1

Alcoholic Beverages Distilleries or Breweries?

1

Chapter 1

Swetha looked at all the papers spread on her table. She thought to herself I have to
somehow make some sense out of all these numbers. She started arranging all the
papers by industry. Once she sorted out the companies by industry, (she grouped them
into 3 industries) a clearer picture started to emerge. Then she decided to begin looking
at the Operating Income, Operating Profit and Adjusted PAT for each of the company
and only for the latest year that is available. Then, she started to group the data using the
soft copies she had on her computer. After two hours, she decided to take a coffee break
and her mind wandered back to three months earlier.

Three months ago Swetha joined a large finance company as the Executive Assistant to
the Vice President (Strategy), Mr. Dileep. She just finished her MBA from the
International Institute of Management, Bilekahalli (IIMB) and was selected by this
finance company during the campus placement. Mr. Dileep told her that the company is
looking for entering into a new industry and he wanted her to analyze couple of industries
for their entry. He made it very clear that there is no particular industry that he had in
mind and that she is free to look at any industry that she chooses. He also told her that
the company is not interested in setting up a green field venture and that their modus
operandi is going to be through acquisition.

Swetha felt that the most profitable venture will be in alcoholic beverages, either
distilleries or breweries. She heard about the Equity Research Station (a database with
information on large number of companies) and managed to get the company to subscribe
to the database.

As a first step, she collected the information regarding all the financial data for each of
the companies in the two industry groups, namely Distilleries and Breweries. The data
was available for a number of years for each company and she collated all the data,

1
V. Nagadevara, Indian Institute of Management Bangalore
2
company-wise, copying all the details from the balance sheets and profit and loss
statements along with all the details and notes. She noticed that the data was not
available for the latest year for all the companies. While looking at the data, she felt that
she needed to understand her own industry better. Immediately, she started collecting
data for all the finance companies. Then only she realized the awesome number of
finance companies that are listed on ERS. Very soon, she got lost in a maze of data.
That was when she felt that she has to organize her data in a more systematic fashion.

Swetha quickly finished her coffee break and went back to her workstation. There was a
message from Mr. Dileep, asking her to meet him the next day. Swetha knew that she
has to make a presentation on the possible alternatives to Mr. Dileep on the acquisition of
the suitable company. She heard from her colleagues that Mr. Dileep likes a very short
and crisp presentation with lot of justification based on data. She decided to use as much
of statistical analysis as possible. She also knew that she would have to quantify the risk
involved with her recommendations.

The obvious first step is to present the summary of the three industries, Swetha said to
herself. I need to make it short and crisp. The data should bring out the characteristics
of the industry. I do need some more time and at the same time I need to show the boss
that I have been very busy till now.

She put all the data together and printed out two sets of hard copies, one for herself and
the other for Mr. Dileep.
3

