ET NowIn an interview with ET Now, Shekhar Ramamurthy, MD, United Breweries, shares his views on the brewery business. Excerpts:
ET Now: At the outset I was listening in to your commentary yesterday and you mentioned that the beer industry has witnessed a tepid growth in H1 hopefully H2 could be better and as I said in my opening comments aside of the states that you have witnessed a strong growth in can things pick up in some of the other states, can you give us a flavour of all of this?
Shekhar Ramamurthy: Yes, as you have seen in the first half of the year has been very slow variety of reasons we had excessive monsoons and inclement weather in the first quarter, it impacted us we are a seasonal business so the first half of the year has been flat.
We do hope, as you rightly said, festive season sitting in, economic activity improving across the country. We think the balance of the year from October to March should grow at least 5% to 6% as the industry and we will definitely do better than that.
ET Now: What is the market share currently that you are enjoying for the end of the sector and considering you are expecting a pick up in the festive season upcoming one what is it that you are targeting by way of a market share say by December end?
Shekhar Ramamurthy: Yes, our market share has been fairly steady at in and around 50% for a very long time. We are very confident that our share will definitely be 50% may be a little more as we go ahead into the festive season in second half of the year. We got our plans and like I have said it is not that our share has been volatile, it has always been rock solid at around 50%.
ET Now: You have a 50% market share clearly you are there in all the premium categories, all the basic categories but if I look at the volume growth not only for your company but for the industry in general it is not in double digit, why is that? On one side we talk about young Indian population, first timers which are now converting into---first time converters yet the numbers do not look very impressive?
Shekhar Ramamurthy: You are right. The demographic breakup that we have in our country, the beer industry should be much bigger, doing much better. However, we have talked about this in the past both as the company and as the All India beer Association. One of the key factors ailing the beer industry is that the retail prices are very high, India is one of the few countries in the world where the price of beer on a per alcohol basis is significantly higher than spirits so that is a big dampener.
The duty structures and taxes on beer are not in a manner that reflects alcoholic strength so we end up paying extremely high duties on beer which is not so in most other countries. If you look at our per capita consumption it is just under 2 litres, the world average is around 24-25. Countries like Vietnam and China have already reached 35-36. So on the positive side we have a young country, we have a growing population, we have economic growth in this country so it will grow; however, you are right it can do much better if the policies of the various states were a little more positive to the industry.
ET Now: Let us see if that happens. I just want some numbers there what was the volume growth that you saw in Q2 if you can give me a number and is there a target volume growth that you have for the next two quarters?
Shekhar Ramamurthy: As I said the outset our volume in the Q2 was flat, industry was also flat so we are at what 50% share. I cannot tell you what our growth will be in the balance of the year, however, I can assure you that the industry we do believe will grow at least 5% to 6% in the balance of the year and we will definitely grow ahead of that.
ET Now: Historically, how is the second half growth different from first half give me historical numbers and then let our viewers interpret them?
Shekhar Ramamurthy: It varies there is no clear trend, it all depends on how the first half has grown not just this year but in the previous years because base effect kicks in. Last year Q1 and first half was very good and second half was not that good and this year in contrast the first half has not been good for the industry, and we do believe with variety of factors not just a base effect but we are seeing growth coming in some of the large markets already.
As they say green shoots of growth in September, October which we believe will carry through in rest of the year. So there is no trend as such it all depends on how the previous years have gone.
ET Now: You were just highlighting as to how specific states have their own problems give us a regional breakup which states are seeing sluggish sales for you right now?
Shekhar Ramamurthy: Yes, for example in the north traditionally Rajasthan has been markets has witnessed a steady growth over the last three to four years and this year we are finding, that the growth has not been so good.
The reason we believe that is so is that prices have gone up. There is little bit of overcharging in the market, economic activity in the state has not been that good, however the rate of decline which we saw being fairly steep in the first quarter has reduced in Q2 and we hope it will return to amortise growth.
