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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 Cash Flows and Capital Structure Cost of Capital Questions.
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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 • Cash Flows and Capital Structure • Cost of Capital • Questions
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 is 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
Presentation Overview • Introductions • Indian Beer Market • Introduction to India • Brewery Operations • Risks and Mitigation Strategies • Recommendations • Cash Flows and Capital Structure • Cost of Capital • Questions
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
Presentation Overview • Introductions • Indian Beer Market • Introduction to India • Brewery Operations • Risks and Mitigation Strategies • Recommendations • Cash Flows and Capital Structure • Cost of Capital • Questions
India It's hard to find a country with as much variation, contrast and contradictions as 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
Presentation Overview • Introductions • Indian Beer Market • Introduction to India • Brewery Operations • Risks and Mitigation Strategies • Recommendations • Cash Flows and Capital Structure • Cost of Capital • Questions
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 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
Presentation Overview • Introductions • Indian Beer Market • Introduction to India • Brewery Operations • Risks and Mitigation Strategies • Recommendations • Cash Flows and Capital Structure • Cost of Capital • Questions
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 help 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 Mitigation • 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. • Risk Mitigation • Closely watch Indian economy. • Increase the cost of capital. • Hedge risks in the options market with excess capital.
Regulatory and Market Risks • In early 1990s alcoholic beverage industry open to foreign investment. • Foreign shareholdings in industry were restricted to a maximum of 74%. • Entry in 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 • No prior approval from the exchange control authorities (FIPB) 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 and Market 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 • SABMiller- 37% market share • Budweiser and Crown Beers of India- 5% market share goal.
Regulatory and Market Risk Mitigation • Risk Mitigation • Trademark registration • Focus on brand naming company image. • 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. • 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. • 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… • Political Risk • India suffered political instability from 1996-1999. • Due to the failure of any party to win an absolute majority in Parliament. • Instability with Pakistan over Kashmir and northern borders. • In 1947, Kashmir was given by the British to India. • It is predominantly Muslim, while India is predominantly Hindu. • Current issue is that both Pakistan and India are both nuclear powers.
Presentation Overview • Introductions • Indian Beer Market • Introduction to India • Brewery Operations • Risks and Mitigation Strategies • Recommendations • Cash Flows and Capital Structure • Cost of Capital • Questions
Presentation Overview • Introductions • Indian Beer Market • Introduction to India • Brewery Operations • Risks and Mitigation Strategies • Recommendations • Cash Flows and Capital Structure • Cost of Capital • Questions