An Indian brewery

An Indian brewery A strategic analysis for ABC Breweries CLSW Consulting Group

Presentation Overview • Introductions • Indian Beer Market • Introduction to India • Brewery Operations • Risks and Mitigation Strategies • Recommendations • Capital Structure and Cash Flows • Questions

CLSW Consulting Team - India • Julia Songtao Chen • Jamie Lamberson • George Santamarina • Nathan Walker

CLSW Consulting Group • Started in 2007 • Helps U.S. firms expand in international markets • Regional consulting teams • Eastern Europe • China • India • Southeast Asia • Africa

ABC Breweries • Started as a microbrewery in 1982 in Portland, OR • Expanded throughout the western United States • Three breweries • Went public in 1994. • Current market cap is $300M • Perceives growth potential is limited in the U.S. • Expects greater growth opportunities in Developing Asian markets

Engagement Goals • Identify risks in entering Indian market • Identify risk mitigation strategies • Suggest investment entry and exit strategies • Provide investment analysis of best plan • Provide recommendations

Why India • One of the fastest growing economies in the World • Expected 8% GDP growth for the next 5 years • Second largest population - 1.1 Billion inhabitants • Average mean age is 27 years old and dropping • Large number of NEW beer drinkers over the next few years • Changing lifestyles mean larger disposable income for young Indians • Growth of “Pub” culture

Changing Face of Indian Culture • Large population exposed to western culture • International travel for a greater number of Indians • Beer no longer considered taboo • Beer is more often considered equivalent to soft drinks • Linked to adventurous, fun-seeking lifestyle

Indian Beer Market • Over 130 million cases of beer in 2006 • Beer market expected to grow by 17.2% CAGR through 2011 • Two Types of Beer • Strong beer - 65% of market in 2006 • Lager • Sales are highly dependent on temperature and weather conditions • Highest sales in May, lowest in January

Top 3 Competitors • Control 90% of the marketplace • United Breweries - Almost 50% of the market • Top brand - Kingfisher • SABMiller (SAB and Miller Beer) - 37% of market • Top brand - Haywards 5000 • Millenium Alcobev

New Market Entrants • Anheuser-Busch in Hyderabad • Carlsberg • InBev

India It's hard to find a country with as much variation, contrast and contradictions as India.

Location of India

Surrounded by Pakistan , Nepal , China , Bhutan and Bangladesh Coastline stretches 7000 kilometers. Surrounded by the Arabian Sea in the west, the Bay of Bengal in the east and the Indian Ocean in the South Total: 3,287,590 sq km land: 2,973,190 sq km water: 314,400 sq km Slightly more than one-third the size of the US Capital: New Delhi Geography of India

Population: 1,129,866,154 Second most populous country of the world 0-14 years: 31.8% (male 188,208,196/female 171,356,024) 15-64 years: 63.1% (male 366,977,821/female 346,034,565) 65 years and over: 5.1% (male 27,258,259/female 30,031,289) Population growth rate: 1.606% Birth rate: 22.69 births/1,000 population Death rate: 6.58 deaths/1,000 population Sex ratio: 1.064 males/female Demographic factors *Above data is as of July 2007 est.

Demographic factors • Labor force: 509.3 million • agriculture: 60% • industry: 12% • services: 28% (2003) • Unemployment rate: 7.8% • Life expectancy at birth: 68.59 years • Population below poverty line: 25%

Key Economic Parameters • Currency (code): Indian rupee (INR) • Exchange rates: Indian rupees per US dollar – 40.42 (07/15/2007)

India GDP Growth • GDP (purchasing power parity): - $4.156 trillion • GDP (official exchange rate): - $804 billion • GDP - real growth rate: - 9.2% (2006) • GDP - per capita (PPP): - $3,800 • GDP - composition by sector: • agriculture: 19.9% • industry: 19.3% • services: 60.7%

India GDP Growth Forecast • India's economic boom will continue. • Real GDP growth will keep an annual average of 7.6% between 2007 – 2012. • Information technology (IT) and IT-enabled services (ITES) output will grow rapidly

India’s leading industrial state. Contributing 13% of national industrial output Major industries include chemical and allied products, electrical and non-electrical machinery, textiles, petroleum and allied products. Capital city: Mumbai, formerly known as Bombay Most populous city of India Estimated population of 18million.(2006) Indian State of Maharashtra

City of Mumbai • Entertainment Capital of India • Bollywood, the centre of India's Hindi film and television industry is located in Mumbai • Commercial Center of India. It contributes: • 10% of all factory employment • 40% all income tax collections • 60% of all customs duty collections • 40% of India's foreign trade • Headquarter of many Indian companies

