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APRIL 10, 2005
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Budget 2005
Online Special

A special Ernst & Young report on the scenario in several sectors pre-Budget, and what they look like post-Budget 2005.


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Finnish

Finland, like India, has 0.7 per cent of world trade. It leads in communications technologies, from paper to phone handsets, and nearly owns the entire market for such niche products as ice-breakers. It has the hardware competence. India, the software. It is inviting Indian firms to joint hands to map the entire technology value chain—from start to finish.

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Business Today,  March 27, 2005
 
 
All Work And No Play?

The king of good times gets down to some serious business, with investments of roughly Rs 10,000 crore. After becoming the world's second largest liquor maker with the acquisition of Shaw Wallace, he's now attempting to become a leader in Indian aviation.

UB Group's Mallya: The liquor baron is on a quest for global glory

Vijay Mallya is on his way from parliament to Delhi's Palam domestic airport. The Rajya Sabha MP, clad in a short-sleeved kurta and pyjama, slips effortlessly into the avatar of Chairman of the Rs 4,000-crore UB Group, as he dashes towards his private jet, a purring Boeing 727 that's set to take off for Mumbai. The 727-originally a 140-seater now converted into three spacious coupes that can seat 26-is Mallya's favourite flying machine (he also owns a 14-seater Gulfstream and a seven-seater hs-125).

Already strapped to their seats are UB group President and CFO Ravi Nedungadi-Mallya's finance pointman-and two senior lawyers from Delhi law firm Luthra & Luthra. Once Mallya gets on board, the aircraft almost immediately begins its ascent. Within a few minutes, at 34,000 feet, the Chairman edges his way to the in-flight bar, calls for one of the two airhostesses (dressed in a blue business suit with a side slit) and asks for his favourite drink-what else but Kingfisher. Nedungadi warns that his boss may need some time to discuss a highly confidential matter with the lawyers. Mallya, after all, has his eyes set on long-time competitor in the liquor business, the Chhabrias-controlled Shaw Wallace, and as Business Today went to press, the 49-year-old flamboyant Chairman had the Vidya Chhabria-chaired company in the bag. "Wait till next week. We will have a big announcement to make," Mallya teased this correspondent last fortnight, in a free-wheeling, mid-air chat.

MALLYA HAS HIGH-OCTANE INVESTMENTS ON HIS PLATE...
» 54.54 per cent of shaw Wallace Rs 1,300 Crore
» Investment for kingfisher airlines over the next three years Rs 8,492 Crore
» Additional 49 per cent of Herbertsons Rs 131 Crore
» Acquisition of Karnataka Breweries and Distilleries Rs 180 Crore
» Remaining 35 per cent in Associated Breweries Rs 30 Crore
...ALTHOUGH MALLYA IS CONFIDENT OF TYING UP THE REQUIRED FUNDS.
» Has tied up $300 million (Rs 1,320 crore) line of credit with ICICI Bank
» May get 85 per cent of the airline funding from European Credit Agency
» Has pledged his 10 per cent stake in Aventis for Rs 250 crore
» Has raised Rs 217 crore from Scottish & Newcastle by giving 17.5 per cent stake in UB Ltd.
» Divested stake in Bayer Crop Sciences, and plans to exit other non-core businesses like UB Engineering at a later stage

The big announcement turned out to be the big deal itself. On the afternoon of March 21, after hectic negotiations in Dubai over valuations, Mallya signed a deal with Vidya Chhabria, Chairperson of Shaw Wallace & Co. (SWC), for acquiring a 54.54 per cent stake in the liquor maker from the Chhabria's holding company, Jumbo World Holdings Ltd., for $300 million (about Rs 1,300 crore). Mallya will pay Rs 325 per share for the promoters' holding, which includes a non-compete premium of Rs 65. As a result, Mallya's open offer price for shares of SWC has now been revised by Rs 10 to Rs 260 per share. As BT went to press, reports indicated that South African Breweries (SAB) had expressed interest in buying out the residual 50 per cent of SWC's brewery business, now owned by Mallya (SAB had earlier bought a 50 per cent stake in SWC's brewery business for $132.8 million, Rs 618.84 crore then, in mid-2003), although an SWC spokesperson did not confirm it. One valuation exercise estimates the worth of 50 per cent holding at $175-200 million (Rs 770-880 crore).

