What's at stake for Vijay Mallya if Kingfisher fails?

ANALYSIS:

If Vijay Mallya's Kingfisher Airlines fails, lenders owed $1.4 billion may end up with a small stake in his spirits business, a modest office building, the carrier's brand, and not a lot else. Here's an analysis of the liquor baron's assets and liabilities.

If liquor baron Vijay Mallya's Kingfisher Airlines fails, lenders owed $1.4 billion may end up with a small stake in his spirits business, a modest office building, the carrier's brand, and not a lot else.

A $16 million beachfront villa in Goa (pictured left), where Mallya throws parties and shoots his Kingfisher swimsuit calendar, is owned by his UB Holdings Ltd (UBHL) and pledged as collateral to State Bank of India, Kingfisher's lead bank. But Mallya's UB Group wants to swap the villa for another asset and says it has the right to do so. SBI is resisting.

Through interviews with bankers, lawyers, and others in the financial industry, as well as information provided by the company and publicly available data, pieced together what parts of Mallya's empire are at risk if Kingfisher falls.

The airline was launched seven years ago by Mallya, who is known as the "King of Good Times" for his flamboyant lifestyle and often referred to as India's Richard Branson.

While Kingfisher has never made a profit, it grew quickly to become India's No.2 airline by domestic market share. It has since been knocked back to sixth, crippled by high debt and fierce competition.

Banks have guarantees of more than $1.2 billion from Mallya and his holding company, but collecting on them could prove difficult, and most of Mallya's lenders, mainly state banks, would pursue that only as a last resort, people familiar with the matter said.

No shares or other assets were directly pledged to banks against specific loans, according to Kingfisher.

"There is no security to fall back upon," said Sharad Bhatia, CEO of Phoenix Asset Reconstruction Co, a distressed debt investor backed by Kotak Mahindra Bank that does not have exposure to Kingfisher but is familiar with the matter.

"Ultimately, banks will have to take a haircut," he said.

After cancelling thousands of flights late last year, cash-strapped Kingfisher has grounded most of its fleet and is desperately awaiting a rule change to allow investments by foreign airlines, although none has publicly expressed interest.

Mallya's UB Group includes Kingfisher, United Breweries, United Spirits Ltd and UB Holdings.

Kingfisher's woes have prompted speculation that British rival Diageo will make a play for United Spirits while Heineken goes after United Breweries.

United Breweries, Mallya's crown jewel, does not have direct exposure to the airline or its creditors.

If the politically powerful Mallya were forced to sell some of his shares in the maker of Kingfisher beer, he could remain in the controlling shareholder group alongside Heineken, which has an equal stake, given the value he brings in a heavily regulated Indian alcohol industry.

United Spirits, the other big listed company in Mallya's stable, could also be hard for Kingfisher's creditors to prise away against his will. Of Mallya's 28 percent of United Spirits, the world's biggest liquor maker by volume, part of the 18 percent held by holding company UBHL is pledged to lenders that funded its $1.2 billion 2007 acquisition of Scottish spirits maker Whyte and Mackay.

The UB Group says it does not see a risk to Mallya's empire.

"Since there are no shares pledged except the 4 percent of USL (United Spirits) there is no risk of Vijay Mallya losing control over any listed company," Prakash Mirpuri, a group spokesman told.

Banks are putting pressure on Mallya by moving to sell the Bombay House office building near Mumbai's airport, worth roughly $9 million, and the villa.

The Kingfisher Airlines brand was valued at 41 billion rupees in 2010 and is now worth 25 billion rupees, one lender said. It is worth less to anyone other than Mallya, 57, who named the carrier after his flagship beer in a country that bans alcohol advertising.

"Selling off a brand, valuing it, is not an exercise that has happened before so we want to start with something that we understand first," said a senior executive with one of Kingfisher's lenders. "We have already started the process of liquidating the securities, the tangible ones - Goa villa and Bombay House. That will begin to hurt Mallya," he said.

UBHL has guarantees of more than 67 billion rupees to banks and about 22 billion rupees to aircraft lessors on behalf of Kingfisher, according to a note by UBHL's auditors in May, but the true value of those guarantees is difficult to ascertain. Unlike collateral, guarantees are not tied to specific assets.

Mallya, who also owns a cricket franchise and last year sold a 42.5 percent stake in his Formula One racing team to India's Sahara group, has given a $50 million personal guarantee.

"Corporate guarantees and personal guarantees are difficult to enforce," said P. Rudran, CEO of Asset Reconstruction Co (India) Ltd, a distressed debt investor backed by banks including SBI and ICICI Bank.

"When we do our valuation, we practically don't give much value to guarantees unless it is a government guarantee."

Until February, Kingfisher was a subsidiary of UBHL, a holding company controlled by Mallya and described as "the central piece that holds it all together" on the cover of its annual report for the financial year that ended in March 2011.

The airline stopped being a subsidiary when part of Kingfisher's debt was converted into shares.

"Nobody can assume that UBHL will automatically be called upon to pay 100 percent of KFA's debts. There are procedures to be followed to establish the net amount if the need arises. Besides UBHL has several counter claims against KFA suppliers," group spokesman Mirpuri said.

