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An Indian brewery

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									An Indian brewery
A strategic analysis for ABC Breweries


         CLSW Consulting Group
                                CLSW Consulting Group


Presentation Overview
   Introductions              Recommendations
   Indian Beer Market         Capital Structure and
   Introduction to India       Cash Flows
   Brewery Operations         Questions
   Risks and Mitigation
    Strategies
                               CLSW Consulting Group


CLSW Consulting Group
   Started in 2007
   Helps U.S. firms expand in international markets
   Regional consulting teams
       Eastern Europe
       China
       India
       Southeast Asia
       Africa
                               CLSW Consulting Group


ABC Breweries
   Started as a microbrewery in 1982 in Portland, OR
   Expanded throughout the western United States
   Three breweries
   Went public in 1994.
   Current market cap is $300M
   Perceives growth potential is limited in the U.S.
   Expects greater growth opportunities in
    Developing Asian markets
                               CLSW Consulting Group


Engagement Goals
   Identify risks in entering Indian market
   Identify risk mitigation strategies
   Suggest investment entry and exit strategies
   Provide investment analysis of best plan
   Provide recommendations
                            CLSW Consulting Group


Presentation Overview
   Introductions              Recommendations
   Indian Beer Market         Capital Structure and
   Introduction to India       Cash Flows
   Brewery Operations         Questions
   Risks and Mitigation
    Strategies
                                   CLSW Consulting Group


Why India
   One of the fastest growing economies in the World
       Expected 8% GDP growth for the next 5 years
   Second largest population - 1.1 Billion inhabitants
   Average mean age is 27 years old and dropping
       Large number of NEW beer drinkers over the next few
        years
   Changing lifestyles mean larger disposable
    income for young Indians
       Growth of “Pub” culture
                                 CLSW Consulting Group


Changing Face of Indian Culture
   Large population exposed to western culture
   International travel for a greater number of Indians
   Beer no longer considered taboo
   Beer is more often considered equivalent to soft
    drinks
   Linked to adventurous, fun-seeking lifestyle
                                    CLSW Consulting Group


Indian Beer Market
   Over 130 million cases of beer in 2006
   Beer market expected to grow by 17.2% CAGR
    through 2011
   Two Types of Beer
       Strong beer - 65% of market in 2006
       Lager
   Sales are highly dependent on temperature and
    weather conditions
       Highest sales in May, lowest in January
                                    CLSW Consulting Group


Top 3 Competitors
   Control 90% of the marketplace
   United Breweries - Almost 50% of the market
       Top brand - Kingfisher
   SABMiller (SAB and Miller Beer) - 37% of market
       Top brand - Haywards 5000
   Millenium Alcobev
                         CLSW Consulting Group


New Market Entrants
   Anheuser-Busch in Hyderabad
   Carlsberg
   InBev
                            CLSW Consulting Group


Presentation Overview
   Introductions              Recommendations
   Indian Beer Market         Capital Structure and
   Introduction to India       Cash Flows
   Brewery Operations         Questions
   Risks and Mitigation
    Strategies
                                  CLSW Consulting Group




It's hard to find a country with as much variation,
        contrast and contradictions as India.
                    CLSW Consulting Group

Location of India
                              CLSW Consulting Group

Geography of India
               Surrounded by Pakistan , Nepal , China , Bhutan
                and Bangladesh
               Coastline stretches 7000 kilometers. Surrounded
                by the Arabian Sea in the west, the Bay of Bengal
                in the east and the Indian Ocean in the South
               Total: 3,287,590 sq km
                      land: 2,973,190 sq km
                      water: 314,400 sq km
               Slightly more than one-third the size of the US
               Capital: New Delhi
                                                         CLSW Consulting Group

                Demographic factors
                                         Population: 1,129,866,154
                                          Second most populous country of the world

                                                0-14 years: 31.8% (male 188,208,196/female
                                                 171,356,024)

                                                15-64 years: 63.1% (male 366,977,821/female
                                                 346,034,565)

                                                65 years and over: 5.1% (male 27,258,259/female
                                                 30,031,289)

                                         Population growth rate: 1.606%
                                         Birth rate: 22.69 births/1,000 population
                                         Death rate: 6.58 deaths/1,000 population
                                         Sex ratio: 1.064 males/female



*Above data is as of July 2007 est.
                                            CLSW Consulting Group