Finance Company name Year Months Operating Income Operating Profit
ACE India Ltd. 0003 12 911,311.87 -222,992.13
Action Financial Services (India) Ltd. 0003 12 58,799,207.00 24,130,966.00
Akshay Fiscal Services Ltd. 0003 12 846,000.00 606,000.00
Apollo Finvest (India) Ltd. 0003 12 15,797,679.00 10,377,284.00
Aravali Securities & Finance Ltd. 0003 12 178,932,136.00 30,128,594.00
Arihant Capital Markets Ltd. 0003 12 8,400,585.00 5,079,767.00
Arihants Securities Ltd. 0003 12 1,880,000.00 -1,187,000.00
Bhandari Consultancy & Finance Ltd. 0003 12 375,693.15 199,613.07
Bharat Bhushan Share & Stock Brokers Ltd. 0003 12 10,481,074.00 8,293,116.00
Birla Century Finance Ltd. 0003 12 106,380,478.00 94,049,067.00
BLB Ltd. 0003 12 366,705,839.00 317,608,205.00
BNK Capital Markets Ltd. 0003 12 81,912,000.00 79,106,000.00
BNR Udyog Ltd 0003 12 8,151,685.00 5,662,509.00
Bridge Securities Ltd. 0003 12 3,963,572.00 1,173,488.00
Cambay Investment Corporation Ltd. 0003 12 59,207,482.00 2,589,009.00
Chartered Capital & Investment Ltd. 0003 12 4,750,000.00 2,856,000.00
CIL Securities Ltd. 0003 12 57,785,885.00 29,756,254.00
Commitment Capital Services Ltd. 0003 12 1,226,247.83 286,157.41
Continental Credit & Investment Ltd. 0003 12 2,048,950.95 834,891.57
Cost Plus Credit Capital Ltd. 0003 12 5,657,477.00 2,433,344.00
Dahyabhai Sons Ltd. 0003 12 57,362,197.00 57,316,042.00
Daulat Securities Ltd. 0003 12 13,301,948.00 10,206,519.00
DGP Securities Ltd. 0003 12 55,927,487.00 40,336,970.05
DJS Stock & Shares Ltd. 0003 12 43,283,021.00 26,423,034.00
DSP Merrill Lynch Ltd. 0003 12 1,625,919,000.00 896,240,000.00
Duncan Brothers & Company Ltd. 0003 12 8,779,000.00 1,824,000.00
Dynamic Portfolio Management & Services Ltd. 0003 12 2,020,701.00 1,313,619.00
Elcid Investments Ltd. 0003 12 10,072,686.00 9,785,296.00
Financial Eyes (India) Ltd. 0003 9 6,347,809.00 5,900,308.00
GDL Leasing & Finance Ltd. 0003 12 1,235,008.82 370,909.82
Gemstone Investments Ltd. 0003 12 5,103,582.16 3,995,897.79
Geojit Securities Ltd. 0003 12 130,149,875.00 81,131,441.00
Gujarat Organics Ltd. 0003 12 71,480,352.00 3,984,124.00
Healthy Investments Ltd. 0003 12 254,569.00 112,026.00
Hinduja Finance Corporation Ltd. 0003 9 116,769,000.00 84,287,000.00
4
Ikab Securities & Investment Ltd. 0003 12 16,669,188.00 7,592,581.00
IL & FS Venture Corporation Ltd 0003 12 79,631,359.00 42,907,101.00
Inani Securities Ltd. 0003 12 17,718,103.07 7,694,817.33
Indcap Financial Ltd. 0003 12 3,599,773.00 1,752,374.00
Industrial Investment Trust Ltd. 0003 12 152,765,212.00 127,436,988.00
Inter Globe Finance Ltd. 0003 12 481,560.80 -58,313.45
J M Share & Stock Brokers Ltd. 0003 12 32,403,067.00 19,854,372.00
Joindre Capital Services Ltd. 0003 12 271,584,459.00 176,069,555.00
JPT Securities Ltd. 0003 12 6,475,593.17 5,788,106.55
Kampani Consultants Ltd. 0003 12 897,404.90 215,188.15
Kinetic Trust Ltd. 0003 12 1,755,594.00 771,372.00
KLG Capital Services Ltd. 0003 12 528,942.03 235,826.56
Libord Securities Ltd. 0003 12 10,552,464.00 2,184,604.00
Lohia Securities Ltd. 0003 12 13,109,000.00 5,971,000.00
Madhur Capital & Finance Ltd. 0003 12 19,920,947.00 16,009,884.00
Mahamaya Investments Ltd. 0003 12 4,487,648.00 2,409,397.00
Merry Sharefin Ltd. 0003 12 5,175,605.00 944,417.00
Midas Pharmasec Ltd. 0003 12 7,791,834.99 -1,214,877.23
Morarka Finance Ltd. 0003 12 6,517,384.00 5,755,511.00
Mukesh Babu Financial Services Ltd. 0003 12 10,616,422.00 8,396,571.00
Munoth Investments Ltd. 0003 12 6,364,000.00 1,884,000.00
NCJ International Ltd. 0003 12 2,568,076.50 1,312,869.23
NDA Securities Ltd. 0003 12 21,110,454.00 11,502,695.00
Networth Stock Broking Ltd. 0003 12 10,374,532.00 4,368,297.00
Nicco Uco Alliance Credit Ltd. 0003 12 733,294,109.00 560,182,512.00
North East Securities Ltd. 0003 12 15,914,861.00 9,618,352.00
Nucleus Securities Ltd. 0003 12 47,006,149.00 12,215,816.00
Oasis Securities Ltd. 0003 12 18,575,450.00 8,656,724.00
Parsharti Investments Ltd. 0003 12 3,014,492.00 806,348.00
Pearl Energy & Infrastructure Ltd. 0003 12 132,139,600.00 -15,090,197.00
Peeti Securities Ltd. 0003 12 69,336,364.36 2,767,403.28
Pilani Investment and Industries Corporation Ltd. 0003 12 236,924,099.00 226,766,728.00
Pioneer Technoparks Ltd. 0003 12 77,270.00 -221,165.00
Plenty Valley Intra Ltd. 0003 12 4,158,391.00 3,218,078.00
Praman Capital Market Service Ltd. 0003 12 18,216,000.00 3,995,000.00
Premium Capital Markets & Investments Ltd. 0003 12 2,616,072.00 -3,880,931.00
Prime Securities Ltd. 0003 12 144,788,000.00 122,564,000.00
5
Radico Khaitan Finance Ltd. 0003 12 614,432.00 -1,231,788.00
Raghav Industries Ltd. 0003 12 4,268,363.00 3,732,599.00
Rathi Mercantile Industries Ltd. 0003 12 4,438,301.00 3,467,643.00
Raunaq Finance Ltd. 0003 12 18,775,000.00 11,535,000.00
Regency Trust Ltd. 0003 12 12,060,401.00 2,949,847.00
Sai Capital Ltd. 0003 12 878,174.00 272,227.00
Sai Industries Ltd. 0003 12 1,335,242.00 647,797.00
Sam-Tul Invest Ltd. 0003 12 1,558,358.00 1,467,740.00
Sanghi Corporate Services Ltd. 0003 12 337,605.00 -87,700.00
Shalibhadra Finance Ltd. 0003 12 10,517,134.00 6,254,776.00
Sharyans Resources Ltd. 0003 12 8,113,500.00 2,308,528.00
Shrachi Securities Ltd. 0003 12 194,782,802.00 164,850,584.00
Shree Rani Sati Investment & Finance Ltd. 0003 12 2,762,063.00 2,470,243.00
Shriyam Securities & Finance Ltd. 0003 12 53,133,000.00 41,529,000.00
Stanrose Mafatlal Investments & Finance Ltd. 0003 12 26,025,713.00 19,640,289.00
Suraj Holdings Ltd. 0003 12 522,936.49 279,933.49
Suryamukhi Trading & Finance Ltd. 0003 12 103,196.00 -485,422.00
Tata Investment Corporation Ltd. 0003 12 495,914,000.00 472,163,000.00
Thacker & Company Ltd. 0003 12 7,567,922.00 6,418,413.00
VCK Capital Market Services Ltd. 0003 12 7,157,884.00 -794,311.00
Vertex Securities Ltd. 0003 12 64,329,024.62 9,424,902.40
Vijay Growth Financial Services Ltd. 0003 12 22,395,864.00 16,901,446.00
Vintage Securities Ltd. 0003 12 181,733.00 -62,077.00
Walchand Capital Ltd. 0003 12 44,663,000.00 23,431,000.00
Yatish Securities Ltd. 0003 12 378,462.00 -288,380.00
Citicorp Securities & Investment Ltd. 0006 12 417,775,214.00 124,805,212.00
IFB Securities Ltd. 0006 12 2,146,000.00 -116,000.00
Frontline Securities Ltd. 0007 12 16,854,666.00 15,413,044.00

mean 66,709,690.10 41,452,680.10
standard deviatipn 191,180,469.57 121,237,782.23