UBHL has a market value of just under $100 million and had liabilities of about $2.58 billion, more than three times its assets, according to Thomson Reuters data as of March 31, 2011, when its biggest asset was Kingfisher, which is worth less now.

"Invoking guarantees is not a simple process that you invoke today and you get a cheque tomorrow. It's a long process - a year or forever. You never know," said a source familiar with the matter, declining to be identified given the sensitivity.

Diageo held talks that collapsed in May 2009 to buy a minority stake in United Spirits, and typically invests in businesses that it can eventually control.

Heineken is engaged in a takeover battle for Singapore's Asia Pacific Breweries. Sources said in March that Mallya was considering selling part of his stake in United Breweries to Heineken.

Neither Diageo nor Heineken is currently in talks with the UB Group, according to people familiar with the matter.

Both Diageo and Heineken declined to comment.

"UBHL has no plans to sell its holdings in UBL (United Breweries) and USL (United Spirits)," Mirpuri said.

Mallya and Heineken each own 37.5 percent of United Breweries. If Kingfisher's banks called in UBHL's guarantee, UBHL may be forced to sell its 11.5 percent of United Breweries. That would still leave Mallya with 26 percent, a board seat and a say in management decisions, unless Heineken tried to force him out, something it appears unlikely to do.

"Dr Vijay Mallya provides significant added value as an ambassador for the industry's interests and is a member of Indian parliament," Heineken said in a December presentation.

The Mallya team's view is unequivocal.

"There is no question of Heineken acquiring any additional stakes in UBL," Mirpuri said.

Kingfisher's lenders are mostly state banks, and many frustrated bankers appear resigned to recovering as little as $25-$30 million, at least in the near term.

India does not have a formal bankruptcy process. Instead, banks typically extend more credit to tide big customers like Mallya through tough times. It is rare for Indian banks, especially state lenders, to force a liquidation, and rarer still for a big Indian company like Kingfisher to collapse.

"Indian banks don't pull the plug. I think that's really sort of the bottom line here, unless they're really pushed to do," said Ashwin Ramanathan, a partner at law firm AZB & Partners in Mumbai.

Kingfisher Airlines cabin attendants serve snacks on a flight after takeoff from Mumbai's domestic airport.

It's war when it comes to the liquor industry

It's war when it comes to the liquor industry

"All is fair in love and war and when it comes to the liquor industry, it is war."

This was an extract from a note signed by none other than the man they called the ‘King of Good Times’. It landed on the table of Ramesh Vangal, the Asia-Pacific head of liquor giant Seagram and Param Uberoi, the head of Indian operations. United Breweries Group Chairman Vijay Mallya was seething with rage. And there was a very good reason for it. This was the first time that his attempt to cobble together a joint venture (JV) with global liquor firm Seagram had been rebuffed. Back in 1998, no one would have dared to spurn Mallya.

You didn’t need to be an insider in the liquor trade to know that Mallya was powerful, politically well-connected and had a larger-than-life image. And what’s more, he often played rough, sparing no effort to snuff out his rivals. His two-decade-long duel with Manu Chhabria, a pugnacious self-made tycoon based in Dubai, was already a part of industry folklore.

And Seagram was clearly no match for Mallya in his home turf. He saw them as an opportunity to expand his portfolio with premium international brands like Chivas Regal. Mallya and Edgar Bronfman, the then CEO of Seagram Company, agreed to form a JV and talks began. And then Mallya laid down a condition: The JV would have to keep off the Karnataka and Andhra Pradesh markets, two of the biggest markets in the country. That prompted Seagram to stage a walk out.

In 2001, when French multinational Pernod Ricard took over Seagram globally, Mallya sensed another opportunity to strike. “He told Patrick Ricard, the chairman of Pernod Ricard, that it is difficult to survive without a local partner,” says a senior executive from the industry. By then, something unusual had happened. Param Uberoi, the head of Seagram India had been picked to head Pernod’s Indian operations, even though he belonged to the acquired entity. When Ricard asked Uberoi for his opinion, he was clear: We can do this alone, he maintained. Mallya backed off, but only for a while. Two years later, he was back with another JV proposal. This time, while Uberoi was ready for a partnership, he refused to bring Pernod Ricard brands under the JV. “His logic was that Pernod Ricard brands were doing well by themselves in India and it was UB brands that needed help,” adds a senior executive from Pernod Ricard. Finally, Mallya’s perseverance broke down and he never returned. The war now shifted to the streets.

The Battle Royale

For the last 10 years, the battle royale between Vijay Mallya and Param Uberoi has perhaps been one of the few untold stories of the decade. When he took over as CEO of Pernod Ricard in India, Uberoi inherited a loss-making business that was no more than half a million cases. Some of his brands were beginning to see traction, but they paled in comparison to the size and scale of Mallya’s brand portfolio. Pernod didn’t have the distribution reach nor the production facilities.