      Demographic factors
   Labor force: 509.3 million
         agriculture: 60%
         industry: 12%
         services: 28% (2003)
   Unemployment rate: 7.8%
   Life expectancy at birth: 68.59 years
   Population below poverty line: 25%
                                               CLSW Consulting Group

Key Economic Parameters
   Currency (code): Indian rupee (INR)
   Exchange rates: Indian rupees per US dollar – 40.42 (07/15/2007)
                                       CLSW Consulting Group

    India GDP Growth
   GDP (purchasing power parity): - $4.156 trillion
   GDP (official exchange rate): - $804 billion
   GDP - real growth rate: - 9.2% (2006)
   GDP - per capita (PPP): - $3,800
   GDP - composition by sector:
      agriculture: 19.9%

      industry: 19.3%

      services: 60.7%
                                        CLSW Consulting Group

India GDP Growth Forecast
   India's economic boom will continue.
   Real GDP growth will keep an annual average of 7.6% between 2007
    – 2012.
   Information technology (IT) and IT-enabled services (ITES) output
    will grow rapidly
                                              CLSW Consulting Group


Indian State of Maharashtra
   India’s leading industrial state.
         Contributing 13% of national industrial output
   Major industries include chemical and allied products,
    electrical and non-electrical machinery, textiles, petroleum
    and allied products.
   Capital city: Mumbai, formerly known as Bombay
         Most populous city of India
         Estimated population of 18million.(2006)
                                 CLSW Consulting Group

City of Mumbai
          Entertainment Capital of India
               Bollywood, the centre of India's Hindi film and
                television industry is located in Mumbai
          Commercial Center of India. It contributes:
               10% of all factory employment
               40% all income tax collections
               60% of all customs duty collections
               40% of India's foreign trade
               Headquarter of many Indian companies
                            CLSW Consulting Group


Presentation Overview
   Introductions              Recommendations
   Indian Beer Market         Capital Structure and
   Introduction to India       Cash Flows
   Brewery Operations         Questions
   Risks and Mitigation
    Strategies
                                    CLSW Consulting Group


  Brewery Operations
                       Brewing is the production of alcoholic
                        beverages through fermentation, a
                        method used for beer production.
                       Work in the brewery is typically divided

                        into 7 steps: mashing, lautering,
                        boiling, fermenting, conditioning,
16th Century Brewer
                        filtering, and filling.
                      CLSW Consulting Group

Brewery Operation Flow Chart
                                        CLSW Consulting Group


    Brewery Operation Inputs
   Raw material
       Malted barley or wheat, water, sugar, hops, yeast
       Glass bottles and aluminum cans
   Capital Equipment
       Numerous tanks, boilers and piping
       Bottling equipment
   Labor
       Production, Marketing, Sales, Administration, Management,
        Distribution
                            CLSW Consulting Group


Presentation Overview
   Introductions              Recommendations
   Indian Beer Market         Capital Structure and
   Introduction to India       Cash Flows
   Brewery Operations         Questions
   Risks and Mitigation
    Strategies
                                         CLSW Consulting Group


Risk Mitigation Strategies
   Acceptance
       “If it happens, we will live with it”
   Mitigation/Risk Reduction
       “If it happens, we have a way of reducing the negative
        effects”
   Elimination
       “It won’t happen. We will not do the deal”
   Transfer
       “If it happens, insurance will pay for the loss”
                               CLSW Consulting Group


Identified Risks
   Infrastructure          Regulatory and legal
   Political Tensions       issues
   Input sourcing          Labor issues
   Trade Restrictions      Corruption
   Currency
                                     CLSW Consulting Group


Infrastructure Risks
   Indian Roads
       80% of traffic is crammed into 3% of available roads
   Power Requirements
       Reliability problems
       Widespread power outages
   Water Requirements
       Increasing depletion of surface and ground supplies
       Pollutant contamination
                                    CLSW Consulting Group


Infrastructure - Risk Mitigation
   Roads - Risk reduction
       Reduce distance to market
       Build brewery in the Navi Mumbai
       Two distribution centers in Mumbai and Pune
   Power - Risk reduction
       Purchase backup power generation equipment
   Water Supply - Risk reduction
       In-house, reverse-osmosis filtration systems
                                    CLSW Consulting Group


