR of ~10% and ~15% from FY19-21e to arrive at our FY21e EPS of Rs.14.5. With USL dominating the whisky segment volume market share in India, we believe they are well placed to ride on the rise in consumption of Alcobev in India. Ever since Diageo PLC took over USL in 2014, several fundamental changes have been made to the modus operandi of USL which in our opinion makes them better placed to ride on the industry growth levers from a medium to long term perspective. With Diageo Global underlining that the Indian market is one of their key focus areas from a long term growth and profitability perspective, we believe there are further growth triggers to be unlocked in USL. Cross-pollination of brands from the global scotch portfolio of Diageo has been driving premiumization for USL for the past couple of years. A renowned parent with an extensive understanding of the global Alcobev industry and the underlying macro growth triggers in India provides for a Perfect Blend to USL’s long term growth ambitions. Despite several margin levers being exhausted since the takeover, we believe there is further scope for margin improvement albeit at a slower pace. Valuing the stock at 45x (in-line with its 10 years historical P/E), we arrive at our TP: Rs.659. find SPARK RESEARCH on (SPAK )

INITIATING COVERAGE 02 July 2019

Jun-19

Dec-18

Jun-18

Dec-17

Jun-17

Dec-16

60% 50% 40% 30% 20% 10% 0% -10% Jun-16

We initiate coverage on two Indian alcohol beverages (Alcobev) companies, United Breweries & United Spirits with an underlying positive stance on the sector. The perception towards alcohol consumption has undergone a significant change over the past few years, which makes the Indian Alcobev industry best placed to ride on the Indian demographic dividend. Per Capita Consumption (PCC) of alcohol per adult in India has grown at ~38% from 2010 to 2017 however the absolute PCC is still at a minuscule 6.0 litres per adult annually. Increase in PCC has largely been driven by a perception change towards alcohol consumption. Alcohol which was once upon a time frowned upon as evil has transformed to being cool and fun (Perception change from the lens of Bollywood – Slide 12,13,14). With ~42% of the Indian population still below the age of 25, we anticipate Alcobev industry growth to gallop over the medium term as ~17mn new consumers come into the legal alcohol drinking age (21 years) every year. Per capita value consumption of alcohol is correlated to per capita GDP, which we believe will lead to premiumization trend over the medium term. Though the ‘taboo perception’ about alcohol is changing in India, the ambiguous regulations should keep the industry growth under check. With alcohol being regulated by the state government in India, there are several regulatory aspects that the Alcobev industry is subjected to beyond just the taxes. The state governments have a high degree of control over the industry including imposing a ban on the sale of Alcobev in a state. Authority over licensing of manufacturing facilities, control over the Route To Market (RTM), pricing regulations are a few other key aspects where the regulators excise a significant control. Despite taxes from alcohol being a key revenue generator for a state, a few state governments have imposed a ban as a populist measure. It is to be noted that several states have also rolled back on the imposed ban as it gave rise to the consumption of spurious/illegal/smuggled liquor. Though the excise duty hikes are largely passed on to the consumer and price increases have been demand inelastic, the probability of a ban by a state government remains a key overhang for the Alcobev sector in India.

Nifty NSE Consumption Index

CMP

TP

RECO

United Breweries

1335 1531 BUY

United Spirits

570

659

BUY

RESEARCH ANALYSTS GNANASUNDARAM [email protected] +91 44 4344 0062

 For US Investors: Click for Analyst Certification and Required Disclosures | Page 2

Indian Alcoholic Beverages Industry | Initiating Coverage Indian Alcohol Industry (sans country liquor) Snapshot Volumes have grown at a steady 8% CAGR over the past 12 years…

CAGR: 8%

2.3

2.6

3.0

3.3

3.7

4.6

4.1

4.9

5.2

5.3

5.2

…leading to ~11% value CAGR over the past 12 years.

5.5

CAGR: 11%

5.8

2.0

0.9

2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018

1.0

1.1

1.3

1.5

CAGR: 3%

376

384

387

394

416

1.7

Source: Company Filings, News Reports and Spark Capital Research

Country Liquor and Indian Made Foreign Liquors (IMFL) together contribute to ~60% of market volumes

The growth was slightly impacted in 2015 on account of the Highway ban

377

2.5

3.0

Alcohol Industry Value in Rs.bn

Source: Company Filings, News Reports and Spark Capital Research

455

2.4

2.8

2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018

Alcohol Industry Volume in Litres (bn)

443

2.2

2.6

464

472

503

510

518

Others, 2%

Country liquor, 30%

Illicit Liquor, 2% Home brewed Alcohol, 11%

Spirits (IMFL), 30%

Wine, 4% 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018

Beer, 21%

MRP (Rs/litre) Source: Company Filings, News Reports and Spark Capital Research

Source: Company Filings, News Reports and Spark Capital Research

Page 3

Indian Alcoholic Beverages Industry | Initiating Coverage Indian Alcohol Industry Snapshot Beer dominates the market with ~52% volume share…

11% 9% 32%

46%

2010

10% 9% 32%

46%

2011

…while Whisky dominates the market from a value share perspective

9% 9%

8% 11%

7% 11%

7% 11%

7% 11%

7% 10%

7% 10%

32%

30%

30%

30%

31%

30%

29%

47%

2012 Beer

48%

2013 Whisky

50%

2014 Brandy

51%

2015 Rum

50%

49%

2016

2017

13%

11% 12%

10% 12%

9% 12%

9% 10%

9% 10%

55%

55%

55%

55%

55%

56%

56%

13%

14%

15%

16%

18%

19%

19%

20%

2011

2012

2013

2014

2015

2016

2017

2018

16%

16%

14%

13%

13%

13%

13%

53%

52%

13% 2010

52%

2018

White Spirits

Beer

Source: Company Filings, News Reports and Spark Capital Research

Whisky

Brandy

Rum

White Spirits

Source: Company Filings, News Reports and Spark Capital Research

Increasing premiumization trends visible across the whisky market

Domestic strong premium lager dominates among the beer offerings.

11%

11%

10%

12%

40%

42%

44%

44%

15%

15%

15%

14%

49%

46%

46%

44%

85%

85%

85%

85%

2014

2015

2016

2017

2014

2015

2016

2017

less than Rs.500

Rs.500-Rs.1500

Source: Company Filings, News Reports and Spark Capital Research

Above Rs.1500

Domestic Premium Lager

Domestic Mid-Priced Lager

Imported Premium Lager

Source: Company Filings, News Reports and Spark Capital Research

Page 4

Indian Alcoholic Beverages Industry | Initiating Coverage Indian Alcohol Industry Snapshot United Breweries through its dominating leadership in the beer market goes on to dominate the overall alcoholic beverages category

In the whisky market, United Spirits dominates the market with ~34% market share

UB Group Diageo Plc

22.7%

28.2%

1.9% 2.3% 2.3% 5.2% 6.2% 7.3%

Pernod Ricard

Pernod Ricard

Mohan Meakin Ltd

Source: Company Filings, News Reports and Spark Capital Research

Radico Khaitan

4%

John Distilleries Pvt Ltd

4%

Jagatjit Industries 5%

13% 5%

Others

11%

Source: Company Filings, News Reports and Spark Capital Research

In the beer market, it is UB group who dominates the market from a volume share perspective 2% 2%

34%

Allied Blenders & Distillers

Mohan Meakin Ltd

12.4%

30%

Anheuser-Busch InBev NV Carlsberg

Allied Blenders & Distillers Radico Khaitan

16.6%

United Spirits - Diageo

In terms of overall non IMIL consumption, South India dominates the market with ~41% share

UB Group

1% 10%

SABMiller - Anheuser-Busch InBev Carlsberg India

3%

West India, 26%

East India, 10%

SOM Distillery

14% 52%

North India, 24%

Mohan Meakin MillerCoors

South India, 41%

Devans 18% Source: Company Filings, News Reports and Spark Capital Research

Others Source: Company Filings, News Reports and Spark Capital Research

Page 5

Indian Alcoholic Beverages Industry | Initiating Coverage Higher prevalence of Indian Made Indian Liquor (IMIL) in North India, leading to higher alcohol prevalence in these markets.

Jammu & Kashmir

Himachal Pradesh Punjab Uttaranchal Haryana Arunachal Pradesh Uttar Pradesh Rajasthan

Assam

Bihar

Meghalaya

Jharkhand Gujarat

Madhya Pradesh

Tripura W Bengal

Orissa Maharashtra Telengana

Andhra Pradesh Karnataka

Tamil Nadu Kerala

Source: Ministry of Social Justice and Empowerment – Government Of India, National Drug Dependence Treatment Centre (NDDTC), All India institute of Medical Sciences (AIIMS), New Delhi, Substance use magnitude in India 2019

Chhattisgarh Tripura Punjab Arunachala Pradesh Goa Uttar Pradesh Manipur Haryana Delhi Uttranchal Daman & Diu Madhya Pradesh Chandigarh Telangana West Bengal Odisha Sikkim India Average Tamil nadu Andhra Pradesh Kerala Pondicherry Himachal Pradesh Assam Nagaland Mizoram Jharkhand Karnataka Maharashtra Gujarat J&K Meghalaya Rajasthan Bihar

36% 35% 29% 28% 26% 24% 22% 22% 21% 19% 18% 18% 18% 17% 17% 16% 16% 15% 14% 14% 12% 10% 9% 9% 8% 8% 7% 6% 6% 4% 4% 3% 2% 1% 0%

5%

India and states: Prevalence of Alcohol Use (10-75 years) 10%

15%

20%

25%

30%

35%

40%

Page 6

Indian Alcoholic Beverages Industry | Initiating Coverage How the Alcohol industry has shaped over the past 8 years Prohibition in Bihar, Demonetization, Route To Market (RTM) changes across several states and the Supreme Court directive on closure of all outlets within 500 meters of all highways were the key industry disruptors over the past 8 years 14% 2%

18% 6%

17% 7%

Volume growth 10% 3%

12%

12%

2010

2011

During the year under review the industry grew by 18%. Salience of the strong beer segment continues to increase, and strong beer now accounts for an estimated 79% of volumes sold

As a result of a weak economic climate, regulatory changes and a poor summer, growth of the Indian beer market in FY12 was significantly lower than the previous year.

The Indian Branded Spirits Industry was around 270 million cases in Fiscal year 201011 a growth of ~10% Comments from UB Comments from USL

The Indian Alcobev Industry has grown rapidly in recent years primarily due to favorable demographic trends, substantial economic growth, increased per capita consumption and a marked shift in societal acceptance of alcohol consumption.

10%

2012 High barley costs, restrictions on use of recycled bottles in certain markets, unplanned power breakdown in key States, requiring the use of more expensive selfgenerated power, have all contributed to a high cost regime During fiscal 2012-13, the Indian spirits market growth dropped to a low 3.4%. In our opinion, this was due to the continuous enhancement in duties and taxes by State Governments

7%

2013

Price/Mix Increae 9%

7%

2014

8%

5% 3% 2%

6% 1%

7%

5%

6%

1%

-1%

2015

2016

2017

2018

2%

Maharashtra, Bihar and Punjab were severely negatively impacted due to a steep rise in excise duty and endconsumer prices. The industry in Tamil Nadu was hit by the perverse ordering pattern of the state

During the year 201415, the Indian beer market grew 8%, to reach 280 million cases. . The strong beer segment continues to lead the growth and is now estimated to account for 85% of the beer market.

The threat to sales in some territories in the country arises due to changes in government regulations and the threat of prohibition which stems from constant changes in the political climate in the country.

Higher consumer prices following increases in duties and taxes by governments, often unreasonable, always impacts consumer demand of discretionary goods and alcoholic spirits have been no exception.

The recent financial performance has been mixed with the Prestige and above segment gross margins under pressure, driven by a combination of rising input cost inflation, price repositioning on key Prestige brands and restricted pricing freedoms

Performance this year virtually flat with less than 1% growth. Higher consumer prices, following increases in duties and taxes, always impacts consumer demand of discretionary goods, and alcoholic spirits have been no exception.

A very difficult year marked by imposition of prohibition in Bihar, Demonetization, political turmoil in Tamil Nadu and the Supreme Court directive on closure of all outlets within 500 meters of all highways across the country Bihar went dry in April, impacting the overall growth for the year by ~1.5%. The supply in Punjab was disrupted due to procedural technical issues. Significant rise in tax had put the burden of overall cost on states like Andhra Pradesh, Telangana, Karnataka and Maharashtra. Demonetisation impacted businesses by knocking off about 15%-20% of sales

In the second quarter, some relief came from a Supreme Court clarification that States could denotify highways passing through city limits, such that the ban would not apply to outlets located within city limits. This clarification resulted in a recovery of the industry and growth in sales. The Supreme Court’s highway ban, GST implementation and the uncertainty caused by route to market changes in certain states this year, disrupted the industry..

2%

one of the reasons why categories grew was that there was a base effect from lingering effects of demonetisation. Also, in our category, we had a highway ban a couple of years ago. When that went away, last year was very good. It was a good year with sales growing 10%, notwithstanding a low comparative. However, our business was impacted in the current quarter by excise policy changes in a couple of our key states

Page 7

VOLUME GROWTH LEVERS

Page 8

Indian Alcoholic Beverages Industry | Initiating Coverage Volume growth has been largely resilient for both the players despite the incessant price increases …USL volumes seem disrupted due to Whyte & Mackay sale in 2015 and shift towards franchise model for most of its popular brands.

UB has recorded a ~8% volume CAGR over the past 11 years…

CAGR: 1% 184

CAGR: 8% 125 75

82

2008

2009

133

139

151

145

137

147

163

101

2010

88

74

2011

2012

2013

2014

2015

2016

2017

2018

2019

2008

2009

112

100

124

121 94

2010

2011

Volumes Consumed (in mn cases)

2012

2013

2014

2015

93

90

2016

2017

79

82

2018

2019

Volumes Consumed (in mn cases)

Source: Company Filings and Spark Capital Research

Source: Company Filings and Spark Capital Research

Volumes have remained resilient despite the price increases over the years for UB… 20%

y = -0.2404x + 0.1244 R² = 0.1026

…so has been the case with USL, which we believe is on account of the strong underlying volume growth triggers in India 25%

y = -0.1792x + 0.1216 R² = 0.1352

20%

Price/mix increase

15% Price/mix increase

120

15%

10%

10%

5% 0% -5%

0% -5%

5%

10% Volume Growth (%)

Source: Company Filings and Spark Capital Research

15%

20%

25%

5% 0% -25%

-20%

-15%

-10%

-5%

0%

5%

10%

15%

20%

25%

Volume Growth (%) Source: Company Filings and Spark Capital Research

Page 9

Indian Alcoholic Beverages Industry | Initiating Coverage How much does per person in India consume? India per capita alcoholic beverages consumption trending in line with per capita GDP growth 2.00 2.5

1.50 1.7

1.8

1.00

1.6

1.8

1.7

1.8

1.9

3.1

3.0

3.1

3.0

3.0

3.5

3.0

3.0 2.5

1.9

1.7

1.5

2.7

1.4 0.9

1.1

1.0

1.2

2.0

1.6

1.4

1.3

1.2

1.5 1.0 0.5

1.6

1.6

1.5

1.5

1.5

1.4

1.1

1.0

1.1

0.8

0.7

0.7

0.6

0.5

0.5

0.5

0.5

0.4

0.4

0.4

0.4

0.4

0.3

0.3

0.3

0.4

0.4

0.50 0.00

0.0 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 Per Capita GDP (USD 000s)

Per Capita Consumption (Litres of pure alcohol per person per year)

Source: WHO data and Spark Capital Research

Given the lower alcohol content in beer, per capita consumption seems lower

2.3

2.6

2.8

2.9

2.9

2.8

2.8

Prices of alcohol content lower in India in comparison to other countries Average price 500 mls Beer in US$

2.8

Average price 500 mls Spirits in US$ 25.4

23.3

33.3

22.6

1.8

17.6

0.2

2007

2008

2009

2010

2011

2012

2013

2014

2015

2016

Per Capita Consumption (Beer) Source: WHO data and Spark Capital Research

Per Capita Consumption (Spirits)

4.2

1.0

1.2

1.4

1.2

1.3

1.2

3.1

3.5

2.7

5.4

4.1 Japan

0.2

France

0.2

Germany

0.2

UK

0.2

11.7

13.0

US

0.2

South Africa

0.2

Indonesia

0.2

China

0.1

India

0.1

11.6

Brazil

11.7

14.2

Argentina

1.4

Source: WHO data and Spark Capital Research

Page 10

Indian Alcoholic Beverages Industry | Initiating Coverage Alcobev industry Volume growth drivers in India ~45% of the population yet to come to legal drinking age in India, which is ~500mn consumer base… 55-64 Yrs 7%

65+ Yrs 6%

…which along with rise in affordability, consumption of alcoholic beverages to gain momentum 1%

00-14 Yrs 28%

Shift towards urban households to spur the consumption of IMFL and beer categories

7%

3%

30% 54%

78%

Median Age: 28 Years

21.9

2018

Aspiring (< Rs. 2.5 Lakhs) Affluent (> Rs. 25 Lakhs)

2016

Rise in number of bars/pubs in India a definitive sign of rising popularity of alcohol

22.5

2025

Source: Company Filings and Spark Capital Research

More women in the workforce should lead to more consumption spending from women

34,768

2016

2017

International Travellers (mn) Source: DGCA and Spark Capital Research

2018

2012

2013

112.6

2017

2018

106.5 103.9 101.3

31,013

2015

111.7 109.1

33,658 32,678

2014

Tier 4

41%

Middle (
Source: Company filings and Spark Capital Research

22.0

51%

2030

98.7

30,314

2013

Tier 2

Tier 1

Tier 3

31,789

2012

17%

13%

Rural

14-24 Yrs 18%

More international travelers from India getting a taste of the international alcoholic beverage brands

14.9

Metro

15% 2005

18.3

13% 5% 12%

43%

Source: Company filigs and Spark Capital Research

16.6

12%

10% 4% 10%

69%

25-54 Yrs 41%

20.4

12%

2014

2015

2016

2017

Bars/pubs ( Number of On-trade Establishments) Source: Industry Sources and Spark Capital Research

2012

2013

2014

2015

2016

Women in Workforce (mn) Source: Industry Sources and Spark Capital Research

Page 11

Indian Alcoholic Beverages Industry | Initiating Coverage The demographic advantage and rising income have always been there, so what has changed now? – It is the perception of Alcohol Consumption Alcoholic beverages has transformed from being a symbol of evil/bad things To being cool and fun!

Source: Youtube, News Reports and Spark Capital Research

It is no more the drink of the antagonist'…. Even the protagonist are spotted with alcohol, breaking the taboo of negativity around alcohol

Page 12

Indian Alcoholic Beverages Industry | Initiating Coverage Perception of Alcohol - through the lens of Bollywood Women who were portrayed as admonishers of alcohol have joined the party

Source: Youtube, News Reports and Spark Capital Research

Alcohol from being associated with deprived and solitude… has transformed into being associated with togetherness and happiness

Page 13

Indian Alcoholic Beverages Industry | Initiating Coverage Perception of Alcohol - through the lens of Bollywood Alcohol which was linked to failures and sorrows… is now more of a celebration drink

Source: Youtube, News Reports and Spark Capital Research

The Bollywood protagonists are no more ashamed or shy of being associated with Alcohol, signifying the underlying acceptance of alcohol over the years

Page 14

Indian Alcoholic Beverages Industry | Initiating Coverage We believe Alcohol industry volumes can grow in mid to high single digits over the next two years Alcohol Industry volumes to touch close ~7.9bn liters in 4 years led by…

10 7.9

8 Rs.bn

6 4

3.7

4.1

4.6

2010

2011

2012

4.9

5.2

5.3

5.2

5.5

5.8

2013

2014

2015

2016

2017

2018

6.7

2

0 2020e

2022e

Alcohol Industry Volume in Litres (mn) Source: Company Filings and Spark Capital Research

(1) Increasing population within the legal drinking age…

(2) Rise in per capita consumption of alcohol…

Population within legal drinking age

…and (3) consumers migrating from IMIL to IMFL

Per Capita Consumption (Pure Alcohol) 7.9 6.6

67%

21%

2019

65%

2.7

3.0

3.1

3.1

3.0

3.0

2018

2025

Population within legal drinking age Source: Company Filings and Spark Capital Research

43%

35%

25%

2022

3.0 30%

2014

7%

6%

69%

34%

2010 2011 2012 2013 2014 2015 2016 2020 2025 Per Capita Consumption (Alcohol) Source: WHO data and Spark Capital Research

Indian Made Indian Liquor (IMIL) Indian Made Foreign Liquor (IMFL)

Beer Others

Source: Company filings and Spark Capital Research

Page 15

STATE REGULATIONS AND THEIR IMPACT

Page 16

Indian Alcoholic Beverages Industry | Initiating Coverage State governments have a wide range of authority over the sale of alcoholic beverages in India, including a few damning ones Impact of the Regulation

Allocates License for production of Alcohol liquor in the state

Prescribes quota of production

Determines the Maximum Retail Price of the product

Imposes Excise Duty, Import Duty and Value Added Tax on the finished products

Controls the wholesale market (in several states)

Decides on the quantum of inventory at each retail outlet

Fixes the retail store timing and location

Assigns retail store licenses

Allocates license to pubs/bars & determines the timing of the sale

Determines the days of operations

Controls the import of liquor/Raw material from other states

Fixes the price for procurement of Sugar cane and retail price of loose Sugar

Has the rights to enforce a ban

1

2

3

4

5

6

7

8

9

10

11

12

13

Government (State) Source: State Excise departments & Spark Capital Research

Quantum of impact

High

Medium

Low

Page 17

Indian Alcoholic Beverages Industry | Initiating Coverage Different tax structures, frequent changes to the Route To Market (RTM) strategies, pricing regulations and high import tariff complicates the alcohol beverages market in India Market Structure

Overview

Pricing Control

Free / Open market

A business may apply for a license for a fee defined by the state government subject to license availability

Company has reasonable independence over price increases

Auction market

The license for sale of liquor is auctioned by the Government to the highest bidder on an annual basis based on an auction process

Company has to negotiate price increases with state appointed distributors

State owned / Government corporations

The government is the wholesaler and/or distributor who purchases directly from a company. Some states also have retail shops run by the government

Strict control on pricing by the state government

Prohibition

States where sales of liquor is prohibited

Not applicable

Jammu & Kashmir

Himachal Pradesh Chandigarh Punjab Uttaranchal Haryana Sikkim

Arunachal Pradesh

Uttar Pradesh Rajasthan

Assam

Bihar

Meghalaya

Nagaland Manipur

Jharkhand Gujarat

Madhya Pradesh

Tripura W Bengal

Mizoram

Orissa

Dadar and Nagar Haveli Maharashtra

Telengana

Andhra Pradesh Karnataka

State Owned/Government Corporations

Partly Banned

Free/Open Market

Auction Market

Puducherry Tamil Nadu

Banned Source: State Excise departments & Spark Capital Research

Page 18

Indian Alcoholic Beverages Industry | Initiating Coverage The advantages and disadvantages of dealing with the state owned/government corporations

The government controlling the market lends to a strong entry barrier for new players to come in as they will have to obtain several licenses before setting up operations.

The government controlling the market lends to a strong entry barrier for new players to come in as they will have to obtain several licenses before setting up operations.

The government operates on a stable distribution model that ensures product reaches retail shelf with minimal hindrance from the retailers.

The opaque government policies leads to a few players having an undue competitive advantage

Despite government controlling the distribution model, the retailers will need to be incentivised for 'Push based' offtakes.

As the government handles distribution, clamping down counterfeits/ smuggled is done rigorously preventing revenue loss to spurious liquor.

The government ensures payment on a robust basis which ensures that debtor days outstanding is under control.

Pricing control derails price/led growth which can severely impact margins especially during a inflationary raw material cycle.

Given the steep interstate taxes, a manufacturer will have to set up a manufacturing unit in the state for better economic prospects.

