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Dear Fellow Shareholders,
The Indian economic environment during 2012–13 was challenging, to say the least. While a GDP growth of 5.4% in the last fiscal may still be reasonable by the standards of the developed western world, it still is a far cry from the optimism of a few years ago when India's economic growth was all set to move into double digits. From the heady expectations of overtaking China, India is now being ranked as the last amongst the investment destinations of the BRICS countries –Brazil, Russia, India, China and South Africa.
With a large, skilled, English–aware and young workforce, India should have found itself with a competitive edge vis–a–vis China. Instead, the lack of adequate investment in infrastructure, policy paralysis, and loose fiscal administration has landed the economy in a situation of deteriorating public finances, high interest rates and spiraling inflation which even stringent monetary policies are unable to rein in. The current account deficit has increased and industrial output remains stagnant, unable to provide enough jobs for the 12–odd million young Indians joining the workforce each year.
The financial year 2012–13 has been a watershed year in many ways both for our Company as also for the industry. After many years of double–digit growth, the Indian spirits industry slowed down to a single–digit growth rate ending the year circa 305 million cases, up just 3.5% from the previous year's 295 million cases.
While our Company's overall growth rate was in line with that of the industry, the push for premiumisation across our portfolio continued to yield encouraging results. 21% growth at the upper end of the product portfolio on top of a 12% and 15% growth during the two previous fiscals pushed the ratio of this segment to 26% of the overall portfolio, up 300 basis points from the previous fiscal.
Trading conditions for the Alcobev industry were not at their best during fiscal 2013. Increasing costs fuelled by Governmental policies and, in our case, by revenue hungry State Governments – have all affected general business performance. Maharashtra and West Bengal are two instances of how revenue–hungry State Governments can stem the growth of the Alcobev industry – while the industry in these States is back to the growth phase, volumes are nowhere near the levels that existed prior to the sharp increases in duties and taxes. Under such circumstances, it is not surprising that consumer demand regresses down the value chain – our Company's sharp growth at the upper end of the portfolio therefore becomes even more commendable.
Such selfish focus on protecting their own turf is what is pushing State governments from extending the benefits of a proposed landmark legislation like the Goods and Services Tax to the Alcobev sector. What is worse is the proposal to keep the industry out of the Constitutional Amendment altogether. I am glad that the Parliamentary Standing Committee has seen reason in the demand of the Alcobev industry that the Constitution must provide for a 'perfect' GST and any 'imperfections' that may be necessitated in the early stages of the implementation of this path–breaking tax reform can be provided for in the GST Acts and rules of the States. I hope the Government will see merit in these recommendations and take them on board in the proposed new legislation.
The sugar lobby, citing cost increases, has been pushing for a huge increase in price for ethanol supplies to the Oil Marketing Companies(OMC) under the federal government mandated 5% Ethanol Blending Programme (EBP). In a country, where the acreage under sugarcane cultivation is shrinking and at a time of drought in some areas, and where the total availability of alcohol to the potable and chemical sectors is way below demand, the EBP is bound to put pressure on an already stressed demand–supply equation. What makes a mockery of the situation is that despite this excessive price, supplies under the EBP are a pittance – all that the OMC procurement prices have done is to raise the floor prices for supplies to other users like the chemical and potable sectors.
Consumer expenditure is expected to grow – however, the overall mood of the Indian consumer is, in my opinion, subdued. Depreciation of the rupee coupled with crippling inflation is taking its toll, on the economy which remains sluggish, and on the weak consumer market. Unstable currencies are pushing up prices of imported goods including articles of common use like fuel. Consumer confidence is therefore being undermined. I believe, however, that these are near–term risks and that the long–term potential is huge, in no small measure due to rising incomes and the burgeoning middle class. Notwithstanding this, the Indian consumer continues to be very exacting in his demands. As the world shrinks, and with innumerable opportunities for exposure to the rest of the world – cheap travel, the internet, TV, etc., the consumer has been insistent on good quality at an affordable price. The younger consumer with a propensity for the here–and–now marks a strategic shift compared to the earlier generation which was more focused on savings and planning for the future. I have no doubt that Indian Industry at large, and particularly aspirat Jonal product companies like USL, will only benefit from this going forward.
The fiscal year also saw a two–decade long business association, and a nearly five–decade long personal relationship, culminating in a strategic partnership. In the early 90s, the UB Group through McDowell & Company Limited had set–up a 50:50 joint venture with United Distillers pic, one of the companies that merged atthe turn of the century to form what is today known as Diageo. This joint venture, for the first time in India, started bottling what are today Diageo's Scotch Whisky brands – Black & White and VAT 69, along with your Company's own Black Dog Scotch Whisky. Despite many twists and turns in the relationship over time due to the individual priorities of the partner companies, the wheel has now turned full circle with Diageo acquiring a 25.02% stake in your Company. I am sure that this partnership with the world's largest 'drinks' company with a truly global foot–print and with such iconic brands like Johnnie Walker, Smirnoff, Captain Morgan, Baileys & Guiness will augur well for our Company and not just reinforce its leadership in the domestic Indian market but also open new vistas in Asia and Africa.
I must thank Mr. S R Gupte, Mr. B M Labroo, Mr. M R Doraiswamy Iyengar, Mr. Sreedhara Menon and Mr. Sudhindar Khanna, who have all stepped down from the Board after a long association with our Company, and with me personally. I will be ever grateful for their support in steering this Company to its current leadership stature. It is also my pleasure to welcome Mr. Paul Walsh, Mr. Gilbert Ghostine, Mr. Ravi Rajagopal, Mr. Arunkumar Gandhi, Ms Renu Sud Karnad, Mr. D Sivanandhan, Mr. Sudhakar Rao and Mr. Vikram Singh Mehta, who have joined the Board pursuant to this partnership with Diageo. I look forward to their long and fruitful association with the Company to propel it to even greater heights.
I am grateful for the enthusiastic efforts of all employees and stakeholders without whose participation and commitment our Company would not have been able to grow from strength to strength every year.
A very warm thankyou to all