Millennium Beer Industries Ltd merged Management Discussions

MILLENNIUM BEER INDUSTRIES LIMITED ANNUAL REPORT 2009-2010 MANAGEMENT DISCUSSION AND ANALYSIS INDUSTRY OVERVIEW: The per capita consumption of beer in India continues to be very low as compared to other countries. There has been a steady growth in the Indian Beer Industry of about 15% per year over the last five years, with Industry volumes crossing 200 million cases in financial year 2009-2010 from about 100 million cases in financial year 2003-2004. Considering the Indian demographics, with around 70% of the population below the age of 30 years, growing income and increasing international influence, the industry is expected to maintain if not exceed, its growth at present rate. The Indian market infrastructure is a barrier to higher growth. In India, alcohol is available in around 65,000 outlets including shops, bars and restaurants which translates to roughly one outlet for every 18,000 residents, whereas the global average for the same is one outlet per 250 residents and the corresponding figure for China is one outlet for every 300 residents. For instance, in urban conglomeration like Greater Mumbai, there are around 2,500 outlets while in Shanghai, which has similar population base, the number of outlets selling alcohol is 18,000. An encouraging development is that in some cities, like Mumbai, the government has started to issue licenses for outlets to sell beer and wine only, delinking it from the sale of Spirits. Taxation is another major factor which adversely affects the India brewing industry. In India, all the alcoholic beverages are taxed uniformly irrespective of their alcohol content. Consequently, same rate of taxation is applied for spirits, lager beer, strong beer and other alcoholic beverages, resulting in higher price for beer relative to high alcohol beverages. Across the globe, levies on beer are typically at half the rate applicable to spirits, providing an incentive for consumers towards lower alcohol beverages. Due to the prevalent excise taxation structure, the majority of Indians who consume alcohol prefer to purchase spirits over beer as it contains higher alcohol at a similar price. Therefore in India, unlike most other countries, consumption of spirits is higher than beer. Some states have recently started to delink beer taxation from spirits, thereby promoting a logical growth in the future. Taxation & Regulation of alcohol being a State subject under the Constitution of India, each State has separate set of regulations, restrictions and taxation structure for the alcoholic beverages. Some States also impose high export duties and restrictions on the export of beer outside the State. Even the sales & distribution structure varies from State to State as some markets are open while in most States primary sale is canalized through State controlled corporations. Over last 5 years, a plethora of foreign brands have entered the Country as 100% Foreign Direct Investment is permitted thereby increasing the choice of brands and competition. All major global brewers are now present in India. OUTLOOK: While multinational companies are expected to increase competition in the premium beer segment, established domestic brands have the advantage of having an established brand equity. Several international brewers have currently built brand associations and are marketing their brands aggressively through various point-of-sale promotions throughout their distribution networks. Your Company has the benefit of a strong route to market combined with Indias leading brands. A double digit growth rate is expected for the coming years, resulting from the increase in disposable income and the growth of consumers entering the legal drinking age. On-trade sales are expected to grow considerably with growing affluence among young consumers together with the culture of frequenting pubs and clubs that is now spreading to second-tier cities. Off-trade sales are meanwhile expected to be boosted by the gradual deregulation of beer retail, through supermarkets/hypermarkets and beer & wine licenses. OPERATIONS SALES: During the year under report your Company sold 1,022,910 HL of beer as against 823,596 HL in the previous year representing a growth of 24.2%. The industry, grew by 10% during the same period. Net sales for the year 2009- 2010 stood at Rs. 2,855 million as compared to Rs. 2,342 million in the previous financial year reflecting an increase of 22%. The growth was driven mainly by improved product mix and higher realization. MANUFACTURING AND OTHER OPERATING EXPENSES: Manufacturing expenses for the year under review stood at Rs.2,027 million constituting 71% of total expenses as compared to Rs.1,679 million in the previous year constituting 66.8% of the total expenses. Your Company has undertaken market focused initiatives and internal measures to contain costs and improve margins. A significant increase in price of the second hand bottles on account of hoarding by bottle traders has adversely affected manufacturing costs. The units of have installed solid fuel boilers which has resulted in a reduction of fuel cost. The units are continuously improving efficiencies in the brewing process as well as packing thereby reducing the manufacturing costs. OPPORTUNITIES & THREATS: With growing demand, the domestic production of beer is on the rise. International brewers have established breweries across India in order to extend their brand presence to more States. With these international brands starting domestic production in India, indigenous brands such as your companys face competition. International premium lager is growing steadily (though on a smaller base) as the companies have expanded their distribution across India, and have launched several new brands during the year under review. India is predominantly a spirits market and beer is a minority preference for those who consume beverage alcohol. The low penetration in beer consumption in comparison to international levels offers the expectation of substantial and sustainable growth in