With Shaw Wallace in the bag, Mallya now becomes the second largest spirits seller in the world with volumes of 60 million cases, only behind Diageo (91 million cases), pushing Pernod Ricard and Allied Domecq to the third and fourth positions. "When I get Shaw Wallace, the whole dimension will change. I will be the biggest player in the world's fastest growing emerging market," Mallya told BT before actually signing the deal last fortnight. Adds Nedungadi: "In a way, we are trying to achieve a certain level of critical mass. Mr. Mallya always had the aspirations to become a global player." Pipes in Vijay Rekhi, President of UB's Spirits division: "UB will have a nearly 60 per cent market share in spirits in India." Mallya plans to consolidate all his spirits businesses under one company, United Spirits.

The Chhabrias, who sold 50 per cent of Shaw Wallace Brewery to SAB of South Africa in 2003, have now bowed out of the Indian liquor industry with SWC's sale
Vidya Chhabria
Chairperson/Jumbo Group

One potential hiccup, though: Whilst the Shaw Wallace buyout will enable Mallya to lay his hands on such blockbuster brands as Royal Challenge, Antiquity and Director's Special, the flip side is that he will also have to swallow the huge liabilities-the Chhabria company's income tax liabilities are estimated at anything between Rs 400 crore and Rs 900 crore.

Mallya, who has arguably over the years made a bigger splash with his playboy image, heavy horses, high fashion, swank mansions, swimsuit-splashed calendars, fast cars, stretched yachts and stretched-into-the-morning yacht parties, is these days more keen to let his businesses walk the talk. He's reportedly lined up to step into Donald Trump's shoes for a TV channel's desi adaptation of The Apprentice, but Mallya's in no mood to fire anybody in the UB boardrooms (not yet, at least). Rather, he's all fired up to make investments of roughly Rs 10,000 crore in liquor and beer acquisitions and also in his ambitious low-cost airline foray. The acquisition blueprint also includes Herbertsons, where Mallya has increased his stake to 92.21 per cent by buying out one-time bitter rival Kishore Chhabria's 49.06 per cent holding for Rs 131.16 crore. For the airlines venture-positioned somewhere between the full-service players and the low-cost Air Deccan variety-Mallya plans to acquire all of 33 aircraft in the next three years and lease four more.

To be sure, UB will always be on the acquisition trail in liquor and beer. For instance, since 2001 the beer division has gobbled up at least seven breweries at an outlay of a little under Rs 500 crore. "These acquisitions raise entry barriers (for competitors like SAB), are synergistic, are at the right price, and provide us with capacity as the market grows," explains Kalyan Ganguly, President and CEO of UB Ltd.

HANGOVER ON THE HORIZON?
Mallya's liquor and beer stocks are on a high, but they appear to be outlandishly valued.
These are bullish times, but if Vijay Mallya's flagship stocks do deserve the valuations they command, the Sensex should arguably be over 10,000, and gaining. Consider: The stock of the liquor company, McDowell & Co., has pole-vaulted from Rs 50 into the Rs 200 range over the past year, and UB Ltd. (the brewing business) has zoomed from Rs 90 to around Rs 400 in the same period-the Sensex for its part in the last one year has gained 24 per cent. What's more, such heady appreciation in the Mallya scrips hasn't exactly been on the back of quality earnings, as has been the case for most of the top tier of India Inc. Unsurprisingly then the price/earnings ratios of Mallya's liquor and beer stocks are looking pretty unrealistic (see accompanying chart). If you compare McDowell to competitor Radico Khaitan, the latter's margins are much healthier. Is that a fair comparison? Mallya thinks not. "I sell 40 million cases nationally, they (Radico) sell 10 million. This is one industry where as your volumes go up the bottom line gets affected."

That may not seem like good news, but the silver lining, according to Sonal Shah, head of the food and agribusiness advisory at Rabo Bank, the alcoholic beverages industry is "poised for growth". So are buyers lapping up UB stock for the long term? To be fair, the buyouts and sale of non-core business should go a long way in making Mallya's companies more competitive. "World over it's not the dividend you pay that matters, but the price of the stock that delivers value to shareholders," contends Mallya. His stocks are doubtless on a high. Now he's just got to assure they stay up there.

