United Breweries Limited (532478) Earnings Call Transcript & Summary

Ladies and gentlemen, good day, and welcome to the United Breweries Q1 FY '21 Conference Call hosted by IDFC Securities. [Operator Instructions] Please note that the conference is being recorded. I now hand over the conferenfindisce over to Mr. Mehul Desai. Thank you, and over to you, sir.

Thank you, Aisha. Good evening, everyone. On behalf of IDFC Securities, I would like to invite you all for Q1 FY '21 earnings call of United Breweries Limited. From the management side, we have Mr. Berend Odink, CFO of United Breweries; and Mr. Poonacha from the Investor Relations team. I'll hand over the call to Mr. Berend for his opening remarks, and then we can take up the Q&A session. Over to you, sir.

Thank you, Mehul. Good evening, everybody, on the call. Thank you for joining today. I hope everybody is safe, doing well. And today, we'll discuss the Q1 results, and I will start with providing commentary along with a few slides. And after that, we'll open it up for questions. So on the key results highlights. It is clear that Q1 has been an unprecedented quarter, severely impacted by the pandemic and related lockdown and restrictions. Net sales for the quarter were down 75%, and the company posted an EBITDA loss of INR 94 crores, against the context that Q1 is normally the peak season for the beer industry. Interest expenses were down 7% versus prior year. If we turn to Slide 4, just to recall that there was a full lockdown in place until May 4. Opening up and restrictions in place different state by state, but common is that on-trade outlets were closed for the full quarter and continue to be closed today. UBL volume for Q1 was down 77%, moving from 100% down in April to 57% down in June during the quarter. On the production side, the breweries have put in place all COVID-related measures to ensure all guidelines are strictly adhered to. We continue to observe local restrictions and temporary lockdowns occur from time to time. On the taxation side, some state governments imposed COVID-related taxes, which have negatively impact the industry. Subsequent tax reductions have happened in Delhi and Orissa. The volume performance by region is depicted on Slide 5. March volumes down 71% with higher decline in Delhi due to the severe initial COVID tax, which was subsequently reduced in early June, while states of UP and Haryana performed relatively better. In West, also the 79% decline, with broadly similar decline in all the main markets. In East was a 90% volume decline due to the imposition of high COVID tax in West Bengal and Orissa. Orissa taxation was reduced early July, while today, no over-the-counter sales in Orissa are happening. In South, there was a 77% volume decline. Karnataka and Telangana volume trend was ahead of the company average, while no sales in Andhra Pradesh due to the low demands and state policy measures. There was a stronger decline in Kerala due to the extended lockdown and introduction of mandatory online preordering mechanism. The net sales breakdown is shown on Slide 6, which, besides the negative volume, there was a positive price/mix impact, but the main elements being both positive price and state mix in more or less equal size. The EBITDA breakdown on the next page shows the main impacts being volume-related and hence reducing the gross profit and gross margin. This was partly offset by a reduction in personnel expenses by 6% and other expenses by 63%, but due to negative operating leverage, resulted in an EBITDA loss of INR 94 crore. Turning to the slide on outlook and summary. The company has and will continue to manage all elements of cost and capital investments in light of the uncertain demand. Active cash management resulted in net debt up by INR 120 crore at the end of Q1 versus the prior quarter. The industry outlook is uncertain with negative macroeconomic growth outlook and continued direct and indirect impact from COVID-19 measures. Overall, UBL is well positioned to navigate the current circumstances with a leading market position, strong brand portfolio and a very robust balance sheet. The company continues to be optimistic about the long-term growth drivers of the industry and is committed to strengthen its market position, while leveraging newly emerging opportunities such as home delivery. With that, we'll be happy to take your questions. So please go ahead.

[Operator Instructions] The first question is from the line of Abneesh Roy from Edelweiss.

My first question is on the home delivery. There are companies like HipBar where some of the liquor companies have investment and now e-commerce companies are tying up with these kind of operators. So are you present on such service providers like HipBar? And do you also have plans for investing into similar kind of operators?

Yes. I mean, the opening up of home delivery for also the beer industry, I think, is a very positive development. So we actively support the new business models. It's early days. I mean, we will not directly invest in the sense of partnership or ownerships or any of those kind of models. But definitely, on the commercial side, we operate with a number of these companies to make sure this is set up in a viable way and I think the long-term opportunity is there. So that is something we support.

And sir, what is your initial reading on home delivery? In Jharkhand, it has been reversed. In states where it's still continuing, how would be your performance versus some of the other industry players? I know it's a very volatile period but in general qualitative comment.

