Factors like the threat of prohibition, high excise duty, exorbitant import duty, ban on free advertisement, restrictions on inter-state movement, government control of distribution and near-monopoly status of retailers and distributors have been responsible for a historically low PE for the liquor industry. But the scenario is likely tochange soon. The attitude towards the brewing industry had changed with the Centre opening up the area for foreign investment, which would mean clearer policies in the future.

The market has already stared re-rating the leaders in the industry. Take for instance, Mc Dowell's which is trading at its all-time high of Rs 129. United Breweries has also more than doubled in the last fortnight from Rs 41 to Rs 94. The jump in the stock is despite the not-so-good performance in the first-quarter. The company's profit had declined from Rs 200 crore (1997-98) to Rs 122 crore for the year ended March 1999. The company has reported a net profit of Rs 1.3 crore for the first quarter. The fall in profits is mainly on account of the downward market conditions and higher ad-expenditure for the promotion of `King Fisher Strong'.

The industry is relatively recession-proof. The large market has attracted the interest of foreign players, who have a large fund bases for capital investment and have a long term businessperspective. Thus, several foreign players like Fosters, Stroh's, etc. have established a base in India.With the entry of MNC players, only the companies which have strong brand equity, widespread distribution setup, diversified portfolio across segments, multi-locational manufacturing units across the country and have strategic tie-ups with global players are likely to survive. The industry is in the midst of a major shakeout and significant number of mergers and acquisitions should help consolidate the market.

Indian players have begun putting their act together. They are looking at mergers as a cheaper route to capacity expansion and increase in number of brands. Thus, players like United Breweries are in talks with local breweries of medium capacity. There is a visible shift in choice from brown spirits to the white spirit and wine segment in India. While globally the wine drinking population is large (per capita consumption approx. 65 litres/year), the consumption in India is a negligible 7 ml percapita. This throws open a large market - thus, offering scope for high growth.

With the development of the wine market (led by the change in culture), the opportunity of increased production is also very high. India has vast areas of grape production. Currently, hardly one per cent of the produce is being utilised for wine-making as against 90 per cent conversion in the European markets. This also offers enormous scope for higher production capacities.Also, the Indian drinker is increasingly inclined towards beer. This could see a reduction in the dominance of brown spirit and higher growth in the beer segment, which in spite of low realisations will be a volume gainer; beer accounts for 45 per cent of the retail segment by volume - but only 20 per cent in value terms. The best picks in the sector are:

Mc Dowell's

The stock has been recently promoted to Group A on BSE. This coupled with the restructuring exercise has led to a renewal of interest in the counter. The stock is expected to touch Rs300 level within a year. The company enjoys a widespread distribution network. The company has 9 distilleries and plans to bring them under one umbrella. The merger plan envisages bringing another 4-5 stand-alone distilleries to the spirits division to make it a single entity. The company has sold of its unrelated business. The company is one of the two companies in the world who own six `millionaire' (with a sale of over 1 million cases per annum) brands. The company supplies to 30,000 retail outlets and sells over 30 lakh cases Mc Dowell No. 1 (the 3rd largest selling non-scotch whiskey and the 8th largest selling brand in the world).

United Breweries

United Breweries, the flagship company of the UB group, is taking up a restructuring exercise to focus on its core businesses and improve shareholder value. UB plans to focus more on the `beer' segment. It's flagship brand `King Fisher' is popular in as many as 40 countries. The clear focus on beer should help the company get better valuationsabroad. UB figures fourth in the list among companies in the world which own a millionaire brand. The company has forayed into strong beer in the domestic market as Indians prefer stronger beers. The company has recently acquired a company in Africa, National Sargom Limited. UB has invested Rs 70 crore in the company and plans to get it listed on the Johannesburg Stock Exchange. The company is reported to be in talks with another African company for a possible acquisition. The stock is expected to give good returns to investors in the long-run.