Whilst the liquor gameplan is audacious in itself, it still pales in comparison with what Mallya has lined up for the airline sally-a business in which he burned his fingers once with UB Air. Mallya expects Kingfisher Airlines to be the biggest contributor to group revenues in five years, but analysts point out that the balance sheets of UB Group companies aren't exactly beefy, and they will be stretched as it is to finance the liquor acquisitions, never mind the Rs 8,000 crore-odd needed to finance the airline foray. After all, for the nine month period ending December 31, 2004, the five major listed group companies under the UB umbrella had a collective turnover of Rs 2,052.47 crore and a measly net profit of Rs 16.72 crore. Profit margins too are nowhere comparable to industry peers, with liquor company McDowell & Co. returning profits of just 2 per cent on sales of Rs 1,091.4 crore last year. Some of Mallya's peers boast net margins of 4-5 per cent at least. United Breweries, the beer businesses, just about managed to stay in the black with Rs 2.78 crore net profit on sales of Rs 432 crore. And UB Engineering is in the red with Rs 14.85 crore net loss. Valuations too are totally out of whack because the stock price appreciation was driven not as much by earnings but largely by news of proposed acquisitions and stake sales (late last year, Mallya sold a 17.5 per cent stake in UB Ltd. to Scottish & Newcastle, s&n, for Rs 217 crore). Cash flows of just Rs 136.33 crore (from five listed companies) in 2004 will make it difficult for Mallya to leverage the gargantuan amounts of debt that will be required.

"After the (Shaw Wallace) deal, UB would have a nearly 60 per cent market share in spirits in India"
Vijay Rekhi
President
UB Spirits Division
"Acquisitions raise entry barriers (for competitors), are synergistic, are at the right price, and provide us with capacity as the market grows"
Kalyan Ganguly
President & CEO/ UB Ltd.

Mallya admits UB Engineering needs "fixing" (and he is going to do it), whilst the low profitability of his liquor and beer businesses are more a function of the industry structure than a reflection of the way he runs his companies. "Because of price control and highly regulated distribution and marketing policies, the profits remain low," he says. For instance, Tamil Nadu raised the prices for liquor after seven long years. Yet, industry analysts point out that there are companies that are more efficiently run-Radico Khaitan, for instance, which can be compared to McDowell, has returned much better profits: Rs 18.25 crore on sales of Rs 391.6 crore.

Mallya predictably is unfazed by the mediocre performance of his listed companies, and the doubts being raised about his funding abilities. He claims to have already put in his own money to the tune of Rs 160 crore into the airline venture so far (he has leased four planes already). By December 2005, he will invest another Rs 100 crore to take the paid-up capital of the airline company, Kingfisher Airlines, to Rs 260 crore. "All this will be UB money and zero debt," claims Mallya. He also claims to have signed a deal with Airbus to acquire 33 planes (all to be delivered between 2005 and 2008), which will entail an investment of more than Rs 8,000 crore. "85 per cent of the finance needed for this will be tied up with European Credit Agency (ECA)," he says. Sources also point out that a credit line of $300 million (Rs 1,320 crore) secured from ICICI Bank last December will be used to fund the Shaw Wallace acquisition.

Meantime, Mallya has also got into a divestment spree as a means to bring funds to the table. He's got plenty to choose from, at the helm of a group with such diverse interests that include pharma, fertilisers, engineering, it and real estate. In addition to the stake sale to S&N, he also sold his holding in Bayer Crop Science last November. Mallya is believed to have pledged his 10 per cent stake in pharma company Aventis, which is worth some Rs 250 crore. He is also believed to be looking at exits from a few of the non-core businesses like UBICS (the it arm) and UB Engineering.