6
ALCOHOLIC DISTILLERIES

Company name Year Months Operating Income Operating Profit Adjusted PAT
Amar Alcoholi Ltd. 9803 12 38,254,099.00 -1,074,645.00 -11,791,494.00
Associated Alcohols & Breweries Ltd. 3 12 352,686,366.00 76,481,234.00 37,519,746.00
Balaji Distilleries Ltd. 3 12 3,755,408,239.00 189,981,615.00 8,703,405.00
G M Breweries Ltd. 3 12 460,233,000.00 81,388,000.00 464,000.00
Herbertsons Ltd. 9803 12 2,195,767,685.00 166,698,606.00 44,346,607.00
Jagatjit Industries Ltd. 9903 12 4,037,561,000.00 386,288,490.00 116,039,300.00
Kedia Distilleries Ltd. 9507 12 820,480,429.00 223,089,440.00 104,083,162.00
Khoday India Ltd. 3 12 1,198,110,000.00 277,715,000.00 150,345,000.00
McDowell & Company Ltd. 3 12 8,372,109,000.00 679,924,000.00 220,689,000.00
Modi Spinning & Weaving Mills Company
Ltd. 9903 12 318,813,069.00 6,415,356.00 -79,428,827.00
Mohan Meakin Ltd. 3 12 2,048,093,023.00 131,615,539.00 21,303,508.00
Pampasar Distillery Ltd. 3 12 505,806,770.00 68,216,410.00 20,901,320.00
Pioneer Distilleries Ltd. 3 12 42,375,501.00 376,118.00 -34,130,411.00
Radico Khaitan Ltd. 9912 12 2,250,016,000.00 112,627,000.00 54,834,000.00
Shaw Wallace & Company Ltd. 9906 12 7,706,739,000.00 615,545,000.00 27,485,000.00
Silver Oak (India) Ltd 3 12 32,128,218.28 2,764,383.63 151,291.33
Som Distilleries & Breweries Ltd. 3 12 446,420,644.00 64,002,418.00 27,623,216.00
Superstar Distilleries & Foods Ltd. 3 12 23,085,979.41 -8,918,741.30 -44,962,944.04
Tilak Nagar Industries Ltd. 9909 12 179,788,885.00 8,634,192.00 -5,833,712.00
Xylon Loquitur Distillers & vintners Ltd. 9605 12 134,370,191.94 13,779,255.40 14,331,653.18




7


Company name Year Months Operating Income Operating Profit Adjusted PAT
Arlem Breweries Ltd. 9903 12 149,242,000.00 -12,098,000.00 -19,520,000.00
Blossom Industries Ltd. 9603 12 36,128,000.00 9,261,000.00 -12,536,000.00
Champagne Indage Ltd. 3 15 186,346,562.00 20,136,789.00 13,645,271.00
Charminar Breweries Ltd. 3 12 329,450,000.00 50,931,000.00 18,284,000.00
Haryana Breweries Ltd. 3 12 223,483,895.00 9,825,529.00 -3,655,030.00
Hindustan Breweries &
Bottling Ltd. 3 12 127,871,443.00 -6,653,182.00 754,271.00
Inertia Industries Ltd. 9903 12 185,652,102.00 -88,188,778.00 -166,092,525.00
Mount Shivalik Industries Ltd. 6 12 356,657,241.00 24,687,680.00 -2,192,481.00
Mysore Breweries Ltd. 9803 12 526,739,873.00 104,855,388.00 52,879,867.00
Narang Industries Ltd. 9803 12 317,214,413.00 5,857,517.00 4,973,678.00
Pals Distilleries Ltd. 9903 12 205,462,848.00 38,934,562.00 13,856,933.00
Rajasthan Breweries Ltd. 9603 12 432,566,489.00 149,705,365.00 56,822,001.00
Rochees Breweries Ltd. 3 12 195,680,000.00 30,251,000.00 -15,103,000.00
Sica Breweries Ltd. 3 12 300,223,000.00 31,485,000.00 13,441,000.00
Skol Breweries Ltd. 3 12 408,667,384.00 46,690,258.00 2,452,553.00
United Breweries Ltd. 3 12 2,655,345,862.00 -402,873,568.00 -726,450,307.00
Winsome Breweries Ltd. 3 12 101,369,414.26 7,033,683.06 -1,762,491.62

8
Alcoholic Beverages Distilleries or Breweries?
Chapter-2: Mobilizations Schemes

Swetha met Mr. Dileep with all the data on all the three industries that she collected and
organized. She was hoping to discuss the strengths and weaknesses of the Alcoholic
Beverage Industry and highlight her research on the distilleries and breweries. Mr.
Dileep brushed aside the data on breweries and distilleries and concentrated on the data
with respect to the finance companies. His immediate comment was that the data is
extremely skewed. Swetha agreed but said to herself, it is the distribution which is
skewed and not the data, but of course did not say it aloud.

This is just like our company. As you know, we have many subsidiaries all of which are
fully owned. It is useful to keep them separate, but we have always have to take an
overall view from the management point of view, said Dileep. I was just reviewing our
performance, region-wise and our Eastern Region is not doing very well. We have this
subsidiary, Golden Fortunes (P) Ltd. which operates only in the Eastern Region and they
need to be strengthened, I mean their operations need to be strengthened.

Swetha thought that the problem is rather simple. You just have to mobilize more money
and lend more to the borrowers and collect your interest differential. After all, that is
how the finance companies make money. Only catch is that you have to mobilize the
money before you can lend it out. From her brief experience with the company, she
knows that the company makes a decent margin on interest differential. She also knows
that one can mobilize more funds by offering higher interest rates. Of course, offering
higher interest rates will reduce your margins because the lending rate for all the
subsidiaries is pegged at 15%. In other words, your own borrowing rate is flexible, but
lending rate is fixed. You just have to manipulate the borrowing rate to maximize your
returns. She said the same thing in so many words to Mr. Dileep.

Mr. Dileep said it is not that simple. If you mobilize more than you can lend, you will
pay interest to your lenders without actually getting any return on these funds and if you
do not mobilize enough, you not only lose business opportunities but also lose goodwill
9
from the existing as well as potential borrowers. So you will have to strike a balance
because you are in trouble either way, explained Dileep.

If you fall short, cant you get help from the sister companies? asked Swetha. Sure.
We actually move funds between our companies quite often. But there is still a cost
involved, replied Dileep. Then he explained the policy of the company in moving funds
around. The funds can be moved between these companies so that the cost to the entire
organization is minimized. The parent company actually acts as a clearinghouse for the
subsidiaries. If any of the group companies have excess funds, these excess funds can be
parked with the parent company at an interest rate of 11%. The very fact that these
companies borrow funds at much more than 11% implies that parking the funds with the
parent company is a loss-making proposition. On the other hand, if any subsidiary falls
short of funds, it can borrow from the parent company at an interest rate of 17%, which is
2% more than their actual lending rate. In other words, the companies pay a penalty of
2% for falling short of the requirements. This policy was put in place so as to monitor
the efficiency and profitability of each subsidiary. Since all the profit and loss accounts
are aggregated at the parent company level, the losses made by the subsidiaries through
borrowing from or lending to the parent company are neutralized by the profits made by
the parent company on these specific operations.

