Though margins are under pressure, this is just an aberration for United Breweries Limited, said Shekhar Ramamurthy, MD of the company. He is of the view that pressure in barley prices may continue to exist going forward.

UBL posted a net profit of Rs 51.44 crore for the quarter ended March against Rs 48.13 crore a year ago.

Speaking to CNBC-TV18, Ramamurthy said with a debt equity ratio of 0.33, the company is under-leveraged.

Further, he said the company will grow evenly around 5-6 percent in FY17, adding, there could be improvement in volumes growth, going forward.

Below is the verbatim transcript of Shekhar Ramamurthy’s interview with Latha Venkatesh & Sonia Shenoy on CNBC-TV18.

Sonia: You have had higher sales and promotion expenses and that has actually caused your margins to go to single digits. Tell us whether this pressure will continue?

A: Let me just clarify one aspect here. You got to look at our performance for the full year and if you look at the full year you would find that our margins have actually improved. He have had 8 percent revenue growth and almost 17 percent EBITDA growth, 14 percent profit after tax (PAT). If you look at it in the context to the full year results are pretty decent.

Now coming to your specific question on our margins, sales and promotion expenses and commodity prices which you haven’t asked, but the commodity prices also play a part in margins. Now our sales and promotion expenses have been steady, there has neither been a significant increase or decrease. We have been around that 16 percent mark for very long time. That is the nature of our business.

If you understand that our business is state specific, we operate under state excise laws. There are different routes to market in each state, in fact if you look at our competition we are perhaps one of the lowest in terms of our selling and sales in promotion cost.
Latha: Just to elaborate on what Sonia is saying all the companies that we have seen in the last two quarters the pattern is the same; the rate of growth of revenues is lower than the rate of growth of EBITDA because raw materials have been kind and that is exactly the pattern you are also showing. Margins are better on a full year level but this wonky performance in the fourth quarter where your EBITDA has barely grown, should be take it as one-off, should we expect that in FY17 once again your EBITDA will grow faster than your revenues?

A: Typically, if you look at our performance over the last several years you would find that our profit growth has always been higher than our revenue growth. The reason for that is as business grows and as volumes grow there is a much better fixed cost absorption.

Latha: That is not the case in quarter four? That is why we are worrying?

A: That I would say as one-off. There are several factors which would come into it. So, you need to take a slightly longer term view. However, if you want to know what is happening to, let’s say, commodity prices whilst they were very weak most of last year, they are beginning to strengthen.

Latha: Especially your raw material?

A: You are correct because 1) our key raw material is barley this is the season when the barley crops comes to the market and we buy it. Our maltsters buy it and barley prices this year have been 15 to 20 percent higher than the last year. There has also been a bit of a reduction in the quantum of barley that has come to the market this year. So, barley prices are going to be under stress for us. 2), sugar prices and if you look at all the industries who use sugar, you would find that sugar prices have strengthen quite significantly from January.

Latha: Therefore you should expect more pressure on margins? You wouldn’t be able to replicate the FY16 margins?

A: I didn’t say that.

Latha: I am asking you?

A: There are various other levers which we would look at and we expect to see better volume growth this year and better volume growth always helps. Last year if you recall, in the first two quarters the industry was pretty much flat and the growth in the industry volumes came only in Q3 & Q4. So, we expect the volumes to be better. We have already seen much better volumes in April for the industry and of course the weather, it is very hot, it is good for the industry.

Sonia: When you say better what you mean because the year has been dismal for the industry as a whole. Just 4 percent growth and you have seen just 3 percent growth. So, when you say better, do you think that we could get back to double digit growth in FY17 for volumes?

A: I don’t see that happening in FY16-17. I would say that the growth will be more even unlike last year where first half was a marginal reduction and second half grew. We see a more even growth this year; it will probably be a 5-6 percent on the overall bases and we will be able to talk about volume growth with a better sense once the season is over. Season sets the benchmark that what the whole year would be.

Sonia: One word on your interest cost as well, for the full year your interest cost have gone up, although marginally but they have still gone up to about Rs 76 crore odd. Can you take us through what the total debt stands at? The last time I checked, it was about Rs 650 crore. Has it gone up and do you expect to bring down interest cost any time soon?

A: Our debt is very low. If you look at our debt equity it is 0.33 or in that order of magnitude so our debt is very low. This is just a little bit up and down and it is nothing significant. We are not anticipating any significant change in our debt profile. We are actually highly underleveraged.

Latha: I just want to confirm, the debt recovery tribunal (DRT) told you all not to pay dividend to Vijay Mallya for his holdings?

A: We have disclosed that the debt recovery tribunal has asked to not to pay dividends to one of our directors.

Latha: Any other instruction from the DRT or from the courts or from the banks with respect to this director’s holdings?

A: Whatever there is we have disclosed in our financial filings, so the DRT is one of them.