USL calls off backward integration plans

Vijay Mallya-owned United Spirits, India’s largest spirits manufacturer, is understood to have called off its ambitious Rs 600-crore backward integration plans, amid debt woes.

Last year, the company had announced plans to set up a massive glass bottle manufacturing plant in India, as part of its cost-rationalisation plans. However, with debt hovering around Rs 8,500 crore under a leverage of little more than two times, the company is understood to have called this off, at least till recapitalisation materialises.

“We are not looking at that project right now, given the pressures on capital…until we are able to correct the debt level. We would concentrate on maintenance capital expenditure, which would be about Rs 100 crore this year, if we don’t correct the capital structure this year,” said P A Mural, joint president and chief financial officer, United Spirits.

In the quarter ended June, interest expense rose about 35 per cent year-on-year to Rs 165 crore. Had this expenditure not been this high, the earnings before interest and tax would have been 52 per cent higher. Higher interest cost and debt for capital expenditure and working capital requirements took a toll on the company. It reported a rise of just five per cent in net profit at Rs 145 crore, with revenue of Rs 2,057 crore, which rose six per cent during the quarter.

Abneesh Roy, analyst with Edelweiss Securities, said United Spirits was exposed to changes in pricing by state governments. “Nearly 50 per cent of sales volumes are generated from regions where state governments control prices. Increase in taxes, changes in the distribution structure and prohibition of liquor in any state could hit the company. Any further increase in prices of molasses, ENA (extra neutral alcohol) and glass prices can impact profit margins,” he said, adding the stretched balance sheet remained an overhang.

The glass-bottling plant was the second of the major backward integration projects United Spirits had embarked upon; the first was the Rs 550-crore acquisition of three distilleries that could distill ENA from molasses or grain.

The Bangalore-based company has faced heat over its debt issues and has, during the past two years, carried out four key deleveraging steps, albeit without much success. It now plans to go for a $300-million bond issue, while also looking at strategic sale options at the enterprise, as well as at its key subsidiary Whyte & Mackay.

United Spirits has not lent directly to its embattled group company Kingfisher Airlines; it has lent to UB Holdings, which in turn lent substantially to the airline. Recently, UB Holdings had stated about Rs 835 crore of corporate guarantees to Kingfisher Airlines had been revoked by bankers and aircraft lessors.