10 April 2014

Update | Sector: Consumer

Pernod Ricard (India)

BSE Sensex
22,715

S&P CNX
6,796

Not Rated

Premiumization mantra
Well placed to capitalize growing IMFL opportunity
We interacted with the global management of Pernod Ricard to gain perspective and
understand the long term strategic goals for its Indian operations. Following are the
key takeaways:
Premiumization remains the key focus for Pernod Ricard in India.
It is targeting a value market share of 50% in two to three years from existing
47%.
Operating environment is challenging but it is building blocks to capitalize on
emerging IMFL growth opportunity.
Variance in product mix explains the difference in profitability v/s UNSP.

Premiumization is the strategy: Pernod Ricard is singularly focused on

driving premiumization in India notwithstanding the short term cyclical
hiccups along the way. Favorable macro factors like rising middle class,
urbanization, demographics (100m new entrants in the legal drinking age in
five years) provide good long term potential in IMFL.
Targeting 50% value market share in two years: Pernod intends to increase
its value market share from 47% currently to 50% in two to three years. It
does not have a volume market share target. Company will be chasing
profitability by focusing on delivering better value proposition to
consumers. Thus, despite price cuts by UNSP in Royal Challenge, Pernod has
not reciprocated. Price cuts in premium brands impair the brand equity,
which is difficult to recoup, as per Pernod Ricard. However, it has lost a
miniscule 100bp market share in Royal Stag (from 81% to 80%), post price
cuts by Royal Challenge.
Challenging operating environment: India is a challenging market to
operate,
given
the
multitude
of
restrictions
on
pricing/distribution/advertising and thus it is not easy to premiumize the
market. Hence, a competitive landscape is not detrimental to the
underlying premiumization theme as the top two players are focused on
protecting earnings growth. Pernod uses brand extension strategy to get
the desired price hikes.
Robust operating performance: Pernod Ricard India has delivered 17%
revenue growth in 1HFY14, with 6-8% coming from pricing and mix
improvement. In India, 90% of Pernods revenue comes from three brands
Royal Stag, Blenders Pride and Imperial Blue. Pernods India operations
have scaled up significantly in the last decade - volumes have grown 7x
from 4m cases in FY03 to 29m cases in FY13, and bottling units from 8 to 25.
It covers 80% of the targeted market universe through 15 profit centers.
Company is looking to expand products and geographic portfolio to meet its
target of 50% value market share in two years. The dominant contribution

Gautam Duggad (Gautam.Duggad@MotilalOswal.com); +91 22 3982 5404

Manish Poddar (Manish.Poddar@MotilalOswal.com); +91 22 3027 8029
Investors are advised to refer through disclosures made at the end of the Research Report.

Pernod Ricard (India)

of premium portfolio explains the gap between UNSP and Pernods

profitability. Despite 4x volumes, UNSPs operating profit index is 14%
lower compared to Pernod Ricard India.
ENA-based spirits more profitable v/s molasses; sub-contracts RM
production: Pernods strength lies in branding and marketing quality liquor;
it sub-contracts RM production (ENA) through long term arrangements with
vendors. Also, company imports certain required grains and benefits from
synergies of group-level buying.
Lowering of tariffs on imported liquor an eventuality, timing
unpredictable: Pernod believes tariffs on imported liquor will eventually be
reduced. However, predicting the time line for such a move is difficult, as
per management. Existing custom duty rates of 150% were speculated to be
lowered to 40% as per media articles in 2013. However, we note that
negotiations for the Free Trade Agreement between India and EU are on
since 2007 and may encounter protests from local manufacturers.

PRI medium term goals in India

Source: Company

Volumes moved up 7x in 10 years

Premium Western Style Spirits (Above USD7-varies by state)
Volume Market Share (%)
Volume M (9L cases)
Bottling Units
# People

2002/03
23
4
8
345

2007/08
41
11
15
535

2012/13
46
29
25
830

Source: Company

Pernod is value leader in Premium Western Style Spirits (%)..