Another market which has seen decline has been Bengal. Now Bengal again has had weak economic activity. Prices have gone up and as you know lot of the times prices go up not because we as company has put them up majority of what consumer pays for a bottle of beer is duties and taxes which go to the government.
Another market which has seen a steep decline in Q2 particularly has been Telangana but that is not really demand related, what happened in Telangana was that they had a retail licence renewals 1st October this year because of which the trade destocked in Q2.
In contrast we have seen that because they had destocked in Q2 there has been explosive growth in October in Telangana so that will turnaround so overall there has not been any market which has seen really strong growth so which has resulted in the first half of the year being flat.
ET Now: What we have discussed so far is a market share set up, geographical break up and your volume trajectory let us understand the raw material aspect commodity prices have come down, transportation cost has come down, global glass prices have come down, bottling cost has come down will that translate into better margins or are you likely to pass on that to your customers?
Shekhar Ramamurthy: Response to your first query yes the fact that the commodity prices are soft has helped us and if you have seen our numbers are increase in cost of sales has been very modest just over 1% and that is largely driven by the fact that commodity prices have been soft. Coupled with the fact that we have had several initiatives running over the last several many years, particularly on energy and efficiencies at are breweries, which are also kicking in but yes the commodity prices being soft helps us as well as the industry.
Now our ability to park on cost increases as and when that happen is also very limited as you know in large path of the country we have to sell at prices set to us by the state governments so that being the case our actual ability to pass on price increases and cost pushes is modest. So to your second part of your question are the fact, the fact that commodity prices being soft have they helped the margins of course they helped the margins.
ET Now: A lot of people or Street expects that you will probably grow about 15% odd over the next two years on the top line front and your EPS too could actually grow substantially may be 30-33% is that possible?
Shekhar Ramamurthy: I am not going to answer that question. As I have said the outlook is positive now I am not going to put a number to what kind of growth we expect but yes it is positive, we will grow and we will grow ahead of the market.
We are perhaps the best efficiencies in the industry across our competitors, we have the best product profile and state mix across the industry so we have the ingredients to make it happen but what it will be exactly I cannot tell you right now.
ET Now: At the outset I was listening in to your commentary yesterday and you mentioned that the beer industry has witnessed a tepid growth in H1 hopefully H2 could be better and as I said in my opening comments aside of the states that you have witnessed a strong growth in can things pick up in some of the other states, can you give us a flavour of all of this?
Shekhar Ramamurthy: Yes, as you have seen in the first half of the year has been very slow variety of reasons we had excessive monsoons and inclement weather in the first quarter, it impacted us we are a seasonal business so the first half of the year has been flat.
We do hope, as you rightly said, festive season sitting in, economic activity improving across the country. We think the balance of the year from October to March should grow at least 5% to 6% as the industry and we will definitely do better than that.
ET Now: What is the market share currently that you are enjoying for the end of the sector and considering you are expecting a pick up in the festive season upcoming one what is it that you are targeting by way of a market share say by December end?
Shekhar Ramamurthy: Yes, our market share has been fairly steady at in and around 50% for a very long time. We are very confident that our share will definitely be 50% may be a little more as we go ahead into the festive season in second half of the year. We got our plans and like I have said it is not that our share has been volatile, it has always been rock solid at around 50%.
ET Now: You have a 50% market share clearly you are there in all the premium categories, all the basic categories but if I look at the volume growth not only for your company but for the industry in general it is not in double digit, why is that? On one side we talk about young Indian population, first timers which are now converting into---first time converters yet the numbers do not look very impressive?
Shekhar Ramamurthy: You are right. The demographic breakup that we have in our country, the beer industry should be much bigger, doing much better. However, we have talked about this in the past both as the company and as the All India beer Association. One of the key factors ailing the beer industry is that the retail prices are very high, India is one of the few countries in the world where the price of beer on a per alcohol basis is significantly higher than spirits so that is a big dampener.
