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India. Nitish Kumar’s liquor prohibition move leaves Carlsberg high and dry

Carlsberg India Chief Executive Officer Michael Jensen throws up his hands at the capricious nature of India's business environment and the way in which politics can transform fortunes in a snap.

"India is the most difficult market in the world but you can't do stuff like that," he told ET in an interview, referring to Bihar's imposition of prohibition. "It is very detrimental for investor confidence."

Three years ago, Bihar Chief Minister Nitish Kumar wooed the Danish brewer to invest in the state, persuading it to spend $25 million to set up a plant near state capital Patna in 2014. Then he became a champion of prohibition, enforcing it across the state this year after being re-elected in 2015. The decision, which will lead to a drop in revenue collections, may also lead to job losses as companies are left with little choice but to pull out.

"It was a sizeable market and investment but they decided to do prohibition in 12 hours,"
said Jensen. The company has no backup plan to cope with such a situation and it will likely dismantle the plant in the state if the ban stays in place.

Jensen's concern is shared by peers such as Diageo Plc, United Breweries and Molson Coors that have been running more than 70 distilleries and breweries in India's third-largest state by population for a decade or more. The units were not just meant to meet in-state demand but served as a manufacturing hub for neighbouring markets. Brewery companies had been keen on investing in Bihar due to the abundance of raw materials barley and wheat and the availability of cheap labour.

Late last year, the state government decided to prohibit country liquor and slash the number of shops selling alcohol to less than 700 from 4,000. All liquor sales have been banned since March as part of an election promise by Kumar, raising concerns about illegal alcohol. On Tuesday, more than a dozen people died in Bihar's Gopalganj district allegedly after drinking spurious liquor that may have contained toxic additives. United Spirits doesn't see any point in staying on. In the June quarter, the country's largest liquor maker, which is owned by Diageo, said it had made a one-time provision for inputs and inventory processing related to Bihar.

"Our medium-term intent is actually (to) exit the state of Bihar from all manufacturing and related activities," Chief Executive Anand Kripalu said on an investor call two weeks ago. "It is about just over 1% of our total business in terms of revenue and probably something similar in terms of profit right. So we believe, while it is an important state in terms of its contribution, it is not that material to our total business."

ORDER CHALLENGED IN COURT

The state is (or was) predominately a whisky market and accounted for 1.8% of the overall Indian-made foreign liquor market worth 317 million cases. In the October-March period, sales in the state amounted to 2.7 million cases, shrinking by 10% over the year earlier. Sector lobby groups have challenged the prohibition order in the Patna High court.

"We are fighting against the unjust ruling to ban all liquor instead of just country and illegal liquor,"
said All India Brewers Association Director General Shobhan Roy. "Our breweries are running full capacity and we have claimed about .`400-crore compensation for existing inventories and machinery."

19 Aug. 2016

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