I think in general, you see across the states, different participants, different models. I think over time, this will definitely emerge and evolve. So the jury is out as what will be the best model, but I think there's a very active interest from various e-commerce players, but also many industry participants. So I think there are many things going forward to evolve into a long-term opportunity. So again, it's early days, but again, promising longer-term prospects.

Sir, my second question is on the consumption in the pub, bars, et cetera. So anything globally you're doing, which you are also doing in India, for example, liquor companies both Pernod and Diageo in India supporting the pubs whenever they open in terms of the very tough time they're facing. So in whatever way they can support, they're supporting. So are you also looking to do that? And any other business tactics from other parts of the world, which you are being -- planning to bring to India when this opens up?

Yes. Obviously, we're very actively in constant touch with markets across the world. We see very different models emerging. And that's, I would say, a lot of creativity in terms of measures, social distancing, but also supporting pub owners, operators as to make sure there's a conducive environment that is totally safe but also brings back people together. So those kind of ideas and best practices we definitely have onboarded. And yes, we have prepared plans to as and when on-trade is allowed to operate again to support business owners here.

And sir, 2 follow-ups here. What is a pushback from government here because now everything is almost open. Malls are open. Most other conventions are open now. So what is the time line you're getting from the government, different governments? And what is the pushback? And secondly, are you seeing some shift because now consumer is obviously at home? So more of family consumption may happen. So do you see that as a positive and that as a silver lining from medium, long term, that change in the habit?

Yes. So your first question, yes, I cannot really comment on the rationale for the unlock measures and what will be done at what stage. I mean, we come with proposals, and we think we have viable plans as to how things could operate. But what will be in the next unlock measures, et cetera, I cannot really judge. Definitely, there's a point on home consumption. So indeed, I think that's the silver lining that more and more this gets -- gains traction. I mean, consumer behavior will not kind of change overnight, but is, again, something we are definitely have supported in the past and we continue to do even more so in the sense that this is more and more of an opportunity that, drinking at home a little would it be with family, with friends, I think gets socially more and more accepted and on the back of COVID much see an additional growth phase.

[Operator Instructions] The next question is from the line of Pavan Ahluwalia from Laburnum Capital.

Just wanted a little more color on the mild versus strong mix. Why is it that strong declined more? So that's one question. And my other question is just from a longer-term standpoint, if you look at the evolution of the beer industry around the world, there has been the rise of craft beers and niche beers everywhere. Any thoughts on how you're tackling that in India, where obviously, we have a very strong flagship brand and we have the ability to introduce products from the global portfolio. How do we plan to address the inevitable emergence of maybe regional brands or niche brands targeted in particular sort of subsegment of the idea that we would try and develop some on our own? Would we look to acquire emerging brands? Any thoughts on that would be appreciated.

Yes. I mean, there are 2 parts to your question. The first part is why mild has done better than strong in these tough times. As you see that a large section of this premium and super premium segment that we are currently having brands are in the mild, and most of this super premium segment has grown vis-à-vis drop in the other brands. And strong, which is largely Kingfisher Strong, which is about 60% of our volumes has been hit on account of this closure and the lack of opportunities for people to consume this kind of segment has dropped.

And another way of saying that is you're saying poorer people have been more hit and therefore, this being kind of discretionary consumption for the poor has taken a very big hit?

You can't say poor. I mean, it's like the large majority of Kingfisher Strong is consumed in locations, which have been shut. For example, in many retail outlets, they used to allow consumption on the location, even though it is against excise rules. But even with the opening up of this retail outlets, consumption at that location is not being allowed now considering social distancing norms. So this has affected the opportunity to consume. Not many people in this country can carry alcohol home. So these retail outlets also allow consumption there. Now, even with the opening up of outlets, this consumption is not being allowed.

Understood.

And I answered the first one. Regarding the second one, yes, we have this in our portfolio. As you know, that we have launched Witbier, which is in response to this new emerging craft beers, which is, by and large, wheat beers. And we will address this segment as and when it becomes relevant, which we are currently doing.

The next question is from the line of Himanshu Shah from Dolat Capital.

Just a couple of questions, sir. Sir, first, can you provide some outlook on how July and August have been panning out here? You called out that June was 57% down year-on-year in terms of volume. So some color on how it's recovering July and August.

Yes. I think as things stand today, it's too uncertain to provide really outlooks or expectations. I think from our company side, we look at all kind of scenarios and trigger points as to how to make sure we're competitive and ready to serve the market as the industry demand will develop. But yes, I think you will see that it will take time for demand to recover and it's linked to the overall development of the pandemic, lifting of restrictions and the overall consumer sentiment.

Sir if you would like to qualify out quantitatively number, like it would be 30%, 40% lower versus last year or pre-pandemic level or even...