demand for beer in years to come, particularly given the youthful age of Indias populace. It is expected that gradually there will be a deregulation in the Indian beer industry too, giving it a boost. Foreign brewers have been eyeing the Indian market for some years now as India is widely acknowledged to be the last untapped big growth market. RISKS AND CONCERNS: The Indian beer industry is plagued with a myriad of taxes & levies that vary from State to State. These along with price regulation, inadequate market infrastructure and restrictions in interstate movement of beer, pose a great challenge for the industry. Unlike most developed countries where beer is less regulated and available freely, high level of regulation and higher end consumer price hampers beer sales in India. Uniform tax regime for beer in all States will be a boon for the industry. If implemented, it will help the beer industry by rationalizing end consumer prices in all States, as is in the case of other consumer goods. Globally, the policy of uniform taxation has been a success because of inherent positive implications on Government revenue. In addition to economic contribution, a uniform tax structure will also create increased agro linkages that are beneficial to a country like India. It is important to realize that the beer sector can contribute immensely to the agricultural sector, as beer is an agro-based product. Barley farmers particularly stand to benefit from the growth of the beer sector. Additionally, the continuing control on pricing as exercised by a number of State Governments has resulted in our inability to raise prices on most of our sales. This has had a direct bearing upon the Companys profitability. As this challenge continues in the current financial year, it has resulted in a number of key markets becoming unattractive from a financial perspective. Excessive regulation and further extensions of Government intervention, in the areas of distribution and pricing, is affecting the growth and profitability of the industry as well as restricting Government revenues. In addition, restrictions on advertising and licensing of retail outlets continue to present challenges to the Industry. Inclusion of alcoholic beverages into Goods and Service Tax (GST) is uncertain. Non-inclusion of alcoholic beverages in purview of GST would be against the fundamental concept of GST and could have a material negative impact. However, even if it is included there may be material negative impact on input cost. INTERNAL CONTROL SYSTEM: Your Company has established a robust system of internal controls to ensure that assets are safeguarded and transactions are appropriately authorized, recorded and reported. Internal Audit evaluates the functioning and quality of internal controls and provides assurance of its adequacy and effectiveness through periodic reporting. Your Companys internal control systems are adequate and are routinely tested and certified by statutory and internal auditors. The process adopted provides reasonable assurance regarding the effectiveness and efficiency of operations, reliability of financial reporting and compliance with applicable laws and regulations. In order to continuously upgrade the internal control system, to be in line with International best practice and to ensure total corporate governance, your Company has implemented risk assessment, control self assessment and legal compliance management systems. These have been updated during the year under review. The internal control system evaluates adequacy of segregation of duties and reliability of management information systems, including controls in the area of authorization procedures and steps for safeguarding assets. Planned periodic reviews are carried out for identification of control deficiencies and opportunities for bridging gaps with best practices along with formalization of action plans to minimize risks. Your Company believes that the overall internal control system is dynamic, and reflects the current requirements at all times, hence ensuring that appropriate procedures and controls, in operating and monitoring practices are in place. Internal Audit reports to the Audit Committee and recommends control measures from time to time. CORPORATE SOCIAL RESPONSIBILITY: Corporate Social Responsibility has become an integral part of the organizational philosophy in the company. Primary Health, Primary Education and Water continue to be the areas of focus. In Dharuhera, your Company had adopted the Government Primary School and its long term engagement continues with them. During the year, your Company supported the school by not only providing educational aids and supplementing mid day meals but also enhanced the quality of education imparted by deploying more teachers. It is because of your Companys initiatives that the enrolment figures have increaed from 33 in 2007 to 73 in 2010. The Aurangabad unit of your Company has planted about 150 trees around the boundary wall to develop a green belt around the plant. Also, the unit is in the process of setting up a Primary Health Centre and drinking water facility for the nearby village. HUMAN RESOURCES: People continue to be the focal point of the organizations development. The Human Resource agenda for the year was to strengthen its people capability and thus enhancing its people productivity. During the year, your Company invested significant time and effort in evaluating the job requirements and identifying individual developmental needs based on the same. the organization also completed the succession planning exercise that has enabled us to fill critical positions internally. Your Company continued to significantly improve the performance in the areas of productivity and safety by means of focused inititatives. Your Company maintained harmonious employee relations during the year. As on March 31, 2010, the total employee strength of your Company stands at 212. Your Directors place on record their sincere appreciation to all employees for their contribution towards the continuous success of the organization.