Swetha asked if she could look at the accounts of Golden Fortunes and come up with a
possible strategy. Dileep agreed, but warned her not to waste too much time on this
because she has to concentrate on the expansion and diversification opportunities.

Swetha spent the next couple of days going over the accounts of Golden Fortunes. The
very first conclusion she came up with is that the amount of funds that can be mobilized
depends on the interest rate offered. Similarly, the demand for funds, in its area of
operation, every month, more or less is clustered around Rs. 50 million, Rs. 80 million,
Rs. 150 million and Rs. 250 million. Hence, she decided to consider these 4 possibilities
as discreet possibilities. She thought that it would make the problem simpler. Based on
the past few months data, she concluded that the demand for funds was Rs. 50 million
10
30% of the time; Rs. 80 million 10% of the time; Rs. 150 million 20% of the time and Rs.
250 million 40% of the time.

Based on her analysis, she found the relationship between the interest rate offered and the
amount of funds mobilized is not necessarily linear. Based on the relationship that she
has established, she concluded that Rs. 50 million could be mobilized just by offering
12% interest rate. By increasing the rate to 12.5%, Rs. 80 million could be mobilized.
On the other hand, the interest rate has to be increased to 13% so as mobilize Rs. 150
million and the interest rate has to be as high as 13.5% to mobilize Rs. 250 million.

Now she thought that she has all the data required to decide (on behalf of Golden
Fortunes) on the amount of funds to be mobilized and consequently the interest rate to be
offered to the lenders.
11
Alcoholic Beverages Distilleries or Breweries?
Chapter-3: Small is Beautiful, or is it?

Swethas successful analysis of the options available to the Golden Fortunes caught the
attention of many people in the company, even though she was really not aware of it.
Some of them knew that she is getting on to the fast track and others did feel a pinch of
jealousy. Nevertheless, Dileep felt that she should get back to analyzing the expansion
and diversification activities of the company. He thought that it is high time the company
strengthens its activities in the Eastern Region. Golden Fortunes is the only subsidiary
operating in the region. Given the current level of operations and the quality of
personnel, both Dileep and Swetha felt that there is very little scope for expanding the
operations of the subsidiary. The possible options available are to acquire one or more
established and well entrenched companies in the region. The objective is to combine the
strengths of the acquired companies with the financial muscle of the parent company to
corner a substantial chunk of the market. We should aim to have at the least 25% of the
market share, not counting the share of Golden Fortunes that we already have with us,
said Dileep. Swetha wanted to know what kind of resources can be made available for
the acquisition and Dileep briefed her on the possible level of resources that could be
deployed and insisted that she keep the information absolutely confidential.

Swetha went back to her database to identify the company that could be ripe for plucking.
She concentrated on those finance companies, which are operating mainly in the Eastern
Region. Given the level of resources that could be deployed, she narrowed her option to
a set of companies. She realized that small companies do have their own strengths and
are closer to the clients even though they have only limited reach. These appear to be
less bureaucratic and closer to the community in which they operate. These companies,
by their very nature were not severely affected by an adverse state of the economy, but at
the same time, they are not able to take advantage of a boom in the economy because of
their small size. On the other hand, the larger companies tend to be more structured and
by their sheer size, they could take full advantage of a boom in the economy. On the
other hand, these larger companies would find it difficult to maintain their market share
during a bad turn in the economy. As far as the mid-sized companies are concerned, they
12
tend to fall between the large and small companies with respect to the advantages and
disadvantages depending on the state of the economy.

Based on the resources promised by Dileep, Swetha felt that they could acquire either 3
small companies, distributed strategically in the Eastern Region, or two medium sized
companies or one large company. Given the objective of capturing the market share, the
state of the economy would have a major role to play in making the final decision. Based
on the set of companies she has already short listed and analyzing their past performance
as well as the reach, she computed the following pay-off matrix.

Pay-off Matrix (Pay-off defined in terms of market share as a percentage)
Acquisition Strategy
State of the Economy
Good Bad
3 Small Companies 20 30
2 Medium Companies 25 15
1 Large Company 30 10

The pay-off is defined in terms of the market share. If the strategy is to acquire 3 small
companies, then the market share would be 20% if the economy turns out to be Good, but
the market share could become 30% for this strategy, if the economy turns out to be Bad.

Swetha contacted Prof. Roy of her old college for a well-informed guess on the
possibility of a good economy. Prof. Roy told her that he would associate a probability
of 0.60 with a good economy. Swetha promptly accepted the probability and continued
with her analysis. She put all the data together to make a final recommendation to
Dileep.

Prof Roy called her that evening. He told her that she should not go ahead with his
estimates blindly and that she should try and collect some data to back this up. If the
economy is going to be good, you should be able to feel the upswing. Check with some
of the other people if they feel the upswing, advised Prof. Roy.

13
Swetha thought about it for a while, trying to figure out how she would measure the
upswing or downswing. Then she suddenly remembered an article she read earlier.
The essence of the article was that all products that are manufactured would necessarily
have to be transported from one place to another. If the production levels are increasing
or even if the inventories are moving out of the storage, there will necessarily be more
demand for transportation services. Similarly, if the economic conditions are becoming
worse, the demand for transportation services will diminish accordingly. In other words,
the transportation sector will feel the upswing or downswing in the economy, much
before the others feel it. She decided to use this concept. She downloaded the data for
the past few years for a number of transport companies and started to analyze the data.

She knew that she has to start with the estimates given by Prof. Roy. But it has to be
substantiated by additional data. She decided to talk to 15 randomly selected transport
operators and find out if they are planning to expand their fleet in the next few days. She
felt sure that, if she contacted them individually and independently, their responses would
be independent of each other. Based on her previous analysis, only 20% of the
companies would be expanding their fleet, if they fear a slow down in the economy (bad
economy, in her words). On the other hand, 40% of them would be expanding their
fleets, if they perceive an increase in the economic activity (good economy, according to
Swetha). She decided that if more than 5 operators from her sample are planning for fleet
expansion, then she could consider that the economy is on the upswing and that it is on
the downswing otherwise. Based on her conclusion with respect to the upswing or
downswing, she would have to revise the original estimates of probabilities given to her
by Prof. Roy. She started wondering what is all this worth, if any.