Political Tensions Risks
   Pakistan - Kashmir border conflict
       Long-running dispute over the Indian States of Jammu
        and Kashmir in Northern India
       Both Pakistan and India have tested nuclear weapons
       Progress towards normalizing relations
   Muslim - Hindu Tensions
       Rise of Hindu fundamentalism following ascent of
        Bharatiya Janata Party (BJP) in 1991
       2002 Gujarat Riots - Over 1000 dead or missing
                                           CLSW Consulting Group


Political Tensions - Risk Mitigation
   Brewery location
        Far from Jammu and Kashmir
        However, State of Maharashtra is next to Gujarat
   Prudent to obtain terrorism and political violence insurance
        Unknown premium amount
        Normally obtained as riders on property insurance
   Put plans in place to protect employees in case of political
    violence or turmoil
   Physical plant and distribution network security
   Consider creating a business continuity/security office to
    oversee security and monitor security situation
                                    CLSW Consulting Group


Input Sourcing Risks
   Brewery requires periodic resupply of raw materials
       Malted barley, water, hops, sugar
       Glass bottles and aluminum cans
   Production may come to a halt without raw material
    availability
   Expected demand for hops may outstrip domestic
    supply
   Except for hops, agricultural commodity prices may
    be artificially low due to imported products
                                   CLSW Consulting Group


Input Sourcing - Risk Mitigation
   On-site storage facilities for barley, hops and
    sugar mitigate against minor disruptions
   Obtain long-term contracts with local producers
   Purchase future contracts
       Barley, sugar and wheat futures are traded in NCDEX
        Indian commodities exchange
   Contract with alternative sources outside India in
    case of local disruption
                                    CLSW Consulting Group


Trade Restrictions Risks
   Agricultural sector is suffering from crisis due to
    low commodity prices
       60% of population is supported by agriculture
       Market restructuring could cause further political
        instability
       Weighted average tariff rate was 14.4 percent in 2005
       Some agricultural import tariffs are as high as 115%
   Non-tariff barriers include:
       Excessive bureaucracy
       Import taxes
                                CLSW Consulting Group

Trade Restrictions - Risk
Mitigation
   Import tariffs are only relevant when domestic
    supplies are not available
   Currently, domestic agricultural prices are low due
    reduction of trade barriers
   At this time, no suggested additional action
    recommended
                                               CLSW Consulting Group
Currency Risk
   Indian economy is currently in a rapid growth phase.
      GDP for past 3 years > 8%

             Wages have increased 15%-plus for skilled workers.
             Corporate and personal borrowing up 28% over past 12 months.
             Overall demand for goods has increased and surpassed supply.

   GDP is US$1,103 billion, 12th largest economy in the world.
   In terms of purchasing power parity (PPP), India has the world's 4th
    largest GDP at US$4.156 trillion.


   Increased wealth = consumption & competition increase.
        February 2007: Referred to as “Overheating Economy”.
                                                      CLSW Consulting Group
     Currency Risk
   Current inflation comfort zone between 5 and 5.5%.
      June 2007, inflation is at 4.8%. Down from 6.9% in January.

      Rupee at a current 9 year high vs. U.S. dollar.

             Spot rate as of 7/17/2007 = 40.230 rupees per dollar
        Cuts in fuel taxes and import duties.
        Ban on wheat exports has help soften food prices.

   RBI inflation goal is between 4 and 4.5%.
      Raised bank reserve ratio to 5.5%.

      Raised interest rate ¼% to

       to 7.75% on April 24, 2007.
                                                   CLSW Consulting Group

Currency Risk
   Past/Future Outlook
      India has had two major financial crises : 1966 and 1991.

             Caused by large out of control trade deficits and shrinking foreign
              exchange reserves.
            Solved by a forced devaluation of the rupee.

        Rupee appreciation will lead to less exporting, so to avoid another financial
         crisis, RBI needs to curb spending and borrowing.


   Currency Risk Mitigation
      Closely watch Indian economy.

      Increase the cost of capital.

      Hedge risks in the options market with excess capital.
                                                       CLSW Consulting Group
    Regulatory Risks
   In early 1990s alcoholic beverage industry open to foreign investment.
        Foreign shareholdings in industry were restricted to a maximum of 74%.
        Entry into India was exclusively through the joint venture route.