No. I mean, we share the numbers month-by-month for Q1. I think for Q2, we do that when the time and the place. I think overall, it is an uncertain market, as we have stated in the release. We've seen the restrictions come and go. I mean, in Karnataka there was a weeklong lockdown in July in certain parts of the states. And other elements, we've seen a bit of good news that, for example, in Mumbai, over-the-counter sales are now possible. We've seen actually today in Chennai a lot of trade opening up. So yes, it's, I guess, steps forward, steps back and probably that is all related to how the pandemic will develop in the months to come.

Okay. Sir, related to this, is it possible to provide some color on volume or value mix and region wise at least? You've provided year-on-year decline in each of the regions, but what will be the contribution of each region, either in terms of volume or value, if you can provide some color? On an annualized basis also it will work.

Yes. We don't provide further details. I mean, we shared, I think, the relevant inputs in terms of the regional volume performance and highlighted some states that were more positive or more negative. Besides, the overall price/mix you've seen on the top line. So I think taking that in totality should give you some insights as to what happened in Q1.

Sir, one more question. The gross margin decline has been quite sharp, both year-on-year and quarter-on-quarter. So is this due to the inflationary pressure on our key raw materials that is glass bottle and barley, hop, et cetera? Or is it more to do with state mix or a combination of both? Some color if you can provide on that.

Yes. Actually, it's more the latter. So this is really about state mix and the brewery mix as such. In terms of input costs, actually, bottle, the malt were more or less flattish in the quarter. So it's really about state mix and some component also of low utilization, so you get inefficiencies in the production and in energy, et cetera. So that's been impacting the gross margin for Q1.

Okay. Sir, just 2 more questions. One is, if you can -- we have seen sharp decline in other expenses year-on-year, 63%. So is it broadly due to the volume decline in business? Or there are some cost rationalization initiatives also which will continue in future, basically, which will sustain in future, even as volumes recover gradually?

It's both. So some parts are linked to volume, but also some parts are definitely around cost managing. So a lot of the discretionary spend have been brought back, commercial expenses. I mean, if there's a lockdown, obviously, we're not continuing the same level of advertising, et cetera. So it's a mix of both.

Okay. Sir, anything you would like to call out on cost management, partners, like what would be potential savings that we -- that may accrue in future?

Yes. I'm not going to share an absolute number because I hope you appreciate the market and how it evolves is very dynamic. So that's how we also look at our costs and our advertising and our expense. I mean, I think when trades open up, we will be then definitely supporting that with appropriate programs to get people back -- get confidence back. But yes, as to how and when that will happen, that's very uncertain. But definitely, again, we're looking at all scenarios, make sure we tailor our cost to how the market picture is evolving.

Yes sir. Sir, just last question, CapEx outlook, if you can provide for the year. Generally, we used to spend INR 250 crore to INR 300 crore. Last 2 years were on a higher side. So some color if you can provide on CapEx for FY '21 and '22, both the years, especially...

Yes. On the CapEx side, the last 2 years were around INR 400 crore, a little bit of north that included quite some capacity expansion as well. Obviously, that overhead has been suspended. So for this year, I think we're closer to a figure of INR 200 crore. But within that, there's a fair share of projects that have been initiated before COVID. So we will be finalizing that circumstances will allow it. So it's bought back I think.

[Operator Instructions] The next question is from the line of Aditya Soman from Goldman Sachs.

So firstly, in terms of nonalcoholic beer, any update? Have you seen sort of an improvement in mix, given that at least that segment has been sort of more open than the alcoholic beer?

For the nonalcoholic, yes, we posted a 30% revenue growth in the quarter. So that's encouraging despite, of course, a full lockdown, but overall challenges in the marketplace, particularly some good trading on the e-commerce platforms. So that's picking up quite well and yes we're pleased with that progress.

And in terms of -- is this now being sold across the country? Or is it in specific states, sir?

It's sold across the country.

And that's both brands, right, so you've -- the Radler and Heineken?

Yes. This includes Heineken 0.0 and SKUs under the Kingfisher Radler umbrella.

Excellent. And one more question on sort of production. To what extent is your production capacity normalized? I mean, in terms of -- I understand the capacity utilization could be low just because demand is lower, but are all your factories running? And could you run them to full capacity, if needed?

Yes. So we have resumed all operations. As you can imagine, from time to time, depending on local breaks, there could be curtailments or restrictions on production, but we don't have any unfulfilled demand. So across the whole network, we're able to supply the market as the demand is there.

Understand. So when demand normalizes over the next few quarters, the supply side would not be an issue?

No, I don't foresee it. No.

The next question is from the line of Jatin Chawla from First Voyager.