14
Alcoholic Beverages Distilleries or Breweries?
Chapter-4: Errors in Judgement?

Swetha felt very proud of what she has done with the decision tree analysis. Now, all
that she has to do is call the 15 transport operators and collect the desired information.
Then she can present her analysis to Mr. Dileep. Mr. Dileep will make his decision
anyway, but still, her analysis will provide all the required inputs. She was sure that he
would go along with her recommendation. She pulled out the list of transport operators
that she has collected from the database and started the selection process to pick the 15 of
them randomly. She decided to use Microsoft Excel for random number generation. She
used SPSS for all her data analysis when she was at IIMB. Unfortunately, she does not
have access to SPSS in the company.

She opened an Excel spreadsheet and searched for the RAND function. She quickly
selected 15 random numbers (between 0 and 1). Since her list of transport operators
contained 127 operators, she felt that she has to scale these numbers between 1 and 127.
She decided to multiply the random numbers generated by Excel with 127 and convert
them to the nearest integer values. To her horror, she found that when she applied the
multiplication formula, all the random numbers have changed. She tried to undo the
multiplication and she was presented with yet another set of new random numbers. Now
she is more confused. It never happened to her with SPSS. Not knowing how to proceed
further, she thought of the only person who she thought could help her, Prof AK Rao, of
Quantitative Methods Department of IIMB. She called him immediately, but was
informed that he was in a class.

Swetha called Prof AK Rao at his house, later in the night. When she explained her
predicament, he had more questions than answers. He, of course, explained quickly that
the RAND function in Excel is, by design, designed to be volatile. It says so on the
formula and always changes on recalculation. But, he was more curious on what she is
doing with the probabilities. Swetha found it too difficult to explain the entire problem to
him on telephone. He suggested that they could meet at 8:00 AM next day in his office.
15
As usual, he has a class at 8:30. Swetha agreed to meet him even though she has to travel
across the city (The traffic will not be that bad at that time of the day).

During their meeting, Prof. Rao started questioning the very basic assumptions of her
analysis. It seems to me that your final recommendations depend on the assumptions
you have made regarding the percentage of operators expanding their fleet, under Good
and Bad conditions. I am talking about your 40% and 20% assumptions. And, mind
you, you are using them as the probability of success. Unless you validate these
numbers, your entire analysis can go for a six, he said.

After a fair amount of discussion, Swetha agreed that she should quickly carry out a
separate survey first restrict herself to those operators who think that the economy will
be Good, and then find out how many of them are planning to expand. Then she can do
the same with those who think that the economy will be Bad. Based on these findings,
she can decide whether her conjecture about the 40% or 20% of operators planning to
expand their fleet is acceptable or not. In her mind, she decided to limit the sample to 10
under each group; making the total to 20. She agreed to make the sample random and
independent. She still has to resolve the answer to the question - What are the
acceptance limits?
16
Alcoholic Beverages Distilleries or Breweries?
Chapter-5: Small or Large, Take Your Pick

So, this is your recommendation, said Dileep, more as a question than a statement.
Swetha and Dileep are discussing the strategies that she came up with for the expansion
activities. She had completed all her surveys and finally came up with the strategy for
the Eastern Region. She explained the logic she had used in arriving at her final decision
along with the possible risks. She was very sure that her numbers are right and the small
survey that she managed within the time frame will back her numbers without any doubt.
She knew that she has covered her risks with appropriate statements in terms of error
probabilities and also knew that the error levels are acceptable.

What is your idea of small companies? queried Dileep. Swetha quickly explained that
she used the operating income for classifying the companies as small or large. Any
company with an operating income of less than or equal to Rs. 10 million is considered as
a small company and the others are considered as large companies. When she applied
this criterion to the 100 companies where data was available for the year 2000, 49
companies were classified as small and rest as large. She thought that it is a nice
coincidence that the companies are almost evenly divided between small and large. She
felt that her classification is justified because the objective was to increase the market
share and operating income is a good indicator for market share.

You know, you should start looking at the profits. As you know, revenue is not profit
and we are not in this business for philanthropic reason, said Dileep with a very
patronizing tone. Swetha immediately countered saying that she was looking at market
share and consequently used operating income for classification since it is a better
indicator for market share. Dileep agreed that the primary concern is market share. But,
we just cannot ignore profits. Is there any way we can look at profits and operating
income simultaneously? asked Dileep. Swetha suggested that she could rework the
entire classification scheme based on profits.
Dileep told her that it the profitability that is important and not profits per se. He also
told her that he has no quarrel on her classification scheme because, market share is of
17
primary importance. But, some how she should look at the profitability of the small and
large companies, within her scheme of classification.

Swetha agreed to relook at the problem and went back to her workstation. She thought
for a while and decided to use the following scheme for analyzing the profitability of the
small and large companies. She would retain her definition of small and large companies
and then calculate the profit per rupee of operating income. In the process, she will be
able to neutralize the size effect on profits and concentrate on profitability. Then she
can compare the averages of the two groups and figure out which group has a better
profitability. She quickly calculated the profit per rupee of operating income for the two
groups and also the averages and standard deviations. She tabulated the results as
follows:

Size Number Average Standard deviation
Small 49 0.1225 1.0195
Large 51 0.5792 0.2830

She knew that her sample of the small and large companies is not exactly random, but she
felt justified based on the size of the sample and proceeded to carryout the required
statistical tests.

Swetha met Dileep the next day and showed him the results, essentially indicating that
the profitability of the small companies is definitely less than that of the large companies.

Lets look at the data for these companies, said Dileep, pulling out the copies of data
sheets that Swetha gave him few days earlier. Good number of these companies are in
the red! Dont you think you should eliminate these from the purview of our decisions?
I dont think we are interested in acquiring these companies with red splashed all over
their balance sheets.