Source: Spark Capital Research

Page 19

Indian Alcoholic Beverages Industry | Initiating Coverage Importance of Alcohol for the state governments Given that alcohol contributes anywhere between ~10% to as high as ~30%, the revenues from sale of alcohol beverages is a key for the state governments 35%

% of alcohol revenues as a % of state generated tax revenues

30% 25% 20% 15% 10% 5% Assam

Jharkhand

Himachal

J&K

Chhattisgarh

Punjab

UP

MP

Orissa

Rajasthan

WB

Maharashtra

Haryana

Karnataka

Telangana

AP

Tamil Nadu

Kerala

0%

Source: State Excise departments & Spark Capital Research

With Alcohol industry being one of the key consumers of Extra Neutral Alcohol (ENA) derived from sugarcane, it is imperative for the states with large sugar cane farmers to allow local alcohol sales. 22.34

State wise Sugarcane cultivated Area (Lakh ha)

1.84

1.83

1.14

1.02

0.99

0.98

0.93

0.35

0.3

0.3

0.19

0.17

0.07

0.05

0.05

0.01

Tamil Nadu

Haryana

Uttarakhand

Andhra Pradesh

Madhya Pradesh

Punjab

Telangana

Assam

Chhattisgarh

Others

West Bengal

Jharkhand

Odisha

Rajasthan

Kerala

2.43 Bihar

Karnataka

Maharas

Uttar Pradesh

3.7

Gujarat

9.02

Source: State Excise departments & Spark Capital Research

Page 20

Indian Alcoholic Beverages Industry | Initiating Coverage Ban of Alcohol in states – Report Card Several states have lifted the ban that they had imposed as banning has resulted in loss of tax revenues, increase in consumption of spurious alcohol and smuggling of alcohol from the neighboring states. Tamil Nadu

Tamil Nadu

Rajasthan

Manipur

Orissa

Mizoram

Bihar

Lifted in 1971

Lifted in 1981

Partial Prohibition – Lifted in 1989

Selectively removed in 2002

Lifted in 1995

Lifted in 2014

Banned

Andhra Pradesh Phase out

Andhra Pradesh Lifted in 1997

Gujarat Banned

Lakshadweep Banned

Nagaland Banned

Uttar Pradesh

Kerala

Mizoram

Partial Prohibition – Lifted in 1998

Lifted in 2016

Banned

Haryana Lifted in 1998

Years – Liquor Ban in India Source: State Excise departments & Spark Capital Research

Alcohol prohibition has been manifested by several parties with limited success

12

Maharashtra, Goa, Arunachala Pradesh, Assam, Gujarat, Haryana, Himachal Pradesh, Jharkhand, Manipur, Tripura, Uttar Pradesh, Uttarakhand

Bihar’s loss of tax revenues has flown into the neighboring states. State Excise Revenues (Rs.bn)

Rs.bn

142.7

140.8

134.8

116.4

173.2

93.4 4

Madhya Pradesh, Punjab, Rajasthan, Chattisgarh

6.3

12

Source: Government of India & Spark Capital Research

Tamil Nadu (AIADMK), Kerala (CPI(M)), Andhra Pradesh (YSR Congress), Telangana (TRS), Karnataka (JDS), Orissa (BJD), West Bengal (TMC), Meghalaya (NPP), Mizoram (MNF), Nagaland (NDPP), Sikkim (SKM), Bihar (JDU)

2014

9.1

7.4 2015 Bihar

52.3

40.2

35.9 31.4

30.2 32.2

31.7

0.3 9.6

2016 Jharkhand

Uttar Pradesh

2017

8.4 0.0

2018

West Bengal

Source: State Excise departments & Spark Capital Research

Page 21

Indian Alcoholic Beverages Industry | Initiating Coverage Excise duty increases have been more systematic in the recent past rather than sporadic increases The state government’s have increased alcohol taxes offlate more from a perspective of gaining tax revenues rather than to reduce consumption of alcohol 80% 70% 60% 50% 40% 30% 20% 10% 0%

Pondicherry

Dadra

Manipur

Goa

Arunachala Pradesh

Assam

Tripura

Delhi

A&N

J&K

Haryana

HP

Kerala

Jharkhand

Mizoram

Chandigarh

Madhya Pradesh

Punjab

Sikkim

Rajasthan

Karnataka

Uttarakhand

UP

Maharashtra

Telangana

Andhra Pradesh

WB

Orissa

Chattisgarh

Tamil Nadu

Excise Duty as a % of gross income (beer)

Source: State Excise departments & Spark Capital Research

South India remains the key market for Beer in India, we understand that Karnataka and Maharashtra are the most lucrative markets from a net realization perspective. 150

145

145

140

120

120

120

110

110

109

100

100

95

20% 15%

65

90

Differential tax rates leads to differential pricing across the states.

10%

Source: State Excise departments & Spark Capital Research

Others

Delhi

Haryana

Punjab

Rajasthan

WB

Chattisgarh

Orissa

Telangana

Andhra…

UP

Kerala

Karnataka

Tamil Nadu

Chattisgarh

Karnataka

Uttarakhand

0% Maharashtra

Price of Kingfisher Strong Beer (Rs./650ml)

UP

WB

Orissa

Tamil Nadu

Maharashtra

Telangana

Rajasthan

Delhi

Haryana

Jharkhand

Kerala

Pondicherry

5%

% of beer volumes sold in India

Source: State Excise departments & Spark Capital Research

Page 22

Indian Alcoholic Beverages Industry | Initiating Coverage Additional Excise Duty in IMFL have been based on MRP across most of the markets The incentive to tax IMFL lower is to disincentivize the consumption of illicit and smuggled alcohol; thereby increasing tax revenues for the state. 80% 70% 60% 50% 40% 30% 20% 10% 0%

Arunachala Pradesh

Manipur

Dadra

Goa

Assam

Tripura

A&N

Delhi

Haryana

J&K

HP

Maharashtra

Mizoram

Chandigarh

Rajasthan

Jharkhand

Sikkim

Pondicherry

Punjab

Telangana

Andhra Pradesh

Madhya Pradesh

UP

Karnataka

Uttarakhand

WB

Kerala

Tamil Nadu

Chattisgarh

Orissa

Excise Duty as a % of gross income (IMFL)

Source: State Excise departments & Spark Capital Research

South Markets remain the key markets for IMFL sales too; IMIL more prevalent in North India

Price of IMFL whisky is as wide as being 2X to the price in a few states. 974

440

450

460

490

570

580

610

650

675

690

696

725

760

760

20% 15% 10% 5%

Price of Royal Challenge Whisky (Rs./750ml) Source: State Excise departments & Spark Capital Research

Others

Delhi

Haryana

Punjab

Rajasthan

WB

Chattisgarh

Orissa

Telangana

Andhra Pradesh

UP

Kerala

Karnataka

Maharashtra

Tamil Nadu

Karnataka

Tamil Nadu

Chattisgarh

Uttarakhand

Kerala

Telangana

Orissa

Maharashtra

Jharkhand

UP

Rajasthan

Pondicherry

WB

Haryana

Delhi

0%

% of IMFL volumes sold in India Source: State Excise departments & Spark Capital Research

Page 23

Indian Alcoholic Beverages Industry | Initiating Coverage With state government’s excising control over the Route To Market (RTM); distribution expansion has been constrained. Total outlet reach in India is limited only to 75000 outlets on account of regulatory curbs and state interferences

A&N

D&N

Manipur

Sikkim

Uttarakhand

Meghalaya

Tripura

J&K

Kerala

Pondicherry

Goa

Jharkhand

Chattisgarh

Delhi

Arunachala Pradesh

Orissa

HP

Assam

Telangana

Haryana

Madhya Pradesh

Andhra Pradesh

Tamil Nadu

Punjab

WB

Rajasthan

Karnataka

Maharashtra

Uttar Pradesh

16000 14000 12000 10000 8000 6000 4000 2000 0

Source: State Excise departments & Spark Capital Research

Despite the lower store count, throughput per store is higher than other consumer companies FY18 Sales

Throughput per store

Reach (mn outlets)

HUL

355,450

3,291

9.000

ITC (Gross Sales)

512,840

5,342

8.000

Nestle

112,923

2,689

3.500

Britannia

99,140

12,71

6.500

Asian Paints

168,246

233,675

0.060

United Spirits (Gross Sales)

283,631

315,146

0.075

United Breweries (Gross Sales)

141,398

157,109

0.075

Source: Company Filings & Spark Capital Research

Selling & Distribution and Freight expenses as a % of sales

24%

25%

27%

14%

13%

14%

2008

2009

2010

28%

16%

2011

26%

15%

2012

27%

14%

2013

United Breweries

28%

16%

2014

29% 20%

20%

11%

12%

2016

2017

15%

2015

18%

14%

2018

United Spirits

Source: Company Filings & Spark Capital Research

Page 24

Indian Alcoholic Beverages Industry | Initiating Coverage Excise duty has been on the steady increase for UB and USL Excise Per case for United Breweries has increased at a ~17% CAGR over the past 13 years… 418

…while for USL. excise duty per case has increased at a ~13% CAGR over the past 13 years

417

373

2,289 2,394

318 1,882

168 70

104

106

221

1,388

124 273

2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 Source: Company Filings & Spark Capital Research

Price Mix YoY increase/decrease (%)

20% 15% 10% 5% 0% 0%

5%

10% 15% 20% 25% Excise Duty YoY increase/decrease

Excise Duty inc/dec (%) Source: Company Filings & Spark Capital Research

435

466

903

…as well as in the case of USL

y = 0.5084x + 0.0171 R² = 0.847

25%

-5%

394

753

Source: Company Filings & Spark Capital Research

Price increases have been affected to pass on the Excise Duty increase for UB…

-5%

314

609

1,086

2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019

30%

35%

Linear (Excise Duty inc/dec (%))

40%

Price Mix YoY increase/decrease (%)

56

91

189

1,657

244

y = 0.7594x + 0.0052 R² = 0.479

40% 35% 30% 25% 20% 15% 10% 5% 0% 0%

5%

10%

15%

20%

25%

30%

35%

Excise Duty YoY increase/decrease

Excise Duty inc/dec (%)

Linear (Excise Duty inc/dec (%))

Source: Company Filings & Spark Capital Research

Page 25

UNITED BREWERIES LIMITED – INITIATING COVERAGE

Page 26

UNITED BREWERIES King of all times

CMP

Target Price

Rating

Rs.1,335

Rs.1,531

BUY

We initiate coverage on United Breweries Limited (UB) with a BUY rating and a TP of Rs. 1531. We have factored in for a revenue and earnings CAGR of ~13% and ~20% from FY19-21 to arrive at our FY21e EPS of Rs. 30.6. We believe the ~13% Revenue CAGR over the next two years will be a function of ~10% volume growth and ~3% price/mix increase. Beer industry volume growth should continue to outpace the overall alcoholic industry volume growth while UB is anticipated to outgrow the category led by it's market leading brand, Kingfisher (KF). The network of 30 manufacturing facilities (owned and leased) spread across 20 states is a definitive competitive moat considering the interstate hindrances in the transfer of alcoholic beverages from one state to another. We decipher that Heineken NV who holds ~46% of UB is yet to take complete control of the Indian associate. We note that Heineken NV taking complete control of UB could lead to several growth and margin levers being unlocked over the medium term. New launches from the global portfolio of Heineken NV into India over the medium term should aid UB in addressing their product portfolio gap at the top of the pricing pyramid by venturing into the emerging craft beer segment. Excise duty changes should continue to be passed on to the consumers, however, inflation in key raw material such as barley and glass should keep gross margins subdued over the near term. Valuing the stock at 50x (10% discount to its 10 years historical P/E), we arrive at our TP: Rs.1531.

INITIATING COVERAGE 2nd July 2019 Industry

CONSUMER

CMP

Rs.1,335

Target Price

Rs.1,531

Key Stock Data Bloomberg

UBBL IN

#1 Beer industry volumes to be driven by strong underlying macro growth levers: ~8% beer industry volume CAGR to be driven by favourable demographics, rising urban population, the emergence of microbreweries and beer’s resonance with the consumption hot zones of South & West India. Beer to be preferred over other alcohol for its convenience cost advantage and lower alcohol content

Shares o/s

264mn

Market Cap

Rs. 358bn

#2 A strong product portfolio should enable UB to consolidate its market leadership: UB holds ~54% volume market share of the beer market in India with 14 major product offerings straddled across the malt liquor and pale lager segments. Apart from the flagship KF brand, UB also boasts of several region-specific brands that were acquired over time.

52-wk High-Low

#3 Kingfisher’s brand recall to aid UB to maintain its market dominance: The brand Kingfisher, synonymous with beer in India has ~47% of volume market share and contributes to ~90% of UB’s market share. The strong brand has aided UB to launch several brand extensions under the KF umbrella over the years. The 3 popular offerings of KF are its Strong, Premium Lager and Ultra variants.

Rs. 1,494-1,030

3m ADV

Rs. 621mn

Index

NSE100 Sep’18 Dec’18 Mar’19

Heineken NV

43.7

43.7

46.5

#4 Established manufacturing setup gives UB a natural hedge: UB has 30 manufacturing locations in India vs 17 of Anheuser-Busch InBev and 7 of Carlsberg India. Given the rigorous state legislations for manufacturing licensing set up and the hindrances involved with interstate transfers of Alcoholic beverages, we ascertain that the entrenched manufacturing presence is a definitive moat for UB.

Vijay Mallya

13.8

13.8

11.2

Enforcement Directorate

16.2

16.2

16.2

#5 Leveraging the global portfolio of Heineken NV: There have been only two brands from the stable of Heineken NV launched in India, we believe Heineken NV will want to take complete control of UB before spreading its global portfolio into India, which we anticipate to happen over the near term. Launches from the global portfolio will also lead to premiumization by venturing into niche categories such as craft and fruit beer.

Institutions

20.6

20.4

20.2

Public

14.8

5.9

5.9

#6 Margins to be under pressure over the near term: We anticipate most of the excise duty hike if any to be passed on to the consumers as the category has been demand inelastic over the past few years. However, inflation in key raw material costs is anticipated to pressurize margins over the near term.

Pledge

13.3

13.3

10.5

Financial Summary Year

Revenues (Rs. mn)

EBITDA (%)

PAT (Rs. mn)

EPS (Rs.)

P/E(x)

EV/EBITDA (x)

RoE (%)

2019P 2020E 2021E

64,754 72,133 82,078

17.6% 17.5% 18.1%

5,629 6,633 8,096

21.3 25.1 30.6

63 53 44

31 28 23

19% 19% 20%

find SPARK RESEARCH on (SPAK )

RESEARCH ANALYSTS GNANASUNDAR [email protected] +91 44 4344 0062 Page 27

United Breweries Ltd I Initiating Coverage I Rating: BUY I TP:Rs.1531 Company Factsheet Corporate Factsheet Company Background

United Breweries was founded in 1915 with 5 breweries. The company was then bought by late Mr. Vittal Mallya in 1947. Setting up its headquarter in Bangalore (Bengaluru) in 1950, the company launched its iconic Kingfisher brand in 1978. Heineken NV acquires control over Scottish & Newcastle and Heineken becomes promoter of UB in 2009. Heineken along with its subsidiaries owns ~47% of United Breweries as per March 2019 filings.

Parent Background

Heineken N.V is a dutch brewing company founded in founded in 1864 by Gerard Adriaan Heineken in Amsterdam. As of 2017, Heineken owns over 165 breweries in more than 70 countries. It produces 250 international, regional, local and speciality beers and ciders. Heineken is the second largest brewer in the world. Heineken organises the company into five territories which are, Western Europe, Central and Eastern Europe, The Americas, Africa and the Middle East, and Asia Pacific.

Top Management

Mr. Shekhar Ramamurthy – Managing Director – He has been with the UB Group since 1989 and has been in several roles across the Group. He joined in the Corporate Planning function and soon thereafter moved into a Marketing role with what is now United Spirits Limited. He spent over 9 years in the Spirits business in Marketing and Sales roles before joining United Breweries Limited as the Head of Marketing and Sales in October 1999. He took on greater responsibilities as the Deputy President of UBL from October 2007 and then as the Joint President of the company from September 2012 till taking over as the Managing Director on August 01, 2015. Mr. Steven Bosch – Director & CFO - Mr. Bosch has been on the board of UBL since September 01, 2016. Before joining Heineken, he was a Vice President with the Royal Bank of Scotland, based in Hong Kong. As a Director in Heineken International’s Global Business Development team, Mr. Bosch has led a wide range of projects including acquisitions, divestitures, mergers, restructuring and business due diligence projects. Mr. Kiran Kumar - Chief Sales Officer, Mr. Manmohan S. Kalsy - Chief Human Resource Officer, Mr. Cedric Vaz - Chief Supply Chain Officer, Mr. Samar Singh Sheikhawat - Chief Marketing Officer, Mr. Perry Goes - Chief Strategy & Business Analytic Officer, Mr. Ramesh Vishwanathan - Chief New Business Officer, Mr. Govind Iyengar - Senior Vice President - Legal & Company Secretary

Distribution Footprint

Total Reach: ~75000 outlets

Own Manufacturing Facilities

Leased Manufacturing Facilities

Andhra Pradesh – Srikakulam, Telangana – Mallepally & Kothlapur, Goa – Ponda, Kerala - Cherthala & Palakkad, Karnataka - Mangalore, Nelmangala & Mysore, Odisha – Khurda, Haryana – Dharuhera, Tamil Nadu – Kuthambakkam & Aranvoyal, Punjab – Ludhiana, West Bengal – Kalyani, Rajasthan – Chopanki & Shahjahanpur and Maharashtra - Taloja & Aurangabad Uttar Pradesh – Aligarh, Daman And Diu – Daman, Madhya Pradesh – Indore, Jammu And Kashmir – Samba, West Bengal – Hoogly, Assam – Gauhati, Sikkim – Rangpo, Meghalaya – Shillong, Jharkhand – Ranchi and Andhra Pradesh – Nellore

Key Brands volume share Kingfisher Premium Strong (35%), Kingfisher Premium Lager (11%), Bullet (2%), Heineken (0.6%) and Kalyani Beer (0.5%), (as per estimates) Corporate Structure

Maltex Malsters Limited (51% Holding - subsidiary) and Kingfisher East Bengal Football Team Private Limited (49.99% holding – Associate)

Auditors

S.R. Batliboi & Associates LLP, Chartered Accountants Page 28

United Breweries Ltd I Initiating Coverage I Rating: BUY I TP:Rs.1531 Brand Launch Timeline and Manufacturing units There have been 8 new launches over the past decade primarily under the Kingfisher brand and cross pollination from Heineken NV.

"Exports Beer"

1944 1960

Kingfisher Premium Lager

Punjab Uttaranchal

Zingaro Strong

Uttar Pradesh Assam

Rajasthan

2008 Kingfisher Ultra

Jharkhand Gujarat

Madhya Pradesh

2012

Tripura W Bengal

Orissa

Kingfisher Ultra Max

Maharashtra

Telangana

2016 Kingfisher Buzz

Karnataka

Andhra Pradesh

Own Manufacturing Units

2018 Tamil Nadu

2018 Source: Company fillings, Spark Capital

Meghalaya

Bihar

2016 Amstel

Kingfisher Canned Beer

Arunachal Pradesh

2015 Kingfisher Storm

Himachal Pradesh

1999

2009 Heineken Brewed by UB

Jammu & Kashmir

Haryana

2000 Kingfisher Blue

Kalyani Breweries

1978 1981

Kingfisher Strong

United Breweries owns 21 own manufacturing units across different states and has 9 contract based units taking the total to 30 units

Kingfisher Radler

Franchise Units

Kerala

Source: Company fillings, Spark Capital

Page 29

United Breweries Ltd I Initiating Coverage I Rating: BUY I TP:Rs.1531 Strong Set of brands – (1) Under the Kingfisher umbrella, (2) Regional oriented brands, (3) From the Heineken portfolio Launched in 1978, Kingfisher Premium is one of the first brands launched in the mild beer category under the Kingfisher umbrella. It is available in 650ml bottles, 330ml pints, 500ml regular cans and 330ml slim cans.

Kingfisher Strong, India's largest selling beer, is brewed from the finest malted barley and hops. he brand symbolizes the values of strength, style, youthfulness and fun. In essence, the brand is a symbol of modern India.

Launched in 2009, Kingfisher Ultra Lager is the foremost premium beer brand on offer in the country. Launched first in Bombay, Bangalore, Delhi and Calcutta, Kingfisher Ultra is now widely available all across India.

Launched in 2015, Kingfisher Ultra Max is a crisp, refreshing strong beer with pleasant aroma and after taste. A slow-brewing and prolonged maturation process, using the finest imported Pilsen malt, Kingfisher Ultra Max is smooth and easy to drink.

Launched in 2017, Kingfisher Storm is a new strong beer from the house of United Breweries Ltd. It is part of the flagship brand Kingfisher the largest, most loved, trusted and enjoyed beer brand in India.

Kingfisher Buzz is a malt based, flavoured alcoholic beverage. It comes in 2 flavours: Berry and Lychee. Launched in 2016, Kingfisher Buzz is currently available in Bangalore, Delhi, Mumbai, Goa, Pune

Bullet has been a favourite beer brand of the people of Rajasthan ever since its launch decades ago. The bold strategy of consumer friendly pricing has made the brand an undisputed leader in Rajasthan.

Cannon 10000 is a legacy brand of Maharashtra which has been in existence for almost four decades. It has a very strong market presence in the marathwada region of Maharashtra.

Kalyani Black Label is an iconic brand in West Bengal. KBL, as it is fondly called, is an established brand with a differentiated taste and has its footprints across many eastern states, offering great value for money.

UB Export is Karnataka‘s home grown brand for decades. People of Karnataka have grown up with UB Export, and love the brand for its authenticity, taste and good quality. It is a high quality product at a affordable price.

Zingaro Super Strong was launched in the year 2000. Zingaro was established as a light hearted super strong premium and refreshing beer that unravels the 'real person in consumer' for moments of uninhibited fun.

London Pilsner is the iconic beer of Mumbai and has a loyal following in Mumbai, Pune and other parts of Maharashtra, despite the launch of a multitude of beer brands from multinational companies.

Launched in 2008, Kingfisher Blue is brewed for the ones who seek adventure and are of the outdoors kind.

Kingfisher Radler is a soft drink with 0% alcohol! With 100% natural ingredients and 30% less sugar, this non alcoholic drink is available in three flavours of Ginger Lime, Lemon and Mint Lime.

Heineken, one of the fastest growing brands in UBL’s portfolio, has established itself as India’s most premium brand.

Amstel is a slow brewed and extra matured lager, internationally appreciated for its quality and enjoyed in over 100 countries across the globe.

Source: Company fillings, Spark Capital

Page 30

United Breweries Ltd I Initiating Coverage I Rating: BUY I TP:Rs.1531 Financial Profile Revenues are expected to grow at ~13% revenue CAGR over the next two years…

…led by high single digit volume growth and low single digit price/mix growth

~13% 82 ~8% ~11% 31

36

39

48

47

42

65

56

13%

72 20%

47

24% 6%

6% 5%

18%

7% 11%

6%

9%

4%

-1% 2011

2012

2013

2014

2015

2016

2017

2018

2019

2020e

2021e

2011

2012

2013

Revenues (Rs.bn)

133

31

146

31

192

10%

13%

2018

2019

4%

3%

9%

10%

2015

2016

2017

2020e

2021e

Price Mix increase (%)

Source: Company Filings & Spark Capital Research

Gross profit per case to increase only marginally due to near term raw material cost headwinds 182

3%

-3%

Volume Growth (%)

Source: Company Filings & Spark Capital Research

162

2014

11%

179

173

184

189

190

PAT however is anticipated to grow ~20% led by ~10% volume growth, 3% price mix increase and ~7% from cost savings.

197

~20%

~2%

8.1

34

43

43

46

44

55

11

10

12

16

18

20

16

2011

2012

2013

2014

2015

2016

2017

2018

EBITDA Per case

Source: Company Filings & Spark Capital Research

67

6.6

~21%

5.6

~17%

~4%

3.9 24

Gross Profit Per case

63

62

PAT Per case

31

33

37

2019

2020e

2021e

~9%

1.4

1.4

1.7

2011

2012

2013

2.3

2.6

3.0

2014

2015

2016

2019-21E CAGR

2.3

2017

2018

2019

2020

2021

PAT Source: Company Filings & Spark Capital Research

Page 31

United Breweries Ltd I Initiating Coverage I Rating: BUY I TP:Rs.1531 THESIS

#1 Beer industry volumes should continue to outpace the alcohol industry led by strong underlying growth levers

#2 A strong product portfolio should enable UB consolidate its market leadership

#3 Kingfisher’s strong brand recall to aid UB maintain its market dominance

#4 Leveraging the global portfolio of Heineken by cross pollinating several global brands into India

#5 Established manufacturing setup gives UB a natural hedge over its competitors

#6 Premiumization opportunities galore at the upper end of the pricing pyramid #6 Price/mix growth to be a function of Excise Duty increases and raw material cost inflation

#7 Raw material cost inflation headwinds to impact near term gross margins. Page 32

United Breweries Ltd I Initiating Coverage I Rating: BUY I TP:Rs.1531 #1 Beer industry volumes should continue to outpace the alcohol industry volumes led by strong underlying growth levers Alcohol Industry volumes have grown at a ~8% CAGR over the past 12 years, the growth in between was severely impacted in 2015 due to the highway liquor sale ban,

~8% ~3% ~9% ~13%

3.7

5.2

5.3

5.2

3.3

4.9

3.0

4.6

2.3

2.6

4.1

5.5

2006

2007

2008

2009

2010

2011

2012

2013

2014

2015

2016

2017

5.8

2018

6.7

2019e

7.9

2020e

Alcohol Industry Volume (bn litres) Source: Industry Sources, DRHP filings, company filings and Spark Capital Research

Beer industry growth throughout has been better than the overall industry growth, we anticipate the growth over the next two years also to outpace the industry growth.