Mallya already had a large stable with at least six brands that were selling more than a million cases a year. His beer brands had nearly 50 percent market share. Mallya was acquiring breweries and distilleries around the country to build a strong manufacturing presence. His spirits business was scattered under many companies, which were already doing 25 million cases in 1999. In 2000, Mallya set in motion a plan to bring all the companies under United Spirits (USL). And by 2005, with Shaw Wallace under his belt, Mallya was the undisputed numero uno in the country. And even today, he loves tom-tomming that USL is among the world’s largest spirits selling company by volume.

There’s, of course, a rather large fly in the ointment: Mallya’s USL is no longer the most profitable spirits company in the country. Last year, it lost that place to Pernod Ricard India (PRI). The privately-held Indian subsidiary of Pernod Ricard doesn’t reveal its financial figures. Yet, executives within and outside the company confirm that the firm generated net profits of ‘around Rs. 500 crore’ for 2010, higher than USL’s Rs. 403 crore.

There are two other data points that make for an intriguing read. Pernod Ricard’s revenue of over Rs. 3,000 crore is just half of USL’s Rs. 6,422 crore. And it sold 20 million cases of spirits in 2010, a little less than one-fifth of what USL sold.

Today, Mallya, the businessman-politician, finds himself in a spot of bother. Each of his major businesses under the UB Group umbrella, including USL and Kingfisher Airlines, is under mountains of debt. USL alone has debt of close to Rs. 6,000 crore on its books. And the spirits company, Mallya’s cash cow, is facing increasing pressure.

By the end of this year, its flagship product, Bagpiper whisky, risks losing the slot of India’s and world’s largest selling spirit brand to Officer’s Choice, owned by friend-turned-rival Kishore Chabbria’s ABD Distillers. Chabbria is the chairman of ABD and had roped in Deepak Roy as the CEO, after he parted ways with Mallya.

More worryingly, neither the industry nor the investors now seem to put much value to USL’s huge annual sales of 116 million cases. “What is the point of calling yourself the largest in the world, if you don’t have profits to show for it,” says Nikhil Vora, managing director, IDFC Securities, who earlier this year downgraded USL’s stock to neutral. Detailed questionnaires sent to Mallya and USL went unanswered.

Things might only get worse from here for Mallya. Most folks within the industry back Uberoi and his team as the one better placed to tap into the fast growing Indian liquor story. The domestic spirits market is the second biggest in the world and the largest for whisky. The silver lining: The premium segment of this market is still pegged at only 20 percent, but is growing at a rate of 25 percent, much faster than the 16 percent growth in the low-price, high-volume segment that USL dominates. Not only is the average age of tipplers coming down, many of them have more disposable income and choose to be associated with bigger, better known brands.

Rivals have considerable praise for Pernod’s stellar performance under Uberoi. “I have a lot of respect for what Pernod Ricard has done in India. They have consistently put top dollar behind their brands and have fought the competition not on price, but through innovative marketing strategies,” says industry veteran Deepak Roy, vice-chairman and CEO of ABD Distillers.

It isn’t just about marketing chutzpah, though. Pernod Ricard’s success stems from a series of leadership calls that its CEO Param Uberoi took for over a decade. At its core, it involved challenging the status quo — and not once succumbing to the pressures of conformance.

Now, for most part, the liquor industry in India still remains a hotbed of political intrigue, regulatory snafus and intense competitive intensity. And it clearly isn’t a place for the faint-hearted. Uberoi simply stuck to his agenda. Through all the muck-raking and mud-slinging, he cut himself off from the rest of the industry. He never attended industry meetings, never gave media interviews (you’re unlikely to even find a solitary image of him on the Internet) and merely let his brands do the talking. He even chose to side-step political landmines by avoiding entry into corrupt yet large, government-controlled liquor markets in Tamil Nadu and Kerala. His decisive leadership eventually allowed Pernod to pull the rug from under Mallya’s feet.

But now, the game could start to change once again. In June this year, Uberoi surprised his colleagues and the rest of the industry by choosing to hang up his boots as CEO and bringing back someone he had hired 13 years ago — Mohit Lal — from Pernod’s operations in Ireland.

His friends have complimented Uberoi for his ‘courageous’ decision. The timing was perfect, his friends told him. “After having led the effort for 12 years, the business is on a strong footing. We have the most profitable brands and are the most profitable company in the industry. In volume and share too, Pernod Ricard brands are leading in the segments and in most states where we operate,” explains Uberoi.

“I felt the time was right to step down from an executive role and allow a new generation of leadership to take the company into the next phase. While I am happy to lend a helping hand to Pernod Ricard, this allows me to devote my attention to other areas that interest me…and also chill a little,” says Uberoi as he runs his hands through his hair. He now sports a grey designer beard and the almost-shoulder touching silver locks are very much reminiscent of his flamboyant rival.

Even after retirement, Uberoi remains his reclusive self, spending the last few months catching up on lost sleep — four hours a day was the regime for over a decade — and also visiting his daughter at Stanford University where he “might pick up a course on psychology later,” and travelling across the country, including to Goa, with his wife, to spend quality time at their new sea-facing apartment. (After their decade-long duel, you can be sure that Uberoi isn’t about to make it on the guest list of Mallya’s famous parties at his sprawling Kingfisher Villa in north Goa.)