MALLYA VS. CHHABRIA: THE 20-YEAR SAGA
They came together, fell out, competed bitterly, and have now made up. At the right price, of course.
SWC's Komal Chhabria: Chhabria tried to bail SWC out of its debt trap, but was unsuccessful

Two decades ago, Vijay Mallya and the late Manu Chhabria made a bid for Shaw Wallace & Co. (SWC), then owned by R.G. Shaw and Sime Derby. Nothing unusual about that, except that they bid for SWC jointly. The two went on to defeat an aggressive management take-over attempt, led by the then SWC Managing Director S.P. Acharya, and, thereafter, perhaps not too unpredictably, Chhabria decided, and succeeded, in keeping SWC for himself. The Mallya camp duly dragged the matter to a Hong Kong court, and it was only in 2004 that the court declared that the UB Chairman was indeed a partner in the acquisition of SWC. Vijay Mallya and Vidya Manohar Chhabria, Chairperson of the Jumbo Group and the widow of the late Manu Chhabria, settled the 20-year-old dispute soon after.

It obviously didn't end there, with Mallya coming out with all guns blazing, training them on SWC, or at least on 55 per cent of it. The Chhabrias, who were earlier believed to be reluctant to sell to their bitter rival of decades, have clearly changed their stance. The only condition to selling SWC was getting the right price.

Can Mallya end SWC's seemingly non-ending string of woes? Despite strong brands like Director's Special, Haywards and Royal Challenge, SWC has for over a decade been plagued by financial ill-health. Borrowings via inter-corporate deposits at 18-30 per cent-for funding brewery acquisitions in the main-trapped the company in a vicious debt trap. The late Chhabria's second daughter, Komal, tried her hand at damage control, but her efforts weren't good enough. Now with Vidya Chhabria signing a deal with her husband's one-time bitter rival, Komal's honeymoon with SWC has ended rather unexpectedly.

Whilst a huge question mark hovers over Mallya's financial muscle, room for scepticism also exists around the airline business model-not just in the case of Kingfisher Airlines but also for all the others rushing into the race. The launch of Kingfisher Airlines is scheduled for May 7, 2005 (coinciding with Mallya's son, Siddartha's 18th birthday), but the moot point is, can Mallya last the long haul? Whilst resource-raising is clearly the biggest factor that will determine success, there are other potential pitfalls too. As the head of one low-cost airline (not Air Deccan) puts it not too charitably: "It is neither fish nor fowl. While it says that it does not want to be a full service carrier, in the same breath they say they will provide personal video screens in every seat and models as airhostesses. Mallya has got into the business because right now it is hot and happening. He has tried UB Air, which was a failure when there was even less competition. I don't think Kingfisher Airlines will succeed."

Captain G.R. Gopinath, Managing Director, Air Deccan, agrees there's huge potential in this untapped market. "But aviation is a business in which cheques (promoters' money) fly faster than planes," he warns, adding that he "welcomes any new player, including Kingfisher. We operate in a different market, aiming at the bottom of the pyramid; Kingfisher is looking at the mid-tier."

Mallya of course is in no mood to listen to his detractors. He expects to break even in year one itself. "We have done our homework. I have done 10 months of meticulous planning for this venture. Today it has become fashionable to launch an airline. But we have a huge brand pull because of the Kingfisher brand. Half of my marketing problems are taken care of," says the hands-on CMD of the airline-Alex Wilcox, formerly with JetBlue, is the coo-adding that an IPO for the airlines company is always an option.

"In a way, we are trying to achieve a certain level of critical mass. UB's plan is to get a global size"
Ravi Nedungadi
President & CFO
UB Group

Mallya is counting on the positioning of Kingfisher Airlines: Significantly superior to existing economy class, with more features than the existing business class. "We are going to call it Kingfisher class. It will offer unique in-flight experience like entertainment systems in every seat, and we will serve hot meals. And our pricing for all these goodies will be 15-20 per cent lower than the current economy class." He also says his airline will be more efficient as it will have only 68 employees per aircraft as compared to 150 for some others.

Clearly, the king of good times appears to have it all worked out. Over the years, his group has undergone significant transformations, even as the doomsayers were hammering nails into the UB coffin. In the late 1980s, he acquired Berger Paints internationally, but eventually exited paints to focus on alcoholic beverages. Along the way, he's also got out of businesses like Best & Crompton, a polymer company, and Bayer Crop Science, to name just three. Many more exits are on the anvil. But Mallya's newest entry into the high-risk airlines business will determine whether he has come of age.

 

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