United Spirits (USL), India’s largest alcoholic beverages maker, is seeking shareholders’ approval later next week for its plans to declare itself sick and report the same to the Board for Industrial and Financial Reconstruction (BIFR). The move comes after the company’s net worth eroded way over 50% over the last four financial years, qualifying it for such a submission to BIFR under Section 23 of the Sick Industrial Companies (Special Provisions) Act, 1985.
USL’s net worth stood at R846 crore as of March 2015, down from its peak net worth of R5,850 crore in 2012-13. The company had accumulated losses of R5,045 crore for FY15. USL has convened an extraordinary general meeting on January 22 to seek shareholders approval as it is required under the above Act.
“It is just an accounting requirement and there is no reason to worry for investors. The growth prospects of USL are very strong and the company’s new management after Diageo is making every effort to revive the company,” an analyst tracking the company said.
“As per the statutory norms, a company is bound to report to BIFR when its net worth erodes by more than 50% and USL is just doing the same. By doing so, the company is seeking protection under BIFR and there is nothing wrong in it,” he added.
“Once the matter is referred to BIFR, it is for the Board to take next course of action. There will be three years of cooling period and the company will get enough time to clean up its books and bring in financial discipline and revive itself,” the analyst added.
While Diageo holds the controlling stake of 54.8%, its chairman Vijay Mallya still owns around 4% through his group companies in USL. Referring to BIFR will help the company explore various avenues to revive and further strengthen its books. According to a USL source, “The erosion is due to diminution in the value of long-term investments in subsidiaries and loans and advances to subsidiaries due to low capacity utilisation, negative margins or strategic shift in business. However, it will not have any impact on the business of the company or its future prospects.”
“The long-term growth prospects of the company are intact. The company has generated cash profits during the six months ended September 30, 2015, after reporting losses in the previous fiscal,” the source said.
Following the acquisition of a controlling stake by Relay BV, a subsidiary of Diageo Plc, the board of directors of the company has been reconstituted with the induction of various non-executive independent directors and also executive and non-executive nominee directors of Relay BV. The company is also in the process of reducing its debt and has already reduced it by around R1,000 crore during FY15. It had a total debt of over R5,000 crore.
Analysts at Motilal Oswal said that under the Diageo parentage USL intends to drive portfolio premiumisation in a fast evolving industry. “We believe the management’s bandwidth was earlier diverted towards non-operational issues and thus resulted in significant under-investments in brands. Going ahead, it will be ruthless in its choice of brands to pursue and invest,” analysts said.
Meanwhile, there is a major area of concern for the company at this stage in the form of prohibition on liquor by some states. Recently, the Bihar government announced that it would ban sale of liquor in the state from April 1, 2016. Since then, the company’s stocks have reacted negatively and on Friday it touched a 52-week low of Rs2,665.60 on NSE. However, analysts believe that the impact will be marginal as the company is focusing more on premium brands and not worried about mass market brands.