   January 2006 India approved a major rationalization of FDI policy.
        Helps avoid multiple layers of approvals required in some activities.
        100 % FDI in manufacture of alcohol under the automatic route is allowed.
            Subject to licensing from state governments where the unit will be set up .




   Entry into brewery sector through automatic approval route
        Under automatic route, approval of the RBI is required.
        Government set up the Foreign Investment Implementation Authority (FIIA).
        Facilitates quick translation of (FDI) approvals into implementation.
        Helps FDI investors obtain necessary approvals.
        Sorts out operational issues with various Government agencies to solve problems.
                                                         CLSW Consulting Group

     Regulatory Risks Continued…
   Foreign capital is freely allowed to be repatriated.
        Includes capital appreciation, profits, and dividends.
        Taxes must be paid before repatriation.
        Any company incorporated in India is considered domestic, even if foreign owned.
            Domestic corporate tax rate = 33%.




   Potential Risks
        Lightened regulations may cause potential market saturation in the brewery sector.
        Immediate competition with large brewers already present.
              United Breweries- 50% market share
              SAB Miller- 37% market share
              Budweiser and Crown Beers of India- 5% market share goal
                                                          CLSW Consulting Group

         Regulatory Risks Continued…
   Regulatory Risk Mitigation
        Focus on brand naming company image.
        Register a trade mark to avoid brand duplication.
             Current registration is good for 7 years.
        Focus on developing in new areas and markets.
                                                   CLSW Consulting Group
        Labor Risks
   National Sample Survey Organization survey
       Equal to approximately 42% (of 1.1 billion) of India’s population.
            56% of rural males and 33% of rural females
            57% of urban males and 18% of urban females in the labor force.
                10% in formal economy, 60% self-employed, 30% casual workers.




   Current Indian unemployment is at 7.8%.
       If unemployment increases, demand for beer decreases.
       Labor force is growing at 2.5% annually, employment is growing at only 2.3%.
       Approximately 2.5 million employable college graduates emerging every year.
       Pressure to transfer agricultural land to higher productivity industry.
            Manufacturing has generated jobs for many of the less educated who are

             squeezed out of agriculture.
                                              CLSW Consulting Group
    Labor Risks Continued…
   Rigid Labor Laws
       Labor market changes have not kept pace with the country's economic
        liberalization program begun in 1991.

   Current Laws:
           Any company employing more than 100 workers cannot fire people

             without government permission.
           Labor commissioner in the government has to be notified of every single

             person working on the night shift.
           No worker to work beyond 75 hours of overtime a quarter.

                 < or = 46.25 hours per week.

   Risk Mitigation
       Treat workers fairly through fair compensations and treatment.
       Clearly understand labor laws to avoid government intervention.
       Keep good rapport with involved labor unions.
                                            CLSW Consulting Group
Corruption Risks




   *2007 Index of Economic Freedom - The Heritage Foundation
                                                       CLSW Consulting Group
           Corruption Risks Continued…
   Corruption is perceived as widespread.
        India ranks 88th out of 158 countries in Transparency International's Corruption
         Perceptions Index for 2005.
            Ranked 72 in 2001, 73 in 2002, and 83 in 2003.

        India study estimates the monetary value of petty corruption in 11 basic services like
         education, healthcare, judiciary, police, etc., to be around Rs.21,068 crores in 2005.
            Equivalent to $4.7 billion U.S. dollars.




   Reasons for widespread corruption:
        Lack of transparency and accountability in the system
        Lack of an effective corruption reporting mechanisms
        Lack of honesty in officials in the Government
        Acceptance of bribe as a way of life, custom and culture
        Ineffective judiciary
        Poor economic policies
                                                            CLSW Consulting Group
         Corruption Risks Continued…
   Mitigation of Corruption Risks
        Establish a system of checks and balances for all executives and directors.
              Require multiple approvals and signatures for major decisions.
        Adhere as closely as possible to the Foreign Corrupt Policies Act of 1977, a
         U.S. federal law.
            Most recently amended in 1998.
           Requires any company associated in the U.S. to have an adequate system

             of internal accounting controls.
        Conduct third party audits to ensure sound business practices.
                            CLSW Consulting Group


Presentation Overview
   Introductions              Recommendations
   Indian Beer Market         Capital Structure and
   Introduction to India       Cash Flows
   Brewery Operations         Questions
   Risks and Mitigation
    Strategies
                                                          CLSW Consulting Group

         Recommendations for Client
   Common Types of Business Entities in India
      Private Limited Company
             Best initial scenario is a 50/50 split of the company with JV partner.
             Shareholders’ rights to transfer shares is prohibited.
             Can immediately start business after incorporation.