Why didnt I think of it? Swetha asked herself. Next time I should think of every
possible question that Dileep might ask. She went back to her database and removed
18
those companies whose P and L accounts showed losses in the year 2000. She
summarized the data for the remaining companies in the following table:

Size Number Average Standard deviation
Small 22 0.6456 0.2360
Large 50 0.5931 0.2678

Obviously, this set of companies presented a different picture altogether. Is the
profitability of the smaller companies significantly less than that of the large companies?
By the way, here she limited her search to companies with operating profit at least a
million. Anyway, the rest of the companies would be of very little interest to Dileep,
Sweta thought.

Suddenly Swetha remembered that her original analysis on the decision tree approach had
classified the companies into 3 categories, namely small, medium and large. What if, Mr.
Dileep asks her for the profitability of all the three categories? She decided to quickly
split the 50 large companies into two categories medium and large. She decided to
classify those companies with operating income between Rs. 10 million and Rs. 50
million as medium companies and those with more than Rs. 50 million as large
companies. She also decided to limit the entire data to only those companies having
positive profits. Finally, the data for the three categories is summarized as follows:

Size Number Average Standard deviation
Small 22 0.6456 0.2360
Medium 25 0.5790 0.2130
Large 25 0.6072 0.3172

Swetha started to wonder if this presents yet another different picture altogether.

19
Alcoholic Beverages Distilleries or Breweries?
Chapter-6: Step Back to Forward

Swetha suddenly realized that she is feeling hungry. She looked at her watch and found
that it is well past lunchtime. She was so absorbed in the work she was doing, she lost
track of time. Any further delay would mean that the canteen will be closed and she will
have to go without lunch. She hurried to the top floor where the canteen is located.

She purchased her lunch coupon and, walked to the self-service counter and surveyed the
items available. Why is it that you can never get anything that you like when you are
really hungry? she asked herself. She finally settled on vegetable sandwiches and a
bowl of fried rice and picked a corner table.

My, my, if it isnt good old Lee, she heard the voice and looked up to stare into the face
she almost forgotten. The face belonged to Chittoo (his real name is Chittharanjan
Sarathchandra Mukhopadhyay, but, nobody ever called him that). They were classmates
in high school and plus two, then went in different paths. Some thing must have
drooped you from the sky, said Swetha. Do people still call you Lee? was the answer
she got.

Okay, tell me what are you doing here, in my turf, demanded Swetha. Chittoo
explained that he is currently working with Golden Fortunes and is in charge for
Corporate Communications. He is here to plead his case for higher advertising budget
for his company. Nobody in this monolith ever listens. They dont understand how
important advertising is, especially in our business. In the new economic scenario, we
must have the top of the mind recall from all our customers and potential customers, he
explained. If you dont increase your advertising expenditure, how will your profits
increase? Look at HLL and their ad budget.

Swetha decided to pull his leg. I always thought that advertisement is a cost and cuts
into your profits. More ad expenditure and it has to come out of your income and so less
profit, isnt it how it works?, she asked. Chittoo retorted quickly, saying that advertising
20
will increase the sales and sales revenue will go up which in turn will lead to increase in
profits. Swetha smiled and said, Sure, all that HLL has to do is double or triple their ad
expenditure and the sales revenue will more than double, or triple. So will the profits,
right?

Chittoo told her not to act so stupid and nave. Sure, there is a limit. But I dont think
we reached that limit. It is people like you sitting in the HQ who have no idea of what
happens in the field should be educated about the facts of life. Swetha realized that
Chittoo is upset and decided go easy on the teasing front. She also decided to help him in
whichever way she can.

Chittoo explained to her that he is being asked to prune his advertising budget and the
experience of the past few years did not help his case at all. His problems seem to have
started three years ago, when the ad expenditure was Rs. 70 lakhs. The management
decided to retain the ad expenses at the same level for the following year, but the profits
dropped from Rs. 185 lakhs to Rs. 170 lakhs. Then the budget was pruned to Rs. 68
lakhs in the past year but the profits increased to Rs. 180 lakhs. The joke around the
office now is that the only way to increase the profits is to minimize the ad budget.
Swetha told him that 3 years is too short a time to draw any conclusions. But, still dont
rule out the possibility that you are already over extended, she told him. Lets look at
at least past 10 years data. We can get all the data from your annual reports and I am sure
they are available in the Accounts Department.

Once they reached her office, she called Nisha Balasubramanyam in the Accounts
Department and asked for the abridged annual reports of Golden Fortunes for the last 10
years. Nisha told her that she can pull them out in ten minutes, but Swetha will have to
go to the Accounts Department to see them. As you know, you cannot take the papers
out side, she explained.

Swetha went to the Accounts Department and copied down all the data she needed from
the abridged annual reports. She walked back to her office and entered the data into an
Excel spreadsheet. She and Chittoo started analyzing the data. It is true that the ad
21
expenditure varied widely between Rs. 60 lakhs and Rs. 74 lakhs. There was a wide
variation in the profits also, from Rs. 110 lakhs to Rs. 215 lakhs. They are not sure how
much of the variation in the profits can be attributed to the variation in the ad
expenditure. The following table summarizes the data they had on the spreadsheet.

Data on Advertising Expenditure and Profits of Golden Fortunes
Year 1 2 3 4 5 6 7 8 9 10
Advertising
Expenditure
68 70 70 71 66 64 72 74 65 60
Profit 180 170 185 215 160 135 195 200 150 110

Chittoo insists that the profits can go beyond Rs. 200 lakhs if only the ad budget can be
increased to Rs. 75 lakhs. You guys sitting in your A/C rooms may not understand this,
but this comes from the gut feeling of a man who has spent years on the street,
understanding the actual business.

22
Alcoholic Beverages Distilleries or Breweries?
Chapter-7: Digging into profits

Chittoo went back very happy, ready to stalk the streets and capture as many customers
as possible for Golden Fortunes while Swetha is still grappling with the profitability
issue. After the debate on the profitability of small, medium and large companies,
Swetha and Dileep zeroed in on a few companies for the Eastern Region. Both of them
have agreed that it is not only the market share and the spread that are important, but the
company should be able to provide a continuous stream of profits. The stability of the
profits and the continuation of the same into the future are of crucial importance. Both of
them felt that it should be possible to identify the factors contributing to the profitability.
Once these are identified, the strengths of these factors with respect to each of the
selected companies can be analyzed before a final decision can be taken. Dileep had
asked Swetha to get on to the job immediately.