Brewing is the production of alcoholic beverages through fermentation, a method used for beer production. Work in the brewery is typically divided into 7 steps: mashing, lautering, boiling, fermenting, conditioning, filtering, and filling. Brewery Operations 16th Century Brewer

Brewery Operation Flow Chart

Brewery Operation Inputs • Raw material • Malted barley or wheat, water, sugar, hops, yeast • Glass bottles and aluminum cans • Capital Equipment • Numerous tanks, boilers and piping • Bottling equipment • Labor • Production, Marketing, Sales, Administration, Management, Distribution

Risk Mitigation Strategies • Acceptance • “If it happens, we will live with it” • Mitigation/Risk Reduction • “If it happens, we have a way of reducing the negative effects” • Elimination • “It won’t happen. We will not do the deal” • Transfer • “If it happens, insurance will pay for the loss”

Identified Risks • Infrastructure • Political Tensions • Input sourcing • Trade Restrictions • Currency • Regulatory and legal issues • Labor issues • Corruption

Infrastructure Risks • Indian Roads • 80% of traffic is crammed into 3% of available roads • Power Requirements • Reliability problems • Widespread power outages • Water Requirements • Increasing depletion of surface and ground supplies • Pollutant contamination

Infrastructure - Risk Mitigation • Roads - Risk reduction • Reduce distance to market • Build brewery in the Navi Mumbai • Two distribution centers in Mumbai and Pune • Power - Risk reduction • Purchase backup power generation equipment • Water Supply - Risk reduction • In-house, reverse-osmosis filtration systems

Political Tensions Risks • Pakistan - Kashmir border conflict • Long-running dispute over the Indian States of Jammu and Kashmir in Northern India • Both Pakistan and India have tested nuclear weapons • Progress towards normalizing relations • Muslim - Hindu Tensions • Rise of Hindu fundamentalism following ascent of Bharatiya Janata Party (BJP) in 1991 • 2002 Gujarat Riots - Over 1000 dead or missing

Political Tensions - Risk Mitigation • Brewery location • Far from Jammu and Kashmir • However, State of Maharashtra is next to Gujarat • Prudent to obtain terrorism and political violence insurance • Unknown premium amount • Normally obtained as riders on property insurance • Put plans in place to protect employees in case of political violence or turmoil • Physical plant and distribution network security • Consider creating a business continuity/security office to oversee security and monitor security situation

Input Sourcing Risks • Brewery requires periodic resupply of raw materials • Malted barley, water, hops, sugar • Glass bottles and aluminum cans • Production may come to a halt without raw material availability • Expected demand for hops may outstrip domestic supply • Except for hops, agricultural commodity prices may be artificially low due to imported products

Input Sourcing - Risk Mitigation • On-site storage facilities for barley, hops and sugar mitigate against minor disruptions • Obtain long-term contracts with local producers • Purchase future contracts • Barley, sugar and wheat futures are traded in NCDEX Indian commodities exchange • Contract with alternative sources outside India in case of local disruption

Trade Restrictions Risks • Agricultural sector is suffering from crisis due to low commodity prices • 60% of population is supported by agriculture • Market restructuring could cause further political instability • Weighted average tariff rate was 14.4 percent in 2005 • Some agricultural import tariffs are as high as 115% • Non-tariff barriers include: • Excessive bureaucracy • Import taxes

Trade Restrictions - Risk Mitigation • Import tariffs are only relevant when domestic supplies are not available • Currently, domestic agricultural prices are low due reduction of trade barriers • At this time, no suggested additional action recommended

Currency Risk • Indian economy is currently in a rapid growth phase. • GDP for past 3 years > 8% • Wages have increased 15%-plus for skilled workers. • Corporate and personal borrowing up 28% over past 12 months. • Overall demand for goods has increased and surpassed supply. • GDP is US$1,103 billion, 12th largest economy in the world. • In terms of purchasing power parity (PPP), India has the world's 4th largest GDP at US$4.156 trillion. • Increased wealth = consumption & competition increase. • February 2007: Referred to as “Overheating Economy”.

Currency Risk • Current inflation comfort zone between 5 and 5.5%. • June 2007, inflation is at 4.8%. Down from 6.9% in January. • Rupee at a current 9 year high vs. U.S. dollar. • Spot rate as of 7/17/2007 = 40.230 rupees per dollar • Cuts in fuel taxes and import duties. • Ban on wheat exports has helped soften food prices. • RBI inflation goal is between 4 and 4.5%. • Raised bank reserve ratio to 5.5%. • Raised interest rate ¼% to to 7.75% on April 24, 2007.

