Having understood the consumer and the beverage market, acquisitions are a part of the company's ongoing journey, feels Ravi Deol, Chairman of Inbrew Holdings.
Diageo-controlled liquor maker United Spirits Ltd (USL) recently approved the sale and franchising of selected brands to Singapore headquartered Inbrew Beverages for a total cash consideration of Rs 820 crore.
Speaking to CNBC-TV18 about the latest acquisition and improving profitability, Deol said “We have been watching the beverage sector for long. In fact I have been watching it even before I started Barista Coffee in 1999."
Before Barista, Deol used to work for Coca-Cola and in 2021, Inbrew acquired Molson Coors Brewing Co.’s beer business in India. "So, for me this is an ongoing journey where we have understood what the consumers require and what the markets need," he added
In response to whether USL will be paid a royalty or any franchise income as a part of the latest deal, Deol said, “There is a slump sale for about 33 brands and there are another 12 brands which are going to be franchised in long-term starting the five years and then be converted to perpetuity.”
There are reasons for that, he said, and without getting into them, he ascertained, “There would be a royalty payment, firstly and at a certain stage those brands would be converted to perpetuity on payment.”
“Certainly these are the royalty as a percentage of the profit that he spends. These are the 11 brands led by Bagpiper.”
Furthermore, deliberating on why the transaction does not include some of the popular brands like McDowells or even director special brands, Deol said, “McDowell’s is the mainstay of United Spirits today. So, they would want to maximise the gains or benefits of owning that. But what we acquired is about 35 million cases which is a very significant volume in Indian market. In IMFL alone it would give us a significant heft and make us the second largest player. So, we are excited about what we have acquired and about building these brands with a focus on innovation with more investments behind this portfolio.”
United Spirits stock perspective
According to Karan Taurani, Senior Vice President - Research Analyst at Elara Capital, Inbrew's latest acquisition is a “very big positive news and a relief that eventually a popular business hive off has happened.”
He also opined that this agreement between the two companies will lead to three or four changes.
Speaking about the likely changes, Taurani said “One is of course it will improve the focus towards the premiumisation portfolio of UNSP (United Spirits) – that is where they’ll be able to gain traction now and they’ll be able to fight tough with competitors like Pernod Ricard.”
Secondly, “Optically the margins will improve from here on. So, from a 17-18 percent kind of an EBITDA margin, the EBITDA margins could breach the 20 percent mark because the P&A segment has got a higher margin.”
Third, "I think it will also lead to a re-rating of the overall company because the company will now only be led by premium portfolio and that will lead to some kind of marginal re-rating as well. We had a positive stance and continue to have a positive stance on the stock."
Talking about if the deal was undervalued, Taurani said that if the popular segment was to be looked at, there isn’t much growth there.
“In fact, during the pandemic, the popular segment was severely hit because it’s a price sensitive segment but we were expecting the deal to happen at 0.8-to-0.1-time sales and it’s come out close to 0.5 times sale which is slightly below than our expectations. That is something which could try and be an overhang for the stock in the near term and the stock may not rebound to those highs over the last one month we have seen towards 950.”
Nonetheless, he added, “From a medium to long-term perspective, I am very positive about this alcohol space as a whole because the states are opening up.”