10% ~4%

~11% ~14%

1.0

1.2

1.3

1.5

2006

2007

2008

2009

2.1

2.4

2.6

2.7

2.5

3.0

1.9

2.7

1.7 2010

2011

2012

2013

2014

2015

2016

2017

2018

3.6

2019e

4.3

2020e

Beer Industry Volumes (bn litres) Source: Industry Sources, DRHP filings, company filings and Spark Capital Research

Page 33

United Breweries Ltd I Initiating Coverage I Rating: BUY I TP:Rs.1531 #1 Beer industry volumes should continue to outpace the alcohol industry volumes led by strong underlying growth levers COST

CONVENIENCE

LIGHTER OPTION

MRP (Rs.1000ml in Karnataka)

Alcohol by volume

With Indians seldom consuming alcohol ‘on the rocks’, there are a lot pre-mixes that are needed for other alcohol drinks

1298

223 Kingfisher Strong Beer

Royal Challenge Premium Whisky

Beer is much cheaper than any other alcohol in the market, making them most lucrative for new consumers

MORE PREFERRED ON A OUTING On-trade Volume as a % of offtrade volume 27%

Beer

22%

Spirits

URBAN ORIENTED

8%

Kingfisher Strong Beer

Royal Challenge Premium Whisky

Given the lower alcohol content in Beer, it is largely preferred in lighter outings

WEATHER DRIVEN CONSUMPTION

Consumption in Bengaluru as a % of Karnataka consumption 47% 36%

Beer

41%

IML

Max/min temperature in celcius North India

28/17

West India

32/20

East India

30/20

South India

32/22

Beer has greater volume emerging from the on trade channel in comparison to other spirits

Beer more of a urban drink than the other spirits, who still have ~2/3rd of their revenues from non-urban

Beer more popular in the tropical South and West India.

EMERGENCE OF MICRO BREWERIES

#GIRLSWHODRINKBEER

YOUNGER & COOLER

Number of micro-breweries 120

Why Indian women are sharing beer selfies

20 2014

2019

Micro breweries have started attracting greater number of audience given their tastier appeal.

Given the lower alcohol content in Beer, it is preferred by women more often than any other Alcobev

Beer is perceived to be more ‘cooler’ while a whisky is considered to be more sophisticated Page 34

United Breweries Ltd I Initiating Coverage I Rating: BUY I TP:Rs.1531 #2 A strong product portfolio should enable UB consolidate its market leadership UB has a strong set of brands that enables UB to have a commanding ~54% volume market share of the beer market… Strong

Mild

Strong

Mild/ Strong

Mild

Lager

Strong Strong Strong Strong Strong

8.0%

34.8%

8.0%

4.8%

7.5%

7.5%

11.0%

2.2%

1.3%

5.0%

5.0%

1.2%

1.0%

Apart from the national brands, UB also has a plethora of regional legacy brands that command a healthy fan following in specific markets.

7.8%

8.0%

7.5%

8.0%

BRAND 1.0%

0.6%

0.2%

0.1%

0.1%

FOCUS MARKET Volume Share

Rajasthan

Mumbai

Karnataka West Bengal Maharashtra

Alcohol Content

Source: Industry Sources, DRHP filings, company filings and Spark Capital Research

Source: Company filings and Spark Capital Research

The 4 strong brands in Kingfisher strong, Premium lager, Bullet and Kingfisher Ultra feature among the top 10 beer brands in the country and together command ~50% of the market both from a volume and value perspective. Brand Kingfisher Strong Tuborg Kingfisher Premium Lager Haywards 5000 Knock Out Bullet Carlsberg Budweiser Kingfisher Ultra Hunter

Company United Breweries Carlsberg United Breweries AB-Inbev AB-Inbev United Breweries Carlsberg AB-Inbev United Breweries SOM

Volume Share 35% 12% 11% 8% 6% 2% 2% 2% 1% 1%

Value Share 34% 11% 10% 7% 7% 2% 2% 3% 2% 1%

Alcohol Content 8.0% 6.5% 4.8% 7.0% 7.8% 7.5% 5.0% 6.5% 5.0% 7.5%

Style Malt Liquor Pilsner Pale Lager Malt Liquor Malt Liquor Malt Liquor Pilsner Pale Lager Pale Lager Malt Liquor

Source: Industry Sources, DRHP filings, company filings and Spark Capital Research

Page 35

United Breweries Ltd I Initiating Coverage I Rating: BUY I TP:Rs.1531 #2 A strong product portfolio should enable UB consolidate its market leadership The two common types of beer in India are the Malt Liquor based strong beers (85% of the market) with alcohol content of ~8% and Pale lager, UB has a strong set of brands across both these varieties, new varieties such as Ale and craft based beginning to gain traction in India PALE LAGER

OTHERS

Description

MALT LIQUOR

ALE

• • • • • •

Bullet Lager Charger Lager Kalyani Kingfisher Premium Lager UB Export Zingaro Lager

• • • • • •

Kalyani Srong Kingfisher Strong Kingfisher Ultra Marco Polo Lager Turbo Zingaro

•

Hi Five

• • • • • •

Budweiser Castle Lager Corona Fosters Lager Haywards SABMiller

• • • •

Armstrong Beer Haywards Strong Beer Knock Out Beer Royal Challenge Beer

• •

Blazer Beer Hoegaarden

• •

Carlsberg Tuborg Mild

• • • • • • • • • • •

Bombay Khoday Golden Peacock Thunderbolt San Miguel Black Fort Woodpecker Arlem Mild Asahi Peroni Birra

• • • • • •

Godfather Punjab 10000 Golden Eagle Vorion Hunter Power 1000

• • • •

Kangaroo Beer Black Knight Beer Miller Beer Mount Shivalik Beer

Lager is a type of beer conditioned at low temperatures. Lagers can be pale, amber, or dark.

Source: Industry Sources, DRHP filings, company filings and Spark Capital Research

Malt liquor is a strong lager or ale in which sugar, corn or other adjuncts are added to the malted barley to boost the total amount of fermentable sugars in the wort.

Ale is a type of beer brewed using a warm fermentation method, resulting in a sweet, full-bodied and fruity taste. Page 36

United Breweries Ltd I Initiating Coverage I Rating: BUY I TP:Rs.1531 #3 Kingfisher’s strong brand recall to aid UB maintain its market dominance Over the years, Kingfisher brand has grown to dominate UB’s offerings with several brand extensions. Kingfisher contributes to ~90% of UB’s beer marketshare. Kingfisher Volume Share (%)

17

18

1990

1991

44

41

41

37

34

32

UB Group Volume Share (%)

45

42

41

23 19

1992

1993

1994

21

21

1995

1996

25

23

23

1997

1999

1998

25

25

2000

2001

32

33

34

35

2002

2003

2004

2005

55

51

51

40

39

34

21

52

50

48

48

36

36

2006

2007

2008

54

45

44

45

2010

2011

2012

40

37

55

50

47

2009

53

53

50

50

44

45

44

45

2013

2014

2015

2016

52 47

2017

Source: Industry data, UB annual report archive and Spark Capital Research

Several extensions riding on the brand Kingfisher’s strength over the years Brand Extensions

Taste

1978

Kingfisher Premium Lager

1981

Kingfisher Canned beer

Pale Lager

1999

Kingfisher Strong

Malt Liquor

2008

Kingfisher Blue

Malt Liquor

2009

Kingfisher Ultra

Pale Lager

2015

Kingfisher Ultra Max

Malt Liquor

2016

Kingfisher Buzz

2017

Kingfisher Storm

Malt Liquor

2018

Kingfisher Radler

0% alcohol

Source: Company filings and Spark Capital Research

Though direct advertisements are banned, Kingfisher continues to engage with consumers through several surrogate advertisements.

Pale Lager

NA

Source: Kingfisher campaigns and Spark Capital Research

Page 37

United Breweries Ltd I Initiating Coverage I Rating: BUY I TP:Rs.1531 #4 Leveraging the global portfolio of Heineken by cross pollinating several global brands into India India contribution to the overall pie is miniscule as of now; currently India profits reported as an associate entity.

Heineken has been steadily increasing its share in United Breweries

Gross Revenues (Rs.bn)

2018

2017

45%

Heineken NV

2359

2274

40%

United Breweries

141

122

% of Heineken Revenues

6%

5%

50%

Heineken ownership share in United Breweries

35% 30%

37.4%

37.4%

38.9%

43.0%

43.7%

43.7%

46.5%

25%

EBITDA (Rs.bn)

2018

2017

20%

Heineken NV

420.2

429.7

United Breweries

11.4

9.0

% of Heineken EBITDA

3%

2%

Jan-13

Jan-14

Jan-15

Jan-16

Jan-17

Jan-18

Jan-19

Heineken at the forefront to buy out erstwhile promoter shares (currently remaining ~8%) that are held by the Enforcement Directorate (ED). Sale likely to conclude soon as the lenders are pressurizing ED to release the erstwhile promoter shares to enable them to sell and get their dues back. Source: Company Filings & Spark Capital Research

“Once the Dutch company gets over 51 per cent stake, it is likely to make several changes to the management structure. Once the current managing director’s tenure ends in another couple of years, it is likely to post a general manager to run the company’s operations in India. Most of the subsidiaries of Heineken across the globe have general managers heading the domestic operations.” News Snippets – September 2018 Potential of Heineken Brands in India “Price is not the chief determinant for this segment – provenance, story, heritage, beer experience etc is. Europe is associated with the best quality beers in the world, especially Belgian beers. Affligem is Belgian, Desperados is French and Edelweiss is Austrian" Mr. Samar Singh Sheikhawat” erstwhile Chief Marketing Officer of United Breweries

Source: Company Filings & Spark Capital Research

Two of the Heineken brands are brewed and sold in India through United Breweries Nature of Transaction Purchase of materials Purchase of materials Technical service fees Royalty paid Consultancy fees paid Consultancy fees paid Consultancy fees paid Reimbursements paid Reimbursements paid Reimbursements paid Dividend accrued/paid on equity shares Dividend accrued/paid on equity shares Dividend accrued/paid on equity shares Trade payables Trade payables Trade payables

Company Heineken Supply Chain B.V. Heineken Asia Pacific Ltd. Heineken International B.V. Heineken Brouwerijen B.V. Heineken Supply Chain B.V. Heineken International B.V. Heineken Brouwerijen B.V. Heineken International B.V. Heineken Brouwerijen B.V. Heineken Ceska Republika Scottish & Newcastle Ltd Heineken UK Limited Heineken International B.V. Heineken International B.V. Heineken Brouwerijen B.V. Heineken Supply Chain B.V.

FY16 0.4 0.1 60.0 25.6 6.0

23.1 0.0 2.5 90.0 8.5 12.7 55.8 6.9 0.0

FY17 0.4 0.0 60.0 31.7 5.4 1.4 0.0 35.3 1.2 4.1 103.5 9.8 17.6 48.0 7.2 1.4

FY18 0.8 8.0 60.0 50.3 7.2 1.2 0.2 32.7 0.0 0.5 103.5 9.8 19.7 52.1 11.4 3.6

Source: Company Filings & Spark Capital Research

Page 38

United Breweries Ltd I Initiating Coverage I Rating: BUY I TP:Rs.1531 #4 Leveraging the global portfolio of Heineken by cross pollinating several global brands into the Indian market. International Brand

Started (Year)

Category

Taste

Brand Extensions

Countries

Origin Country

Amstel

1870

Beer

Pilsner

Amstel Light, Amstel Lager, Amstel Premium Pilsener, Amstel Bright and Amstel Radler

over 100

Netherlands

Desperados

NA

Beer

Flavored

Tequila based beer

NA

France

Sol

1899

Beer

Pale Lager

Sol Cero, Sol Limón y Sal, Sol Clamato, Sol Michelada and Sol Oscura.

over 60

Mexico

Tiger

1932

Beer

Pale Lager

Tiger Crystal, Tiger White, Tiger Black

50

Singapore

Birra Moretti

1859

Beer

Pale Lager

na

over 40

Italy

Affligem

1950

Craft

Ale Pale

Affligem Blonde, Affligem Double, Affligem Triple

NA

Belgium

Lagunitas

1993

Craft

Pale Lager

na

NA

United States

Mort Subite

NA

Variety Beer

Flavored

Kriek, Whitte, Gueuze, Botanic, Oude Gueze,

NA

Belgium

Strongbow Apple Ciders

NA

Cider Brands

Apple Cider

Gold Apple, Red Berries, Medium Dry, Original Dry, Elderflower, Dark Fruit, Rosé Apple

NA

England

Orchard Thieves

NA

Cider Brands

Fruit Flavors

na

NA

New Zealand

Stassen

1895

Cider Brands

Apple Cider

na

NA

Belgium

Bulmers

1887

Cider Brands

Apple Cider

na

NA

Australia

Old Mout

1954

Cider Brands

NA

na

NA

NA

Blind Pig

NA

Cider Brands

fruit and liquor

na

NA

NA

Source: Heineken Global Website & Spark Capital Research

Page 39

United Breweries Ltd I Initiating Coverage I Rating: BUY I TP:Rs.1531 #5 Established manufacturing setup gives UB a natural hedge over its competitors Given the complexity involved with interstate goods transfer and their taxation in India, manufacturing plants across several states is a definitive advantage.



Assam Orissa



Chhattisgarh



East 12%





West Bengal



Meghalaya



Jharkhand



Sikkim



South 35%

West 31% North 22%



Bihar Maharashtra

Given the warmer climate in South and West India, they remain the key markets for beer in India







Goa



Daman



Madhya Pradesh



Punjab



Haryana



UP



Rajasthan





Source: Industry Filing & Spark Capital Research

Karnataka and Maharashtra are the key state by revenue and profitability for United Breweries

 



 

J&K 

Himachal Pradesh

Karnataka



Telangana





Kerala





Pondicherry



Tamil Nadu



Andhra Pradesh Source: Company Website & Spark Capital Research





 

 Source: Industry Filing & Spark Capital Research

Page 40

United Breweries Ltd I Initiating Coverage I Rating: BUY I TP:Rs.1531 #5 Established manufacturing setup gives UB a natural hedge over its competitors All the three global players have an armor of strong brands in their global portfolio; global fight could start ensuing in the Indian soils. Heineken Global portfolio

Anheuser-Busch InBev Global portfolio

 Amstel

 Budweiser

 Hero

 Corona

 Hoegaarden

 Tiger

 Stella Artois

 Jupiler

 Birra Moretti

 Aguila

 Labatt Blue

 Beck's Blue

 Leffe

 Mort Subite

 Bogota Beer

 Michelob ULTRA

 Strongbow Apple Ciders

 Boxing Cat Contender Extra Pale Ale

 Modelo Especial

 Brahma

 Patagonia 24.7

 Bud Light

 Pilsen

 Canvas

 Pirate Life Throwback IPA

 Cass

 Quilmes

 Castle Lager

 Salva Vida

 Cusqueña Dorada

 Skol

 Eagle Lager

 Victoria

 Goose Island Bourbon County Brand Stout

 Victoria Bitter

 Harbin

 Wäls Brut

 Desperados

 Sol

 Affligem  Lagunitas

 Orchard Thieves  Stassen  Bulmers  Old Mout  Blind Pig

Carlsberg global portfolio  Tuborg  Somersby cider  Kronenbourg  Grimbergen  Holsten Source: Global Website of the respective companies

Page 41

United Breweries Ltd I Initiating Coverage I Rating: BUY I TP:Rs.1531 #6 Premiumization opportunities galore at the upper end of the pricing pyramid UB has brands that are straddled across the pricing pyramid with… Marco Polo

90

London Pilsner

90

…the top end Heineken and Kingfisher Ultra brands gaining value share 10.0

650ml

Kingfisher Buzz (330ml)

100

Kalyani Black Label

100

5.0

0.0 2012

Bullet

100

Canon 10000

100

Zingaro UB Export

2014 Heineken

2015

2016

2017

2018

KF Ultra

Source: Industry Sources & Spark Capital Research

Craft as a % of the overall market is currently miniscule in India 120 India

99%

1%

120

Amstel

140

Kingfisher Premium Lager

140

Kingfisher Storm

145

Kingfisher Strong

145

Kingfisher Ultra

2013

USA

13%

87%

Craft as a % of overall beer market

Others

Several craft beer brands in the global Heineken portfolio that can be launched to take advantage of the rise in craft consumption

175

Brand

Year of origin

Type

Taste

Affligem

1950

Craft

Ale Pale

Kingfisher Ultra Max

190

Lagunitas

1993

Craft

Pale Lager

Heineken

190

Mort Subite

NA

Variety Beer

Flavored

Source: Company Website & Spark Capital Research

Source: Company Website & Spark Capital Research

Page 42

United Breweries Ltd I Initiating Coverage I Rating: BUY I TP:Rs.1531 #6 Premiumization opportunities galore at the upper end of the pricing pyramid United Breweries

Carlsberg

AB InBev

Vorion 6000

Kingfisher BLUE Premium POPULAR PRICE RANGE : < Rs.22/100 ml)

Kingfisher Draught Beer

Knock Out

UB Export

Fosters

Kalyani black label

Others

Tuborg Booster

Buller Super Strong

Haywards 5000 Royal Challenge

Zingaro

Kangaroo Beer Bombay Other Beer Thunderbolt Punjab 1000 Meakin 10000 Black Knight Super Strong Power 1000

Kingfisher Premium Lager

Meakin 10000

Kingfisher Strong Premium PREMIUM PRICE RANGE : btw Rs.( 22 40/100 ml)

Black Knight

Kingfisher Ultra Max

Tuborg Green

Kingfisher Ultra Lager Beer

Tuborg Strong Premium

Heineken

Carlsberg All Malt Premium

Canon 10000

Carlsberg Elephant Strong

Fosters Lager Budweiser Premium Budweiser Magnum Strong

Miller ace strong Miller High Life Godfather Khajuraho Super Strong

Amstel

Vorion 12000

London Pilsner

Hunter Corona Extra Corona Light

LUXURY PRICE RANGE : >Rs.59/100 ml)

Corona sunsets Hoegaarden

Bira 91 St. Feuillien Leffe Stella Artois Premium Asahi Japan Fuller's London Murphy's Irish Stout-

Source: Madhuloka & Spark Capital Research

Page 43

United Breweries Ltd I Initiating Coverage I Rating: BUY I TP:Rs.1531 #6 Price/mix growth to be a function of Excise Duty increases and raw material cost inflation Gross MRP to increase at a ~4% CAGR over the next two years led by price increases…

423 216

243

286

327

321

497

800

824

679

621 447

769

Excise Duty Increase/decrease

748

…historically price increases have been to pass on the excise duty increases

531

355

y = 1.6662x - 0.0023 R² = 0.847

40% 35% 30% 25% 20% 15% 10% 5% 0% -5% -10% -5%

0%

5%

2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021

10%

15%

20%

Gross MRP increase/decrease

Source: Company Filings & Spark Capital Research

Source: Company Filings & Spark Capital Research

Differential tax rate across the states makes Excise duty a complex problem to solve as there are pricing restrictions too in a select few markets.

Pondicherry

Dadra

Manipur

Goa

Arunachala Pradesh

Assam

Tripura

Delhi

A&N

J&K

Haryana

HP

Kerala

Jharkhand

Mizoram

Chandigarh

Madhya Pradesh

Punjab

Sikkim

Rajasthan

Karnataka

Uttarakhand

UP

Maharashtra

Telangana

Andhra Pradesh

WB

Orissa

Chattisgarh

Tamil Nadu

80% 70% 60% 50% 40% 30% 20% 10% 0%

Source: Company Filings, Industry sources, State government excise departments & Spark Capital Research

Page 44

United Breweries Ltd I Initiating Coverage I Rating: BUY I TP:Rs.1531 #7 Raw material cost inflation headwinds to impact near term gross margins. Cost Of Goods Sold per case has increased ~6% per annum over the past 13 years

162

6% 113 99 75

110

112

122

118

126

140

130

Gross margins are currently at ~54% and is expected to contract over the near term

164

57.8%

148

54.4%

59.0%

65.0%

59.6% 56.1%

54.6%

60.0%

53.9%

51.1%

53.2%

83

11.6

16.6

19.4

2011

2012

22.5

25.0

27.9

27.1

25.5

29.9

53.6%

34.7

55.0% 50.0% 45.0% 40.0% 35.0%

2006 2007 2008 2009 2010 2011 2012 2013 2014

2015 2016 2017 2018 2019

2010

2013

2014

Gross Profit

COGS per case Source: Company filings & Spark Capital Research

2015

2016

2017

2018

2019

Gross Margin (%)

Source: Company filings & Spark Capital Research

Packaging material constitutes ~60% of the overall COGS pie…

…while raw material pie is comprised ~50% of Barley

Purchase of traded goods 4%

Packaging Material 59%

Source: Company filings & Spark Capital Research

Raw Material 37%

Barley

Others

Source: Company filings & Spark Capital Research

Page 45

United Breweries Ltd I Initiating Coverage I Rating: BUY I TP:Rs.1531 #7 Raw material cost inflation headwinds to impact near term gross margins. Barley produced in India continues to be on the uptrend…

…so has been the MSP on the crop…

Barley Produced in India (1000 MT) 1689 1221

1328

1663 1619

1752 1831

1950

1100 1150

1750 1770

1613

1225

1325

1410 1440

980 980

1440

1355

1196

Barley MSP (INR/Quintal)

565 500 500 500 525 540 550

650 680

750 780

385

2006 2007 2008 2009 2010 2011 2012

2013 2014 2015 2016 2017 2018 2019

Source: Bloomberg & Spark Capital Research

Source: Bloomberg & Spark Capital Research

…which has led to overall prices spiraling up higher over the past 6 months Barley Price (INR/qtl) 1775 1450

Jun-19

Apr-19

Feb-19

Oct-18

Dec-18

Jun-18

Aug-18

Apr-18

Feb-18

Oct-17

Dec-17

Aug-17

Jun-17

Apr-17

Feb-17

Dec-16

Oct-16

Aug-16

Jun-16

Apr-16

Feb-16

Dec-15

Oct-15

Aug-15

Jun-15

1255

"Barley is scarce in our country and the crop comes in March-April. We are in the process of buying most of our barley for the year right now and barley prices are ruling at least 15% higher than last year. The reason for that is earlier this year, the government increased the support prices for grains across the board. What tends to happen is that when other grains go up, the demand for barley goes up and prices go up. Because the other use for barley is for cattle feed and apart from us and a few other malted beverage industries who use barley as input material, large amount of barley in this country goes into cattle feed and it is today the lowest priced cattle feed though prices are higher by about 15% vis-à-vis last year and the production is not going up." Actually we have to import barley this year and we are going to import almost about 20% of our barley requirements from overseas. So that is already putting and will continue to put a lot of pressure on our input costs"

Source: Bloomberg & Spark Capital Research

Page 46

United Breweries Ltd I Initiating Coverage I Rating: BUY I TP:Rs.1531 #7 Raw material cost inflation headwinds to impact near term gross margins. Scarcity of water and cost of water could turn out to be the biggest long term raw material risk for United Breweries Water availability in India

Litre of water/Litre of Beer

7.42

3.75

3.73

3.52

3.4

3.24

2017-18

4.25

2016-17

4.54

2015-16

4.94

2014-15

5.12

2012-13

2011-12

2030

2010-11

2008

2009-10

Demand

2008-09

Supply

2007-08

634

2006-07

650

744

5.49

2013-14

6.46

1498

Source: NITI Aayog, company filings and park Capital Research

Packaging cost remains ~28% of revenues and is on the uptrend…

25.7% 26.8% 25.1% 24.7% 27.0%

30.3% 29.7% 26.4% 25.3% 25.0%

…indicated by the uptick in glass prices on account of rise in energy costs US Producer Price Index Flat Glass (NSA, Index)

28.2% 28.6% 27.4%

137

130.5

2018

Packaging Material cost per case (Rs. ) Source: Company Filings and Spark Capital Research

as a % of sales

May-19

2017

Feb-19

2016

Nov-18

2015

Aug-18

2014

May-18

2013

Feb-18

2012

Nov-17

2011

Aug-17

2010

Feb-17

2009

May-17

2008

Nov-16

2007

Aug-16

2006

Feb-16

95 May-16

92

Nov-15

90

Aug-15

81

May-15

78

Feb-15

74

Nov-14

79

Aug-14

74

May-14

61

Feb-14

58

Nov-13

52

Aug-13

49

May-13

118.1

47

Source: Bloomberg and Spark Capital Research

Page 47

United Breweries Ltd I Initiating Coverage I Rating: BUY I TP:Rs.1531 Operating Profit levers EBITDA margins should inch to ~18.1% over the next two years… 16.1% 12.8% 10.3%

14.1% 11.6% 12.2%

…led by moderation in other expenses 17.6% 17.5% 18.1%

14.3% 13.6% 13.3%

23

31

31

34

43

43

46

44

55

62

FY10

FY11

FY12

FY13

FY14

FY15

FY16

FY17

FY18

FY19

EBITDA per case

63

67

FY20e FY21e

24%

25%

6.4%

7.0%

7.5%

7.1%

6.9%

6.7%

6.5%

4.5

4.8

5.3

5.3%

4.7%

1.1

1.4

1.9

2.4

2.6

3.0

3.4

3.6

4.0

FY10

FY11

FY12

FY13

FY14

FY15

FY16

FY17

FY18

Employee Expenses (Rs.bn)

FY19 FY20e FY21e

% of sales

Source: Industry, Spark Capital Research

S&D expenses have been rationalized over the past few years (some on account of change in accounting mechanism)… 24%

6.2%

4.7%

EBITDA margin (%)

Source: Company Filings and Spark Capital Research

24%

6.3%

…leading to overall S&D expenses declining.

