This summer, alcoholic beverage tycoon Vijay Mallya's United Spirits Ltd said it had dislodged Groupe Pernod Ricard, makers of Chivas Regal and Absolut Vodka, to become the world's second largest spirits company by volume. And it would be going past London-headquartered Diageo Plc, a drinks powerhouse with brands like Johnnie Walker and Smirnoff, to emerge as the biggest volume player within a year, as dominance in the second most populous country makes it the fastest growing spirits marketer globally.

A few months later, Pernod Ricard's Indian subsidiary is delivering a counter-punch, not surprisingly, though. The Paris-based global drinks giant's local unit will be reporting profit before tax of slightly over Rs 580 crore, as against USL's Rs 570 crore, for FY10. Pernod Ricard's domestic operations has just one-sixth the volume sales of its rival, but has been gulping down profit as well as market share in the key segments of India's mainstay whisky consumption.

VCCircle learns that Pernod Ricard India's annualized revenue touched Rs 2,500 crore with PBT above Rs 580 crore, which is up over 35% (absolute numbers depend on euro conversion rates, as the company prepares July-June FY10 figures). Its volume sales jumped 29% to 17.5 million cases (of 9 litre each) with three whiskies Blender's Pride (25%), Royal Stag (28%) and Imperial Blue (27%) continuing their robust run in recent years. The local subsidiary, with operating margins of about 25%, is now among top five contributors to Pernod Ricard's worldwide profits.

Groupe Pernod Ricard is expected to unveil FY10 numbers in the coming weeks, and the India unit never discusses standalone financials as a policy.

USL's PBT for FY10 stood at Rs 570 crore, coming on topline revenue of Rs 4,960 crore. It jumped from Rs 459 crore and Rs 4,139 crore respectively in FY09. The Bangalore-based company's operating margins moved up nearly 200 bps to 18.53% last financial year, but it paid Rs 312 crore in interest payouts as repayment of Whyte & Mackay acquisition cost started kicking in. Meanwhile, Pernod Ricard is chasing India's urban consumption story far more aggressively riding on its asset light and (largely) interest free balance sheet.

"USL and Pernod Ricard are operating on two different business propositions. We are straddling different price segments while Pernod does not have presence in two-third of the (lower) price bands that we operate in. Pernod's global acquisition costs are on the balance sheet of the parent company, hence the profitability of USL cannot be compared with that of Pernod's Indian subsidiary," says a top official at United Breweries (UB) Group, which is the beer-to-airline conglomerate of Mallya.

In fact, sources say, the Pernod Ricard SA dived into the accumulated profits of the Indian unit last year as the drinks behemoth that scripted several leveraged acquisitions in recent years, the last being $8.3 billion buyout of Absolut Vodka in 2008, was working hard on improving profitability.

Pernod Ricard will not push its way into the regular priced and cheaper segments of India's spirits industry and is determined on tapping the 'urbanizing' India. This is a strategy, which industry observers argue, has helped it occupy the profitable segments and apply pressure on some of USL's key brands like Royal Challenge and McDowell No.1 whiskies. Pernod's Royal Stag, a prestige whisky pitched against McDowell No.1, closed at 9.5 million cases, almost five million cases behind the latter. Nevertheless it is challenging McDowell No.1 by value already, and gallopping ahead in volume growth as well.

The French giant's assault on the premium whisky racks has been ominous for some years now. Blender's Pride sells at least half a million cases (sales are 2.12 million cases) more than USL's iconic Royal Challenge, which was once India's most profitable alcoholic beverage brand. "The key to Pernod Ricard's profitability was its decision to stick to the higher end of the mainstream domestic market. Pernod could be earning an average of Rs 350-400 on every case sold, while USL will be taking home around Rs 200 per case. Its earnings on Blender's Pride whisky could be around Rs 1,300 per case, which is well ahead of Royal Challenge now," says Deepak Roy, Vice Chairman & Managing Director, Allied Blenders & Distillers (ABD) Ltd, and one-time ally of Mallya.

(Five years ago, Mallya had approached Pernod Ricard for a joint bid to acquire Shaw Wallace & Co Ltd. The proposal did not take-off as both of them wanted to own Royal Challenge Whisky. Subsequently, Pernod Ricard decided to grow organically even as Mallya made a $300-million successful bid.)

"USL's interest pay-out is beginning to be a strategic disadvantage for the company now - not just in terms of profitability but in terms of operations as well," says Sanjay Jain, Director at Taj Capital, a New Delhi-based boutique investment firm. Last year, USL pared down its Rs 7,000 crore cumulative debt when it repaid $315 million (Rs 2,200 crore)  through various initiatives including sale of treasury stocks that mopped up $200 million. The UB Group official said there was no further de-leveraging plan on the anvil, and he expected to interest cost to remain "more or less the same during FY11".

Jain argues the case for USL going for one more round of de-leveraging as it requires more flexibility in tackling Pernod Ricard's "heroics" in the profitable consumption segments. Pernod, in the past two years, has also started building its imported portfolio of international brands such as Chivas Regal 12-Year-Old Scotch Whisky and Absolut Vodka in a niche but expanding super-premium segment for lifestyle drinks. For instance, Chivas Regal now accounts for nearly 40% of the bottled-in-orgin scotch whisky sales in India, a market where Diageo's Johnnie Walker once held sway. And earnings could be as high as $80 (or Rs 3,800) from one case of Chivas Regal, adds Roy of ABD Ltd.

But Jain cautions that Pernod Ricard India's low-profile but tough talking MD Param Uberoi "might be waging more heroic and lonely battles in the days ahead". A de-leveraged USL could be ruthless and it has to be seen how Pernod Ricard's headquarters, on capital conservation mode, will view the India strategy then. There are questions posed whether Pernod Ricard can afford to rely solely on profitable segments that makes it vulnerable to attacks from both international peers as well as USL.

For now, the focus remains on the flamboyant 54-year-old Mallya, whose alcoholic beverage businesses have been unchallenged for almost a decade. "The empire has been sleeping for sometime now," Jain quips.

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