One is, if you look at the quarter the sprits companies have done a lot better. So just wanted to understand this beer to spirits shift that we have seen. Are there any kind of longer-term trends to read here? Or this is just kind of factors impacting things in the situation that we are in right now?

Yes. I think, beer has been a bit more impacted versus spirits. First of all, it's more of a bulkier product. So if you want to take something home, I guess it's less convenient, I guess, than maybe a single bottle. Secondly, for beer, you already ideally have it cold. So having that kind of slot in your home fridge could be a challenge in some areas. So i think that's why the beer industry has been a bit more impacted as to what is structural about it? How will it pan out? I think it's very early days. Very little data as of yet to say that this is -- to what extent this will last or will it change. I think that's to it.

And prior to COVID, what was your on-trade share?

From our volume base, around 20% was on trade.

I'd like to add something here. I'd like to add something here because even if you say on trade, I mean, a lot of our retail shops also allowed consumption, which is now stopped. So the effect has been larger than it's been on paper.

So if you were to kind of take a guess on how much of that was around the retail shops, then the number would we, what, 30%, 35%? Or even higher than that?

We can't because, I mean, which of the retail shops which are bending rules -- I mean, we can't really comment on that. But if you look at the market and the way it operates, many retail shops, what volume, we wouldn't like to call out, but many retail shops did allow consumption on-premise.

Sure. The reason I asked this was because the spirits companies say on trade for them is 25%. And one would normally think that beer would have a higher on-trade than spirits, which is the kind of reason to kind of harp a little bit more on this question.

Yes. Yes, I think we have to take into account kind of the license types. But I think as Poonacha rightly called out, there's a kind of gray area where people may be outside the off-premise shop would consume. In some states, it is a very common feature of the business. In other states, it's more traditional within the definition, I guess, of an on-trade premise. So yes. It's difficult to mix that one-to-one on.

Sure. And I think your press release had a comment on you being encouraged about how some of the states have reversed some of the excessive hikes that they've done. So what are your thoughts on overall kind of state taxation and how it has evolved in the last few months as states have been kind of starved for revenues?

Yes. I think particularly, when the markets opened up, we saw some very quick and steep reactions in terms of excise duties. I think a bit of encouraging news is that in Delhi and more recently in Orissa, this was rolled back to maybe what you call more normal levels or levels of increase. So as of today, I think West Bengal is still on quite a high duty increase of 30%, Andhra also quite fairly high duty, but I guess that's a little bit of a separate situation in the sense of the policy direction the state is pursuing. So there are some smaller states that are also seeing heavy duty increases. But some of the larger ones like maybe Karnataka, like Maharashtra, not really duty increases. So in that sense, it's a mixed picture.

So other than West Bengal, there is no kind of large state where the duty has been like really unreasonable?

No. What we spoke about last call in Telangana, there's some INR 30 per bottle on the main SKU. So that's also pretty sizable. Rajasthan, some INR 10. So I think some states have seen annual increases, more or less, so that will not be maybe too different. But specifically, where it's related to COVID and maybe funding some deficits at the stage, suffered particularly around COVID, some of that has been brought back. And yes, we continue to make representations as to what we see might be a more healthy level of duty for both the industry participants, but also the states themselves.

Right. And some of the states have kind of called this out as a COVID cess. So are you hopeful that in those states, this will reverse once the pandemic is behind us?

Yes. I think we've seen 2 examples where it reversed. I think at the end of the day, the demand is so much impacted due to the COVID cess, it is also a very strong rationale for the state themselves to probably reconsider some of those increases. Whether they have labeled it COVID or more general excise term that, I guess, is something else. But yes, at the end of the day, the state is also looking at excise revenues in total. So yes, I think that is a shared interest that we're obviously also very much looking forward.

Just one last point related to this. In your annual report, you also talked about engaging with states on getting taxation more linked to the level of alcohol content. Anything that you would like to share there, where you kind of you've seen making some progress? Or is this still very early days on that?

Well, this will be a very much continuous efforts. So for example, in Haryana, we've seen a policy that actually distinguishes between alcohol content also of beer. So I think that there is encouraging. But in our efforts, yes, we continue to make this representation where we have some strong examples that I think make a lot of sense and that is still the message we convey. And whether that leads in the near-term or mid to long-term to follow-up an implementation, I guess that we'll have to see later on. But what we take very seriously is our role to convey those messages and the way the excise model could be implemented.

The next question is from the line of Krishnan Sambamoorthy from Motilal Oswal Securities.

Berend, you mentioned about INR 120 crore increase in net debt over March. Has there been any increase in working capital and specifically receivables over this period? And any delay from state governments on this one?