27% 23%

21%

22%

22%

39.3% 38.7% 39.9% 36.1% 36.9% 37.7% 34.8% 32.8%

22%

13%

13%

30.0% 29.0% 28.4% 28.5%

12%

1.9

2.9

3.7

4.8

6.2

7.0

7.4

8.4

9.2

10.4

6.2

6.2

6.6

8.2

11.3

13.4

15.3

16.4

18.7

16.8

15.5

16.9

18.8

2006

2007

2008

2009

FY10

FY11

FY12

FY13

FY14

FY15

FY16

FY17

FY18

FY10

FY11

FY12

FY13

FY14

FY15

FY16

FY17

FY18

FY19

S&D expenses Source: Company Filings and Spark Capital Research

% of sales

Other Expenses (including S&D expenses)

20.5

23.4

FY20e FY21e

% of sales

Source: Industry, Spark Capital Research

Page 48

United Breweries Ltd I Initiating Coverage I Rating: BUY I TP:Rs.1531 Operating Profit levers United Breweries

Carlsberg India

AB InBev India

2016

2017

2018

2016

2017

2018

2016

2017

2018

Gross Revenues

93,965

100,130

121,746

25425

30,273

37,237

39,226

31,434

30,429

Excise Duty

48,083

55,006

68,116

13551

16431

21533

18,490

15,724

17,330

Net Revenues

45,882

45,124

53,630

11,874

13,842

15,704

20,736

15,710

13,099

COGS

21,209

21,779

26,315

5997

6887

6839

10,418

8,120

7,456

Gross Profit

24,673

23,345

27,316

5,877

6,955

8,865

10,318

7,590

5,643

Employee Cost

3,386

3,563

3,992

1441

1454

1545

1,744

2,552

1,743

S&D

6,238

6,155

6,583

2188

2138

2095

1,675

1,442

531

Other Expenses

7,362

6,265

6,895

2465

2052

3320

5,245

5,162

4,269

EBITDA

7,687

7,362

9,846

-217

1,311

1,905

1,654

-1,566

-899

Excise Duty as a % of gross sales

51%

55%

56%

53%

54%

58%

47%

50%

57%

COGS as a % of net sales

46%

48%

49%

51%

50%

44%

50%

52%

57%

GP as a % of net sales

54%

52%

51%

49%

50%

56%

50%

48%

43%

Employee Cost as a % of net sales

7%

8%

7%

12%

11%

10%

8%

16%

13%

S&D as a % of net sales

14%

14%

12%

18%

15%

13%

8%

9%

4%

Other Expenses as a % of net sales

16%

14%

13%

21%

15%

21%

25%

33%

33%

EBITDA as a % of net sales

17%

16%

18%

-2%

9%

12%

8%

-10%

-7%

EBITDA as a % of gross sales

8%

7%

8%

-1%

4%

5%

4%

-5%

-3%

Source: Company Filings and Spark Capital Research

Page 49

United Breweries Ltd I Initiating Coverage I Rating: BUY I TP:Rs.1531 Financial Leverage – Interest cost to go down on the back of debt repayments Finance cost has dropped by ~2.5x in the past 4 years and is expected to further decline over the near term 6.0%

5.9% 4.1%

4.2% 3.3%

2.8%

2.8% 2.0%

1.9%

1.6%

1.7%

1.2%

0.8%

477

496

662

1141

752

865

985

796

795

728

811

587

477

0.5% 312

2006

2007

2008

2009

2010

2011

2012

2013

2014

2015

2016

2017

2018

2019

Finance Cost (Rs.mn)

0.1% 86

0.1% 79

2020

2021

810

770

2020

2021

0.02

0.02

% of sales

Source: Company Filings and Spark Capital Research

With robust debt repayment; Debt levels at miniscule levels as on 2019. We have built in for further repayment over the next two years. 1.01

1.02

0.71

0.67

0.65 0.49 0.34

0.44

0.50 0.38

0.32

0.25

4,033

6,262

6,903

7,649

7,962

4,379

4,414

7,440

7,433

9,490

8,062

5,940

0.12 3,121

2006

2007

2008

2009

2010

2011

2012

2013

2014

2015

2016

2017

2018

Debt

D/E

0.03

2019

910

Source: Company Filings and Spark Capital Research

Page 50

United Breweries Ltd I Initiating Coverage I Rating: BUY I TP:Rs.1531 Free Cash flow to improve significantly over the near to medium term PAT margin improvement should lead to better RoE over the near term… FY10

Asset Turnover

1.09

FY11

1.52

FY12

1.86

FY13

1.70

FY14

1.54

FY15

1.53

FY16

1.55

FY17

1.57

FY18

1.87

FY19

2.05

…and also to better RoCE and RoIC over the near to medium term FY 20E

2.02

FY 21E

24.2% 19.3%

1.96

21.4%

14.2%

Leverage

1.68

1.51

1.37

1.46

1.53

1.52

1.47

1.34

1.20

1.08

1.03

1.02

8.6% 4.6%

PAT Margin 3.6% 4.5% 3.9% 4.4% 5.3% 5.5% 6.2% 4.9% 7.0% 8.7% 9.2% 9.9% %

11.1%

11.5%

11.0%

11.1%

11.3%

11.9%

8.4%

10.2%

10.8%

10.7%

11.4%

2011

2012

2013

2014

2015

2016

FY10

FCF

2017

2018

FY 20E FY 21E

FY11

FY12

FY13

FY14

FY15

FY16

FY17

FY18

FY19

FY 20E

Core working capital days (on gross revenues) should remain flat. FY 21E

2264 3498 3730 4214 5054 5028 6169 5419 6898 8224 9059 10526 -531

RoIC (%)

Source: Company Filings and Spark Capital Research

FCF also should meaningfully improve led by better operating profits and lower CAPEX

CAPEX

2019

14.1%

6.5% 10.4% 9.9% 11.0% 12.6% 12.9% 14.0% 10.2% 15.7% 19.2% 19.1% 19.8%

Source: Company Filings and Spark Capital Research

OCF

18.8%

8.9%

RoE (%)

EBITDA post tax Working Capital Changes

19.5%

18.4%

6.3% 2010

Dupont

10.2%

2213 -1845 -2692 -2159 3381

-777

22

-1265 -1416 -2545 -2616

1733 5711 1885 1522 2895 8408 5392 5441 5633 6808 6514 7910

FY10 FY11 FY12 FY13 FY14 FY15 FY16 FY17 FY18 FY19

FY 20E

FY 21E

Inventory days

25

24

26

30

29

29

27

27

24

27

27

27

Debtor Days

75

43

45

48

51

44

43

47

45

39

39

39

Creditor days

54

32

25

15

11

18

16

17

16

15

15

15

Core WC Days

46

35

47

63

69

55

54

58

54

50

51

51

-1513 -4389 -3806 -3782 -2120 -4069 -2430 -2355 -2014 -4331 -2599 -2685 220

1323 -1921 -2260

776

Source: Company Filings and Spark Capital Research

4339 2962 3086 3619 2477 3915 5225

Source: Industry, Spark Capital Research

Page 51

United Breweries Ltd I Initiating Coverage I Rating: BUY I TP:Rs.1531 Corporate Governance (1/3) – Erstwhile Promoter, Dr.Vijay Mallya’s influence on United Breweries – Nil in our opinion Dr. Vijay Mallya evicted from BoD in CY2017: “Vide Order dated 25.01.2017 passed by the Securities and Exchange Board of India (SEBI) Dr. Vijay Mallya was restrained from holding the position as Director or Key Managerial Personnel of any listed company with effect from the date of said Order. Thereafter, Dr. Mallya did not participate in any Board Meetings and was not involved in taking business decisions of the Company. At its meeting held on August 10, 2017, the Board of Directors of the Company observed that in normal course, Dr. Mallya, as Director would have come up for retirement by rotation at the AGM on September 23, 2017 in terms of Section 152(6)(d) of the Act. In the circumstances that SEBI had restrained Dr. Vijay Mallya from holding position as Director or Key Managerial Personnel of any listed entity, neither could Dr. Mallya offer himself for re-appointment nor could the Board of Directors recommend his re-appointment as Director of the Company at that AGM till such time the restraint imposed by SEBI Order was vacated or disposed off in favour of Dr. Mallya.” FY18 Annual report Dr.Vijay Mallya shares taken over by the Enforcement Directorate: “As per disclosures received by UBL in May 2018 under SEBI (Prohibition of Insider Trading) Regulations, 2015 and SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, 2011 from a few Promoter companies controlled by Dr. Vijay Mallya, we are informed that 41315690 Equity Shares held by such entities in UBL constituting 15.63% of the total paid up capital have been transferred to the demat account of Enforcement Directorate, Mumbai, Government of India. Earlier, in August 2017, 1389068 Equity Shares constituting 0.52% of the total paid up capital were also transferred to the demat account of Enforcement Directorate, Mumbai, Government of India. The Enforcement Directorate now holds 42704758 constituting 16.15% Equity Shares in the Company.”. The enforcement directorate sold ~2.8% of this stake to Heineken in March 2019.” FY18 Annual report Dividend to the erstwhile promoters to be withheld: “Pursuant to Order of Debt Recovery Tribunal, Karnataka, Bangalore, (the Tribunal) dated September 30, 2015, dividend for the financial year 2016-2017 and thereafter, if declared and payable to Dr. Vijay Mallya and United Breweries (Holdings) Limited shall be withheld till further Orders. 9. It is in public domain that United Breweries (Holdings) Limited (UBHL), a promoter of your Company has been ordered to be wound up by Hon’ble High Court of Karnataka vide Order dated February 07, 2017. UBHL has since filed an appeal against the said Winding-up Order which is pending.” FY18 Annual report Shareholding snapshot

Source: Company Filings and Spark Capital Research

Mar-15

Mar-16

Mar-17

Mar-18

Mar-19

Heineken

38.9%

43.0%

43.7%

43.7%

46.5%

Dr.Vijay Mallya

35.9%

30.7%

29.9%

29.5%

11.0% Page 52

United Breweries Ltd I Initiating Coverage I Rating: BUY I TP:Rs.1531

Corporate Governance (2/3) – Top Management salary structure Board of directors remuneration is in acceptable standards of the companies act (all values in Rs.mn) Name of the Director/KMP Remuneration Paid Mr. Shekhar Ramamurthy Mr. Kalyan Ganguly Mr. Henricus Petrus van Zon Mr. Steven Bosch Mr. Govind Iyenger Mr. Umesh Hingorani Mr. Guido de Boer Ms. Kanta Labroo Total Sitting fee paid Dr. Vijay Mallya Mr. A K Ravi Nedungadi Mr. Duco Reinout Hooft Graafland Mr. Roland Pirmez Mr. Sijbe Hiemstra Mr. Frans Erik Eusman Mr. Ernst Van De Weert Mr. Stephan Gerlich Mrs. Kiran Majumdar Shaw Mr. Madhav Bhatkuly Mr. Chugh Yoginder Pal Mr. Chhaganlal Jain Mr. Sunil Alagh Mr. Christiaan August J Van Steenbergen Director Commission paid Dr. Vijay Mallya Mr. A K Ravi Nedungadi Mr. Stephan Gerlich Mrs. Kiran Majumdar Shaw Mr. Madhav Bhatkuly Mr. Chugh Yoginder Pal Mr. Chhaganlal Jain Mr. Sunil Alagh Total Source: Company Filings and Spark Capital Research

2014

2015

2016

2017

2018

49 200 63 0 14 9

82

84

10 7

0 84 69 0 12 9

33 25 16 11

0 34 16 9

2 126

2 175

2 336

1 169

2 146

0.1 0.1 0.0 0.0

0.3 0.5

0.6 1.1

0.0 1.3

0.5 0.8

0.3 0.8

0.0 0.1 0.1 0.2 0.2 0.2

0.3 0.4 0.1 0.1 0.0 0.0 0.0 0.1 0.3 0.1 0.6 0.6 0.5

1.0 21.0 0.0 2.3 2.3 2.3 2.3 2.3 2.3 34.8

3.1 20.1 0.0 2.2 2.2 2.2 2.2 2.2 2.2 33.3

4.8 24.6 0.0 2.7 2.7 2.7 2.7 2.7 2.7 40.8

0.5 0.5 0.8 1.8 1.9 1.8 0.0 10.3 6.4 2.8 2.8 2.8 2.8 2.8 2.8 2.8 26.0

0.6 0.7 0.6 1.4 2.0 1.6 0.1 9.4 0.0 7.5 7.5 7.5 7.5 7.5 7.5 7.5 52.5

58 49

0.1 0.1 0.2 0.1 0.2 0.3 0.1 1.0 1.0 0.9

Page 53

United Breweries Ltd I Initiating Coverage I Rating: BUY I TP:Rs.1531

Corporate Governance (3/3) – Other Corporate governance tenets

Board of Directors

2015

2016

2017

2018

Total No. of Directors

12

12

11

11

No. of Independent Directors

6

6

6

6

No. of changes in directors over last year

2

4

1

1

Mr. Shekhar Ramamurthy

Risk Management Committee Member

Mr. Steven Bosch

Member

Director

Board Members composition in various committees

Audit Committee

Nomination & Remuneration

Mr. A K Ravi Nedungadi

Member

Mr. Frans Erik Eusman

Member

Share Transfer Committee

Stakeholders’ Relationship

Borrowing Committee

Member Member

Member

Chairman

Member

Corporate Social Responsibility Member Member

Mr. Christiaan A J Van Steenbergen Mr. Chhaganlal Jain

Member

Member

Member

Member

Mr. Chugh Yoginder Pal

Chairman

Member

Member

Chairman

Chairman

Mr. Sunil Alagh

Member

Chairman

Member

Ms. Kiran Mazumdar Shaw

Chairman

Mr. Madhav Bhatkuly

Member

Member Member

Member

Chairman

Mr. Stephan Gerlich

Auditors Auditor

(In Rs.mn) Contingent Liabilities & Commitments

Contingent Liabilities outstanding as on March 31 As % of networth

Source: Company Filings and Spark Capital Research;

st

2015

2016

2017

2018

S.R. Batliboi & Associates LLP

S.R. Batliboi & Associates LLP

S.R. Batliboi & Associates LLP

S.R. Batliboi & Associates LLP

2015

2016

2017

2018

5.3

7.4

7.8

8.7

28.1%

34.3%

33.5%

32.3%

Page 54

United Breweries Ltd I Initiating Coverage I Rating: BUY I TP:Rs.1531 Valuations – The stock has traded between 50x-70x for more than 2/3rd of the time over the past 10 years UB has traded at an average of ~55x over the past 10 years despite volatile performance

UB has traded at a 50x-70x P/E range for 2/3rd of the duration in the past 10 years.

100.0

P/E Multiple range

No. of days traded

% of of no. of days

Cumulative traded no. of days

under 30x

46

2%

46

2%

60.0

30 - 35x

83

3%

129

5%

50.0

35 - 40x

175

7%

304

12%

40 - 45x

159

6%

463

19%

45 - 50x

271

11%

734

29%

50 - 55x

473

19%

1207

48%

55 - 60x

379

15%

1586

63%

60 - 65x

392

16%

1978

79%

65 - 70x

360

14%

2338

94%

70 - 75x

103

4%

2441

98%

75 - 80x

20

1%

2461

98%

80 - 85x

12

0%

2473

99%

85 - 90x

14

1%

2487

99%

90 - 95x

12

0%

2499

100%

90.0 80.0

+2 SD, 78.3

70.0

+1 SD, 66.8 Average PE, 55.3 -1SD, 43.7

40.0

Source: Bloomberg & Spark Capital Research

-2 SD, 32.2

30.0

Jun-19

Dec-18

Jun-18

Dec-17

Jun-17

Dec-16

Jun-16

Dec-15

Jun-15

Dec-14

Jun-14

Dec-13

Jun-13

Dec-12

Jun-12

Dec-11

Jun-11

Dec-10

Jun-10

Dec-09

Jun-09

20.0

Source: Bloomberg & Spark Capital Research

2,200 2,000 1,800 1,600 1,400 1,200 1,000 800 600 400 200 0

78x 66x 54x 42x

Dec-18

Jun-18

Dec-17

Jun-17

Dec-16

Jun-16

Jun-15

Dec-15

Dec-14

Jun-14

Dec-13

Jun-13

Dec-12

Jun-12

Dec-11

Jun-11

Dec-10

Jun-10

Dec-09

30x

Jun-09

CMP (Rs.)

We believe the company would trade at the band of ~50x-60x over the medium term too

Jun-19

%of Cumulative no. of days

Source: Bloomberg & Spark Capital Research

Page 55

United Breweries Ltd I Initiating Coverage I Rating: BUY I TP:Rs.1531 Valuations – Cashflow Valuations Using a discounted cash flow methodology, we ascertain that UB will have to deliver low double digit top line growth and high teen margin to justify the potential upside Total revenue EBITDA EBITDA margin % Dep EBIT Tax Effective Tax rate (%) Minority Interest as a % of sales EBI Dep WC Changes as a % of sales Capex FCFF FCFF/EBITDA

FY14 42,297 5,973 14.1% 1,978 3,995 1,087 27% 4 0% 2,904 1,978 -2,159 -5% -2,121 602 0.10

FY15 46,881 6,217 13.3% 2,075 4,142 1,188 29% 4 0% 2,950 2,075 3,381 7% -4,075 4,331 0.70

FY16 48,331 6,930 14.3% 2,436 4,493 1,560 35% 4 0% 2,930 2,436 -777 -2% -2,436 2,152 0.31

FY17 47,292 6,421 13.6% 2,871 3,551 1,182 33% 4 0% 2,365 2,871 22 0% -2,360 2,897 0.45

Stable EBITDA and low CAPEX to improve FCFF Assumption Table Measure

FY19-23 10%

FY23-30 10%

Price

3%

3%

Excise Duty

14%

13%

Total income

13%

13%

EBITDA Margin (Avg)

18%

18%

EBITDA growth (%)

15%

15%

FCFF/EBITDA (Avg)

34%

52%

Volume

Source: Bloomberg & Spark Capital Research

FY18 56,190 9,020 16.1% 2,597 6,423 2,132 33% 4 0% 4,287 2,597 -1,265 -2% -2,017 3,601 0.40

FY19P 64,754 11,384 17.6% 2,599 8,785 3,160 36% 4 0% 5,621 2,599 -1,416 -2% -4,248 2,556 0.22

FY20E 72,133 12,633 17.5% 2,685 9,948 3,574 36% 4 0% 6,369 2,685 -2,545 -4% -2,599 3,911 0.31

FY21E 82,078 14,888 18.1% 2,857 12,031 4,362 36% 5 0% 7,663 2,857 -2,616 -3% -2,685 5,220 0.35

FY22E 92,991 17,109 18.4% 3,037 14,072 5,159 37% 6 0% 8,907 3,037 -2,870 -3% -2,857 6,216 0.36

FY23E FY24E FY25E FY26E FY27E FY28E FY29E FY30E 1,04,334 1,18,188 1,33,906 1,51,716 1,71,894 1,94,756 2,20,659 2,50,006 19,268 21,865 24,773 28,067 31,800 36,030 40,822 46,251 18.5% 18.5% 18.5% 18.5% 18.5% 18.5% 18.5% 18.5% 3,229 2,718 3,080 3,489 3,954 4,869 5,516 6,250 16,039 19,146 21,693 24,578 27,847 31,161 35,305 40,001 5,945 6,510 7,376 8,357 9,468 10,595 12,004 13,600 37% 34.0% 34.0% 34.0% 34.0% 34.0% 34.0% 34.0% 7 8 9 11 12 14 15 17 0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 10,087 12,628 14,308 16,211 18,367 20,553 23,286 26,383 3,229 2,718 3,080 3,489 3,954 4,869 5,516 6,250 -2,983 -2,364 -2,678 -3,034 -3,438 -1,948 -2,207 -2,500 -3% -2.0% -2.0% -2.0% -2.0% -1.0% -1.0% -1.0% -3,037 -3,037 -3,037 -2,000 -2,000 -2,000 -2,000 -1,000 7,295 9,946 11,673 14,666 16,883 21,474 24,596 29,133 0.38 0.45 0.47 0.52 0.53 0.60 0.60 0.63

Which on an assumption of ~5% terminal growth rate translates to the projected upside of ~15%. Rs. mn Discounted FCFF PV of Terminal Value EV Less: Net Debt/(net Cash) Implied Market Cap Outstanding Shares Target Price Terminal Growth WACC Terminal Value

FY20 82495 318968 401464 -3333 404796 264 1531 5.0% 9.0% 7,57,697

Source: Bloomberg & Spark Capital Research

Page 56

United Breweries Ltd I Initiating Coverage I Rating: BUY I TP:Rs.1531 Financial Summary Abridged Financial Statements Rs. mn

FY13

FY14

FY15

FY16

FY17

FY18

FY19P

FY20E

FY21E

FY22E

38,987 22,546 4,769 1,704 3,065 392 796 0 2,660 1,721 1,721 6.5

42,297 24,976 5,973 1,978 3,995 152 795 0 3,351 2,260 2,260 8.5

46,881 27,944 6,217 2,075 4,142 377 728 0 3,790 2,598 2,598 9.8

48,331 27,122 6,930 2,436 4,493 864 811 0 4,547 2,983 2,983 11.3

47,292 25,513 6,421 2,871 3,551 517 587 0 3,481 2,296 2,296 8.7

56,190 29,876 9,020 2,597 6,423 131 477 0 6,078 3,942 3,942 14.9

64,754 34,678 11,384 2,599 8,785 320 312 0 8,793 5,629 5,629 21.3

72,133 37,988 12,633 2,685 9,948 349 86 0 10,211 6,633 6,633 25.1

82,078 43,625 14,888 2,857 12,031 512 79 0 12,463 8,096 8,096 30.6

92,991 49,880 17,109 3,037 14,072 744 75 0 14,741 9,575 9,575 36.2

15,112 745 7,440 166 23,463 24,660 15,748 1,140 444 946 2,331 510 2,345 23,463 22,552 18,136 4,164

17,066 795 7,433 332 25,625 26,684 15,861 823 460 1,059 1,425 744 5,253 25,625 24,499 21,191 4,948

18,851 676 9,490 75 29,092 30,530 17,710 902 648 1,238 132 1,646 6,816 29,092 28,341 26,070 8,120

21,471 634 8,062 110 30,277 32,731 17,627 608 596 1,010 140 2,012 8,285 30,277 29,533 27,775 6,912

23,342 470 5,940 105 29,857 34,794 16,966 1,372 537 541 243 1,717 8,480 29,857 29,282 27,127 5,156

26,903 182 3,121 129 30,335 36,956 16,803 723 495 532 242 2,276 9,263 30,335 30,023 28,526 2,346

31,838 114 910 47 32,909 40,011 17,260 1,899 512 626 462 3,534 8,617 32,909 32,748 29,761 -178

37,451 114 810 47 38,422 42,609 17,173 1,899 512 2,626 1,517 3,534 11,162 38,422 38,261 32,219 -3,333

44,273 114 770 47 45,204 45,294 17,002 1,899 512 4,626 3,855 3,534 13,777 45,204 45,043 34,663 -7,711

52,193 114 730 47 53,084 48,151 16,822 1,899 512 6,626 7,044 3,534 16,648 53,084 52,923 37,353 -12,940

2,266 1,522 3,801 -2,280 -1,543 -4,317 2,113 3,277

3,902 2,895 2,121 774 1,569 -1,576 -1,722 2,485

9,832 8,408 4,075 4,333 5,049 -3,295 -5,717 1,370

6,988 5,392 2,436 2,956 3,750 -2,452 -2,968 1,150

6,876 5,441 2,365 3,075 3,658 -2,336 -3,012 784

8,167 5,633 2,017 3,616 4,123 -1,970 -3,635 775

9,968 6,808 4,248 2,559 2,871 -5,363 -1,226 1,088

10,088 6,514 2,599 3,915 4,001 -4,254 -1,205 4,143

12,272 7,910 2,685 5,225 5,304 -4,179 -1,393 8,481

14,239 9,080 2,857 6,223 6,298 -4,120 -1,771 13,670

Profit & Loss Revenue Gross profit EBITDA Depreciation EBIT Other Income Interest expense Exceptional items PBT Reported PAT (after minority interest) Adj PAT EPS (Rs.)