        Public Limited Company
             Must have at least 7 shareholders.
             Must obtain “trading certificate” before business can begin.
                 In addition to certificate of incorporation.

             Must obtain government approval before the hiring of management.

        Subsidiary
             Composition of the board of directors is controlled by the holding company.
             The holding company controls more than one-half of the total voting power in the
              subsidiary.
                                                      CLSW Consulting Group

         Recommendations to Client
   Formation of a joint venture- Private Limited Company
        Companies incorporated in India are treated the same as domestic
         companies, even if 100% foreign owned.
        Many tax exemptions available to the company set up
         domestically.
        Only $2250 is required to form a private company.
        Once partner is determined, a Letter of Intent is signed by the parties
         highlighting the basis of the future joint venture agreement.
        Very specific joint venture agreement is signed.
             Includes (and numerous other details)
                  Dispute resolution agreements

                  Board of directors

                  Non-compete agreements

                  Business termination procedures
                                        CLSW Consulting Group

Recommendations to Client
 Exit Strategy
    Dividends, capital gains, royalties and fees can be repatriated
     easily with the permission of the Reserve Bank of India.
    Can repatriate share after discharging tax and other obligations.
    Can also disinvest share either to Indian partner, to another
     company, or to the public.
    Problems do arise when people and businesses try to go around
     the rules or from inexperience.
                            CLSW Consulting Group


Presentation Overview
   Introductions              Recommendations
   Indian Beer Market         Capital Structure
   Introduction to India       and Cash Flows
   Brewery Operations         Questions
   Risks and Mitigation
    Strategies
                                     CLSW Consulting Group


Assumptions
   Audience is familiar with WACC and NPV
   Debt obligations are in dollars
   Cash flows are denominated in dollars
   CAPM is used to estimate cost of equity
   Figures are based on “most likely scenario”
   Firm reserves right to modify capital structure as
    necessary
                                                           CLSW Consulting Group
Weighted Average Cost of Capital
  WACC % = (Debt % * Interest Rate * (1-t)) + (Preferred Stock % * (Dividend/Issue Price)) +
  (Equity % * Equity Cost)

  WACC % = Cost of Debt + Cost of Preferred Stock + Cost of Equity

                                               Preferred          Equity
                               Debt Cost            Cost           Cost                WACC
WACC                     =       3.35% +            0% +      10.88%       =        14.23%

Debt %:                             50%
Preferred Stock %:                   0%
Equity %:                           50%
Interest Rate:                      10%
1-tax rate                          67%
Preferred Stock Cost:                0%
Cost of Equity (CAPM):
  Rf rate:                         4.5%
  risk premium:                     10%
  beta:                              1.5


             WACC = 14.23% with current variables
             WACC is sensitive to changes in variables
                                           CLSW Consulting Group
NPV
             Cash Flow
  Year   Growth Rate %       Cash Flow     Certainty % Cash Flow NPV
    0                      -25,000,000          100%      -25,000,000
    1                        5,000,000            95%       4,158,459
    2             10%        5,500,000            90%       3,793,874
    3             14%        6,270,000            85%       3,576,045
    4             19%        7,461,300            80%       3,506,387
    5             16%        8,655,108            75%       3,338,320
    6             10%        9,520,619            70%       3,000,518
    7              6%       10,091,856            65%       2,585,570
    8              5%       10,596,449            60%       2,193,927
    9              5%       11,126,271            55%       1,848,680
   10              5%       11,682,585            50%       1,544,889

         Total NPV        Payback Period
              4,546,668       4 Years



         Total NPV = $4,546,668.47
         Total Payback = 4 Years
             CLSW Consulting Group


Questions?
                              CLSW Consulting Group


References
Bhavna Rathore, “The beer market in India -
  forecasts to 2011” - Just - Drinks. Bromsgrove:
  Mar 2007
Risk Management -
  http://en.wikipedia.org/wiki/Risk_management
2007 Index of Economic Freedom - The Heritage
  Foundation

								
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