The duty structures and taxes on beer are not in a manner that reflects alcoholic strength so we end up paying extremely high duties on beer which is not so in most other countries. If you look at our per capita consumption it is just under 2 litres, the world average is around 24-25. Countries like Vietnam and China have already reached 35-36. So on the positive side we have a young country, we have a growing population, we have economic growth in this country so it will grow; however, you are right it can do much better if the policies of the various states were a little more positive to the industry.
ET Now: Let us see if that happens. I just want some numbers there what was the volume growth that you saw in Q2 if you can give me a number and is there a target volume growth that you have for the next two quarters?
Shekhar Ramamurthy: As I said the outset our volume in the Q2 was flat, industry was also flat so we are at what 50% share. I cannot tell you what our growth will be in the balance of the year, however, I can assure you that the industry we do believe will grow at least 5% to 6% in the balance of the year and we will definitely grow ahead of that.
ET Now: Historically, how is the second half growth different from first half give me historical numbers and then let our viewers interpret them?
Shekhar Ramamurthy: It varies there is no clear trend, it all depends on how the first half has grown not just this year but in the previous years because base effect kicks in. Last year Q1 and first half was very good and second half was not that good and this year in contrast the first half has not been good for the industry, and we do believe with variety of factors not just a base effect but we are seeing growth coming in some of the large markets already.
As they say green shoots of growth in September, October which we believe will carry through in rest of the year. So there is no trend as such it all depends on how the previous years have gone.
ET Now: You were just highlighting as to how specific states have their own problems give us a regional breakup which states are seeing sluggish sales for you right now?
Shekhar Ramamurthy: Yes, for example in the north traditionally Rajasthan has been markets has witnessed a steady growth over the last three to four years and this year we are finding, that the growth has not been so good.
The reason we believe that is so is that prices have gone up. There is little bit of overcharging in the market, economic activity in the state has not been that good, however the rate of decline which we saw being fairly steep in the first quarter has reduced in Q2 and we hope it will return to amortise growth.
Another market which has seen decline has been Bengal. Now Bengal again has had weak economic activity. Prices have gone up and as you know lot of the times prices go up not because we as company has put them up majority of what consumer pays for a bottle of beer is duties and taxes which go to the government.
Another market which has seen a steep decline in Q2 particularly has been Telangana but that is not really demand related, what happened in Telangana was that they had a retail licence renewals 1st October this year because of which the trade destocked in Q2.
In contrast we have seen that because they had destocked in Q2 there has been explosive growth in October in Telangana so that will turnaround so overall there has not been any market which has seen really strong growth so which has resulted in the first half of the year being flat.
ET Now: What we have discussed so far is a market share set up, geographical break up and your volume trajectory let us understand the raw material aspect commodity prices have come down, transportation cost has come down, global glass prices have come down, bottling cost has come down will that translate into better margins or are you likely to pass on that to your customers?
Shekhar Ramamurthy: Response to your first query yes the fact that the commodity prices are soft has helped us and if you have seen our numbers are increase in cost of sales has been very modest just over 1% and that is largely driven by the fact that commodity prices have been soft. Coupled with the fact that we have had several initiatives running over the last several many years, particularly on energy and efficiencies at are breweries, which are also kicking in but yes the commodity prices being soft helps us as well as the industry.
Now our ability to park on cost increases as and when that happen is also very limited as you know in large path of the country we have to sell at prices set to us by the state governments so that being the case our actual ability to pass on price increases and cost pushes is modest. So to your second part of your question are the fact, the fact that commodity prices being soft have they helped the margins of course they helped the margins.
ET Now: A lot of people or Street expects that you will probably grow about 15% odd over the next two years on the top line front and your EPS too could actually grow substantially may be 30-33% is that possible?
Shekhar Ramamurthy: I am not going to answer that question. As I have said the outlook is positive now I am not going to put a number to what kind of growth we expect but yes it is positive, we will grow and we will grow ahead of the market.
We are perhaps the best efficiencies in the industry across our competitors, we have the best product profile and state mix across the industry so we have the ingredients to make it happen but what it will be exactly I cannot tell you right now.
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