Balance Sheet Net Worth Employee Benefit Obligation Total debt Other liabilities and provisions Total Networth and liabilities Gross Fixed assets Net fixed assets Capital work-in-progress Intangible Assets Investments Cash and bank balances Loans & advances and other assets Net working capital Total assets Capital Employed Invested Capital (CE - cash - CWIP) Net debt

Cash Flows Cash flows from Operations (Pre-tax) Cash flows from Operations (post-tax) Capex Free cashflows Free cashflows (post interest costs) Cash flows from Investing Cash flows from Financing Total cash & liquid investments

Page 57

United Breweries Ltd I Initiating Coverage I Rating: BUY I TP:Rs.1531 Financial Summary FY13

FY14

FY15

FY16

FY17

FY18

FY19P

FY20E

FY21E

FY22E

9.5% 5.6% 24.6%

8.5% 15.4% 31.3%

10.8% -6.1% 15.0%

3.1% 8.1% 14.8%

-2.2% -5.3% -23.0%

18.8% 18.2% 71.7%

15.2% 9.5% 42.8%

11.4% -0.4% 17.8%

13.8% 3.6% 22.1%

13.3% 1.4% 18.3%

57.8% 12.2% 4.4%

59.0% 14.1% 5.3%

59.6% 13.3% 5.5%

56.1% 14.3% 6.2%

53.9% 13.6% 4.9%

53.2% 16.1% 7.0%

53.6% 17.6% 8.7%

52.7% 17.5% 9.2%

53.2% 18.1% 9.9%

53.6% 18.4% 10.3%

48% 8% 12% 11% 15% 17% 1.58 1.66

65% 14% 14% 11% 17% 19% 1.59 1.65

158% 32% 14% 11% 16% 16% 1.54 1.61

101% 19% 15% 12% 18% 16% 1.48 1.60

107% 20% 10% 9% 14% 13% 1.36 1.58

91% 20% 16% 14% 22% 23% 1.52 1.85

88% 23% 19% 18% 28% 30% 1.62 1.97

80% 20% 19% 19% 27% 31% 1.69 1.88

82% 23% 20% 19% 28% 35% 1.81 1.82

83% 24% 20% 20% 28% 38% 1.93 1.75

0.3 0.9 1.9 30 63

0.3 0.8 3.6 29 69

0.4 1.3 11.5 29 55

0.3 1.0 6.7 27 54

0.2 0.8 9.3 27 58

0.1 0.3 11.8 24 54

-0.0 -0.0 21.8 27 50

-0.1 -0.3 75.8 27 51

-0.2 -0.5 100.2 27 51

-0.2 -0.8 121.1 27 51

264 3,52,981 205.1 187 3,56,005 75 234

264 3,52,981 156.2 232 3,57,106 60 123

264 3,52,981 135.8 122 3,60,200 58 43

264 3,52,981 118.3 42 3,59,284 52 67

264 3,52,981 153.8 65 3,56,765 56 66

23

21

19

16

15

264 3,52,981 89.5 65 3,54,604 39 63 0.9% 13

264 3,52,981 62.7 63 3,50,904 31 52 1.0% 11

264 3,52,974 53.2 52 3,47,749 28 53 0.7% 9

264 3,52,974 43.6 54 3,43,371 23 43 1.1% 8

264 3,52,974 36.9 45 3,38,141 20 37 1.5% 7

Dividend pay-out (%)

12.6%

12.4%

12.3%

10.7%

16.0%

9.3%

14.2%

15.4%

15.7%

17.3%

Dividend yield (%)

0.1%

0.1%

0.1%

0.1%

0.1%

0.1%

0.2%

0.2%

0.3%

0.4%

Growth ratios Revenue EBITDA Adj PAT

Margin ratios Gross EBITDA Adj PAT

Performance ratios Pre-tax OCF/EBITDA OCF/IC (%) RoE (%) RoCE (%) RoCE (Pre-tax) RoIC (Pre-tax) Fixed asset turnover (x) Total asset turnover (x)

Financial stability ratios Net Debt to Equity (x) Net Debt to EBITDA (x) Interest cover (x) Inventory days Working capital days

Valuation metrics Fully Diluted Shares (mn) Market cap (Rs.mn) P/E (x) P/OCF(x) EV (Rs.mn) (ex-CWIP) EV/ EBITDA (x) EV/ OCF(x) FCF Yield Price to BV (x)

1335

Page 58

United Breweries Ltd I Initiating Coverage I Rating: BUY I TP:Rs.1531 Crystal Ball Gazing United Breweries revenues are likely to grow at a ~13% CAGR over the next three years, supported by volume growth of ~10% and price/mix increase of ~3%. Operating margins are likely to expand on the back of premiumization and cost savings. Operating profits are anticipated to increase at a ~14% CAGR over the next three years. Assuming a 10% discount to its 10 year P/E multiple and assigning a multiple of ~45x Revenue growth of 13% to be aided by Volume growth of ~10%

Multiple should at least inch to average levels as growth improves

Capital efficiency to improve led by better margins

Operating margin expansion coupled with higher cash levels should lead to ~20% earnings growth

We believe the strong revenue growth and operating margin expansion levers should enable the multiples to at least sustain at current levels

Total Asset turnover to increase as no major CAPEX is envisioned over the medium term.

P/E multiple

FY21E EPS (Rs.)

Price target

Revenues CAGR

30.8%

11.4%

8.9%

12.7%

RoE (%)

7%

12%

14%

20%

40

41.7

1669

Gross Margin

53.9%

57.2%

55.7%

53.4%

RoCE (%)

7%

11%

12%

19%

45

41.7

1878

EBITDA CAGR

27.2%

15.2%

13.8%

14.1%

RoIC (%)

3%

11%

11%

25%

EBITDA margin

12.3%

12.6%

14.3%

18.1%

Average 1 yr fwd

FY06-FY11 FY11-FY14 FY14-FY19 FY19-FY23E

FY06-FY11 FY11-FY14 FY14-FY19 FY19-FY23E

-223.0%

17.5%

20.0%

18.3%

PE (x)

37.8

58.8

59.4

52.4

Total Asset Turnover (x)

1.1

1.7

1.7

1.8

EV/EBITDA (x)

17.6

27.8

28.1

26.6

Total WC days

35

60

55

51

Peak 1 yr fwd

Pre-tax OCF/EBITDA (%)

58%

58%

114%

83%

PE (x)

59.9

98.1

89.8

55.8

Post Tax OCF as a % of IC

9%

12%

23%

23%

EV/EBITDA (x)

27.5

43.1

38.6

28.2

Debt/EBITDA

2.5

0.7

0.8

-0.6

EPS CAGR

Entry = Rs. 1335@ 44x FY21E EBITDA

Cumulative Dividends of Rs.12/share

EPS CAGR of ~18%, exit multiple of 43x on FY23E EPS

TOTAL RETURN OF

42%

Page 59

UNITED SPIRITS LIMITED – INITIATING COVERAGE

Page 60

UNITED SPIRITS LTD The perfect Blend

CMP

Target Price

Rating

Rs.570

Rs.659

BUY

We initiate coverage on United Spirits Limited (USL) with a BUY rating and a TP of Rs. 659. We have factored in for a revenue and earnings CAGR of ~10% and ~15% from FY19-21e to arrive at our FY21e EPS of Rs.14.5. We believe the ~10% Revenue CAGR over the next two years will be a function of ~8% volume growth and ~2% price/mix increase. With USL dominating volume market share of the whisky segment in India, we believe they are well placed to ride on the rise in consumption of alcoholic beverages in India. Alcoholic beverages growth in India to be driven by the underlying demographic advantage and the change in perception towards alcohol. Ever since Diageo PLC took over USL in 2014, several fundamental changes have been made to the modus operandi of USL which in our opinion makes them better placed to ride on the industry growth levers from a medium to long term perspective. Cross-pollination of brands from the global scotch portfolio of Diageo has been driving premiumization for USL for the past couple of years. A renowned parent with an extensive understanding of the global alcohol industry and the underlying macro growth triggers in India provides for a Perfect Blend to USL’s long term growth ambitions. Despite several margin levers being exhausted since the takeover, we believe there is further scope for margin improvement albeit at a slower pace. Valuing the stock at 45x (in-line with its 10 years historical P/E), we arrive at our TP: Rs.659.

INITIATING COVERAGE 2nd July 2019 Industry

CONSUMER

CMP

Rs.570

Target Price

Rs.659

Key Stock Data Bloomberg

UNSP IN

#1 Strong brands to enable USL to consolidate their market leadership: USL dominates the whisky market (56% of the industry’s value share) in India with ~34% volume market share. Volumes of the focus prestige segment brands such as McDowell, Royal Challenge and Signature have grown at a CAGR of ~21%, ~46% and ~26% respectively from CY14-18 and we expect this trend to continue over the medium term cementing USL as the undisputed leader of the whisky segment.

Shares o/s

727mn

Market Cap

Rs. 427bn

52-wk High-Low

Rs. 680-438

#2 Premiumization journey should aid in improving product mix and profitability: Prestige and above segment that contributed ~51% of volumes and ~67% of value sales in 2019 should increase its share to ~55% of volumes and ~70% of value sales by FY21e. The rising popularity of premium whisky offerings in the market and cross-pollination of global Diageo offerings into the Indian market should fuel this rise in premiumization.

3m ADV

Rs. 894mn

#3 Transforming from United Spirits India ltd to DIAGEO India: Several changes have been made to the business modus operandi of USL such as product rationalisation, supply chain efficiencies, selling and distribution competencies, higher accountability and investing back into the business ever since Diageo’s takeover making the organisation leaner and better equipped to tap into the long term growth levers. With Diageo PLC having outlined its key growth levers to be Scotch, US and India, we believe the parent is fully tuned into driving considerable growth from the Indian subsidiary over the medium to long term. With an Indian born Mr Ivan Menezes at the helm of Diageo PLC, we ascertain that the focus on the Indian market to be significant. Cross-pollination of offerings from the global portfolio to be an additional growth driver. #4 Raw material cyclicality to impact near term margins: Rise in Molasses ENA price (~30% of USL’s RM basket) is anticipated to impact gross margins of USL over the near term. Increase in the volumes of grain-based alcohol should enable USL to mitigate this risk over the long term. We do not anticipate any structural inflationary pricing impact on account of Government Of India’s Ethanol lending Project (EBP) as we anticipate the EBP requirement to be met from the diversion of sugar production (which is in excess) and not from the molasses used for the production of Extra Neutral Alcohol (ENA). With the energy costs up, glass bottle costs are also on the uptrend. We anticipate excise duty changes to be passed on to the consumers. Financial Summary Year

Revenues (Rs. mn)

EBITDA (%)

PAT (Rs. mn)

EPS (Rs.)

P/E(x)

EV/EBITDA (x)

RoE (%)

2019P

93,408

16.4%

7,916

11

52

29

28.7%

2020E

102,906

16.2%

8,780

12

47

26

24.9%

2021E

113,452

16.7%

10,549

15

39

22

23.5%

find SPARK RESEARCH on (SPAK )

Index

BSE100 Sep’18 Dec’18 Mar’19

Diageo

54.8

54.8

54.8

Vijay Mallya

2.0

2.0

2.0

Enforcement Directorate

1.7

1.7

1.7

Institutions

27.5

27.8

27.8

Public

14.0

13.7

13.7

Pledge

1.9

1.9

1.8

RESEARCH ANALYSTS GNANASUNDAR [email protected] +91 44 4344 0062 Page 61

United Spirits Ltd I Initiating Coverage I Rating: BUY I TP:Rs.659 Company Factsheet Corporate Factsheet

Company Background

Parent Background

Founded in 1926 by Scotsman Angus McDowell as McDowell and Co, a trading company with its headquarters in Madras. In 1951, Mr.Vittal Mallya acquires Mcdowell and co. in 2006, United Spirits Limited (USL) is created through the merger of McDowell & Co Limited, Herbertsons Limited, Triumph Distillers and Vintners Private Limited, Baramati Grape Industries India Limited, Shaw Wallace Distilleries Limited and four other companies. In 2013-14 Diageo plc acquires 54.8 percent shareholding in USL, making India one of its largest markets. Diageo plc is the global leader in beverage alcohol with an outstanding collection of brands across spirits and beer. Diageo has more than 200 brands that are enjoyed in more than 180 countries through the world. The have more than 150 manufacturing sites involved in production of these brands. Diageo plc owns several well renowned brands which include Johnie Walker, Smirnoff, Captain Morgan, Bailey, Tanqueray and Guinness. Diageo plc has an employee base of ~30000 throughout the globe.

Mr. Anand Kripalu – Managing Director and CEO– Anand Kripalu joined Diageo India in May 2014 as Chief Executive Officer. Mr.Anand has over 30 years of experience in the Indian consumer goods market. Mr. Sanjeev Churiwala – CFO - He has around 23 years of diversified work experience. Prior to joining Diageo India, Sanjeev was with LafargeHolcim`s Indian subsidiary Ambuja Cements Mr. Prathmesh Mishra- Chief Commercial Officer - He is responsible for the business operations in India. Prathmesh joined Diageo India in 2014. Top Management & Board Ms. Julie Bramham- Chief Marketing Officer - Prior to joining Diageo in India Julie was part of Diageo Europe for nearly two decades. of Directors Ms. Abanti Sankaranarayanan - Chief Strategy and Corporate Affairs Officer - Prior to her current role, She was MD of Diageo India Pvt Ltd. Mr. Kedar Ulman - Chief Supply Chain Officer - he is responsible for Diageo India’s complex supply chain comprising a wide India footprint of 60 manufacturing locations and procurement. Kedar joined Diageo India in 2009 as Chief Procurement Officer Ms. Mamta Sundara - General Counsel - In this role, she is responsible for leading the legal function, which balances and mitigates the company’s risks. Mr.Arif Aziz - Chief Human Resources Officer - Aarif’s 20 years’ experience spans several sectors many of which have been senior leadership roles. Distribution Footprint

Total Reach: ~75000 outlets

Manufacturing Facilities

19 owned facilities as on March 2018

Key Plant locations

1. Alwar (Rajasthan) ,2. Asansol (West Bengal), 3. Aurangabad (Maharashtra), 4. Baddi (Himachal Pradesh), 5. Baramati (Maharashtra), 6. Bhadrakali (West Bengal), 7. Bhopal-I (Madhya Pradesh), 8. Gopalpur-On-Sea (Orissa), 9. Gulbarga (Karnataka), 10. Hyderabad I (Nacharam, Telangana), 11. Hyderabad II (Malkajgiri, Telangana), 12. Kumbalgodu (Karnataka), 13. Meerut (Uttar Pradesh), 14. Nasik-I (Maharashtra), 15. Nasik-II (Maharashtra), 16. Pathankot (Punjab), 17. Ponda (Goa), 18. Rosa (Uttar Pradesh), 19. Udaipur (Rajasthan)

Key Brands

McDowell’s No.1, Old Tavern, Hayward’s Fine, Bagpiper, Royal Challenge, Director’s special, Signature.

Corporate Structure

Wine Society of India Pvt Ltd (33% Holding - Associate) and Hip Bar Private Limited (26% holding – Associate)

Auditors

Price Waterhouse & Co. Chartered Accountants LLP Page 62

United Spirits Ltd I Initiating Coverage I Rating: BUY I TP:Rs.659 Company Timeline Company Timeline 1826

 An enterprising Scotsman Angus McDowell sets up McDowell and Co as a trading company with its headquarters in Madras.

1951

 Vittal Mallya acquires McDowell & Co

1959

 McDowell's sets up its first distillery in Kerala.

1963-64

 McDowell's launches its own McDowell's No.1 Brandy after the import contract for No.1 Bisquit Brandy gets terminated.

1968

 McDowell's No. 1 Whisky launches and is an instant success.

1973

 USL acquired Herbertsons & Co. Defying all odds to acquire a host of breweries during Prohibition in India.

1977-80 1980

 Vittal Mallya goes on a distillery acquisition spree in Udaipur, Alwar, Mirganj and Serampore. He also sets up a plant in Pondicherry.  Master blenders at Shaw Wallace & Company (which was later acquired by McDowell's) perfect Royal Challenge

1992

 McDowell's launches Asia's first Single Malt, Duet Gin and Vodka variants.

1992

 India's first joint venture in alcohol beverages — United Distillers India Limited — is formed with United Distillers plc of United Kingdom. Black Dog 12 Year Old Deluxe Scotch, Black and White, VAT 69 and White Horse are bottled in India at the company’s Nashik Unit.

1994 2005

2006 2007

 McDowell's Signature, slated to be the 'Best Indian Whisky,’ is introduced.  McDowell's completes the acquisition of its traditional competitor Shaw Wallace & Company. Celebrated brands such as Royal Challenge, Antiquity, Director’s Special, and White Mischief are now part of the portfolio.  United Spirits Limited (USL) is created through the merger of McDowell & Co Limited, Herbertsons Limited, Triumph Distillers and Vintners Private Limited, Baramati Grape Industries India Limited, Shaw Wallace Distilleries Limited and four other companies.

Manufacturing citadels

Jammu & Kashmir

Himachal Pradesh

Pathankot

Baddi

Punjab

Uttaranchal

Meerut

Haryana

Arunachal Pradesh

Rosa Uttar Pradesh Rajasthan

Assam

Bihar

Meghalaya

Udaipur

Tripura

Bhopal

Alwar

Madhya Pradesh

Gujarat

Asansol

Jharkhand W Bengal

Bhadrakali Orissa

Aurangabad Nasik-I

Baramati

Gopalpur-On-Sea

Telengana

Maharashtra

Hyderabad I - Nacharam Hyderabad II - Malkajgiri

Gulbarga Pathankot

Andhra Pradesh

Karnataka

Kumbalgodu

 USL acquires Whyte and Mackay, the United Kingdom's leading Scotch whisky distillers. Tamil Nadu

2013-2014

 Diageo plc acquires 54.8 percent shareholding in USL, making India one of its largest markets.

Source: Company fillings, Spark Capital

Kerala

Source: Company fillings, Spark Capital

Page 63

United Spirits Ltd I Initiating Coverage I Rating: BUY I TP:Rs.659 Brands

Luxury

> Rs.2,000

Premium

Rs. 900 – 2,000

Prestige

Rs. 350 – 900

Popular

Consumer Prices*

< Rs. 350

Focus Brands

Non Focus Brands

* Average consumer prices in India, 750ml bottle Source: Company fillings, Spark Capital

Page 64

United Spirits Ltd I Initiating Coverage I Rating: BUY I TP:Rs.659 Financial Profile …driven by ~12% growth in the P&A segment and ~3% growth in the popular segment

We anticipate a ~8% volume growth over the next two years…

112

120

124

95

Volumes in Mn cases 121 94

93

90 79

82

88

33

FY13 FY12

FY13

FY14

FY15

FY16

FY17

FY18

541 318 72

314 102

347 93

-1 FY10

49 FY11

16 FY12

437

-9 FY13

401

104

88 -11

-86 FY14

FY16

FY17

Prestige & Above

581

578

42 40

FY18

FY19

47

52 41

42

FY20e

FY21e

Popular

588

432 5.45 110

153

187

189

1.94

200 -0.13

-87 FY15

Source: Company filings and Spark Capital Research

FY15

37

34

37 41

Overall PAT anticipated to grow ~15% over the next two years.

4

Gross Profit per case (Rs. )

FY14

53

Source: Company filings and Spark Capital Research

EBITDA per case is anticipated to increase to Rs.200 leading to PAT per case of Rs.111

400

31

FY19 FY20e FY21e

Source: Company filings and Spark Capital Research

381

59

95 29

FY11

Volumes in Mn cases 63

100

FY10

88

16

35

FY16

FY17

85

97

100

1.49

EBITDA per case (Rs. )

FY19

7.92

FY18

FY19

8.78

10.55

3.11

-1.17

111 -10.41

FY18

6.66

FY20e FY21e

FY10

FY11

FY12

FY13

FY14

-8.22 FY15

FY16

FY17

FY20e FY21e

PAT

PAT per case (Rs. ) Source: Company filings and Spark Capital Research

Page 65

United Spirits Ltd I Initiating Coverage I Rating: BUY I TP:Rs.659 Thesis

#1 Alcohol Industry volumes to grow led by strong underlying macro growth levers

#2 USL’s wide portfolio straddled across various alcohol offerings keeps them well equipped to demand changes

#3 Strong brands to enable USL consolidate their market leadership

#4 Premiumization journey should aid in improving product and profitability mix.

#5 Transforming from United Spirits India ltd to DIAGEO India

#6 Strategically located manufacturing units provide a natural advantage

#7 Excise duty hikes to be managed through price increases

#8 Margins to be under pressure in the near term; no structural long term threats. Page 66

United Spirits Ltd I Initiating Coverage I Rating: BUY I TP:Rs.659 #1 Alcohol Industry volumes growth to be led by strong underlying macro growth levers Alcohol Industry volumes anticipated to grow at 6.5% CAGR over the next two years…

1,303

1,498

1,699

1,848

1,985

2,015

2,115

2,200

2,484

2,332

…while USL volumes are anticipated to grow ~8% over the next two years

2,645 221 112

2010

2011

2012

2013

2014

2015

2016

2017

2018

2019e 2020e

2010

279

261

243

120

2011

124

2012

121

2013

291

293

289

94

93

90

79

82

2014

2015

2016

2017

2018

Alcohol Industry Volumes (mn cases) (Without Beer)

Alcohol Industry (Without Beer)(Rs.bn) Source: Company filings and Spark Capital Research

344

324

306

299

88

95

2019e 2020e USL

Source: Company filings and Spark Capital Research

Volume growth for the industry should be driven by rise in per capita consumption…

…while price/mix growth to be driven by consumers up trading

7.9

6.6

Country liquor, 30%

Others, 2% Illicit Liquor, 2%

2.74

2.96

3.06

3.05

3.02

Home brewed Alcohol, 11%

3.04

3

Spirits (IMFL), 30%

Wine, 4% 2010

2011

2012

2013

2014

2015

2016

2020

2025

Beer, 21%

Per Capita Consumption (Alcohol) Source: Company filings and Spark Capital Research

Source: Company filings and Spark Capital Research

Page 67

United Spirits Ltd I Initiating Coverage I Rating: BUY I TP:Rs.659 #1 Alcohol Industry volumes to grow led by strong underlying macro growth levers Whisky is the largest among the IMFL market volumes & value consumed and…

13 47

11 61

11 65

10 63

10 65

11 63

12 65

43

42

43

43

44

43

46

42

130

144

157

165

172

174

176

2010

2011

2012

2013

12 41

11 35 44

Whisky

2014

Rum

2015

Brandy

99 219 278

2016

2017

2018

40%

164 299 256

174 295 262

1331

1423

1461

1613

1714

1206

1534

1034

2010

2011

2012

2013

2014

2015

2016

2017

2018

Rum

Brandy

Vodka

Diageo is the market leader in the whisky market ~34% volume share

44%

12%

44%

13%

45%

46%

46%

44%

42%

2014

2015

2016

2017

2018

Rs.500-Rs.1500

Source: Company filings and Spark Capital Research

142 324 258

Whisky

49%

less than Rs.500

143 312 260

Source: Company filings and Spark Capital Research

10%

42%

100 301 301

147 322 272

912

White Spirits

Premium whisky has been gaining share 11%

94 282 305

110 263 307

187

182

Source: Company filings and Spark Capital Research

11%

…has grown the highest from a value share perspective among the IMFL spirits

Above Rs.1500

John Distilleries Pvt Ltd 4%

Others 30%

Mohan Meakin Ltd 5% Radico Khaitan 5% Allied Blenders & Distillers 11%

Diageo Plc 34%

Pernod Ricard 13%

Source: Company filings and Spark Capital Research

Page 68

United Spirits Ltd I Initiating Coverage I Rating: BUY I TP:Rs.659 #2 USL’s wide portfolio straddled across various alcohol offerings keeps them well equipped to demand changes United Spirits Limited (USL)

Pernod Ricard

Radico Khaitan

Allied Blenders & Distillery

Mohan Meakin

John Distilleries

 Johnnie Walker

 100 Pipers

 8PM whisky

 Officer’s choice

 Summer Hall

 Paul John Brilliance

 McDowell's No.1

 Blenders Pride

 After Dark premium whisky

 Officer’s choice blue

 Colonel's Special

 Paul John Edited

 Royal Challenge

 Chivas Regal

 Regal Talon whisky

 Officer’s choice black

 Golden Eagle

 Paul John Bold

 The Singleton (Glen Ord Distillery)

 Seagram's Imperial Blue

 Rampur Indian single malt

 Sterling reserve premium whiskies

 Top Brass

 Paul John Nirvana

 Talisker

 Jameson

 Whytehall

 Officer’s choice star

 Diplomat Deluxe

 Paul John Classic Select Cask

 Signature

 Passport

 Black Knight

 Paul John Peated Select Cask

 Black Dog

 Ricard

 Solan No.1

 Paul John Kanya

 VAT 69

 Royal Stag

 Cellar 117

 Paul John oloroso Single Cask

 Antiquity Blue (USL)

 MMB

 Paul John Mars Orbiter

 Baileys Irish Cream Whisky Liqueur

 Blue Bull

 Paul John Christmas Edition 2018

 Lagavulin (Diageo)

 Original Choice Deluxe Whisky

 Bagpiper (USL)

 Black Pelican Whisky

 Director's Special (USL)  Cardhu (Diageo)  Clynelish (Diageo)  Cragganmore (Diageo)  Dalwhinnie (Diageo)  Glenkinchie (Diageo)  Oban (Diageo)  Gordons (Diageo)  Black & White (Diageo)  Caol Ila

USL has the widest whisky portfolio in India with several scotch offerings that are Bottled In India and several Bottled In Origin Page 69

United Spirits Ltd I Initiating Coverage I Rating: BUY I TP:Rs.659 #2 USL’s wide portfolio straddled across various alcohol offerings keeps them well equipped to demand changes

Pernod Ricard  Absolut Vodka

Radico Khaitan  Magic Moments vodka

 Orloff

USL  Smirnoff (Diageo)

ABD

Mohan Meakin

John Distilleries

 Class 21

 Ciroc (Diageo)  Ketel One (Nolet Distillery)

 White Mischief (USL)  Romanov (USL)

VODKA RUM

 Vana

 Contessa rum

 McDowell's No.1

 Jolly Roger Rum

 Old Monk Supreme Rum

 Pluton Bay rum

 Captain Morgan (Diageo)

