Tough Times for the King of Good Times
“King of Good Times”: the marketing theme of India’s largest beer producer United Brewery Group (Kingfisher brand) is one of the most recalled advertising catch line in the Indian industry. UB Group sells more than half of the beers sold in India, while its liquor business controls three-fourths of the Indian market. And we are not talking about beer or spirits industry alone.
Often compared to UK’s Richard Branson of Virgin Group, UB Group’s chairman Vijay Mallya is one of the best known entrepreneurs in India. His dominance in the Indian liquor industry, indulgence in airline business and penchant for sports of cricket, football and formula one racing (he has bought out teams in each sport) makes him the darling of the media among industry barons.
But it seems there are tough times ahead for Mr. Mallya: recent problems concerning his airline business could easily have consequences for his beer business.
Kingfisher Airlines, which is part of Mallya’s empire was set up in 2003 and hasn’t seen a single year of profit since it got listed on the stock exchange in 2006. Accumulated losses at the end of November stand at about INR 8.2 billion. The airline doesn’t have money to pay for fuel, employee’s salaries and airport fees.
A September report by Veritas Investment Research states that Mallya should not have got into the airline business at all: “We believe that the ill-conceived foray into the airline business has already cost UB shareholders dearly, and that their ownership of India’s premier liquor and beer assets has been sacrificed at the altar of egoistic ambitions.” No surprises that UB Group management vehemently dismisses the report as nonsense.
Mallya was forced to take loans from banks which now have a total exposure of about INR 70 billion to Kingfisher Airlines, of which over INR 13 billion had been converted into equity during the last financial year as part of debt restructuring. Of the banks’ total exposure, over INR 4 billion are in the form of term loans. The consortium, led by India’s leading banker, State Bank of India, has a handful of other public and private sector banks.
In mid 2011, Kingfisher airline failed to raise INR 10 billion through global depository receipts because of the political instability in the Middle East. State Bank of India and other lenders converted part of their loans to equity at a premium to market price and now hold 23 per cent stake in the airline. These loans for troubled airline came at a huge cost for the UB group, as nine out of 10 shares of United Spirits have been pledged as collateral to the banks.
Saddled with huge liabilities, Kingfisher Airlines is asking the banks for another debt restructuring and relaxed terms to pay interest costs. However, given the tight liquidity scenario and financial health of airlines business banks are under a lot of pressures and may not dance to the tunes of Mr. Mallya this time.
It would be interesting to observe how UB Group comes out of the current problems and whether the recent event will have an impact on the group’s beer business, considering that SAB Miller is aggressively targeting the same market and is close on its heels.