Pernod
40

...along with being the most profitable player

Key Competitor
47

Pernod

36

31

Key Competitor
311

290

192
100

07/08

11/12
Source: Company

10 April 2014

07/08

11/12
Source: Company
2

Pernod Ricard (India)

Over the last two years revenues have increased at 28% CAGR (INR m)
FY11

FY12

FY13

Gross Revenues

43,932.2

59,407.8

72,164.2

Profit before tax

5,078.0

8,818.6

10,068.2

Profit after tax

3,352.0

5,925.7

6,851.7

PBT Margin

11.6%

14.8%

14.0%

PAT Margin

7.6%

10.0%

9.5%
Source: Company

Pernods Balance Sheet (INR m)

March
Equity and liabilities
Shareholders' funds
Share capital
Reserves and surplus
Total Shareholders' Funds
Share application money pending allotment
Non-current liabilities
Long-term borrowings
Other long-term liabilities
Long-term provisions
Total non-current liabilities
Current liabilities
Short-term borrowings
Trade payables
Other current liabilities
Short-term provisions
Total current liabilities
Total Equity and Liabilities
Assets
Non-current assets
Fixed assets
Tangible assets
Intangible assets
Tangible assets capital work-in-progress
Intangible assets under development or work-inTotal Fixed Assets
Non-current investments
Deferred tax assets (net)
Long-term loans and advances
Other non-current assets
Total non-current assets
Current assets
Current investments
Inventories
Trade receivables
Cash and bank balances
Short-term loans and advances
Other current assets
Total current assets
Total Assets

10 April 2014

FY11

FY12

FY13

474
5,453
5,927
0

474
5,843
6,317
0

474
6,013
6,486
0

0
22
162
184

86
30
210
326

86
37
319
443

0
3,974
6,963
1,078
12,015
18,126

0
4,838
8,199
6,913
19,950
26,592

0
5,438
8,566
8,592
22,596
29,525

797
19
18
27
861
0
1,513
484
0
2,859

873
36
17
74
1,000
0
1,108
666
18
2,793

916
96
27
90
1,129
0
1,476
571
33
3,209

0
1,988
5,976
3,423
3,801
78
15,267
18,126

0
0
2,864
3,686
7,677
10,840
5,913
4,242
7,230
7,441
115
107
23,799
26,316
26,592
29,525
Source: Company

Pernod Ricard (India)

Pernods Cash flow statement (INR m)

March
Cash flows from used in operating activities
Profit before extraordinary items and tax
Adjustments for reconcile profit (loss)
Adjustments to profit (loss)
Adjustments for finance costs
Adjustments for depreciation and amortisation expense
Adjustments for unrealised foreign exchange losses gains
Other adjustments for which cash effects are investing or financing cash flow
Other adjustments for non-cash items
Total adjustments to profit (loss)
Adjustments for working capital
Adjustments for decrease (increase) in inventories
Adjustments for decrease (increase) in trade receivables
Adjustments for decrease (increase) in other current and non-current assets
Adjustments for increase (decrease) in trade payables
Adjustments for increase (decrease) in other current and non-current liabilities
Adjustments for provisions
Total adjustments for working capital
Total adjustments for reconcile profit (loss)
Net cash flows from (used in) Operations
Income taxes (paid) refund
Net cash flows from (used in) operating activities before extraordinary items
Net cash flows from (used in) operating activities
Cash flows from used in investing activities
Other cash receipts from sales of equity or debt instruments of other entities
Proceeds from sales of tangible assets
Purchase of tangible assets
Purchase of intangible assets
Interest received
Net cash flows from (used in) investing activities before extraordinary items
Net cash flows from (used in) Investing activities
Cash flows from used in financing activities
Proceeds from borrowings
Dividends paid
Interest paid
Other inflows (outflows) of cash
Net cash flows from (used in) financing activities before extraordinary items
Net cash flows from (used in) Financing activities
Net increase (decrease) in cash and cash equivalents before effect of exchange rate changes
Net increase (decrease) in cash and cash equivalents
Cash and cash equivalents cash flow statement at end of period