“It is going to be an interesting phase,” says Uberoi of the coming days. The former Voltas and PepsiCo veteran is now serving a two-year term as the chairman. While he has handed over the reigns to his successor Mohit Lal, Uberoi is “only a call away” and despite not being involved in the day-to-day affairs, is still plugged into the goings on in the industry and the company.

Inside Pernod Ricard India’s corporate office in Gurgaon, there’s an apparent calm, but the underlying buzz is palpable. “They are not a company that you can take lightly,” says a senior Pernod Ricard executive, on conditions of anonymity, about the competition from the giant in Bangalore. “They are formidable, swift on feet. But we believe that the best man should win and the consumers should decide the winner,” he adds.

Mallya is losing no time to use his shock-and-awe tactics. The veteran of many a war raised the pitch a few months ago through his tweets on Twitter after an ad campaign by his company caught everyone’s attention. A McDowell’s ad showed Indian cricket captain M.S. Dhoni ridiculing a character similar to his Indian cricket teammate Harbhajan Singh, who turns out for Royal Stag, a brand owned by Pernod Ricard. Already, the more profitable of the two, Royal Stag, is poised to overtake its rival USL brand in volumes next year. (Interestingly, Dhoni used to endorse Royal Stag before he moved on to the rival camp on a record multi-crore endorsement deal.)

But Uberoi refused to pick up the bait and Pernod Ricard remained silent all the while, even as Mallya took digs at Harbhajan through his tweets, before pulling out the ad after Harbhajan’s mother threatened to sue him.

Nerves of Steel

There’s perhaps no better place to develop such nerves of steel than to work in a ballsy startup. Uberoi spent almost a decade in PepsiCo, as part of the team that launched the iconic beverage in India, before signing up as group chief financial officer for Seagram’s Indian business. Spirits was one of the two main businesses for Seagram, which also had a huge presence in entertainment through Polygram and Universal Music. Though the company had started selling its iconic international spirits brands like Chivas Regal in India, Seagram’s focus was to develop premium local brands and had introduced Royal Stag whisky in 1995.

Mallya, on the other hand, was in the middle of a protracted war with Manu Chhabria of Shaw Wallace across both the beer and the spirits markets. The fight was most intense for the high volume, low margin segment. “The market was almost equally divided between the two companies. The competition was intense and sometimes cut-throat,” recounts Deepak Awatramani, a Mumbai distributor who used to distribute brands of both the companies.

In 1998, soon after Seagram rebuffed Mallya’s overtures, Uberoi was asked to take over the spirits business as CEO. The business was losing Rs. 40 crore a year and had volumes of less than half a million cases a year. Uberoi was among the first non-sales chief executive of a liquor company in India. While this meant he was more focussed on earning profits than driving volumes, his FMCG (fast moving consumer goods) background ensured that he chose a very different route to rebuild the business. During those early days, Uberoi’s decisions were first ridiculed by the industry, but as they bore fruit later, elicited respect and cemented his legacy.

First, he changed the top team. “The focus was to align the team to a common vision,” says Uberoi. If anyone didn’t share that vision, they were replaced. Uberoi roped in Mohit Lal, who was at confectionery giant Perfetti as the CFO; got a new manufacturing head and till 2001, took care of marketing himself. Later, Sumeet Lamba was roped in from Dabur and only the sales head, Rakesh Vasishta who was in the UB Group, came from the liquor background. “I suspect, a lot of other industry players may have laughed at us for this kind of a mix,” Uberoi recalls with a smile.

Structurally, Seagram’s operations in India were divided into four regions, each a profit centre in itself. Uberoi increased this to six. “Aside from the sales head, we added marketing and finance heads to sharpen ground level actions and decision making capabilities,” says Uberoi. And then the finance whiz did something that was unheard in the industry. He forbade his sales team to cut prices of the products. “Royal Stag was the first grain-based whisky in India, whereas till then local whiskies were made from molasses. It was a premium product and we decided to play that up. And price is a good indicator of the quality,” says Mohit Lal, the then CFO.

On the production side, Seagram had just one bottling unit in Uttar Pradesh, from where bottles were trucked across the country. That pushed up logistics costs. Uberoi went about increasing the access to more bottling units across the country, and also set up distilleries.

These steps saw Seagram double its turnover and sales within three years. By 2001, it had wiped off the losses. And Uberoi’s progress immediately appeared on the radar of its most formidable rival in Bangalore.

On a High

French multinational Pernod Ricard had entered India in 1996, but waited another four years before it launched its first two products — Santiago rum and Tilsbury whisky. The two had a short life because within a year, in 2001, Pernod Ricard acquired Seagram globally. “It is to the credit of Pernod Ricard’s decentralised business model, that even after the acquisition, the company was called Seagram India till 2007. The focus remained to develop local brands as Pernod Ricard’s international brands had limited opportunity outside Duty Free and large hotels owing to absence of state policies and prohibitively high duty rates,” says Uberoi. In an unusual move, Uberoi was chosen to head the Indian business even though he belonged to the acquired company’s operations.