Swetha went to work with her ERS database. Again, she felt that the industry level
analysis should precede the company level analysis. She downloaded data with respect to
as many finance companies as possible. The major problem she had was that the data she
wanted was not available for all companies. Also, the reference period was different for
different companies. On the whole, she managed to obtain data on the following
variables for a decent number of companies in the industry:
Profit after tax
Operating income
Operating profit
Market price (on a particular reference date)
Market capitalization
Earnings per Share
Price Earnings ratio
Book value per Share
Price-Book Value Ratio

23
She felt sure that these variables would be able to provide enough insight into the
operating profit as well as profit after tax. It was also clear to her that whatever the
information and knowledge gained out of this analysis will be specific to the industry,
and not necessarily to a particular company. She also knew she needs to dig deeper into
the selected companies, after she has enough understanding about the industry. The data
that she put together is given in Appendix IV.

She decided to estimate the impact of various variables on profit after tax (PAT). She
loaded all the data into SPSS (version 10.0) and started analyzing the data. She was glad
that she managed to convince Mr. Dileep on acquiring a copy of SPSS for her use in the
company. When she tried to identify the variables impacting the profit, she found that
Earnings per Share has a significant impact on PAT. But then, she is not very sure about
the relationship between the two variables. Should she treat EPS as an independent
variable? Thanks to SPSS, she managed to try out different models before meeting Mr.
Dileep.

Dileep is of the opinion that since the data is for the entire industry, it could be plausible
that EPS can be treated as an independent variable. Swetha is not so sure. She argued
that EPS is essentially determined by the PAT and hence PAT should be treated as the
independent variable. Dileeps contention is that we are concerned with PAT and not
with EPS, and if EPS is a determining factor, why not consider it for the purpose of
identifying the impacting factors. Finally, they have agreed to look into this again when
they analyze the data of the companies that they are considering for acquisition.

Dileep suddenly raised an interesting question. Can you find the determinants of the
market price? I would like to see what role is played by different variables in
determining the market price. After all, the market players have had always judged us by
our share prices.
24
Alcoholic Beverages Distilleries or Breweries?
Chapter-8: The Good and the Bad

I think you should concentrate on the alcoholic beverages. I was going through your
data and it looks like we should think of breweries, said Dileep. I had been busy with
our acquisitions in the northeast. Now that the acquisitions have been finalized, I can
concentrate on the alcoholic beverages. I am not so sure if the breweries is the best bet.
There are too many companies in the red. They are also at the mercy of the excise rates
and as you know, these rates keep changing year after year, replied Swetha.

Dileep and Swetha are discussing the future course of action in his room. The strategy
for acquisition of finance companies in the northeast had been finalized and the final
decision now rests with Board. Meanwhile they are back to the original idea of
diversification, either into breweries or distilleries.

As you can see, there are many, actually about half of them running big losses. Even
when the operating profit is positive, by the time you take out tax and other things, the
PAT turns out to be negative. On the other hand, if you look at the distilleries, only five
out of the twenty are in the red. Even out of these five, only two have operating profit
negative. Dont you think it is better to look at them rather than breweries? questioned
Swetha.

Dileep had a completely different idea. How had these companies been faring in the
past? I dont think they were all that bad in those days. Let us say, they were all making
profits three, say, four years ago. Then can we figure out what contributed to their going
under and then we can see how we might avoid such a situation. It will make our
decision easier in short listing the candidates for our purpose. Swetha knew that her
database will have all the required data and she can figure out the patterns between those
companies which were doing well few years ago, but doing badly now and those
companies which continue to do well.

25
She went back to her ERS database and tried to ferret out the data for the 17 companies
that she had already listed under Alcoholic Beverages Breweries. She found that the
data was not readily available for the year 1997 for few of the companies. But, she
managed to copy the entire data with respect to P and L account and Balance Sheet along
with the annexures for the other companies wherever the data was available.

Swetha went to see Nisha Balasubramanyam in the Accounts Department to see if she
could help her with the data. Nisha told her that she depends on a different database
called Capitaline and Swetha is welcome to use it. Swetha decided to use this new
database and searched for the companies where the data was not available with her ERS.
Finally, she managed to get the data for all the seventeen companies except Rajasthan
Breweries Ltd. Also, she found that the data with respect to two companies, namely
Charminar Breweries and Pals Distilleries was not available for the year that she wanted
(she wanted the data for 1997). Data for Charminar Breweries was available for the year
1998. Similarly, the data for Pals Distilleries was available for the year 1995. She
decided to use this data for her analysis purpose.

She has also noticed that the data for Champagne Indage limited is somewhat extra-
ordinary. The percentage of raw material cost was 101.65. Similarly, the percentages of
the other costs are also extra-ordinarily high. On investigation, she found that this was
due to the fact that there was a large stock adjustment during the year. On second
thoughts, Swetha decided to collect the data for this company for the year 1998 also.

After tabulating the data for all the companies, Swetha started to search for possible
similarities of the patterns in the two groups of the companies. She tried to plot the
different variables across the two groups in search of possible patterns.
26