No. The working capital is actually, I think, very healthy. So we focused a lot on the cash management, on the payables and the collections. So as such, I think the net debt increase was relatively modest, if you would compare to the prior year Q1. Of course, there are a few states where trading is -- it's relatively low, so they might be a bit showing more of an overdue. But others, I think we've seen very good collections. So net-net, I think, on the working capital side, we're in a good shape.

Okay. The second is, any comments on price increases that you obtained from any of the large states over the last 2 or 3 months?

Yes. So we've seen, I would say, a healthy positive price impact in the quarter. We've seen small price increases in, for example, Karnataka, Maharashtra. So all in all, I would say, yes, where we continue to strive for healthy price increases in the sense of protecting the bottom line and then some of the input costs, I think we're on a growth track there.

Just on -- a follow-up on that, Berend, the 2 states that you mentioned are prepricing markets. Any states where you were expecting a price increase and you've not obtained it yet and where you are hopeful of getting it maybe in subsequent quarters?

Difficult to comment on what might happen in the future. I mean, obviously, every state has its own considerations into proving that or not. So our role again is to strive for healthy balanced price increases. Whether those will fall in what quarter or what year that we'll report back as and when it happens.

And then, lastly, can you quantify the extent of the price increases obtained on an average?

No, I'm not putting that out. But for example, in Karnataka, it was INR 5 per bottle. Maharashtra, INR 10. So yes, I would say probably very much similar as to the kind of annual increases you've all seen in the last couple of years.

The next question is from the line of Avi Mehta from IIFL Securities.

Sir, consumer sales have indicator that July has moderated from June given the local lockdowns. Have we seen a similar kind of impact in July as well? Would you be able to share that?

I think July has been, again, impacted state by state. So I called out Karnataka, where there was a week lockdown, which obviously is an important state in our total contribution. Some other states, some better trading due to reduction of taxes and what have you. I think if you would compare it to maybe FMCG, where you might have seen a story of inventory building, which was subsequently, I guess, more depleted and back to more normalized levels, I don't think this is the case for the beer industry where stocking up and et cetera is less of a phenomena than maybe in FMCG in some of the categories.

So it will be still an improving trajectory to that extent. I mean, on an aggregate basis, I understand the state level dynamics. But on an aggregate basis, because you don't have the exact proportion of each state so which is why I was just trying to kind of get on an aggregate basis, could it be an improving trajectory or a flattish trajectory or declining, I mean, whichever way you want to put it?

Yes, I don't want to really specifically call out July and I think we will come back on the totality of Q2 obviously when we talk about Q2 results. But what I said earlier, I think, the industry continues to be impacted a lot by the pandemic and the related restrictions. Encouraging was, of course, within Q1, we've seen a bit of an improvement month-by-month. So we'll have to see how that can continue going forward.

Okay. And the second bit is could you share if you're seeing any change in terms of either market share, discounting on the ground, or any such sense because of the way that the industry is going through -- the beer industry is going through?

I think our market share is more or less flattish in the quarter. I think we've seen, yes, the usual competitive pressure. I guess there was also quite some discounting on stocks that people wanted to lift out of the market so that maybe was a bit more pronounced than usual. But yes, we continue to be very focused on the market share position. And whether demand is low or high, I think that will be an important parameter for us under any scenario.

Okay. And lastly, any update, how is the input cost situation kind of behaving, especially on the glass and the barley side?

Yes. So that's looking on the barley side, with most of the harvest now done, a bit softening of prices. So we have seen around 10% reduction on barley prices versus prior year. Obviously, against a background that we entered the year with a bit more inventory than anticipated due to the drop in demand. On the glass, new bottle prices also moderated to kind of low inflation kind of levels. And so from that sense, on the input cost side, a much better picture than 1 year ago.

No. But on glass, the recycled glass prices, is there any change here because of the lockdown? Is that kind of hurting? Or is that a risk that you could see how is that behaving?

Yes. In Q1, we have seen a similar rate of new versus recollected bottles as usual. How that will move going forward, yes, I think that's difficult to forecast. There's a lot of local dynamics are in play. Obviously, the market is quite disrupted with on-trade continue to be closed. So we'll have to see how that impact moves going forward. So that recollection rate, I guess, it's more of a question mark, but the pricing of the new glass is kind of low inflationary.

And barley, you said inventories moderately higher with higher inventory. Do you have any expectations by when do you expect the new barley to kind of start reflecting?

It's difficult to call out because, again, that we have to see when the malting process is done, and when we have consumed the inventories that we entered the season with. But obviously, that's been taken into account into our buying strategy over the last few months. So we'll come back on that in probably Q2.

So okay. So second half or nothing of that sort you could kind of share or no, no comments on that? I'm just trying to kind of understand from that point of view. Barley reflecting in -- how would you see that? You don't want to -- sorry, I didn't get it. So you're not able to share or are you reserving your comment...