Before Uberoi could begin the second innings, there was a ‘surprise visitor’ in Vijay Mallya. The fact that talks again broke down with Mallya may have been a blessing in disguise. Over the next few years, Uberoi shifted gears to build on the foundations set in place three years before the Pernod Ricard acquisition.

The key was revving up the brands. “In the Indian alcohol industry, you either give an image per rupee or a kick per rupee. Before Pernod Ricard came in, it was mostly kick per rupee. They changed the rules of the game,” says Santosh Kanekar, an industry veteran turned consultant.

But it wasn’t without its challenges. Through the years, USL had built a strong relationship with distributors, first under Vittal Mallya and then under his son Vijay. Mallya leveraged this strength to build volumes, pushing distributors to drive stocks, giving discounts and sometimes asking distributors, who also had retail outlets, to push USL products in their shops.

Once it became clear that he wouldn’t be able to bring Pernod to the bargaining table, Mallya decided to go on the offensive. He asked his distributors to deal with only his products and drop all the Pernod Ricard brands. He also asked the retail outlet owners to stop selling the Pernod brands.

Simultaneously, Mallya flooded every bar and highway joint with Bagpiper and McDowell posters, glasses, ash trays and even table covers.

By then, Uberoi knew that they couldn’t match up to USL’s distribution strength. First, he carefully selected his distributors. He opted for the smaller players. “We didn’t have volumes initially and knew that the bigger distributors won’t push our products,” says a Pernod Ricard executive. So instead, Pernod salesmen, through the hand-picked distributors, focussed on not pushing volumes, but on ‘width’, or reaching maximum consumer points.

Moreover, as Kanekar says, “In India, due to advertising restrictions, you can’t show consumers how to use your product.” So, Uberoi’s team hosted tasting sessions in restaurants and clubs to introduce their products and sponsored musical events, including DJ nights. As awareness of the brands improved, volumes also picked up. Retail outlets, despite Mallya’s orders, started stocking PRI brands.

“Consumers wanted it and we didn’t want to lose consumers. Many a times, Pernod Ricard brands were kept under the shelf,” says a distributor in Mumbai who also owns retail outlets. So, even if all but one distributor dropped PRI brands on Mallya’s behest in 2005 in Mumbai, the popularity of Royal Stag and Blender’s Pride meant that Uberoi’s sales numbers were not affected.

With economic prosperity, Indian consumers had become image conscious and Uberoi wanted to leverage that. In 2005, Uberoi hiked the price of Imperial Blue by 25 percent. Volumes tanked by 30 percent within six months. “But within a year we regained lost ground and started growing — on a more profitable basis!” he says. It reaffirmed his belief that consumers were willing to pay the price, provided the product quality was high and consistent.

The pricing strategy was complemented by a high-stakes marketing campaign. Royal Stag’s ‘Have you made it large?’ campaign with Saif Ali Khan, who was roped in as ambassador in 2004, touched a chord with the soaring aspirations of the new generation; Blender’s Pride’s fashion tour, now on for seven years, was a sustained drive that was built around lifestyle. In 2004, Pernod Ricard crossed the five million case mark and doubled it by 2007.

On the other hand, campaigns by USL’s Signature, which competes with Blender’s Pride in the same segment, was somewhat diffused in its focus, as it dabbled with golf accessories, the derby and also roped in actor Abhay Deol as its brand ambassador. “What makes it for Blenders Pride is the consistency,” says alcoholindia, a popular blog on the Indian liquor industry.

And managing a large brand portfolio posed its own challenges. When Mallya acquired Shaw Wallace in 2005, Royal Challenge was the biggest brand in the premium segment. But he already had Signature in that segment. Now with two brands in the same segment, the focus got diluted. By 2010, Royal Challenge’s volumes increased to 1.1 million cases. But that of Signature moved up to 1.2 million cases. And Blender’s Pride continued to rule the roost at 2.3 million cases.

Uberoi knew he had an Achilles’ heel though. “Political influence was something that our competitors had in plenty. They were big companies and had contacts. We were a MNC. This was not our strength and we wanted to keep away from it,” says a senior executive at PRI.

That meant not bowing to political pressure in appointing a distributor or giving a contract to a bottler or a distiller — Uberoi would never allow himself to be browbeaten.

That also meant keeping out of those particular states and therefore lose out on volumes — Pernod took the hit, for instance, in Tamil Nadu and Kerala.

Mallya, on the other hand, prospered and mastered the art of managing the business environment. He knew it was necessary if his company had to grow in a highly regulated industry. He was already close to decision makers and that proximity went to the next level when he himself became a Member of Parliament in 2002.

However, Uberoi’s call proved right. In 2010, Pernod Ricard crossed the 20 million cases mark and the chairman now expects to double that in the next three years. “We will double our profits every two-and-a-half years,” says Uberoi. Today, India is the biggest contributor in volumes for Pernod Ricard globally and is its fifth largest profit centre.

