UB Group now focusses on manufacturing to derisk business: Ravi Nedungadi

Ravi Nedungadi, President and Group CFO,UB Group in an interview with ET Now, talks about the group's prospect and its strategic planning.


ET Now: You have been on an acquisition spree over the past few years United Spirits has now acquired a good 41.5% in Sovereign Distilleries as well, what is the rationale for this buyout?

Ravi Nedungadi: I think it will be useful for me to laid the strategic background. For the last several years United Spirits has had most of its focus on the front end of the business and we have been growing quite dramatically both in terms of volume, in terms of market share as well as in terms of the premiumisation of our business.

So now our idea is to turn our attention to the back end, to the manufacturing see how can we derisk, hedge ourselves, and make sure that we have a continuous supply of key inputs in the background of such a massive expansion of the business. So we set up about in a fairly systematic way looking for primary distillation. We started about a year and a half ago may be about 12 months ago with the acquisition of a company called Tern Distilleries in Andhra Pradesh. Then we acquired Pioneer last year and we have just announced taking a 41% stake in Sovereign Distilleries which is Karnataka based. But the most important aspect of the Sovereign is not just the share acquisition but it is a fact that we have taken a 20 year exclusive lease on the facility which guarantees us long term access to the spirit which is what we were after.

ET Now: Tell us a bit about your Kingfisher Airline debt restructuring, we understand that you have again restructured your debt with your lenders?

Ravi Nedungadi: We are looking at a situation where the growth in passenger traffic is extremely robust in India. There have been a few things particularly the Middle East mayhem, which has resulted in little skittish behaviour in the price of crude. We do not think that structurally from a fundamental demand and supply position, the kind of prices now Brent is sitting close to $120, NYMEX at somewhere close to 110. We do not think that these are the fundamental pricing levels. In India, because the vast majority of the travel is non-discretionary in nature people are travelling on work, on business etc. There is the headroom to pass on these temporary fluctuations to some reasonable degree to the consumer, because the consumer will keep travelling as long as there is a economic activity and there is a recognition that this is only a consequence of an international price movement.

ET Now: But are not you worried that because of the debt restructuring it will result in a massive equity base for you?

Ravi Nedungadi: Well the aviation industry is a capital intensive industry and it is not unusual to have a significant amounts of capital. So, that itself is not a cause of concern. We built up this company from scratch and therefore it had resulted in a somewhat of a lopsided balance sheet in the way the finances in the balance sheet grew with the debt restructure which has happened that has been substantially reddressed. The paid up capital of the company has little less than doubled from about 260-270 crore to little over 500 crore now. Our own stake in the company between UB Holdings and its subsidiaries on the one hand and Mr. Mallya personally has come down as a consequence from about 66% to 58%. So obviously there is still scope for some dilution and we have to take a nuanced view as to how much of a capital size we can live with in the interest of keeping up the growth momentum which as I said business is growing at 20% plus and that is what the fantastic news.

ET Now: Post the debt restructuring would you still be raising money via the equity route?

Ravi Nedungadi: We would want to make sure that the next couple of years is well funded. So we do not want to dramatically increase any size. Since we are now operating in a cash positive manner and because there are no compulsory calls on the cash either for a capex or for debt repayment we are not a) wanting to rush into the capital raise because we have the luxury of being able to go through, and wait for the markets to settle down and on the other hand when the window of opportunity opens up I think we would be quite quick to move. We may not want to raise the amount very significantly so the target remains in the region of about 200 to 300 million.

ET Now: We have seen demand far outstrip supply over the last 6 to 8 months when it comes to the aviation space, but there are moves taking place in terms of capacity addition as well, are you worried that we may see a situation where capacity will rise driving down yields thereby?

Ravi Nedungadi: There is obviously when company see growth in demand, there is a natural response to try and increase the supply. However, in this case we believe that there is a mechanism whereby this thing will be balanced a) the Government of India, Civil Aviation Ministry has set up what is called an Aircraft Acquisition Committee and the actual import of any aircraft into the country requires a specific approval of this Aircraft Acquisition Committee. And among other things the Committee looks at what the demand and supply position is, what the infrastructure is etc. So you can go ahead and place large orders with leasing companies or with manufacturers but you still need specific approvals before you get the capacity in.

Secondly, the thing is that until infrastructure significantly catches up where are you going to park these aircrafts supposing you bring them in Delhi, Bombay all these airports are already pretty chock a block even after the existing expansion. So there is a smaller airport set up being opened up and being refurbished are really not intended and will not necessitate large jets. So therefore I think that while the urge is there to increase supply it will be in a balanced manner and equally people will or they may bring in new aircraft and phase off existing plane which are older by returning them to less orders etc.

ET Now: Are there any plans on the annual to sell any stake in your cricket team Royal Challengers?

Ravi Nedungadi: We are not even considering it.