Currency Risk • Past/Future Outlook • India has had two major financial crises : 1966 and 1991. • Caused by large out of control trade deficits and shrinking foreign exchange reserves. • Solved by a forced devaluation of the rupee. • Rupee appreciation will lead to less exporting, so to avoid another financial crisis, RBI needs to curb spending and borrowing. • Currency Risk Mitigation • Closely watch Indian economy. • Increase the cost of capital. • Hedge risks in the options market with excess capital.

Regulatory Risks • In early 1990s alcoholic beverage industry open to foreign investment. • Foreign shareholdings in industry were restricted to a maximum of 74%. • Entry into India was exclusively through the joint venture route. • January 2006 India approved a major rationalization of FDI policy. • Helps avoid multiple layers of approvals required in some activities. • 100 % FDI in manufacture of alcohol under the automatic route is allowed. • Subject to licensing from state governments where the unit will be set up. • Entry into brewery sector through automatic approval route • Under automatic route, approval of the RBI is required. • Government set up the Foreign Investment Implementation Authority (FIIA). • Facilitates quick translation of (FDI) approvals into implementation. • Helps FDI investors obtain necessary approvals. • Sorts out operational issues with various Government agencies to solve problems.

Regulatory Risks Continued… • Foreign capital is freely allowed to be repatriated. • Includes capital appreciation, profits, and dividends. • Taxes must be paid before repatriation. • Any company incorporated in India is considered domestic, even if foreign owned. • Domestic corporate tax rate = 33%. • Potential Risks • Lightened regulations may cause potential market saturation in the brewery sector. • Immediate competition with large brewers already present. • United Breweries- 50% market share • SAB Miller- 37% market share • Budweiser and Crown Beers of India- 5% market share goal

Regulatory Risks Continued… • Regulatory Risk Mitigation • Focus on brand naming company image. • Register a trade mark to avoid brand duplication. • Current registration is good for 7 years. • Focus on developing in new areas and markets.

Labor Risks • National Sample Survey Organization survey • Equal to approximately 42% (of 1.1 billion) of India’s population. • 56% of rural males and 33% of rural females • 57% of urban males and 18% of urban females in the labor force. • 10% in formal economy, 60% self-employed, 30% casual workers. • Current Indian unemployment is at 7.8%. • If unemployment increases, demand for beer decreases. • Labor force is growing at 2.5% annually, employment is growing at only 2.3%. • Approximately 2.5 million employable college graduates emerging every year. • Pressure to transfer agricultural land to higher productivity industry. • Manufacturing has generated jobs for many of the less educated who are squeezed out of agriculture.

Labor Risks Continued… • Rigid Labor Laws • Labor market changes have not kept pace with the country's economic liberalization program begun in 1991. • Current Laws: • Any company employing more than 100 workers cannot fire people without government permission. • Labor commissioner in the government has to be notified of every single person working on the night shift. • No worker to work beyond 75 hours of overtime a quarter. • < or = 46.25 hours per week. • Risk Mitigation • Treat workers fairly through fair compensations and treatment. • Clearly understand labor laws to avoid government intervention. • Keep good rapport with involved labor unions.

Corruption Risks *2007 Index of Economic Freedom - The Heritage Foundation

Corruption Risks Continued… • Corruption is perceived as widespread. • India ranks 88th out of 158 countries in Transparency International's Corruption Perceptions Index for 2005. • Ranked 72 in 2001, 73 in 2002, and 83 in 2003. • India study estimates the monetary value of petty corruption in 11 basic services like education, healthcare, judiciary, police, etc., to be around Rs.21,068 crores in 2005. • Equivalent to $4.7 billion U.S. dollars. • Reasons for widespread corruption: • Lack of transparency and accountability in the system • Lack of an effective corruption reporting mechanisms • Lack of honesty in officials in the Government • Acceptance of bribe as a way of life, custom and culture • Ineffective judiciary • Poor economic policies

Corruption Risks Continued… • Mitigation of Corruption Risks • Establish a system of checks and balances for all executives and directors. • Require multiple approvals and signatures for major decisions. • Adhere as closely as possible to the Foreign Corrupt Policies Act of 1977, a U.S. federal law. • Most recently amended in 1998. • Requires any company associated in the U.S. to have an adequate system of internal accounting controls. • Conduct third party audits to ensure sound business practices.

An Indian brewery