 Old Monk Gold Reserve Rum

 1965 premium rum

 Ron Zacapa

 Old Monk XXX Rum

 Original Choice Deluxe XXX Rum

 Old Monk Deluxe XXX Rum

RUM

 Old Monk White Rum  MORPHEUS  OLD ADMIRAL

BRANDY

 McDowell's VSOP Non focus segment

 Kyron Premium Brandy

 Triple Crown

 Mont Castle Grape Brandy

 Lord & Master Brandy

 Doctor's Reserve No.1

 Roulette XO Premium Grape Brandy

 Officer’s Choice Brandy

 D.M.  MMB

Page 70

United Spirits Ltd I Initiating Coverage I Rating: BUY I TP:Rs.659 #3 Strong brands to enable USL consolidate their market leadership The three key focus prestige segment whisky brands have demonstrated considerable growth over the last 5 years. USL brands have ~36% share of the total top 16 brands. Volume Brand

Owner 2014

2015

2016

2017

2018

Volume Share

2018 Vs 2017

201418 CAGR

2014

2015

2016

2017

2018

2018 Vs 2017

201418 CAGR

Officer’s Choice Whisky

Allied Blenders & Distillers

28.4

32.9

32.9

32

34

6.25%

5%

17%

19%

19%

18%

18%

61bps

170bps

McDowell’s No.1 Whisky

United Spirits

13.4

25.7

26.6

26.4

29

9.85%

21%

8%

15%

15%

15%

16%

101bps

774bps

Imperial Blue

Pernod Ricard

14.1

17.5

18

19

22.7

19.47%

13%

8%

10%

10%

10%

12%

171bps

396bps

Royal Stag

Pernod Ricard

16.1

17.3

18

18.7

21.6

15.51%

8%

9%

10%

10%

10%

12%

129bps

221bps

Original Choice

John Distilleries

10.6

10.7

10.1

10.3

11.5

11.65%

2%

6%

6%

6%

6%

6%

50bps

0bps

Hayward’s Fine

United Spirits

4.8

7.1

7.9

8.5

9.4

10.59%

18%

3%

4%

4%

5%

5%

36bps

224bps

8PM

Radico Khaitan

4.3

4.1

5.7

7

8.2

17.14%

18%

3%

2%

3%

4%

4%

54bps

189bps

Blenders Pride

Pernod Ricard

4.8

5.6

6.2

6.4

7.3

14.06%

11%

3%

3%

4%

4%

4%

39bps

112bps

Old Tavern

United Spirits

5.5

11

9.9

7.1

6.2

-12.68%

3%

3%

6%

6%

4%

3%

-58bps

12bps

Bagpiper

United Spirits

3.7

7.3

7.2

5.8

5.6

-3.45%

11%

2%

4%

4%

3%

3%

-19bps

85bps

Royal Challenge

United Spirits

1.4

3.6

4.7

4.5

5.6

24.44%

41%

1%

2%

3%

2%

3%

52bps

219bps

Bangalore Malt Whisky

John Distilleries

0.8

1.1

2.1

3.6

5.2

44.44%

60%

0%

1%

1%

2%

3%

81bps

232bps

Director’s Special Whisky

United Spirits

2.9

5

5

4.1

4.2

2.44%

10%

2%

3%

3%

2%

2%

-1bps

56bps

Signature Whisky

United Spirits

0.9

1.5

1.8

2

2.3

15.00%

26%

1%

1%

1%

1%

1%

13bps

71bps

White & Blue

Alcobrew

0.4

1.2

1.4

1.6

2.1

31.25%

51%

0%

1%

1%

1%

1%

24bps

89bps

Sterling Reserve Premium Whiskies

Allied Blenders & Distillers

N/A

N/A

N/A

N/A

1.2

N/A

N/A

0%

0%

0%

0%

1%

64bps

64bps

Top 16 Brands

112

152

158

157

175

11.40%

12%

65%

87%

89%

86%

94%

Market Size

172

174

176

182

187

2.68%

2%

29%

40%

40%

37%

36%

USL brands

33

61

63

58

62

19%

35%

36%

32%

33%

Source: Spark Capital Research

Page 71

United Spirits Ltd I Initiating Coverage I Rating: BUY I TP:Rs.659 #3 Strong brands to enable USL consolidate their market leadership USL has 3 prestige focus brands, 3 popular focus brands, 2 popular non-focus brands and 1 prestige non-focus brand among the top 16 whiskies sold in India in 2018 Rank

2018 growth

2014-18 CAGR

Category

Brand Importance

21.3%

Prestige

Focus Brand

5.9%

5.9%

Popular

Non-Focus Brand

9.4

18.3%

18.3%

Popular

Non-Focus Brand

7.1

6.2

3.0%

3.0%

Popular

Focus Brand

7.2

5.8

5.6

10.9%

10.9%

Popular

Focus Brand

3.6

4.7

4.5

5.6

41.4%

41.4%

Prestige

Focus Brand

2.9

5

5

4.1

4.2

9.7%

9.7%

Popular

Focus Brand

Whisky – Indian

0.9

1.5

1.8

2

2.3

26.4%

26.4%

Prestige

Focus Brand

Brandy

3.5

3.3

3.6

1.7

1.4

-20.5%

-20.5%

Prestige

Non-Focus Brand

Brand

Owner

Category

2014

2015

2016

2017

2018

3

McDowell’s Whisky

United Spirits

Whisky – Indian

13.4

25.7

26.6

26.4

29

21.3%

16

McDowell’s No.1 Rum

United Spirits

Rum

8.9

17.2

15.7

12.3

11.2

20

Hayward’s Fine

United Spirits

Whisky – Indian

4.8

7.1

7.9

8.5

37

Old Tavern

United Spirits

Whisky – Indian

5.5

11

9.9

38

Bagpiper

United Spirits

Whisky – Indian

3.7

7.3

39

Royal Challenge

United Spirits

Whisky – Indian

1.4

54

Director’s Special Whisky

United Spirits

Whisky – Indian

94

Signature

United Spirits

128

McDowell’s No.1 Brandy

United Spirits

Source: Spark Capital Research

These 9 brands constitute ~92% of company volumes.

The key brand McDowell's contributes to ~50% of the overall volumes of USL . 92%

92%

88%

92%

46

46

3

4

17

16

26

27

26

29

2015

2016

2017

2018

26

48%

40 2 12

42 1 11

4

9

45

94

82

2014

93 2015

Top 9 products cases sold Source: Spark Capital Research

82

90 2016

Overall Cases Sold

72

79 2017

75

82 2018

% of overall cases sold

13 2014

McDowell’s Whisky

McDowell’s No.1 Rum

McDowell’s No.1 Brandy

Source: Industry, Spark Capital Research

Page 72

United Spirits Ltd I Initiating Coverage I Rating: BUY I TP:Rs.659 #4 Premiumization journey should aid in improving product and profitability mix. Volume Share of the premium offering on the uptrend…

…driven by the introduction of the premium scotch portfolio in India Blue Label

78%

77%

73%

67%

63%

59%

53%

49%

47%

45%

41%

47%

51%

53%

55%

Platinum Label Gold Reserve Label

22%

23%

27%

33%

37%

FY12

FY13

FY14

FY15

FY16

FY17

P&A

Popular

Talisker FY18

FY19

FY20e

FY21e

Singleton

Source: Spark Capital Research

Double Black

Value share to be in excess of ~90% over the next few years as per our estiamtes

75% 48% 45%

47%

54%

82%

86%

Black Label

91%

Rare J&B

57%

Red Label

Bottled in Origin (BIO)

32%

30%

35%

34%

FY12

FY13

FY14

40%

37%

FY15

FY16

32%

37%

37%

36%

35%

FY18

FY19

FY20e

FY21e

Black & White

Black Dog P&A Source: Spark Capital Research

FY17

Popular

Vat 69

Bottled in India (BII)

Source: Spark Capital Research

Page 73

United Spirits Ltd I Initiating Coverage I Rating: BUY I TP:Rs.659 #4 Premiumization journey should aid in improving product and profitability mix.

Luxury

> Rs.2,000

Premium

Rs. 900 – 2,000

Prestige

Rs. 350 – 900

Popular

Consumer Prices*

< Rs. 350

* Average consumer prices in India, 750ml bottle

Focus Brands

Source: Company Filings &Spark Capital Research

Page 74

United Spirits Ltd I Initiating Coverage I Rating: BUY I TP:Rs.659 #4 Premiumization journey should aid in improving product and profitability mix. Popular Brands growth expected to stabilize and grow at ~3% in the near term

In FY16, USL decided to franchisee most of its non-focus popular segment brands to local distilleries to focus on its core portfolio of premium brands Date of shifting to Franchise

3%

5%

3%

5%

3%

5% January 2017

0% -3% -7%

-9%

April 2017

-10% -9% -16% May 2017

FY15

FY16

-22% FY17

FY18

FY19

FY20E

FY21E June 2017

Volume growth (%)

Value growth (%)

FY15

Source: Company Filings &Spark Capital Research

Brands Select Popular Segment Brands Select Popular Segment Brands All Brands Select Popular Segment Brands Select Popular Segment Brands Select Popular Segment Brands Select Popular Segment Brands Select Popular Segment Brands Select Popular Segment Brands Select Popular Segment Brands Select Popular Segment Brands Select Popular Segment Brands Select Popular Segment Brands All Brands

Cases 3.3mn cases, 180crs revenue for 9MFY17

7 mn cases, 460crs of revenue in FY17

Source: Company Filings &Spark Capital Research

The income from franchise agreements to grow at ~6% over the next two years. 1,493

161%

State Andhra Pradesh Goa Kerala Pondicherry Andaman & Nicobar Chandigarh Rajasthan Madhya Pradesh Himachal Pradesh Jammu & Kashmir Delhi Sikkim Uttar Pradesh Tamil Nadu

1,492

1,579

The huge potential of the IMIL market is the key underlying growth trigger for the popular brands portfolio

1,670

183% 164

953

184

198

215

229

240

225

230

240

FY16

FY17

FY18

180

686 528

FY15

-28%

-23%

FY16

FY17

FY18

0%

6%

6%

FY19

FY20E

FY21E

Income from brand franchise arrangements Source: Company Filings &Spark Capital Research

growth (%)

FY09

FY10

FY11

FY12

FY13

FY14

FY15

Indian Made Indian Liquor (IMIL)mn cases Source: Company Filings &Spark Capital Research

Page 75

United Spirits Ltd I Initiating Coverage I Rating: BUY I TP:Rs.659 #5 Transforming from United Spirits India ltd to DIAGEO India

• “We started our journey in 2014 with the objective of transforming our business in India from the erstwhile United Spirits to making it a true Diageo subsidiary.

Product Rationalisation

• We went through the process of picking core/focus brands and then refreshing most of them.

Creating a ‘Pull’ demand

• We have made a big change in how we sell from sell in to sell out culture. • We have built a huge muscle of productivity and that has provided us vital fuel to invest back into the business. • We have brought about clarity and accountability in customer service levels by integrating the entire end to end supply chain. • We have put in place better systems and processes and significantly enhanced our controls and speed and quality of reporting. • We have also made a step change in our corporate citizenship, starting by ensuring highest level of compliance and governance in the market, and from compliance to community to road safety. And we have also changed the nature of our engagement that both we and the industry have with the government. • We have made significant organizational changes in terms of our talent, our culture, our business model and our ways of working. • We have sorted out a host of legacy issues that we have inherited as part of the acquisition • And finally, in the last couple of years, we have faced some of the largest external headwinds ever seen in this business –demonetization followed by highway ban and then GST. Despite that, we have come out stronger and every part of this business has been transformed. • And to go back to Ivan’s point, while a lot has been done, we are absolutely not complacent. We know there is a lot more to do and we are focused on trying to do that.”

Investing back into the business Supply chain integration Feedback looping mechanism

Sticking to global standards in dealing with external clients/ relations Changing the way the company works Sorting out the legacy issues Business transformation

Not complacent, but confident

Anand Kripalu Managing Director & Chief Executive Officer of United Spirits Limited

Page 76

United Spirits Ltd I Initiating Coverage I Rating: BUY I TP:Rs.659 #5 Transforming from United Spirits India ltd to DIAGEO India India a key part of Diageo Global’s growth plans..

…so are the prestige segment Indian whisky brands

(Forecast 2017 – 2022, International Spirits, 2017 Constant Currencies)

Diageo #1

78%

North America

Europe

India

LAC

SE Asia Developed Greater Asia China

Africa

Global Travel

Source: Diageo presentations &Spark Capital Research

Total

Incremental Retail Sales £bn

Incremental Retail Sales £bn

(Forecast 2017 – 2022, International Spirits, 2017 Constant Currencies)

Diageo #1

US Whiskey

Gin

Scotch

Other Indian Vodka Tequila Cognac Rum Canadian Liqueur Spirits Whiskey Whiskey Armagnac Whiskey

Source: Diageo presentations &Spark Capital Research

Diageo global has a consolidated ~55% holding in United Spirits

Other 45.2% Diageo Global 54.8%

India a key focus market for Diageo Global: “For Diageo Global the three focus areas are scotch, US spirits, and India. January 2019: Volume growth accelerated. This was largely driven by India, which accounted for nearly 60% of total volume growth as it lapped a weaker prior year period. There were also volume gains in gin and scotch. Contribution from price/mix continued to be strong, with every region delivering positive price/mix. Improved growth in U.S. Spirits and scotch more than offset the adverse impact of the doubledigit net sales growth of Diageo India, a business with lower average NSV per case compared to Diageo’s average." "India, LAC and Africa together accounted for 27% of the global emerging middle class in 2018 and are expected to drive 66% of forecast growth between now and 2030.“ Diageo Global presentations and transcripts

Source: BSE filings &Spark Capital Research

Page 77

United Spirits Ltd I Initiating Coverage I Rating: BUY I TP:Rs.659 #5 Transforming from United Spirits India ltd to DIAGEO India Diageo posses an enviable global portfolio of brands that can be cross pollinated into India (a few of the brands already present in India) Scotch Whisky

Other Whisky

Vodka

Rum

Bell's Blended Scotch Whisky

Crown royal

Ciroc

Captain Morgan

Buchanan’s

Baileys

Ketel one

Ron zacapa

Cardhu

sheridan's

Smirnoff

Cacique

Cragganmore

Bundaberg

Glenkinchie

Pampero

Haig Club justerini and brooks Johnnie Walker Mortlach Oban

Grand old parr Talisker VAT 69 White horse Windsor the singleton Caol ila Royal Lochnagar Clynelish Dalwhinnie Glen elgin

Lagavulin Bulleit Source: Diageo global website &Spark Capital Research

Page 78

United Spirits Ltd I Initiating Coverage I Rating: BUY I TP:Rs.659 #5 Transforming from United Spirits India ltd to DIAGEO India Diageo has 20 brands among the top 150 spirits brands in the World (not including the USL brands) Rank

Brand

Owner

Category

2014

2015

2016

2017

2018

%+/-

4

Smirnoff

Diageo

Vodka

25.6

25.8

25.7

26

26

0%

9

Johnnie Walker

Diageo

Whisky – Scotch

17.9

17.6

17.4

18.3

18.9

1%

13

Captain Morgan

Diageo

Rum

10.4

10.3

10.7

11.7

11.7

3%

31

Crown Royal

Diageo

Whisky – Canadian

5.3

6.2

6.8

7

7.3

8%

33

Baileys

Diageo

Liqueurs

6.2

6.3

6.5

6.9

7.1

3%

36

Gordon’s

Diageo

Gin

4.3

4.3

4.5

5.1

6.5

11%

45

Ypióca

Diageo

Local – Cachaça

5.2

4.9

4.8

5.1

4.7

-2%

55

Tanqueray

Diageo

Gin

2.5

2.7

3.1

3.5

4

12%

68

J&B

Diageo

Whisky – Scotch

3.7

3.5

3.5

3.4

3.2

-4%

73

Yeni

Diageo

Local – Raki

3.5

3.5

3.4

3.4

3

-4%

79

Ketel One

Diageo

Vodka

2.4

2.4

2.4

2.4

2.8

4%

80

Black & White

Diageo

Whisky – Scotch

1.3

1.5

1.8

2.4

2.7

20%

81

Seagram’s 7 Crown

Diageo

Whiskey – American

3.2

2.9

2.9

2.9

2.7

-4%

95

Bell’s

Diageo

Whisky – Scotch

2.2

2.2

2.2

2.2

2.2

0%

99

Cîroc

Diageo

Vodka

2.6

1.8

2.4

2

2.1

-5%

109

Buchanan’s

Diageo

Whisky – Scotch

1.6

1.5

1.7

1.7

1.7

2%

118

White Horse

Diageo

Whisky – Scotch

1.7

1.5

1.3

1.5

1.6

-2%

119

Bulleit

Diageo

Whiskey – American

0.8

1

1.3

1.5

1.6

19%

122

Don Julio

Diageo

Tequila

0.4

0.9

1

1.3

1.5

39%

139

Vat 69

Diageo

Whisky – Scotch

1.2

1.3

1.2

1.3

1.3

2%

Source: Spirits Research &Spark Capital Research

Page 79

United Spirits Ltd I Initiating Coverage I Rating: BUY I TP:Rs.659 #6 Strategically located manufacturing units provide a natural advantage

ZONE

STATES

EAST

Pernod Ricard

USL

West Bengal 











Goa



Madhya Pradesh



Punjab



NORTH SOUTH



UP

Himachal Pradesh

Mohan Meakin

John Distilleries

 

 

Haryana

Rajasthan

ABD



Orissa

Maharashtra WEST

Radico Khaitan







 

Karnataka



Telangana



  



Kerala



Pondichery



Andhra Pradesh



Key markets for USL Page 80

United Spirits Ltd I Initiating Coverage I Rating: BUY I TP:Rs.659 #7 Excise duty hikes to be managed through price increases Excise duty per case has increased at a ~18% CAGR over the past 13 years…

…with majority of the excise duty hike passed on to the consumers y = 0.7594x + 0.0052 R² = 0.479

40% 2289 2394 1657

1882

MRP per case (Rs.)

18%

35%

1388

273

314

394

435

466

609

753

1086

903

30% 25% 20% 15% 10% 5%

FY06 FY07 FY08 FY09 FY10 FY11 FY12 FY13 FY14 FY15 FY16 FY17 FY18 FY19

0% 4%

ED per case

8%

12%

16%

20%

24%

28%

32%

ED per case (Rs.)

Source: Company filings & Spark Capital Research

Source: Company filings & Spark Capital Research

We understand that USL’s key markets are Maharashtra, Karnataka, UP, Rajasthan, Telangana, West Bengal and Rajasthan going by their plant locations

Arunachala Pradesh

Manipur

Dadra

Goa

Assam

Tripura

A&N

Delhi

Haryana

J&K

HP

Maharashtra

Mizoram

Chandigarh

Rajasthan

Jharkhand

Sikkim

Pondicherry

Punjab

Telangana

Andhra Pradesh

Madhya Pradesh

UP

Karnataka

Uttarakhand

WB

Kerala

Tamil Nadu

Chattisgarh

Orissa

80% 70% 60% 50% 40% 30% 20% 10% 0%

Source: State Excise Department filings and Spark Capital Research

Page 81

United Spirits Ltd I Initiating Coverage I Rating: BUY I TP:Rs.659 #8 Margins to be under pressure in the near term; no structural long term threats. Gross margins which has been on the uptrend over the past few years is anticipated to remain flat over the next two years

Gross Profit per case has increased ~4% CAGR over the past 13 years

55% 541 345

318

315

314

347

381

400

437

401

581

578

588

51% 50% 48%

45% 45% 45% 44% 44% 44%

49% 51% 49% 49%

432

25 FY08 FY09 FY10 FY11 FY12 FY13 FY14 FY15 FY16 FY17 FY18 FY19 FY20E FY21E

35

42

47

48

41

37

39

43

51

56

Gross Profit (Rs.bn)

Gross Margin (%)

Raw material cost per case of 9 liters of alcohol is Rs.323 and packaging costs are Rs.202

10%

9%

21%

10%

7% 7%

20%

20%

20%

2% 21%

21%

20%

20%

19%

22%

22%

25%

30%

26%

31%

18%

27%

FY08

FY09

FY10

FY11

FY12

FY13

FY14

FY15

18%

2%

13%

277

3%

3%

19%

19%

231

111 116

Raw material consumed Source: Company filings & Spark Capital Research

35%

32%

30%

27%

FY16

FY17

FY18

FY19

Packaging material consumed

Others

FY08

137 126 142

FY09

164 118

FY10

137

FY11

264

218 157

FY12

168

FY13

Raw Material cost per case (Rs.)

323

317

316

10%

67

Source: Company filings & Spark Capital Research

Raw material and packaging costs are relatively lower in the last two years on account of premiumization

11%

61

FY08 FY09 FY10 FY11 FY12 FY13 FY14 FY15 FY16 FY17 FY18 FY19 FY20E FY21E

Gross Profit per case Source: Company filings & Spark Capital Research

47

174

FY14

196

FY15

202

193

FY16

FY17

202

FY18

Packaging cost per case (Rs.)

Source: Company filings & Spark Capital Research

Page 82

United Spirits Ltd I Initiating Coverage I Rating: BUY I TP:Rs.659 #8 Margins to be under pressure in the near term; no structural long term threats. Extra Neutral Alcohol (ENA) or Rectified Spirit inflation has been in tandem to Molasses prices in India…

…as 70% of ENA is derived from molasses in India as against 4% globally Molasses Non Agri 3% 4% Sugar Beet 2%

World Ethanol production by feedstock

Cane Juice 32%

Aug-15

Feb-16

Aug-16

Feb-17

Aug-17

India WPI Rectified Spirit

Feb-18

Aug-18

Feb-19 Wheat 3%

Molasses price INR/qtl.

Source: Bloomberg & Spark Capital Research

Grain 26%

India Ethanol production by Raw Material

Coarse Grains 56%

Molasses 74%

Source: ISMA presentations and Spark Capital Research

Molasses prices are lower and the process of conversion is also simpler leading to most brown spirits being made out of molasses in India Key Alcohol source

Complexity

Process

Simple

Single Stage Hydrolysis

Sucrose

 Cane juice ; Beet juice; Molasses

Moderate

Two Stage Hydrolysis

Starch

 Cassava; wheat rice; sorghum; millets

Rum

Most Complex

Pretreatment Followed by Liquefaction

 Bagasse; wheat & rice straw; grass

Gin

Cellulose

RM used

With no clear guideline definition of the aw material to be used, most brown malts in India are made out of molasses. Whisky

Country liquors

Molasses

225 – 235 l/ton

Brandy

B- Heavy molasses

300 – 310 l/ton

Grains

above 400 l/ton

Fenny or Feni

Sugar cane

70 – 75 l/ton

Source: ISMA presentations and Spark Capital Research

Vodka

 Whisky is an alcoholic beverage made by distilling the fermented extract of malted cereal grains such as corn, rye, barley, or using neutral grain spirit or rectified grain spirit, or neutral spirit of agricultural origin, or their mixture.  Rum is an alcoholic distillate obtained from fermented juice of sugarcane, sugarcane molasses, or any other sugarcane product, and shall not contain any colouring matter other than caramel.  Gin is a distilled alcoholic beverage made from neutral spirit of agricultural origin flavoured with juniper berries and or other flavoring agents of botanical origin  Country liquors or spirits are alcoholic beverages obtained from distillation of fermented carbohydrates of agricultural origin.  Brandy is an alcoholic beverage made by distillation of wine. Brandy may be aged or matured to possess aroma and taste characteristic of brandy  Fenny or Feni is a distilled liquor made from the fermented juice of cashew apple or coconuttoddy  Vodka is a distilled alcoholic beverage made from the neutral spirit obtained from fermented mash of rye, potato, cassava, grains or any other carbohydrates of agricultural origin.

Source: FSSAI and Spark Capital Research

Page 83

United Spirits Ltd I Initiating Coverage I Rating: BUY I TP:Rs.659 #8 Margins to be under pressure in the near term; no structural long term threats. Molasses prices have been on the uptrend despite record production and high underlying stock of Sugar…

…due to rise in the state determined FRP prices, ex-mill sugar price has been on the downtrend over the past two years. 3,620

300 219

213

208

228

226

105

92.98

74.74

90.8

107.2

77.52

264

145

200

244

263

251

244

283

251

203

325

307

2012-13

2013-14

2014-15

2015-16

2016-17

2017-18

2018-19E

Production

Internal Consumption

Ethanol & RS 13%

170 129.84

2,917

220

3500

3,120 255

230

4000

275

3000 3,040

2500

230

2000

210

1500

145

139.12

1000 500 0

FY10

FY11

FY12

FY13

FY14

FRP (per quintal of Sugar Cane)

FY15

FY16

FY17

FY18

FY19

Avg. ex-mill price of Sugar (INR/tonne)

Source: ISMA presentations and Spark Capital Research

…despite ethanol generate higher profitability C-Grade Molasses

Source: ISMA presentations and Spark Capital Research

150

3,121 2,492

200

Opening Balance

Power Other 6% 1%

Sugar 81%

2,951

3,148

100

Source: ISMA presentations and Spark Capital Research

Sugar Mills derive ~80% of revenues from Sugar, while ethanol is just ~13%...