No, no. Yes, I'm not going to speak specific months or quarters when that will be consumed because obviously, that is linked to demand picture at this point in time in the coming months. I'm just saying that in our buying strategy, when we entered the barley buying more or less in April, we're well aware of the disruption due to the pandemic. So that has been factored into how much we bought in the last month.

The next question is from the line of Ashit Anil Desai from Emkay Global.

Yes. I had a question. Is there any inventory or raw material write-offs during the quarter? We had some situation in Bombay Breweries, which we had called off earlier.

No, we have not really had write-offs as such. I think it is fair to point out that the whole expiry and usual raw materials, et cetera, is a topic of attention given the sharp decline in demand. But the quarter is, yes, more or less fully impacted by COVID. This is one of the topics that we're focused on. But I think the supply chain team is doing a great job in making sure everything is used in time, et cetera. So as of now, no definite write-offs, beyond the provisions that we've taken in the March quarter end.

Okay. Okay. And on gross margins, I see you called out state mix but actually, you've also called out positive state mix in the presentation. So what are the drivers for gross margin decline? And how much of those are one-offs that you expect because from a 2-year perspective, if we see your gross margins are down almost 600 bps or 700 bps, last year, 300, 350 and this year also similar decline.

Yes. I would distinguish, let's say, the current impact or maybe last year impact. I think last year, was driven by a large extent, steep increases in barley and glass, which we're not able to price within that year on the revenue side, hence the pressure on gross margin. I think in Q1, we've seen input costs as such pretty stable. So it's much more around the state mix and the brewing mix within that, coupled with the other element that I called out was yes, more inefficiencies in the breweries due to the lower utilization of the network.

Okay. And given the lower input cost, do you think you'll be able to get back to last year gross margins going ahead? Or the brewery inefficiencies will continue?

I think the inefficiencies will be a function very much of the demand development going forward. So yes, that's not something I can call out. What we see or what I shared on the input costs, I think that is looking pretty much better than a year ago. But as to how the demand recovery will move, I won't comment.

Ashit, I mean, coming to gross margin, unless we operate at our regular 80%, 85% capacity, gross margins cannot be compared. It's -- you can't -- it's like comparing apples and oranges. Because there is a lot of costs that we need to incur when we are operating only on single shift vis-à-vis 3 shifts, sometimes 2 shifts. So this operating net flow capacity has a big cost burden, which is spread over lower volumes. So it's really not comparable. So unless we get back to original levels -- I mean, it really -- you can't say that we are not getting good prices or we are not saying -- we're not getting -- not able to procure material at the right price. So we are doing all that. But it's just that the fact that they are not able to operate at optimum capacity, which is hitting the margins.

Got it. And why is your depreciation lower this quarter?

That's reason what we're just saying. When we depreciate on a regular basis, in a normal year, it is depreciation of 3-shift basis. 3-shift basis means your depreciation is double what your normal depreciation is. If you operate in one shift, it is half. It's your rate. Then if you're operating 2 shifts, it is in between these 2 rates. And in each unit, based on the maximum number of working days and which shift it has worked, for example, if a unit A has worked 20 days on -- with one shift, the depreciation is made on one shift basis. If it has worked on 2 shift for a maximum number of days, the depreciation is 2 shifts. That's why you're seeing the drop in depreciation.

Okay. We followed this historically also? Or this is the only quarter...

Historically, most of our breweries operated always 3 shift. So we have never had...

Okay. Lastly, if I may take one more question. I just wanted your insights on -- if you look at other markets where the bars and restaurants have opened up. And I mean, if you could call out what's the kind of recovery in the category that you've seen in those markets?

Yes. If you look to maybe take one example, I think in China, for example, it's been, even to some extent, at pre-COVID levels quite quickly. But I would say a lot of it depends on the kind of restrictions that are in place or consumer sentiment around going out and gathering in groups, et cetera. So I guess there are different -- given recovery rates at different markets and some have moved up, but maybe also subsequently moved down. So yes, it's -- I guess, it's difficult to put one figure to it, but they're very promising examples and there are some examples where it is shown to take more time.

The next question is from the line of Tejash Shah from Spark Capital.

First question is on any update on Andhra Pradesh this year? And have you seen any revival of orders from the government? Or at least if the negotiations have improved?

If I heard you correctly, the question was about Andhra Pradesh?

Yes, on Andhra Pradesh.

Yes. No, there, I think we can safely say that continues to be very challenging, not least because of taxation increase of some 75% on the consumer level. So the -- I think the total beer industry, ever since COVID opening up in May has been severely down. So that continues to be a very difficult trading environment.