FY11

FY12

FY13

5,078

8,819

10,068

352
142
18
(328)
(174)
10

268
157
(7)
(404)
1
14

108
203
(5)
(268)
(324)
(285)

(223)
(1,281)
(3,143)
(2,219)
6,441
1,078
653
663
5,741
2,155
3,586
3,586

(876)
(1,731)
(3,412)
946
1,234
303
(3,536)
(3,521)
5,297
2,710
2,587
2,587

(822)
(3,237)
(327)
957
391
686
(2,352)
(2,637)
7,431
3,464
3,968
3,968

7
229
44
478
212
212

0
5
222
78
374
79
79

6
237
100
303
(28)
(28)

4,973
348
(2,514)
(7,835)
(7,835)
(4,037)
(4,037)
3,408

86
247
(161)
(161)
2,505
2,505
5,913

4,763
75
(773)
(5,611)
(5,611)
(1,671)
(1,671)
4,242

Source: Company

10 April 2014

Pernod Ricard (India)

NOTES

10 April 2014

Disclosures

Pernod Ricard (India)

This report is for personal information of the authorized recipient and does not construe to be any investment, legal or taxation advice to you. This research report does not constitute an offer, invitation or
inducement to invest in securities or other investments and Motilal Oswal Securities Limited (hereinafter referred as MOSt) is not soliciting any action based upon it. This report is not for public distribution
and has been furnished to you solely for your information and should not be reproduced or redistributed to any other person in any form.
Unauthorized disclosure, use, dissemination or copying (either whole or partial) of this information, is prohibited. The person accessing this information specifically agrees to exempt MOSt or any of its
affiliates or employees from, any and all responsibility/liability arising from such misuse and agrees not to hold MOSt or any of its affiliates or employees responsible for any such misuse and further agrees
to hold MOSt or any of its affiliates or employees free and harmless from all losses, costs, damages, expenses that may be suffered by the person accessing this information due to any errors and delays.
The information contained herein is based on publicly available data or other sources believed to be reliable. While we would endeavour to update the information herein on reasonable basis, MOSt and/or
its affiliates are under no obligation to update the information. Also there may be regulatory, compliance, or other reasons that may prevent MOSt and/or its affiliates from doing so. MOSt or any of its
affiliates or employees shall not be in any way responsible and liable for any loss or damage that may arise to any person from any inadvertent error in the information contained in this report. MOSt or any
of its affiliates or employees do not provide, at any time, any express or implied warranty of any kind, regarding any matter pertaining to this report, including without limitation the implied warranties of
merchantability, fitness for a particular purpose, and non-infringement. The recipients of this report should rely on their own investigations.
This report is intended for distribution to institutional investors. Recipients who are not institutional investors should seek advice of their independent financial advisor prior to taking any investment decision
based on this report or for any necessary explanation of its contents.
MOSt and/or its affiliates and/or employees may have interests/positions, financial or otherwise in the securities mentioned in this report. To enhance transparency, MOSt has incorporated a Disclosure of
Interest Statement in this document. This should, however, not be treated as endorsement of the views expressed in the report.
Disclosure of Interest Statement
1. Analyst ownership of the stock
2. Group/Directors ownership of the stock
3. Broking relationship with company covered
4. Investment Banking relationship with company covered

Pernod Ricard (India)

No
No
No
No

Analyst Certification

The views expressed in this research report accurately reflect the personal views of the analyst(s) about the subject securities or issues, and no part of the compensation of the research analyst(s) was, is,
or will be directly or indirectly related to the specific recommendations and views expressed by research analyst(s) in this report. The research analysts, strategists, or research associates principally
responsible for preparation of MOSt research receive compensation based upon various factors, including quality of research, investor client feedback, stock picking, competitive factors and firm revenues.