2,727

38.8

2011-12

66.01

2,951 250

2010-11

58.54

254

245

2009-10

49.8

248

2008-09

43.64

242

260

2007-08

110.33

229

256

We understand that EBP requirements will be met out of diversion in Sugar production rather than from molasses. mn tonnes

B-Grade Molasses

Sugar - Profit/(Loss) (INR/Kg)

-2

-8

Ethanol - Realisation (INR/litre)

47

52

OMCs are advised to prioritise ethanol from 1) 100 % sugarcane juice, 2) B heavy molasses / partial sugarcane juice, 3) C heavy molasses and 4) Damaged Food grains/other sources, in that order.

Sugar Cane crushed in FY19

300

Sugar produced

32.1

Molasses produced

13.8

Alcohol Produced (litres)

3243

Portable Alcohol Indutry demand

1800

Less: Grain based Alcohol (30%)

540

Portable Alcohol industry Usage

1260

Remaining

1983

10% blending requirment

3300

Balance to be diverted from Sugar production

1317

Source: ISMA presentations and Spark Capital Research Source: Industry, Spark Capital Research

Source: ISMA presentations and Spark Capital Research

1 tonne of Sugar Cane - 107 kgs of sugar and 46 kgs of molasses average realistic yield of alcohol @ 235 liters/ton of molasses 500mn cases sold & 9 litre per case and 40% of average alcohol)

Page 84

United Spirits Ltd I Initiating Coverage I Rating: BUY I TP:Rs.659 #8 Margins to be under pressure in the near term; no structural long term threats. USL has been increasing its consumption of non-molasses based offerings

Prices of grain based spirits driven by paddy cost… 3500

70%

3000 2500 2000

35%

1500 20%

1000

10%

500

Source: Company filings & Spark Capital Research

Jun-19

Mar-19

Dec-18

Sep-18

Jun-18

Mar-18

Dec-17

Sep-17

Jun-17

Mar-17

Dec-16

Sep-16

Jun-16

Grain based spirit as a part of USL's RM basket

Mar-16

FY19

Dec-15

FY13

Sep-15

FY09

Jun-15

0

FY08

Source: Bloomberg & Spark Capital Research

…and wheat prices

Packaging cost on the rise on account of higher energy cost.

2500

140 1950

2000

135 130

1500

125 120

1000

115

500

110

Source: Bloomberg & Spark Capital Research

May-19

Jan-19

Sep-18

May-18

Jan-18

Sep-17

May-17

Jan-17

Sep-16

May-16

Jan-16

Sep-15

May-15

Jan-15

Sep-14

May-14

Jan-14

Sep-13

105 May-13

Jun-19

Mar-19

Dec-18

Sep-18

Jun-18

Mar-18

Dec-17

Sep-17

Jun-17

Mar-17

Dec-16

Sep-16

Jun-16

Mar-16

Dec-15

Sep-15

Jun-15

Mar-15

Dec-14

Sep-14

Jun-14

0

Source: Bloomberg & Spark Capital Research

Page 85

United Spirits Ltd I Initiating Coverage I Rating: BUY I TP:Rs.659 Operating margin levers to gain momentum over the medium term EBITDA margins to remain relatively flat over the two years on account of gross margin pressure

EBITDA per case is anticipated to increase by a ~3% CAGR over the two years EBITDA per case

16.4%

16.2%

16.7%

14.0% 187

189

200

12.1%

11.4%

11.2%

0.4% 0.3

9.6

9.9

12.0

15.3

16.6

18.9

FY15

FY16

FY17

FY18

FY19

FY20e

FY21e

10.4%

153 93

104

88

110

4

FY12

FY13

-11 FY14

FY15

FY16

FY17

FY18

FY19

FY20e

11.2

10.9

FY12

FY13

EBITDA (Rs.bn)

Source: Company filings & Spark Capital Research

8.3%

8.0%

7.2%

EBITDA Margin (%)

Source: Company filings & Spark Capital Research

Employee cost as a % of sales is expected to dwindle as pay scales are matched with Diageo global 8.1%

-1.4 FY14

FY21e

EBITDA per case

7.8%

-1.3%

7.8%

7.9%

7.4%

A&P as a % of sales is anticipated to remain flat over the next two years 12.2%

6.9%

6.5%

10.9%

11.3%

10.1% 7.2%

7.6%

9.2%

9.2%

7.2

7.5

8.6

7.8

6.8

6.9

6.8

6.9

7.1

7.4

10.1

10.6

13.0

10.6

6.2

6.7

7.9

8.6

FY12

FY13

FY14

FY15

FY16

FY17

FY18

FY19

FY20e

FY21e

FY12

FY13

FY14

FY15

FY16

FY17

FY18

FY19

Employee Cost Source: Company filings & Spark Capital Research

% of sales

A&P

% of sales

Source: Company filings & Spark Capital Research

Page 86

United Spirits Ltd I Initiating Coverage I Rating: BUY I TP:Rs.659 Operating Profit levers Vs competitors USL Rs.mn

Pernod Ricord

Allied blenders and distillers

Radico Khaitan

2015

2016

2017

2018

2015

2016

2017

2018

2015

2016

2017

2018

Gross Sales

224,060

239,209

257,568

265,559

102,908

119,755

128,486

157,442

21,280

30,072

39,620

55,714

2015

Excise Duty

130,710

154,260

169,393

179,653

40,406

56,180

63,251

85,813

7,163

12,133

19,496

32,385

17,242

Net Sales

93,350

84,949

88,175

85,906

62,502

63,575

65,235

71,629

14,117

17,938

20,124

23,329

14,884

COGS

52,190

47,571

49,297

43,406

26,932

32,587

33,721

34,628

5,353

7,660

10,016

11,657

RM

24,887

29,423

28,561

25,365

24,772

30,423

30,260

32,035

3,634

5,718

8280

9,957

Packaging

18,451

17,946

18,194

15,894

Others

8,852

202

2,542

2,147

2,160

2,164

3,461

2,594

1,719

1,942

1736

1,700

GM

41,160

37,378

38,878

42,500

35,570

30,987

31,514

37,001

8764

10278

10108

11672

Employee cost

7,779

6,800

6,882

6,809

2,289

2,516

2,958

3,286

1,241

1,566

1648

1,640

A&P

10,563

6,154

6,734

7,916

3,860

3,345

3,295

3,760

2,909

3,184

2452

3009

Distribution Cost

1,461

1,310

1,331

1,465

309

387

437

499

304

241

818

770

2016

2017

2018

48,680

62,704

20,607.79

31,881

44,476

15,431

16,799

18,228

7,196

7,206

9,214

9,522

4,294

4,304

5,208

4,792

2,414

2,795

3,817

4,600

488

107

189

130

7688

8225

7,585

8,706

1,195

1,310

1,412

1,550

1,073

1,160

805

873

885

780

227

261

32125.623 36038.737

Freight

2,135

2,092

2,329

2,276

2,467

2,549

2,555

2,637

683

650

802

862

Other expenses

18,892

11,375

11,710

12,027

12,392

6,973

7,630

9,082

2703

3,408

3,328

3845

2,148

2,379

2,226

2,462

EBITDA

330

9,647

9,892

12,007

14,253

15,217

14,640

17,737

1607

1879

1863

2409

1,704

1,946

2,113

2,698

Other Income

811

436

1,053

2,189

395

2,085

903

1,900

44

104

101

150

450

381

196

267

Depreciation

2,229

1,572

1,886

1,923

301

372

456

479

128

203

716

860

383

403

417

409

Interest

6,873

4,574

3,751

2,710

956

324

342

353

628

832

1198

1453

899

847

804

682

PBT

-7,961

3,937

5,308

9,563

13,391

16,607

14,744

18,805

895

948

50

246

871

1,077

1,089

1,873

Extraordinary

-8,392

-274

-3,681

-445

-78

-135

-8

1

5

TAX

520

2,228

697

2,599

4,538

5,781

5,178

6,525

378

297

25

133

195

308

288

638

PAT

-16,873

1,435

930

6,519

8,852

10,826

9,566

12,280

439

516

17

113

676

769

802

1,240

Net Worth

14,676

16,347

17,856

24,191

15,997

19,577

22,654

23,364

2,166

2,695

3,256

3,251

8,293

9,045

10,441

11,568

Capital Employed

66,151

59,903

59,818

59,448

16,083

19,944

25,032

23,661

3,896

2,995

3,886

4,023

12334

11847

12,259

12,946

Inventory

19,519

19,276

19,197

19,343

5,724

6,548

6,264

7,129

419

841

1716

1878

2130

2327

2,930

3,109

Debtors

23,032

29,534

27,112

25,425

15,276

19,769

23,029

24,743

1,620

2680

3306

3553

778

5489

6,240

6,300

Creditors

10,189

12,247

14,551

14,083

8,236

10,017

10,004

11,850

864

1268

2089

2258

1242

1490

3,407

2,977

Source: Company filings, RoC & Spark Capital Research

Page 87

United Spirits Ltd I Initiating Coverage I Rating: BUY I TP:Rs.659 Operating Profit levers Vs competitors USL

Pernod Ricord India

Allied blenders and distillers

Radico Khaitan

Rs.mn

2015

2016

2017

2018

2015

2016

2017

2018

2015

2016

2017

2018

2015

2016

2017

2018

Excise Duty as a % of Gross Sales

58.3%

64.5%

65.8%

67.7%

39.3%

46.9%

49.2%

54.5%

33.7%

40.3%

49.2%

58.1%

53.7%

57.2%

65.5%

70.9%

Excise Duty as a % of Net Sales

140.0%

181.6%

192.1%

209.1%

64.6%

88.4%

97.0%

119.8%

50.7%

67.6%

96.9%

138.8%

115.8%

133.5%

189.8%

244.0%

Cost Of Goods Sold

55.9%

56.0%

55.9%

50.5%

43.1%

51.3%

51.7%

48.3%

37.9%

42.7%

49.8%

50.0%

48.3%

46.7%

54.8%

52.2%

Raw Material

26.7%

34.6%

32.4%

29.5%

39.6%

47.9%

46.4%

44.7%

25.7%

31.9%

41.1%

42.7%

28.8%

27.9%

31.0%

26.3%

Packaging

19.8%

21.1%

20.6%

18.5%

0.0%

0.0%

0.0%

0.0%

0.0%

0.0%

0.0%

0.0%

16.2%

18.1%

22.7%

25.2%

Others

9.5%

0.2%

2.9%

2.5%

3.5%

3.4%

5.3%

3.6%

12.2%

10.8%

8.6%

7.3%

3.3%

0.7%

1.1%

0.7%

Gross Margin

44.1%

44.0%

44.1%

49.5%

56.9%

48.7%

48.3%

51.7%

62.1%

57.3%

50.2%

50.0%

51.7%

53.3%

45.2%

47.8%

Employee cost

8.3%

8.0%

7.8%

7.9%

3.7%

4.0%

4.5%

4.6%

8.8%

8.7%

8.2%

7.0%

8.0%

8.5%

8.4%

8.5%

A&P

11.3%

7.2%

7.6%

9.2%

6.2%

5.3%

5.1%

5.2%

20.6%

17.7%

12.2%

12.9%

7.2%

7.5%

4.8%

4.8%

Distribution Cost

1.6%

1.5%

1.5%

1.7%

0.5%

0.6%

0.7%

0.7%

2.2%

1.3%

4.1%

3.3%

5.9%

5.1%

1.4%

1.4%

as a % of net sales

Freight

2.3%

2.5%

2.6%

2.6%

3.9%

4.0%

3.9%

3.7%

NA

NA

NA

NA

4.6%

4.2%

4.8%

4.7%

Other expenses

20.2%

13.4%

13.3%

14.0%

19.8%

11.0%

11.7%

12.7%

19.1%

19.0%

16.5%

16.5%

14.4%

15.4%

13.2%

13.5%

EBITDA Margin

0.4%

11.4%

11.2%

14.0%

22.8%

23.9%

22.4%

24.8%

11.4%

10.5%

9.3%

10.3%

11.4%

12.6%

12.6%

14.8%

Other Income

0.9%

0.5%

1.2%

2.5%

0.6%

3.3%

1.4%

2.7%

0.3%

0.6%

0.5%

0.6%

3.0%

2.5%

1.2%

1.5%

Depreciation

2.4%

1.9%

2.1%

2.2%

0.5%

0.6%

0.7%

0.7%

0.9%

1.1%

3.6%

3.7%

2.6%

2.6%

2.5%

2.2%

Interest

7.4%

5.4%

4.3%

3.2%

1.5%

0.5%

0.5%

0.5%

4.4%

4.6%

6.0%

6.2%

6.0%

5.5%

4.8%

3.7%

PBT Margin

-8.5%

4.6%

6.0%

11.1%

21.4%

26.1%

22.6%

26.3%

6.3%

5.3%

0.2%

1.1%

5.9%

7.0%

6.5%

10.3%

Extraordinary

-9.0%

-0.3%

-4.2%

-0.5%

0.0%

0.0%

0.0%

0.0%

-0.6%

-0.7%

0.0%

0.0%

0.0%

0.0%

0.0%

0.0%

TAX

0.6%

2.6%

0.8%

3.0%

7.3%

9.1%

7.9%

9.1%

2.7%

1.7%

0.1%

0.6%

1.3%

2.0%

1.7%

3.5%

PAT Margin

-18.1%

1.7%

1.1%

7.6%

14.2%

17.0%

14.7%

17.1%

3.1%

2.9%

0.1%

0.5%

4.5%

5.0%

4.8%

6.8%

RoE

-115%

9%

5%

27%

55%

55%

42%

53%

20%

19%

1%

3%

8%

9%

8%

11%

RoCE

-26%

2%

2%

11%

55%

54%

38%

52%

11%

17%

0%

3%

5%

6%

7%

10%

Inventory Days

32

29

27

27

20

20

18

17

7

10

16

12

24

24

22

18

Debtor Days

38

45

38

35

54

60

65

57

28

33

30

23

9

56

47

37

Creditor Days

17

19

21

19

29

31

28

27

15

15

19

15

14

15

26

17

Core WC days

53

56

45

42

45

50

55

46

20

27

27

21

19

64

43

37

Pernod Ricord’s high gross margin and operational efficiencies are the potential benchmark for United Spirits to aspire for. Pernod Ricord’s margins are also a testament to the margin potential that exists in the category. Premiumization drive coupled with operational cost efficiencies should lead USL closer to Pernod Ricord’s operating margins. Page 88

United Spirits Ltd I Initiating Coverage I Rating: BUY I TP:Rs.659 Financial Leverage Financial leverage to accrue over the next two years as more debt gets repaid out of the FCF generated. Given the rise in credit ratings, USL could also bring down its interest rate significantly over the next two years. 11.8%

13.1%

12.5% 9.5%

7.1%

9.5%

9.4% 7.4%

6.2%

5.4%

4.3%

2.9%

3.2%

2.5%

1.8%

0.87

5.45

7.18

6.07

4.56

8.76

9.85

13.23

6.87

4.57

3.75

2.71

2.37

1.83

1.39

1.2% 0.84

FY06

FY07

FY08

FY09

FY10

FY11

FY12

FY13

FY14

FY15

FY16

FY17

FY18

FY19

FY20

FY21e

Interest Expense

0.7% 0.35

FY22e

% of sales

Source: Company filings & Spark Capital Research

Debt repayment to continue over the next two years and we have assumed for an all time low debt of Rs.8.06bn by FY21. 3.2

3.5

3.3 2.7

1.8

1.6

1.6

1.8

2.6

2.3

1.7

1.4

1.1

0.9

0.6

15.43

14.80

66.04

78.04

58.50

67.11

81.63

82.42

83.07

50.81

42.82

41.55

34.60

28.70

23.70

0.3 16.06

FY6

FY7

FY8

FY9

FY10

FY11

FY12

FY13

FY14

FY15

FY16

FY17

FY18

FY19

FY20

FY21e

Gross Debt

0.1 8.06 FY22e

Gross Debt/Equity

Source: Company filings & Spark Capital Research

Page 89

United Spirits Ltd I Initiating Coverage I Rating: BUY I TP:Rs.659 Cash Flow & Capital efficiency RoE to optically seem lower on account of reduction in leverage

RoIC though to increase from the current ~14% to ~18% 32%

FY10 FY11 FY12 FY13 FY14 FY15 FY16 FY17 FY18 FY19 FY20E FY21E Asset Turnover Leverage

14% 0.6

3.2

0.7

2.6

0.8

2.7

0.8

2.8

0.8

3.2

1.0

4.1

1.3

4.1

1.5

3.5

1.4

2.8

1.6

2.2

1.7

1.8

1.7

1.5

4%

0% 0%

2%

2010 0.00

14%

4%

-2%

-26% -36%

9%

18%

32%

29%

25%

FY11

FY12

FY13

FY14

FY15

FY16

FY17

-1%

3%

2011

2012

2013

2014

-37% 2015 2016 RoE (%)

15%

18%

6%

12%

14%

2017

2018

2019 FY 20E FY 21E

RoIC (%)

Core WC days (as a % of gross sales) to remain flat over the next two years

FY18 FY19 FY20E FY21E

EBIDA 20,491 8,355 12,597 12,165 8,626 5,701 8,614 5,088 9,373 12,016 12,273 13,713 Post tax WC -4,577 -9,513 -5,036 7,523 -14,146 -7,664 -5,787 1,380 -122 6,319 -3,358 -3,294 changes OCF

-11%

Source: Company filings & Spark Capital Research

FCF generation in the next two years should be utilized to repay the debt FY10

-2%

23%

Source: Company filings & Spark Capital Research

23%

-27%

PAT Margin -0.2% 7.4% 2.1% -1.1% -9.8% -8.8% 1.8% 3.5% 7.7% 8.5% 8.5% 9.3% % Dupont

25%

10% -9%

6%

29%

18%

FY10 FY11 FY12 FY13 FY14 FY15 FY16 FY17 FY18 FY19 FY20E FY21E Inventory days

59

55

56

43

46

31

30

28

27

25

25

25

Debtor Days

45

36

36

41

35

27

36

42

38

33

33

33

Creditor days

50

36

40

32

28

16

16

18

20

18

18

18

Core WC Days

54

54

51

52

52

43

50

52

45

39

39

39

15,914 -1,158 7,561 19,688 -5,519 -1,963 2,827 6,468 9,251 18,335 8,915 10,419

CAPEX

-2,734 -2,308 -6,195 -1,506 -2,288 -1,626 -2,580 -2,274 -298 -1,075 -2,147 -2,325

FCF

13,180 -3,466 1,366 18,182 -7,807 -3,590

Source: Company filings & Spark Capital Research

247

4,194 8,953 17,260 6,768 8,094

Source: Company filings & Spark Capital Research

Page 90

United Spirits Ltd I Initiating Coverage I Rating: BUY I TP:Rs.659 Corporate Governance (1/4) – Dr. Vijay Mallya’s impact Initial and Additional Inquiry: “As disclosed in the financial statements for the year ended March 31, 2017, upon completion of the Initial Inquiry which identified references to certain additional parties and certain additional matters, the MD & CEO, pursuant to the direction of the Board of Directors, had carried out an additional inquiry into past improper transactions (‘Additional Inquiry’) which was completed in July 2016 and which prima facie identified transactions indicating actual and potential diversion of funds from the Company and its Indian and overseas subsidiaries to, in most cases, Indian and overseas entities that appear to be affiliated or associated with the Company’s former non-executive chairman, Dr.Vijay Mallya, and other potentially improper transactions. All amounts identified in the Additional Inquiry have been provided for or expensed in the financial statements of the Company or its subsidiaries in prior years. Pursuant to a detailed review of each case of such fund diversion, and after obtaining expert legal advice, the Company has, where appropriate, filed civil suits for recovery of funds from certain parties, including, Dr. Vijay Mallya, before the appropriate courts. Further, at this stage, it is not possible for the management to estimate the financial impact on the Company, if any, arising out of potential non-compliance with applicable laws in relation to such fund diversions. - as disclosed in the financial statements for the years ended March 31, 2016 and March 31, 2017, from the Securities Exchange Board of India (‘SEBI’), in relation to the Initial Inquiry, Additional Inquiry, and matters arising out of the Agreement entered into by the Company with Dr.Vijay Mallya to which the Company has responded and no further communications have been received thereafter” FY18 Annual report Regulatory notices and communications: “as disclosed in the financial statements for the years ended March 31, 2016 and March 31, 2017, from the Ministry of Corporate Affairs (‘MCA’) in relation to its inspection conducted under section 206(5) of the Companies Act, 2013 during the year ended March 31, 2016 and subsequent show cause notices alleging violation of certain provisions of the Companies Act, 1956 and Companies Act, 2013 to which the Company had responded. The Company has received a letter dated October 13, 2017 from the Registrar of Companies, Karnataka (the ‘Registrar’) inviting the Company’s attention to the compounding provisions of the Companies Act, 1956 and Companies Act, 2013 following the aforesaid show cause notices. The Company thereafter filed applications for compounding of offences with the Registrar in relation to three show cause notices, applications for adjudication with the Registrar in relation to two show cause notices and requested the Registrar to drop one show cause notice based on expert legal advice received. The management is of the view that the financial impact arising out of compounding/ adjudication of these matters will not be material. as disclosed in the financial statements for the years ended March 31, 2016 and March 31, 2017, from the Directorate of Enforcement (‘ED’) in connection with agreements entered into with Dr.Vijay Mallya and investigations under the Foreign Exchange Management Act, 1999 and Prevention of Money Laundering Act, 2002 to which the Company had responded and no further communications have been received thereafter; and” FY18 Annual report

Source: Company filings & Spark Capital Research

Sep’18

Dec’18

Mar’19

Diageo

54.8

54.8

54.8

Vijay Mallya

2.0

2.0

2.0

Enforcement Directorate

1.7

1.7

1.7

Institutions

27.5

27.8

27.8

Public

14.0

13.7

13.7

Pledge

1.9

1.9

1.8

Page 91

United Spirits Ltd I Initiating Coverage I Rating: BUY I TP:Rs.659 Corporate Governance (2/4) – Top Management Board of directors remuneration is in acceptable standards of the companies act (all values in Rs.mn) Nature of Transaction

Company

Nature of Relationship

FY15

FY16

FY17

FY18

Remuneration

Anand Kripalu

Managing Director

62

119

123

135

Remuneration

Sanjeev Churiwala

Executive Directors

0

45

Remuneration

Mr Ashok Capoor

Managing Director

66

3

Remuneration

Mr P A Murali

Executive Directors

48

153

Employee share-based payments Anand Kripalu

Executive Directors

5

9

Sitting fee paid

Mahendra Kumar Sharma

Non-Executive directors

1

1

Sitting fee paid

Indu Shahani

Non-Executive directors

1

1

Sitting fee paid

Rajeev Gupta

Non-Executive directors

1

1

Sitting fee paid

D Sivanandhan

Non-Executive directors

2

1

Sitting fee paid

V K Viswanathan

Non-Executive directors

1

1

Sitting fee paid

Nicholas Bodo Blazquez

Non-Executive directors

0

-

Sitting fee paid

Sudhakar Rao

Non-Executive directors

0

-

Sitting fee paid

Ravi Rajagopal

Non-Executive directors

1

-

Director Commission paid

Mahendra Kumar Sharma

Non-Executive directors

5

5

Director Commission paid

Indu Shahani

Non-Executive directors

4

4

Director Commission paid

Rajeev Gupta

Non-Executive directors

3

4

Director Commission paid

D Sivanandhan

Non-Executive directors

4

4

Director Commission paid

V K Viswanathan

Non-Executive directors

2

4

Director Commission paid

Nicholas Bodo Blazquez

Non-Executive directors

2

-

Director Commission paid

Sudhakar Rao

Non-Executive directors

1

-

Director Commission paid

Ravi Rajagopal

Non-Executive directors

2

-

Source: Company filings & Spark Capital Research

FY14

27

Page 92

United Spirits Ltd I Initiating Coverage I Rating: BUY I TP:Rs.659 Corporate Governance (3/4) – Related Party Transactions Most loans extended to group companies by the erstwhile promoter has been written off in FY16. Nature of Transaction Loans advanced to Loans advanced to Assignment of receivables in favour of the Company Loan outstanding Principal amount Loan outstanding Principal amount Trade receivables from related parties Trade Payable to related parties Trade Payable to related parties Trade Payable to related parties Trade Payable to related parties Trade Payable to related parties Trade Payable to related parties Trade Payable to related parties Trade Payable to related parties Trade Payable to related parties Amount due from / (due to) Amount due from / (due to) Amount due from / (due to) Amount due from / (due to) Amount due from / (due to) Amount due from / (due to) Amount due from / (due to) Amount due from / (due to) Amount due from / (due to) Amount due from / (due to) Amount due from / (due to) Amount due from / (due to) Amount due from / (due to) Amount due from / (due to) Amount due from / (due to) Amount due from / (due to) Amount due from / (due to) Amount due from / (due to) Amount due from / (due to) Deposits outstanding Source: Company filings & Spark Capital Research