The New Frontier

Over the next couple of years, both Pernod and USL are likely to look to expand the premium segment. “While we will continue to drive our existing products, we are also looking to bring in more international brands from the Pernod Ricard stable,” Uberoi says. Mohit Lal hints that international brands like Jameson Irish whisky would see more focus. And vodka, the favourite drink of yuppies, will be an area of focus. “We will create more segments in vodka as we did in whisky,” says Uberoi.

Mallya, too, is losing no time to jump into the premium end. He’s already unveiled a premium light beer in Heineken. And in spirits, USL is looking to leverage its Whyte and Mackay portfolio. Last year, it launched McDowells Platinum and followed it up this year with Signature Premier, crafted by the Whyte and Mackay master blender Richard Paterson.

But USL’s skills in selling premium products are still unproven. “For years, USL’s team has focussed on driving volumes. Margins or profitability have not been the main priorities. For this to change requires a shift in organisational DNA and the company is yet to show that,” says Kanekar. As Vora of IDFC Securities points out, Mallya might have missed a trick or two by ‘under-pricing’ McDowells Platinum despite the new brand’s success.

Just before he stepped down, Uberoi further decentralised operations. From six, today Pernod Ricard has 15 regions-cum-profit centres in India. That, he says, will help focus better on consumer needs, improve fiscal discipline and respond to challenges faster.

Why there is no Indian Steve Jobs ????

Why there is no Indian Steve Jobs ????

VIRTUALLY every Saturday, Ajai Chowdhry, chairman and CEO of HCL Infosystems and one of the six co-founders of India's oldest computer company, HCL, spends a few hours listening to wannabe entrepreneurs. He listens to their ideas, looks at their business models and considers their pitches. Every once in a while, if he comes across an idea that interests or excites him, he goes a step further. He, and a few other senior executives like him, then ensure that that particular wannabe entrepreneur can manage to make the transition to actual entrepreneur.

They help out with critical start-up funding. But much more than money, they offer what these entrepreneurs really need and what they cannot find in any business school or bank. They offer mentoring and advice and the wisdom learnt through their experience of having walked this path earlier, on their own.

History

It's hard work, and consumes a lot of what every busy chief executive like Chowdhry is most short of — time. But he, and the dozens of other successful businessmen who form the Indian Angel Network, know that this is the critical difference between a dream staying on paper and the dream turning into reality.

Ajai Chowdhry should know that better than most. In 1976, his colleague in the Delhi Cloth Mills ( DCM), Shiv Nadar, had talked him, and four other colleagues and friends, into quitting DCM and starting their own computer company. Hindustan Computers Limited, as it was then known, managed to ship its first home designed, home- built microcomputer in 1978. Around the same time that a Syrian-American college drop-out called Steve Jobs had shipped his first microcomputer — the Macintosh.

This was the predecessor of the PC. But IBM was to lay claim to that term, and make it its own, a full three years later, when it managed to roll out its first desktop PC. IBM, of course, took a different route to becoming the world's largest technology company. And Jobs took Apple on a different journey altogether, making it arguably the world's most inventive technology company, and eventually the world's most valuable one. Period.

But what of HCL? Just imagine. Thirty six years ago, all three companies were virtually at the same point in the industry's lifecycle. Apple and HCL, in fact, were so similar, they could have been twins. Jobs started Apple in a garage.

Nadar, Chowdhry and their friends started their company in a south Delhi ' barsati'. Apple took an off- the- shelf microprocessor and built a computer around it. And then developed the software to make it run. HCL took an off- the- shelf microprocessor and built a computer around it. And then wrote the software to make it run. At virtually the same time.

Nearly four decades later, the picture has changed dramatically. Today, HCL is admittedly a very successful company. It has revenues in excess of $ 6 billion and is among the top five players in the country in all the sectors that it operates in.

Difference

But look at Apple. Apple recorded net sales ( in 2010) of over $ 65 billion. In the stock market, at $ 350 billion, Apple is nearly a hundred times more valuable than HCL. It is not just the top player in its segments in the US — it is the top player in the world.

What happened? Why did HCL get left behind, while Apple managed to surge ahead unstoppably? What was the ' X' factor which powered Apple to such heights? Apple fans would unhesitatingly say: Steve Jobs. Yes, the man was a genius.

True, he had the uncanny ability to visualise not just what the consumer would want, but what the consumer would lust after, what the consumer would lose sleep over and what the consumer would be willing to queue up for hours and days in sun and rain to buy. There has never been an entrepreneur quite like him. Arguably, there never might be an entrepreneur quite like him again.

But if Apple and Jobs were in a special league, it does not mean that HCL was not something special too. It too was a powerhouse of invention. Not only did HCL develop a microcomputer at the same time as Apple or a desktop PC three years ahead of IBM. They continued to invent. HCL developed a working UNIX computer years ahead of Sun and its own relational database management system ( RDBMS) ahead of Oracle. In 1981, HCL's Shiv Nadar funded two college dorm- mates who started a fledgling information technology training company called NIIT. Nevertheless, there was one key element which was different, the reason why Apple and Sun and IBM and Oracle became the kind of global giants that they are and the reason why HCL's growth was stunted.