And last quarter, you spoke about CCI report briefly. You said that [Technical Difficulty] particularly this quarter. So any update on that to share?

So on the CCI case, no, there's not as much -- so much an update. I mean, a lot of the process actually been on hold or suspended due to COVID. So a couple of these process that have been pushed back, and hence, we'll be submitting our responses to the initial report in the coming 2 months. So it seems that, yes, not much of an update.

The next question is from the line of Vishal Punmiya from Nirmal Bang Institutional Equities.

So my first question is regarding the procurement of barley, so recently change in regulation. So you can now basically procure directly from the farmers. What benefits can you see from this in terms of procuring directly from the farmers instead of going through the APMC? And the second question is basically, what would be the key focus area for a new CEO who had joined from a medium-term point of view? While he's not on the call, if you can just highlight his key focus areas that would be very helpful.

Yes. Your -- just to clarify your first question. Was it -- what are the benefits UBL gets by procuring directly from farmers by excluding the intermediaries. Was that your question?

Yes. Yes. So what would be your change in strategy in terms of procurement? And what would be the benefits, if there is a change in strategy?

Yes. I mean, benefits will be cost. Basically, you will have a direct access to the farmer. And when you go through an aggregator, some farmers will be selling at a lower price but some of these aggregators will be giving you at higher price, right? So when you're accessing directly, you will get that bit of advantage. Of course, there'll be fluctuations, which has to be handled carefully, which we are doing. So there will be some cost advantage. We'll not be able to quantify what is it as is, but there will be some cost advantage. With respect to your second question of our new MD. He, I think, would address the investors very soon. So you can hear it from him of how differently he would be handling this company or what his thoughts are. So I wouldn't be able to comment on that.

Just a follow-up on the first question. Any commissions that go away while procuring directly from the farmers and also the logistics benefit that comes in direct procurement?

Yes. I mean, you will have a little more logistic costs because you'll have to source from different locations. That is there. But like you said, the intermediary fees -- there are certain things which you will save on. So we are confident that it will have a positive cost advantage on overall basis.

Will the duration of the logistics would go down?

Sorry?

Will the duration go down in terms of traveling from one point to another in terms of procuring the raw materials into the brewery?

That doesn't matter because between the March and June season, we procured close to 70% to 80% of the barley required for the full year. So if barley is coming in even 2, 3 weeks later, I mean, we already contracted the size and quantity. The job is done. So it doesn't matter.

No. So beyond year FY '21, would there be any benefit?

I mean, this is a one-time benefit. You can't keep getting benefit on and on because then you'll compare vis-à-vis the lower base, right?

Okay. Yes.

Yes. It's a one-time benefit.

[Operator Instructions] The next question is from the line of Himanshu Shah from Dolat Capital.

Most of my questions have been answered. Just one question. How do we try and bring back the consumers as the economy starts recovering? Like what would be the input factors or key things that we would try to get back the consumers post the pandemic?

Yes. I think we are -- again, we've seen practices globally that had worked pretty well. I think on the one hand, it's not only waiting for consumers to come back, but even on current circumstances, driving more of the in-home consumption. So what we're doing digitally is very much focused on that. And yes, as soon as bars and on-trade is allowed to open that would definitely come with a range of activities to support that. But we have to also see how that deregulation actually will happen, so that we take our efforts accordingly.

Okay. Sir, is there any kind of price cuts or anything that we would envisage or like to take off to attract the consumers?

I think -- can you repeat the question?

Any kind of price cuts or anything in any specific states or any location that we would be envisaging to bring back the consumers?

No, I don't think price cuts is kind of sustainable approach to -- I mean, you can always have your activations and similar type of programs. But as it is, I think it's more about the long-term sustainable approach that consumers feel confident, feel engaged that, yes, coming back socially is safe to do. And I think, many examples around the world show that people like to gather. I mean I think that has not fundamentally changed due to the pandemic, but how and at what point in time that is feasible, of course, that differs a lot by market. But in essence, people, of course, want to continue to gather with friends and family, and I think that has not fundamentally changed.

Okay. Sir, just 2 more quick follow-ups. One on safety basis. We will be filing the replies within next 2 months. You just called out that. Is that right?

Yes. That's correct.

Okay. And sir, secondly, with respect to Andhra Pradesh state, when you call out the trading environment remains difficult. Just want to confirm, is the state government ordering with us? Or the ordering remains prima facie to private parties only?

So any orders we get is from the state corporation. What else they order? I don't have visibility on it, if that was your question.

No, sir. I'm just asking, I think, so post the route-to-market changes in Andhra Pradesh, a larger portion of ordering was happening with private parties. The same scenario continues as on date for whatever volume that must be happening in this state?