Company
Name

Percentages
Raw
Material Excise
Power
&
Fuel
Other
Expenses
Employ
ees
Seliing
&
Adm Misc
Interest
&
Finance
Arlem Breweries
Ltd. 13.31 21.49 6.01 25.63 14.3 21.42 3.53 4.33
Blossom Industries
Ltd. 14.04 6.37 6.74 30.34 6.18 16.48 1.69 19.85
Haryana Breweries
Ltd. 11.3 0.15 5.34 37.62 33.2 30.8 2.17 3.64
Inertia Industries
Ltd. 57.68 8.05 3.84 4.4 9.67 12.89 43.18 4.46
Mount Shivalik
Industries Ltd. 13.84 3.97 4.67 39.27 3.17 19 1.85 5.07
Rochees Breweries
Ltd. 13.22 7.47 6.18 32.67 3.64 29.09 4.08 9.57
United Breweries
Ltd. 25.46 4.52 3.86 22.94 7.52 23.64 7.82 12.02
Winsome Breweries
Ltd. 20.69 0 17.2 34.48 13.79 32.76 10.34 9.48
Champagne Indage
Ltd.(1997) 101.65 12.52 3.57 17.48 8.61 37.3 4.26 5.3
Champagne Indage
Ltd.(1998) 20.55 11.76 3.33 16.91 6.73 23.52 2.06 2.12
Charminar
BreweriesLtd(1998) 18.64 15.47 5.39 44.09 3.01 3.91 3.01 0.9
Hindustan
Breweries &
Bottling Ltd. 32.49 34.51 5.05 8.24 10.51 7.97 1.89 1.1
Mysore Breweries
Ltd. 18.95 0 5.95 27.54 5.65 19.66 0.86 2.25
Narang Industries
Ltd. 12.55 1.71 6.81 36.99 8.92 27.15 0.34 4.15
Pals Distilleries
Ltd.(1995) 35.19 0 13.9 42.59 4.63 30.56 1.85 5.56
Rajasthan
Breweries Ltd.
Sica Breweries Ltd. 18.43 8.27 4.81 55.69 7.92 5.67 2.4 3.23
Skol Breweries Ltd. 8.2 35.28 4.53 32.22 4.91 6.01 1.52 2.73

27
Alcoholic Beverages Distilleries or Breweries?
Chapter-9: Which is My Segment?

Swethas analysis of the breweries and their profitability led to short listing of the
companies for possible acquisition. While, the finance department is getting ready to
work out the financial details for possible buy-out strategies for each of the short listed
companies, Dileep is busy analyzing collaboration possibilities with well-known
international beer majors. The objective is to use the internationally known brands along
with the existing brands of the acquired brewery, there by increasing the market share of
the acquired company.

Why dont we go for a quick market survey and see what is the most likely brand to
succeed? We know all the major brands and can use these names for the survey. Once
we are clear about the brands, we can think of the collaborating company, Swetha
suggested to Dileep.

Brands are one thing, but we need to know which type of beer should we concentrate on.
What you find in this country are high alcohol, high sodium and god only know how
many calories. I am not sure this is the market segment that we want to be in. But, I
dont really know. It all depends on what the market likes, said Dileep.

Thats exactly my point, replied Swetha. If we know which brand is preferred by the
customers, then we know which is the market segment we should be in. The all we need
to do is to look at the companies, which make these brands. We can get this market
survey done very quickly before the finance finalizes their strategy.

Dileep is not very keen on a market survey right now. He explained his reasoning. We
are looking at the foreign brands. Very often the customers get carried away be the brand
name initially and slowly the awe of the foreign name disappears and they go on to some
other brand and there goes your market share.

I agree that it can happen, but what do you suggest? asked Swetha.
28

I think the best approach is to put the brands with similar characteristics together and see
the preferences of the customers within these groups and across these groups. If they
gravitate to a particular group in your survey, then we know that those are the
characteristics that they like in their beers. Then we can concentrate on those with these
characteristics. Then we can decide on which brands we should go for.

What if their preferences cut across the groups? Then, we cant zero in on any group.
Arent we back to square one? Swetha is being the devils advocate.

If the preferences cut across the groups, then we know we have to cover as many groups
as possible. I am sure these groups can be correlated with different type of customers and
so we will have had our market segmentation also done in your survey itself, explained
Dileep.

Swetha went back to her office and gathered as much literature on beers as possible.
Then she started looking at possible characteristics of the beers, which could influence
the customers choices. Of all the possible characteristics, she short-listed a few, namely,
sodium content, alcohol content, calories, country of origin and of course, cost per ounce
(most of the literature she was looking at was US based). She managed to collect
information on these characteristics for these 35 beers as given in the Appendix. She
further reduced the list by concentrating on only first 20 beers and four characteristics
namely, sodium content, alcohol content, calories and cost.

Again, she started looking for different patterns and similarities across these beers using
the four selected characteristics. She is also not very sure whether she should limit the
number of groups to four or five or even more.
29
Appendix
BEER ORIGIN PRICE COST CALORIES SODIUM ALCOHOL LIGHT
Augsberger 1 2.39 .40 175 24 5.50 0
Becks 6 4.55 .76 150 19 4.70 0
Budweiser 1 2.59 .43 144 15 4.70 0
Budweiser Light 1 2.63 .44 113 8 3.70 1
Coors 1 2.65 .44 140 18 4.60 0
Coors Light 1 2.73 .46 102 15 4.10 1
Hamms 1 2.59 .43 136 19 4.40 0
Heilmans Old Style 1 2.59 .43 144 24 4.90 0
Heineken 4 4.59 .77 152 11 5.00 0
Kirin 7 4.75 .79 149 6 5.00 0
Kronenbourg 3 4.39 .73 170 7 5.20 0
Lowenbrau 1 2.89 .48 157 15 4.90 0
Michelob Light 1 2.99 .50 135 11 4.20 1
Miller Light 1 2.55 .43 99 10 4.30 1
Old Milwaukee 1 1.69 .28 145 23 4.60 0
Olympia 1 2.65 .44 153 27 4.60 0
Pabst Blue Ribbon 1 2.29 .38 152 8 4.90 0
Schlitz 1 2.59 .43 151 19 4.90 0
Schlitz Light 1 2.79 .47 97 7 4.20 1
Strohs Bohemian Style 1 2.49 .42 149 27 4.70 0
Anchor Steam 1 7.19 1.20 154 17 4.70 0
Blatz 1 1.79 .30 144 13 4.60 0
Dos Equis 5 4.22 .70 145 14 4.50 0
Henry Weinhard 1 3.65 .61 149 7 4.70 0
Labatts 2 3.15 .53 147 17 5.00 0
Michelob 1 2.99 .50 162 10 5.00 0
Miller High Life 1 2.49 .42 149 17 4.70 0
Molson 2 3.35 .56 154 17 5.10 0
Olympia Gold Light 1 2.75 .46 72 6 2.90 1
Pabst Extra Light 1 2.29 .38 68 15 2.30 1
Rolling Rock 1 2.15 .36 144 8 4.70 0
Schmidts 1 1.79 .30 147 7 4.70 0
Scotch Buy (Safeway) 1 1.59 .27 145 18 4.50 0
St Pauli Girl 6 4.59 .77 144 21 4.70 0
Tuborg 1 2.59 .43 155 13 5.00 0