The difference was that HCL was an Indian company, working in Indian conditions.

The others were all American. And the ecosystem available to HCL and its American counterparts was incomparably different.

The very factor which helped create HCL may have helped to choke it, and companies like it. In 1977, George Fernandes' quirky nationalism drove IBM out of India, opening the doors for HCL. But over the next 13 years — the unlucky 13 perhaps — before reforms started, government regulations and the licence permit Raj ensured that HCL was left comprehensively behind. It could not make enough computers to meet demand, because it didn't have the licence to produce the extra number.

When it got the licence, it could not import the components needed, because foreign exchange was short and you needed a separate permit for precious foreign exchange. It could not move into other markets abroad because that was controlled too. And so on.

HCL can justifiably blame the lack of reforms for its lack of growth. But for hundreds of thousands of would- be inventors and entrepreneurs, there are still as many and equally insuperable hurdles, in their way. From a Kerala inventor reduced to sending emails to journalists about his heat exchanger which does the work of an AC at a hundredth the cost, to the son of a Gujarat potter whose ' rural fridge' wins him global awards and recognition, but no help in product ionising it, the lack of an ecosystem which encourages and supports innovation and enterprise is killing off the vision of thousands of Indian Steve Jobs before they can be turned to reality.

Lesson

That is the real lesson we can learn from looking at the life of Steve Jobs. Jobs was what he was because he was Steve Jobs — a genius. But Apple became Apple because it managed to find an environment where the company could convert its ideas into reality and reap adequate reward for its inventiveness.

What if Jobs had decided to stay on in India after his 1974 visit? What if he had started Apple in India, not the US? Could a college drop- out have managed to get the funding to start a company? Would anybody have taken the technology developed by a non- graduate seriously? The answer is obvious. It is not just enough to be inventive or even entrepreneurial.

Without a viable ecosystem which encourages new ideas, is genuinely open to competition and one which rewards intellectual innovation adequately, we would never be able to boast about our own Apples or our own Steves.

But two decades down the reforms road, we are still to learn that lesson.

Why Do So Many New Businesses Fail?

Why Do So Many New Businesses Fail?

New research by the U.S. Bureau of Labor Statistics shows that nearly six in ten businesses shut down within the first four years of operation. While not as calamitous as the 90% failure rate often repeated as fact, the BLS statistics are sobering for anyone tempted to invest their time and personal savings into launching a small business. To avoid becoming a statistic yourself, I have put together the top reasons so many new businesses fail.

1. Poor Execution 

When you're the boss, the only place you should point fingers is at the mirror.

As business ideas and opportunities, crisp execution—rather than a clever idea— is vital to the success of new businesses. It stands to reason, therefore, that poor execution is the downfall of most startups that go bust. There are several ways you can avoid execution failure. First, you should conduct an honest evaluation of your skills and only pursue opportunities that are aligned with your strengths. Entrepreneurs who are blinded by greed or arrogance are more prone to getting in over their heads. It's also wise to surround yourself with talented people who aren't afraid to speak up when you're headed off a cliff.

Companies with inept leadership usually fail in the first year or two, but even established companies can stumble badly when they outgrow the capabilities of the founding team. Bill Gates led Microsoft from inception to its current position as one of the largest and most successful companies in history, but this is seldom the case. As a founder, you need the discipline to know when to hand over the reigns to a professional manager who can take your business to the next level.

 2. No Viable Market 

What if we launched a business and nobody showed up?

Each day, entrepreneurs from the "build it and they will come" school of business invest their money in a cool idea with the hopes that customers will magically appear once they open the doors. All too frequently, these hopes turn out to be in vain. History is replete with ventures that crashed and burned because the founders spent all of their time and money developing a product without bothering to consider how to attract customers. Even worse, many did not really understand what customers valued and were willing to pay for. (Remember the "dot bomb" era of the not-so-distant past?)

It's imperative to research and validate the market before you launch your business. Talk to prospective customers and find out what they really need. Chances are, you will end up with a much more compelling offering than what you initially dreamed up on your own. Remember, find the customers first, then look for a solution.

 3. Too Much Leverage 

Give me a lever long enough and I will bankrupt my company.

Mature companies can predict revenues over the next few quarters with some degree of certainty. These businesses can make prudent use of leverage, both financial (debt) and operating (fixed overhead costs) to improve equity returns.

Revenues projections for early-stage companies, on the other hand, can be all over the map. In this environment, it can be dangerous to take on more than a modest amount of debt or other fixed obligations (rent, salaries, etc.). With little margin for error, if revenues take longer to ramp up than expected—as they nearly always do—you may find yourself handing the keys of your business over to your creditors.

It's best to keep most costs variable at first and use equity capital to finance your startup until your company has been around a while and you develop some confidence in your ability to forecast sales. Delay making investments or taking on fixed obligations until you have a critical mass of customers. You'll know when it's time to rent a larger office space or hire that second shift when you've got a backlog of orders on the books.

4. Undercapitalizing the Business 

Maybe you should've waited to order that red Ferrari after all...