Yes. I commented earlier that I think the total industry is severely down. So I think reading in the volumes that are trading there today, a lot of that market share -- I think that is a bit difficult. So I would just say the market is very severely down and we'll get directly what orders I don't have visibility on. I can only see what we have received in orders, which is since the lockdown next to zero. So that is the situation for us in the state of Andhra.

The next question is from the line of Jatin Chawla from First Voyager.

Just a quick follow-up on the gross margin thing. Does the fact that there is no on-trade volumes at all, does that impact gross margins also?

Maybe only a little bit to the extent that the premium part of the portfolio is a bit more skewed to the on-trade, so that we'll have some bearing. But again, the lower utilization of the network and the state mix has more pronounced impact in Q1.

The next question is from the line of Abneesh Roy from Edelweiss.

So sir, you mentioned in 2 states, the duty has been reversed. So given the current scenario, is there some benefit you are seeing in these 2 states?

Yes. So in June in Delhi -- earlier in the month of June, Delhi reversed. So I think we've seen progressive improvement in the market since. For Orissa that occurred early July. So it's a bit too early to read a lot into it. But of course, in general, yes, more affordable pricing will be a big plus to have consumers come back to the category.

And one follow-up, sir. In Andhra, you are also suffering. All liquor players are suffering. So now, are you planning some remedial action on the legal front because in some of the other states we have seen this? And on duty reversal there, is there any visibility? Or all these are steps on the prohibition which is there, so step-wise prohibition which they want to do?

No, when you mean legal action, what's the understanding? I didn't get your understanding itself.

No, in some of the other states, we have seen when route-to-market, there is a drastic change, and it'll start favoring some of the smaller players, regional players. And it is essentially unfair, not level playing field. We have seen in 2, 3 states earlier, there has been some legal action and some states we have actually won. The industry has in fact won. So here, is there anything similar possible, anything similar happening?

You are right. If you are just saying that the size of the industry is remaining as it was prior to these new actions by the state government of Andhra Pradesh and if the ordering was not been given to us, it made sense to try and address the issue. But here, the industry itself is come to a minuscule level. And the state government is, of course, not officially, making noises that it is going towards prohibition by the time the current incumbent government comes for reelection. So when all these things are there, does it make sense to take it legally?

No, my question is, is the market share shifting to the unorganized players, fly by night operators, is that happening?

You are right. You are right. You are right. The market share is of a large volume. The volume itself is dwindled. The volume of Andhra is dwindled.

For the entire -- even the illegal player?

It's not illegal. It's not illegal. Please don't interpret it. They're not illegal. They are local players who are not national. These are not illegal players. These are getting orders. SNJ is getting -- they're not illegal. They have got legal license.

No, no local players. My meaning was local players only.

Yes, yes. So the local players who are getting orders are getting orders, but the entire industry has come to probably 1/10 of what it was. It doesn't make sense to take action. It doesn't.

The next question is from the line of Krishnan Sambamoorthy from Motilal Oswal Securities.

My question is regarding the logistics of home delivery. Now wherever home delivery is allowed either to the wine shop delivery guy or also the aggregator, how do you get back the old bottles? Does this gets collected on subsequent orders? Or do you say that this is a new avenue of growth, so eventually, it will come back to the company at some time? And therefore, is there an implications on lower margin because of higher proportion of new bottles, possibly until -- any time until the on-trade segment opens?

Whether the consumption is home trade or whether it is -- sorry, home consumption or whether it is on-trade consumption, the used bottles comes back to us on a different route itself. There's no deposit model where it comes back in the route of supply. So for example, we bill the corporation in say the Karnataka. The corporation will bill the various retail or they will bill the various on-trade locations. And all these points of consumption, they don't return it back to the corporation or back to UBL. They are being picked up by bottle aggregators. So it is a total different sector itself, which operates. So whether the consumption at home or whether the consumption is on-trade, it doesn't make a big difference. It finds its way back.

Yes. Poonacha, even there, right, if you look at in the current environment, wouldn't there be a delay in pickup by the bottle aggregators and eventually to you?

There can be -- see, for example, say, you consume a case of beer in your home, will you keep the bottles long in your home? You won't, no, because it consumes space. So what you will do is end of the week you will find somebody to pick it up. I mean, you don't even want anything for it. You just want it to be clear. So these are the people who pick up these things and it comes back to the bottle aggregators.

As there are no further questions, I would now like to hand the conference over to the management.

Thank you, everybody, for joining the call today. Thank you for your interest and your questions. Please stay safe and look forward to catch up for the next quarter's call. Thank you very much.

Thank you. On behalf of IDFC Securities, that concludes today's conference call. Thank you for joining us, and you may now disconnect your lines.