Company Wine Society of India Private Limited UBHL Diageo India Private Limited Wine Society of India Private Limited UBHL Guinness Nigeria Plc Diageo Plc Diageo Brands BV Diageo India Private Limited Diageo Great Britain Limited Diageo Australia Limited Diageo North America Inc. Diageo Scotland Limited Diageo Singapore Supply Pte Limited Diageo Business Service India Pvt Limited Diageo India Private Limited Diageo Scotland Limited Diageo Singapore Pte Limited Diageo Singapore Supply Pte Limited Diageo Australia Limited Diageo North America Inc. Diageo Great Britain Limited Diageo Vietnam Diageo plc. Diageo Brands BV Relay BV UBHL UBHL - UB Global Corporation Wine Society of India Private Limited UBHL - Pegasus United Breweries Limited Kingfisher Finvest India Limited Sovereign Distilleries Ltd City Properties Maintenance Company Bangalore Limited UBHL

Nature of Relationship Associate Fellow subsidiary Fellow subsidiary Associate Fellow subsidiary Fellow subsidiary Parent Fellow subsidiary Fellow subsidiary Fellow subsidiary Fellow subsidiary Fellow subsidiary Fellow subsidiary Fellow subsidiary Fellow subsidiary Fellow subsidiary Fellow subsidiary Fellow subsidiary Fellow subsidiary Fellow subsidiary Fellow subsidiary Fellow subsidiary Fellow subsidiary Fellow subsidiary Fellow subsidiary Fellow subsidiary Fellow subsidiary Fellow subsidiary Associates Fellow subsidiary Fellow subsidiary Fellow subsidiary Associates Fellow subsidiary Fellow subsidiary

FY14 58 1,285

FY15 29 9,955 117 9,955

-81 -813

88

FY16 15 -249 62 168 -249

FY17 0 0 3 314

FY18 38 0

8 937 5 5 3 20 15 -

6 58 535 4 17 17 1 128

314

-43 5 -4 -17 -29 -18 1 2

-256

2 -254

14,223

14,220

0 13,965

156 182

135 233

86 285

-27

-126 17

0 8

-28

1

-1 0

Page 93

United Spirits Ltd I Initiating Coverage I Rating: BUY I TP:Rs.659 Corporate Governance (4/4) – Top Management

Board of Directors

2015

2016

2017

2018

Total No. of Directors

9

10

10

10

No. of Independent Directors

5

5

5

5

No. of changes in directors over last year

4

2

3

0

Board Members composition in various committees

Director

Audit & Risk Management Committee

Mr Mahendra Kumar Sharma

Member

Nomination & Remuneration

Mr Anand Kripalu

Stakeholders’ Relationship

Corporate Social Responsibility

Member

Member

Mr Sanjeev Churiwala Mr V K Viswanathan

Chairman

Member

Dr (Mrs) Indu Shahani

Member

Chairperson

Member

Chairperson

Mr D. Sivanandhan

Member

Member

Chairperson

Member

Mr Rajeev Gupta

Member

Mr Vinod Rao

Member

Mr John Thomas Kennedy

Member

Member

Member

Mr Randall Ingber

Auditors Auditor

(In Rs.mn) Contingent Liabilities & Commitments

Contingent Liabilities outstanding as on March 31 As % of networth

Source: Company filings & Spark Capital Research;

st

2015

2016

2017

2018

BSR & Co. LLP Chartered Accountants

BSR & Co. LLP Chartered Accountants

Price Waterhouse & Co. Chartered Accountants LLP

Price Waterhouse & Co. Chartered Accountants LLP

2015

2016

2017

2018

9,646

11,826

14,638

14,296

66%

72%

82%

59%

Page 94

United Spirits Ltd I Initiating Coverage I Rating: BUY I TP:Rs.659 Valuations – Relative Valuation The stock has traded between 38x-45x for ~43% of its 10 years history

USL has traded at ~45.3x over the past 10 years 120.0

P/E Multiple range

No. of days traded

% of of no. of days

Cumulative traded no. of days

%of Cumulative no. of days

100.0 +2 SD, 84.8

80.0

10 - 17x

99

4%

99

4%

60.0

17 - 24x

382

15%

481

19%

40.0

24 - 31x

335

13%

816

33%

+1 SD, 65.0 Average PE, 45.3 -1SD, 25.6

20.0

-2 SD, 5.9

59 - 66x

201

8%

2155

86%

66 - 73x

108

4%

2263

90%

73 - 80x

102

4%

2365

95%

80 - 87x

68

3%

2433

97%

87 - 94x

40

2%

2473

99%

94 - 101x

26

1%

2499

100%

101 - 108x

2

0%

2501

100%

Jun-19

78%

Jun-18

1954

Dec-18

15%

Jun-17

385

Dec-17

52 - 59x

Dec-16

63%

Jun-16

1569

Jun-15

16%

Dec-15

403

Jun-14

45 - 52x

Dec-14

47%

Dec-13

1166

Jun-13

12%

Jun-12

291

Dec-12

38 - 45x

Jun-11

35%

Dec-11

875

Dec-10

2%

Jun-10

59

Jun-09

31 - 38x

Dec-09

-

Source: Bloombergg & Spark Capital

Current price presents a valuation upside, even on mean reversion. 1,800 1,600 1,400

Source: Bloombergg & Spark Capital

CMP (Rs.)

1,200

90x

1,000

800

70x

600

50x

400

30x

200

10x Jun-19

Jun-18

Dec-18

Dec-17

Jun-17

Dec-16

Jun-16

Dec-15

Jun-15

Dec-14

Jun-14

Dec-13

Jun-13

Jun-12

Dec-12

Dec-11

Jun-11

Dec-10

Jun-10

Dec-09

Jun-09

0

Source: Bloombergg & Spark Capital

Page 95

United Spirits Ltd I Initiating Coverage I Rating: BUY I TP:Rs.659 Valuations – DCF Valuations We have assumed EBITDA to increase at a ~13% CAGR over the estimated period and a terminal growth rate of ~5% Total revenue EBITDA EBITDA margin % Dep EBIT Tax Effective Tax rate (%) Minority Interest as a % of sales EBI Dep WC Changes as a % of sales Capex FCFF FCFF/EBITDA

FY14

FY15

FY16

FY17

FY18

FY19P

1,06,154

93,350

84,949

88,175

85,906

93,408

FY22E

FY23E

FY24E

FY25E

FY26E

1,25,239

1,38,422

1,57,658

1,79,425

2,04,044

-1,375

330

9,647

9,892

12,007

15,297

16,622

18,933

21,243

23,873

27,906

31,758

36,116

41,042

46,609

52,897

59,997

-1.3%

0.4%

11.4%

11.2%

14.0%

16.4%

2,026

2,229

1,572

1,886

1,923

2,147

16.2%

16.7%

17.0%

17.2%

17.7%

17.7%

17.7%

17.7%

17.7%

17.7%

17.7%

2,325

2,557

2,833

3,138

3,626

4,127

4,693

5,333

6,057

7,471

-3,402

-1,899

8,075

8,006

10,084

9,830

13,150

14,297

16,376

18,410

20,735

24,279

27,631

31,423

35,709

40,552

45,426

50,167

2,762

520

2,228

697

-81%

-27%

28%

9%

2,599

3,281

4,349

5,221

6,093

7,062

8,012

9,118

10,369

11,784

13,382

14,991

16,555

26%

25%

30%

32%

33%

34%

33.0%

33.0%

33.0%

33.0%

33.0%

33.0%

3

4

52

33.0%

-71

181

-166

50

50

50

50

57

65

74

84

95

108

0%

0%

122

0%

0%

0%

0%

0%

0%

0%

0%

0.0%

0.0%

0.0%

0.0%

0.0%

0.0%

0.0%

-6,167 2,026

-2,423

5,795

7,380

7,304

10,035

9,898

11,104

12,266

13,623

16,210

18,448

20,980

23,841

27,075

30,327

33,490

2,229

1,572

1,886

1,923

2,147

2,325

2,557

2,833

3,138

3,626

4,127

4,693

5,333

6,057

7,471

-14,146

9,830

-7,664

-5,787

1,380

-122

6,319

-3,358

-3,294

-3,681

-4,118

-3,153

-3,588

-4,081

-4,638

-5,267

-5,977

-6,779

FY21E

FY27E

FY28E

FY29E

FY30E

2,31,876 2,63,327 2,98,854 3,38,969

-13%

-8%

-7%

2%

0%

7%

-3%

-3%

-3%

-3%

-2.0%

-2.0%

-2.0%

-2.0%

-2.0%

-2.0%

-2.0%

-2,325

-1,643

-2,597

-2,802

-1,843

-917

-2,147

-2,325

-2,557

-2,833

-2,833

-2,833

-2,000

-2,000

-1,000

-1,000

-1,000

-20,611

-9,502

-1,017

7,844

7,262

17,584

6,718

8,043

8,861

9,810

13,850

16,153

19,592

22,537

26,865

30,822

35,540

14.98

-28.80

-0.11

0.79

0.60

1.15

0.40

0.42

0.42

0.41

0.50

0.51

0.54

0.55

0.58

0.58

0.59

FCFF to increase at a ~13% CAGR over the forecast period Measure Volume Price Excise Duty Total income EBITDA Margin (Avg) EBITDA growth (%) FCFF/EBITDA (Avg)

FY20E

1,02,906 1,13,452

Assumption Table FY19-23

FY23-30

8%

8%

3%

3%

11%

10%

10%

13%

17%

18%

12%

18%

42%

Source: Bloomberg & Spark Capital Research

53%

Assuming a WACC of 9.3%, we arrive at our TP: Rs.659 Rs. mn Discounted FCFF PV of Terminal Value EV Less: Net Debt/(net Cash) Implied Market Cap Outstanding Shares Target Price Terminal Growth WACC Terminal Value

FY20 107876 396032 503908 19992 483916 727 659 5.0% 9.3%

8,78,058

Page 96

United Spirits Ltd I Initiating Coverage I Rating: BUY I TP:Rs.659 Financial Summary Abridged Financial Statements Rs. mn

FY13

FY14

FY15

FY16

FY17

FY18

FY19P

FY20E

FY21E

FY22E

1,04,986 47,090 10,908 1,784 9,124 1,563 9,849 -108 946 -1,012 -1,168 -9.3

1,06,154 48,261 -1,375 2,026 -3,402 6,859 13,226 -32357 22,589 -44,891 -10,412 -71.6

93,350 41,160 330 2,229 -1,899 811 6,873 -8392 430 -16,877 -8,219 -56.6

84,949 37,378 9,647 1,572 8,075 436 4,574 -274 4,211 1,383 1,490 10.5

88,175 38,878 9,892 1,886 8,006 1,053 3,751 -3681 8,989 1,001 3,105 21.9

85,906 42,500 12,007 1,923 10,084 2,189 2,710 -445 10,008 6,338 6,656 46.9

93,408 47,374 15,297 2,147 13,150 692 2,372 -1353 12,823 7,002 7,916 10.9

1,02,906 50,794 16,622 2,325 14,297 716 1,834 0 13,180 8,780 8,780 12.1

1,13,452 55,607 18,933 2,557 16,376 835 1,391 0 15,820 10,549 10,549 14.5

1,25,239 60,917 21,243 2,833 18,410 894 844 0 18,460 12,318 12,318 17.0

47,873 0 82,424 4,433 1,34,730 31,026 20,305 1,312 58,386 2,179 2,816 22,664 27,068 1,34,730 1,30,297 1,23,990 77,429

30,323 0 83,071 4,028 1,17,421 35,317 21,905 1,097 35,099 2,381 7,047 19,478 30,415 1,17,421 1,13,394 1,02,869 73,643

14,676 0 50,806 669 66,151 24,062 15,110 1,133 5,731 9,150 3,464 7,787 23,776 66,151 65,482 51,735 38,192

16,347 0 42,817 739 59,903 15,799 14,440 2,821 5,100 620 1,368 7,445 28,109 59,903 59,164 54,355 40,829

17,856 0 41,545 417 59,818 17,503 14,554 1,993 4,612 1,498 872 8,812 27,477 59,818 59,401 55,038 39,175

24,191 0 34,595 662 59,448 18,438 13,714 1,018 4,199 1,235 2,560 12,036 24,686 59,448 58,786 53,973 30,800

30,903 0 28,698 504 60,105 19,323 14,599 1,019 4,230 227 2,829 18,376 18,825 60,105 59,601 55,526 25,642

39,684 0 23,698 504 63,886 21,470 14,421 1,019 4,230 227 3,429 18,376 22,183 63,886 63,382 58,706 20,042

50,233 0 16,057 504 66,794 23,795 14,189 1,019 4,230 227 3,276 18,376 25,477 66,794 66,290 61,768 12,554

62,551 0 8,057 504 71,112 26,353 13,913 1,019 4,230 227 4,188 18,376 29,159 71,112 70,608 65,173 3,642

21,590 19,688 2,243 17,446 27,310 -11,210 -9,924 4,995

-3,822 -5,519 2,325 -7,844 1,703 -2,520 12,350 9,428

-550 -1,963 1,643 -3,607 3,597 38,772 -40,019 12,614

4,735 2,827 2,597 230 4,833 7,514 -11,549 1,988

8,468 6,468 3,330 3,138 6,890 -2,273 -4,749 2,370

13,382 9,251 1,843 7,408 9,936 1,044 -9,661 3,795

21,616 18,335 917 17,418 19,790 -5,715 -8,324 3,056

13,264 8,915 2,147 6,768 8,601 -1,481 -6,834 3,656

15,639 10,419 2,325 8,094 9,485 -1,540 -9,032 3,503

17,561 11,470 2,557 8,912 9,756 -1,713 -8,844 4,415

Profit & Loss Revenue Gross profit EBITDA Depreciation EBIT Other Income Interest expense Exceptional items PBT Reported PAT (after minority interest) Adj PAT EPS (Rs.)

Balance Sheet Net Worth Employee Benefit Obligation Total debt Other liabilities and provisions Total Networth and liabilities Gross Fixed assets Net fixed assets Capital work-in-progress Intangible Assets Investments Cash and bank balances Loans & advances and other assets Net working capital Total assets Capital Employed Invested Capital (CE - cash - CWIP) Net debt

Cash Flows Cash flows from Operations (Pre-tax) Cash flows from Operations (post-tax) Capex Free cashflows Free cashflows (post interest costs) Cash flows from Investing Cash flows from Financing Total cash & liquid investments

Page 97

United Spirits Ltd I Initiating Coverage I Rating: BUY I TP:Rs.659 Financial Summary FY13

FY14

FY15

FY16

FY17

FY18

FY19P

FY20E

FY21E

FY22E

13.6% -2.4% -160.1%

1.1% -112.6% 791.2%

-12.1% -124.0% -21.1%

-9.0% 2823.6% -118.1%

3.8% 2.5% 108.3%

-2.6% 21.4% 114.4%

8.7% 27.4% 18.9%

10.2% 8.7% 10.9%

10.2% 13.9% 20.1%

10.4% 12.2% 16.8%

44.9% 10.4% -1.1%

45.5% -1.3% -9.8%

44.1% 0.4% -8.8%

44.0% 11.4% 1.8%

44.1% 11.2% 3.5%

49.5% 14.0% 7.7%

50.7% 16.4% 8.5%

49.4% 16.2% 8.5%

49.0% 16.7% 9.3%

48.6% 17.0% 9.8%

198% 16% -2% -12% 8% 7% 3.38 0.78

278% -5% -27% 3% 3% -3% 3.01 0.90

-167% -4% -37% -1% -2% -4% 3.88 1.41

49% 5% 10% 5% 14% 15% 5.38 1.42

86% 12% 18% 9% 15% 15% 5.04 1.47

111% 17% 32% 15% 21% 19% 4.66 1.45

141% 33% 570% 16% 23% 24% 4.83 1.55

80% 15% 25% 16% 24% 24% 4.79 1.61

83% 17% 23% 18% 26% 27% 4.77 1.70

83% 18% 22% 19% 27% 28% 4.75 1.76

1.6 7.1 2.0 43 52

2.4 -53.5 -0.4 46 52

2.6 115.7 -0.3 31 43

2.5 4.2 0.6 30 50

2.2 4.0 1.7 28 52

1.3 2.6 3.4 27 45

0.8 1.7 7.7 25 39

0.5 1.2 4.9 25 39

0.2 0.7 7.5 25 39

0.1 0.2 13.6 24 39

126 71,746 -61.4 55 4,90,301 45 25

145 82,837 -8.0 21 4,86,731 -354 -88

145 82,821 -10.1 -75 4,51,243 1,368 -230

145 82,821 55.6 -211 4,52,192 47 160

145 82,837 26.7 147 4,51,366 46 70

1

3

6

5

5

145 82,837 12.4 64 4,43,966 37 48 3.8% 3

727 4,14,184 52.3 45 4,38,807 29 24 8.9% 13

727 4,14,184 47.2 23 4,33,207 26 49 21.0% 10

727 4,14,184 39.3 46 4,25,719 22 41 8.2% 8

727 4,14,184 33.6 40 4,16,807 20 36 9.8% 7

-37.5%

-0.1%

0.0%

0.0%

0.0%

0.0%

0.0%

0.0%

0.0%

0.0%

0.5%

0.0%

0.0%

0.0%

0.0%

0.0%

0.0%

0.0%

0.0%

0.0%

Growth ratios Revenue EBITDA Adj PAT

Margin ratios Gross EBITDA Adj PAT

Performance ratios Pre-tax OCF/EBITDA OCF/IC (%) RoE (%) RoCE (%) RoCE (Pre-tax) RoIC (Pre-tax) Fixed asset turnover (x) Total asset turnover (x)

Financial stability ratios Net Debt to Equity (x) Net Debt to EBITDA (x) Interest cover (x) Inventory days Working capital days

Valuation metrics Fully Diluted Shares (mn) Market cap (Rs.mn) P/E (x) P/OCF(x) EV (Rs.mn) (ex-CWIP) EV/ EBITDA (x) EV/ OCF(x) FCF Yield Price to BV (x) Dividend pay-out (%) Dividend yield (%)

570

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United Spirits Ltd I Initiating Coverage I Rating: BUY I TP:Rs.659 Crystal Ball Gazing United Spirits revenues are likely to grow at a ~10% CAGR over the next three years, supported by volume growth of ~8% and price/mix increase of ~2%. Operating margins are likely to expand on the back of premiumization and cost savings. Operating profits are anticipated to increase at a ~12% CAGR over the next three years. Assuming its 10 year P/E multiple and assigning a multiple of ~45x Revenue growth of 10% to be aided by Volume growth of ~8%

Multiple should remain at its 10 year historical average

Capital efficiency to remain low due to cash accumulation

Operating margin expansion coupled with higher cash levels should lead to ~16% earnings growth

We believe a strong revenue growth and operating margin expansion levers should enable the multiples sustain at mean levels

Total Asset turnover to increase as no major CAPEX is envisioned over the medium term.

P/E multiple

FY23E EPS (Rs.)

Price target

Revenues CAGR

20.0%

12.9%

-2.5%

10.3%

RoE (%)

9%

-8%

6%

23%

40

19.7

786

Gross Margin

50.7%

45.1%

45.4%

48.8%

RoCE (%)

8%

-1%

7%

18%

45

19.7

885

EBITDA CAGR

21.3%

-149.4%

-261.9%

11.8%

RoIC (%)

6%

-3%

3%

18%

EBITDA margin

15.8%

7.1%

9.2%

16.8%

Average 1 yr fwd

EPS CAGR

FY06-FY11 FY11-FY14 FY14-FY19 FY19-FY23E

FY06-FY11 FY11-FY14 FY14-FY19 FY19-FY23E

3.7%

-218.3%

-168.7%

15.8%

PE (x)

25.9

41.3

58.8

42.7

Total Asset Turnover (x)

0.9

0.8

1.4

1.7

EV/EBITDA (x)

14.7

21.6

32.0

25.6

Total WC days

49

52

47

39

Peak 1 yr fwd

Pre-tax OCF/EBITDA (%)

62%

186%

20%

82%

PE (x)

40.7

102.5

98.6

47.4

Post Tax OCF as a % of IC

8%

6%

8%

17%

EV/EBITDA (x)

24.4

49.3

44.9

27.3

Debt/EBITDA

6.1

-13.2

31.6

0.4

Entry = Rs. 570@ 39x FY21E EBITDA

Cumulative Dividends NIL

EPS CAGR of ~16%, exit multiple of 45x on FY23E EPS

TOTAL RETURN OF

55%

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Indian Alcoholic Beverages Industry | Initiating Coverage Spark Disclaimer Spark Disclaimer Spark Capital Advisors (India) Private Limited (Spark Capital) and its affiliates are engaged in investment banking, investment advisory and institutional equities. Spark Capital is registered with SEBI as a Stock Broker, corporate member on the Bombay Stock Exchange and National Stock Exchange and Category I Merchant Banker. We hereby declare that our activities were neither suspended nor we have defaulted with any stock exchange authority with whom we are registered in the last five years. We have not been debarred from doing business by any Stock Exchange/SEBI or any other authorities, nor has our certificate of registration been cancelled by SEBI at any point of time.

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No

Details of Financial Interest of covering analyst/ and his relatives

No

Investment banking relationship with the company covered

No

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No

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Indian Alcoholic Beverages Industry | Initiating Coverage Spark Disclaimer Analyst Certification of Independence The views expressed in this research report accurately reflect the analyst’s personal views about any and all of the subject securities or issuers; and no part of the research analyst’s compensations was, is or will be, directly or indirectly, related to the specific recommendation or views expressed in the report. Additional Disclaimer for US Institutional Investors This report was prepared, approved, published and distributed by Spark Capital Advisors (India) Pvt. Ltd a company located outside of the United States (a “non-US Group Company”). This report is distributed in the U.S. by LXM LLP USA, a U.S. registered broker dealer, on behalf of Spark Capital Advisors (India) Pvt. Ltd only to major U.S. institutional investors (as defined in Rule 15a-6 under the U.S. Securities Exchange Act of 1934 (the “Exchange Act”)) pursuant to the exemption in Rule 15a-6 and any transaction effected by a U.S. customer in the securities described in this report must be effected through LXM LLP USA.

Neither the report nor any analyst who prepared or approved the report is subject to U.S. legal requirements or the Financial Industry Regulatory Authority, Inc. (“FINRA”) or other regulatory requirements pertaining to research reports or research analysts. No non-US Group Company is registered as a broker-dealer under the Exchange Act or is a member of the Financial Industry Regulatory Authority, Inc. or any other U.S. self-regulatory organization. Analyst Certification. Each of the analysts identified in this report certifies, with respect to the companies or securities that the individual analyses, that (1) the views expressed in this report reflect his or her personal views about all of the subject companies and securities and (2) no part of his or her compensation was, is or will be directly or indirectly dependent on the specific recommendations or views expressed in this report. Please bear in mind that (i) Spark Capital Advisors (India) Pvt. Ltd is the employer of the research analyst(s) responsible for the content of this report and (ii) research analysts preparing this report are resident outside the United States and are not associated persons of any US regulated broker-dealer and that therefore the analyst(s) is/are not subject to supervision by a US broker-dealer, and are not required to satisfy the regulatory licensing requirements of FINRA or required to otherwise comply with US rules or regulations regarding, among other things, communications with a subject company, public appearances and trading securities held by a research analyst account. Important US Regulatory Disclosures on Subject Companies. This material was produced by Spark Capital Advisors (India) Pvt. Ltd solely for information purposes and for the use of the recipient. It is not to be reproduced under any circumstances and is not to be copied or made available to any person other than the recipient. It is distributed in the United States of America by LXM LL P USA and elsewhere in the world by Spark Capital Advisors (India) Pvt. Ltd or an authorized affiliate of Spark Capital Advisors (India) Pvt. Ltd . This document does not constitute an offer of, or an invitation by or on behalf of Spark Capital Advisors (India) Pvt. Ltd or its affiliates or any other company to any person, to buy or sell any security. The information contained herein has been obtained from published information and other sources, which Spark Capital Advisors (India) Pvt. Ltd or its Affiliates consider to be reliable. None of Spark Capital Advisors (India) Pvt. Ltd accepts any liability or responsibility whatsoever for the accuracy or completeness of any such information. All estimates, expressions of opinion and other subjective judgments contained herein are made as of the date of this document. Emerging securities markets may be subject to risks significantly higher than more established markets. In particular, the political and economic environment, company practices and market prices and volumes may be subject to significant variations. The ability to assess such risks may also be limited due to significantly lower information quantity and quality. By accepting this document, you agree to be bound by all the foregoing provisions. LXM LLP USA assumes responsibility for the research reports content in regards to research distributed in the U.S. LXM LLP USA or its affiliates has not managed or co-managed a public offering of securities for the subject company in the past 12 months, has not received compensation for investment banking services from the subject company in the past 12 months, does not expect to receive and does not intend to seek compensation for investment banking services from the subject company in the next 3 months. LXM LLP USA has never owned any class of equity securities of the subject company. There are not any other actual, material conflicts of interest of LXM LLP USA at the time of the publication of this research report. As of the publication of this report LXM LLP USA, does not make a market in the subject securities.

Absolute Rating Interpretation

BUY

Stock expected to provide positive returns of >15% over a 1-year horizon

ADD

Stock expected to provide positive returns of >5% – <15% over a 1-year horizon

REDUCE

SELL

Stock expected to provide returns of <5% – -10% over a 1-year horizon

Stock expected to fall >10% over a 1-year horizon

SPARK CAPITAL ADVISORS | Board: +91.44. 4344 0000 | www.sparkcapital.in Spark Capital Advisors (India) Pvt. Ltd. is a SEBI registered Research Analyst bearing SEBI Registration No. INH200001459

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