It's all too common for entrepreneurs to grossly underestimate the amount of time and capital necessary to reach cash flow breakeven, causing many promising ventures to shut down prematurely. Be conservative with your financial projections and plan on having adquate funds when you launch to cover all sunk costs (including startup losses) until your company becomes cash flow positive.

If you don't have enough savings to cover the required investment, it may be tempting to launch your startup under the assumption that you will be able to obtain funding at a later date. Whle staging investment has its advantages (preserving the option to abandon, higher valuation and—therefore—less dilution, etc.), this strategy can backfire and leave you unable to get the money when you need it most or force you to negotiate with banks and investors from a position of weakness. It's often better to change the business model to bring required investment in line with available resources.

5. Lack of Competitive Advantages 

Never bring a knife to a gunfight!

Does your town really need another dry cleaner, pizzeria, or lawn care service? Entrepreneurs frequently start these me-too kind of businesses because of their simplicity and modest capital requirements. However, the lack of competitive barriers render them extremely vulnerable to new entrants, who will gladly cut prices to the bone to steal customers.

If you want your startup to thrive, you need something that insulates it from competition. It could be a great location, a cool brand, proprietary technology, or a cost structure that cannot be easily replicated. None of these advantages is likely to be permanent, but they only need to shield you long enough for your company to take root. This will give you time to make investments that create additional barriers.

6. Competing Head-to-Head with Industry Leaders 

Better sharpen those elbows...

A sure sign of impending failure is an entrepreneur who plans to bootstrap his new business while competing directly against entrenched market leaders. Large businesses have enormous resources to deter competitors from entering their markets. Big companies can undercut your prices, outspend you on advertising, and choke off access to suppliers and distributors. I strongly advise against making a frontal assault unless you have a world-class team and very deep pockets. Even then, your chances of success are likely to be disappointing.

7. Picking a Niche That is too Small 

Don't be a market of one!

Most small businesses compete successfully against larger rivals by specializing in a niche market. However, you still need to do your homework to be sure that the niche is large enough to support your business and that customers are not too expensive to find and serve. You may discover that niche markets can be just as fiercely competitive as the mass market. You need to figure out how fast your niche is growing and how much market share you will need to capture.

If your financial projections require you to hold more than a few percent of market share to remain profitable, be careful. Don't press ahead unless you can convincingly demonstrate to yourself how your competitive advantages will enable you to become the market leader.

8. Breakup of the Founding Team 

Breaking up is hard on you -- and your company.

A startup can be a high-stress environment, especially when you are struggling to turn the corner before the lights go out. At moments like this, disagreements about the direction of the company or the division of profits among the owners can lead to a rift within the founding team. Because people wear lots of hats in startups, the sudden departure of a key executive can doom a fledgling organization. This makes it imperative to structure agreements so that the founders and key hires are treated fairly and that everyone's interests are closely aligned with the success of the new venture.

9. Poor Pricing Strategy 

The price is right?

The most common method for setting prices is to start at the unit cost and then mark up the price to achieve a profit, so-called "cost-plus" pricing. Unfortunately, cost has little to do with how a product or service is valued by customers, which can lead to systematic underpricing. For example, if a widget costs $20 to manufacture, and you sell it to a customer for $25 when that customer would gladly have paid $35, you have left $10 worth of value on the table.

Even worse, cost-based pricing can lead to prices that are greater than what the market will bear. Because unit cost is related to sales volume (see CVP Analysis for more info), high prices lead to fewer sales, which in turn increases unit cost, leading to a further round of price increases.

As Thomas Nagle and John Hogan point out in The Strategy and Tactics of Pricing, failing to account for the effect of price on sales volume—and hence costs—has led to numerous business failures over the years once they enter a "death spiral" of price increases to allocate fixed costs across a smaller volume of sales. You should instead let anticipated prices, based on the product's perceived value to customers, determine the cost structure, not the other way around. Consequently, pricing strategy and customer value should be addressed in the earliest stages of planning a new business.

10. Growing too Fast 

What goes up...comes down...

Growth is considered as an indication of business success, but uncontrolled growth can—and does—kill entrepreneurial companies for two primary reasons. The first is that businesses need systems and infrastructure to scale properly, but few invest the time and effort to lay the foundations for growth in those first hectic years. That's too bad, because things tend to spin out of control when you put the pedal down. This can be especially problematic for companies that receive a large infusion of outside capital. It's the equivalent of trying to break the land speed record by strapping a jet engine onto a soap box racer. Don't be surprised when the wheels come off...

The second reason is that top-line growth requires additional investments in fixed assets (warehouses, machinery, trucks, etc.) and working capital (inventory, accounts receivable, etc.). At controlled rates of growth, companies are able to finance incremental sales through internal cash flow. Hypergrowth, on the other hand, can suck up large amounts of cash, forcing businesses deep into debt or bringing the whole enterprise to a screeching halt. Many times, owners are not even aware of the impending collapse, because they focus on profitability (as depicted on the income statement) rather than cash flow. Never forget that cash is the lifeblood of your business!