Regional Disclosures (outside India)

This report is not directed or intended for distribution to or use by any person or entity resident in a state, country or any jurisdiction, where such distribution, publication, availability or use would be contrary
to law, regulation or which would subject MOSt & its group companies to registration or licensing requirements within such jurisdictions.

For U.K.

This report is intended for distribution only to persons having professional experience in matters relating to investments as described in Article 19 of the Financial Services and Markets Act 2000 (Financial
Promotion) Order 2005 (referred to as "investment professionals"). This document must not be acted on or relied on by persons who are not investment professionals. Any investment or investment activity
to which this document relates is only available to investment professionals and will be engaged in only with such persons.

For U.S.

Motilal Oswal Securities Limited (MOSL) is not a registered broker - dealer under the U.S. Securities Exchange Act of 1934, as amended (the"1934 act") and under applicable state laws in the United
States. In addition MOSL is not a registered investment adviser under the U.S. Investment Advisers Act of 1940, as amended (the "Advisers Act" and together with the 1934 Act, the "Acts), and under
applicable state laws in the United States. Accordingly, in the absence of specific exemption under the Acts, any brokerage and investment services provided by MOSL, including the products and services
described herein are not available to or intended for U.S. persons.
This report is intended for distribution only to "Major Institutional Investors" as defined by Rule 15a-6(b)(4) of the Exchange Act and interpretations thereof by SEC (henceforth referred to as "major
institutional investors"). This document must not be acted on or relied on by persons who are not major institutional investors. Any investment or investment activity to which this document relates is only
available to major institutional investors and will be engaged in only with major institutional investors. In reliance on the exemption from registration provided by Rule 15a-6 of the U.S. Securities Exchange
Act of 1934, as amended (the "Exchange Act") and interpretations thereof by the U.S. Securities and Exchange Commission ("SEC") in order to conduct business with Institutional Investors based in the
U.S., MOSL has entered into a chaperoning agreement with a U.S. registered broker-dealer, Motilal Oswal Securities International Private Limited. ("MOSIPL"). Any business interaction pursuant to this
report will have to be executed within the provisions of this chaperoning agreement.
The Research Analysts contributing to the report may not be registered /qualified as research analyst with FINRA. Such research analyst may not be associated persons of the U.S. registered brokerdealer, MOSIPL, and therefore, may not be subject to NASD rule 2711 and NYSE Rule 472 restrictions on communication with a subject company, public appearances and trading securities held by a
research analyst account.

For Singapore

Motilal Oswal Capital Markets Singapore Pte Limited is acting as an exempt financial advisor under section 23(1)(f) of the Financial Advisers Act(FAA) read with regulation 17(1)(d) of the Financial
Advisors Regulations and is a subsidiary of Motilal Oswal Securities Limited in India. This research is distributed in Singapore by Motilal Oswal Capital Markets Singapore Pte Limited and it is only directed
in Singapore to accredited investors, as defined in the Financial Advisers Regulations and the Securities and Futures Act (Chapter 289), as amended from time to time.
In respect of any matter arising from or in connection with the research you could contact the following representatives of Motilal Oswal Capital Markets Singapore Pte Limited:
Anosh Koppikar
Kadambari Balachandran
Email:anosh.Koppikar@motilaloswal.com
Email : kadambari.balachandran@motilaloswal.com
Contact(+65)68189232
Contact: (+65) 68189233 / 65249115
Office Address:21 (Suite 31),16 Collyer Quay,Singapore 04931

Motilal Oswal Securities Ltd

Motilal Oswal Tower, Level 9, Sayani Road, Prabhadevi, Mumbai 400 025
Phone: +91 22 3982 5500 E-mail: reports@motilaloswal.com
10Investors
April 2014
are advised to refer through disclosures made at the end of the Research Report.