Turnaround stories are a lot like the Rocky movies - the initial half involves the main character being beaten down, mismanaged, or involved in some shady stuff, only to be brought to the right track by someone, leading to an insane pay off at the end.
Today’s company is a lot like that, where a string of bad decisions and bad luck brought it to its knees, paving the way for a messiah to come in and rescue it.
We’re talking about United Spirits - the largest alcoholic beverage company in the country (40% market share), and among the top 3 in the world!
The first half of this story is set in the years between FY08 and FY14 - amid the world reeling in from the Global Financial Crisis, and a certain flamboyant businessman losing his charm.
What Went Wrong?
While the company was in an advantageous position, being a market leader and having its McDowell’s brand become the best-selling whiskey in the world, there were 3 things that weren’t letting the company achieve excellence:
1. The Mallya Connection
We can’t talk about United Spirits without talking about the man behind its initial fandom, and the one who monopolised the alcoholic beverage market - Dr. Vijay Mallya (yes, he has a PhD in business).
Yet, among Mallya’s other ventures, was Kingfisher Airlines, infamous for its speedy, debt-riddled, demise - but what does United Spirits have to do with this? The month of December 2007 seems to shine some light:
Kingfisher - announced acquisition of Air Deccan for Rs. 1,000 crore, so as to expand its reach to overseas travel (the rule stated that only airlines with 5 years of fly time were allowed to do international travel, and Kingfisher was only 2 years in at the time)
United Spirits - share price starts plummeting around the date of this announcement, sending the stock from Rs. 400 to Rs. 100 in 4 years!
Apart from mere association to the “poster boy of loan default”, as lovingly christened by the ex-chairman of Air Deccan, there was a seemingly-direct correlation as well.
Allegations (that were later proven) suggested that Mallya was shoring up debt in United Spirits’ books and transferring it to Kingfisher to facilitate the acquisition and overall functioning of the dying airline!
🍸 With Kingfisher’s debt already crossing Rs. 7,000 crore at that point, the company’s promoters seem to have resorted to poor governance to sustain themselves, sending investors into a world of panic
2. Poor Business Mix
In an industry that already fluctuates immensely due to raw material cost and taxation imposed on the product, profitability is a strategic game - one that United Spirits wasn’t good at.
Its product portfolio was great at the volume game, with products like Bagpipers, Signature and Antiquity Blue being top choices in the under Rs. 1,000/750 ml range (there made up for around 80% of volumes, with the above Rs. 1,000 range making up for the other 20%).
Yet, with imported raw material costs and excise duty on the rise, the company recorded a net loss of Rs. 4,500 crore at the end of FY14!
🍸 If it had a more premium portfolio of alcohol, it may have been able to tide over the flux that is part and parcel of being in the industry
3. Bad Investments
In an effort to compete on a global scale in the Scotch segment, United Spirits had acquired a Glasgow-based company known as Whyte & Mackay for more than US$ 1 billion in 2008 (almost Rs. 5,000 crore at the time). This was its attempt to compete with the likes of Johnny Walker (owned by Diageo).
Coupled with racking on more debt for United Spirits, Whyte & Mackay gave single-digit financial performance and showcased inability to compete against larger Scotch brands - making it a dud investment.
🍸 Coupled with US$ 111 million spent on RCB in 2008 and a whole bunch of ill-operated manufacturing plants reaching a count of almost a 100, the company’s use of funds had been erratic
The company didn’t lose its position as a market leader, but definitely lost its spot in investors’ portfolios. Yet, in what seemed like a cosmic twist to the story, Diageo (the company it wished to compete with) decided to acquire United Spirits and rejig the whole company!
The Turning Point
It was finally time for the messiah-arc of the story, and come FY15, after a series of announcements and deals, Diageo spent about Rs. 18,000 crore to acquire a 54% stake in United Spirits, buying out the entire Mallya and affiliated promoter group out!
What then ensued over the next few years, from FY16 to FY23, was a full scale, systematic clean up, targeting all 3 of the aforementioned pain points that United Spirits faced:
The result of this turnaround can be seen in the magnificent financials that the company has exhibited ever since, and investor confidence being restored, with the stock up 4x since the acquisition announcement back in November 2012!
In addition to all this, Diageo is strategically investing in future alcohol trends like white spirits and craft alcohol, while also setting up digital infrastructure for the possibility of online delivery of alcohol becoming the new norm over the next 5-7 years.
While some of you might be feeling the FOMO of not having invested in this stock a few years ago, it might give you comfort that the stock actually trades at a reasonable 44x 2-year forward PE, in and around its 5-year average multiple!
From being drunk on its own mistakes, the company’s sober and renewed approach with Diageo at the helm has helped realise its full potential as a monopoly stock. Just as we’ve been tracking it on our Monopolies portfolio, you could check out the company too (and join us to try its products)!
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