TWO WORDS. UTTAR PRADESH (U.P.). They’re enough to break Abhishek Khaitan into a smile. A new excise policy has made India’s largest and most populous state the backdrop to a happy new business reality for the managing director of Radico Khaitan Ltd (Radico), the maker of Magic Moments vodka. The new rules have been a win-win for the private sector and for the government. They include an open bidding process for dealers and retailers in a bid to weed out smuggling syndicates; streamlining of the wholesale trade by striking down special excise zone rules that benefitted certain wholesalers; and in January this year, allowing hotels to serve liquor till 4 a.m. from the earlier deadline of 12 a.m.

This has boosted revenue collection from the sale of alcohol in U.P., slated to touch ₹30,000 crore by March this year, according to trade analysts. It had already gone up by 71% to ₹24,000 crore in FY19 from ₹14,000 crore in FY17. For businesses like Radico, the upside is simple: The policy has weeded out oligarchs from controlling the liquor trade. That means higher spirits in U.P., always a positive market for alcobev (alcoholic beverage) players in India. Radico, which holds 56% of the vodka market in the country, has taken full advantage of these changes. “Amongst all the states today, U.P. is seen as more reformist as far as alcohol laws are concerned. It has actually allowed branded players to increase their presence out there,” says Sanjay Jain, a financial adviser to the Indian spirits industry.

“This was a home run for Radico and they didn’t let go of their advantage.” A home run also because Radico has its largest distillery in Rampur, U.P., which can produce over 100 million litres of spirit per annum. Not surprisingly, its gross sales surged from ₹4,867.96 crore in FY17 to ₹8,058 crore in FY19; also, the company reported a 16% revenue and 52.3% profit growth in FY19 over the previous year, placing it on the top spot of the Fortune India Next 500 list. Last year, the company ranked 28 on the list.

“U.P. is our largest domestic market where we have 30% share of the IMFL (Indian-made foreign liquor or branded spirits) market. We make a significant contribution to the state’s revenues to the tune of ₹5,000 crore in the form of duties and taxes,” an upbeat Khaitan, 46, tells Fortune India at his Mathura Road office in New Delhi.

The 17%-18% sales upswing in U.P. continued into the third quarter of FY20; add to this, states such as Uttaranchal, Maharashtra, Telangana, Andhra Pradesh, and Assam delivered double digit growth, too. “Radico posted an impressive performance (in Q3FY20), with overall volumes growing 14% to 6.5 million cases (of 9 litres each) against the industry’s growth of just 1.5%. Radico’s performance has been strong, indicating market share gains and scale-up of new launches,” a research report by brokerage firm Emkay Global said. (Radico also has a significant presence in the country liquor segment in U.P.)

Magic Moments accounts for 32% of the company’s revenue while 8PM whisky, Old Admiral brandy, and Contessa Rum are millionaire brands, defined as those selling over a million cases annually. Radico is recognised for having organically grown these brands, in the process transforming itself from a supplier of bulk spirits to a branded spirits manufacturer. “What differentiates Radico is that it is one of the very few companies that has built brands from bottom up,” Jain points out.

IT HELPS THAT KHAITAN was “infatuated” with the family business from an early age. “From class 9 onwards, I was very clear that I wanted to be in the liquor trade,” says Khaitan, who joined the company in 1995-96, after an engineering degree in industrial production from BMS College of Engineering, Bengaluru. “[Then] our market capitalisation was about ₹5 crore. Today, it’s over ₹5,000 crore,” he says. Of course, he wouldn’t have been in this trade had his father, Lalit Khaitan, not bought Rampur Distillery and Chemical Company in 1973 with the main motive of “getting out of Calcutta [now Kolkata]”.

A teetotaller at the time, he belonged to a traditional Marwari family (whose businesses included a general store, restaurant, and a steel-furniture manufacturing unit, among others). He had no idea of the distillery business when he put in `16 lakh to acquire the company from Sanjay Dalmia, chairman of the Dalmia Group of Companies.

It was a purely commodity business then, supplying extra neutral alcohol—the primary raw material in making various spirits—to branded players. Contessa Rum was the sole brand, which was sold to the armed forces; it also made country liquor. Lalit Khaitan added a bottling business too and became a leading third-party bottler to top spirit makers of the time, such as Shaw Wallace.

But by 1994-95, the commodity play in the spirits business had run its course. Lalit Khaitan had his back to the wall. The company had losses of around ₹10 crore and loan repayments of ₹35 crore. Besides, the contract with Shaw Wallace had ended and there was a dire need for newer tie-ups. “I remember both Lalit Khaitan and Abhishek met me when the Shaw Wallace contract was withdrawn. They were keen to see if McDowell [now known as United Spirits Ltd] would be interested, but we could not come to their assistance,” recalls Vijay Rekhi, the former managing director and president of United Spirits. Khaitan believes that was because Vijay Mallya, the owner of McDowell, wanted a stake in the company, which they weren’t keen on giving.

The choice was simple, he says. “Either go bankrupt or create our own brands. That is when I took the call to start our own brand,” recalls the younger Khaitan, just 23 at the time but riding on the confidence of topping his university. Hundred freshers were hired, plans were drawn out, and the mothership was given a modern name, Radico Khaitan. And, on August 8, 1998, 8PM whisky, a mass-market brand catering to the largest spirits segment in India, was launched. (Even today, whisky constitutes 60% of the spirits industry here.)

“They ran a very innovative TV commercial for 8PM [showing that India and Pakistan’s army generals shared a drink at 8 pm] that caught the imagination of consumers. As they say in Hindi, it was a hatke [off-the-beaten-path] campaign,” says Rekhi, who now runs his own advisory firm Vizanar Alcobev & FMCG Advisors. 8PM went on to became a millionaire brand within the first year of its launch. Last year, it ranked 11th in the IWSR Drinks Market Analysis Global Database of the top 100 fastest growing spirit brands in the world. Buoyed by the success of 8PM, Khaitan rolled out other mass market brands, including Old Admiral brandy. “From 1998 to 2006, from a base of zero, we went on to sell 10 million cases (of 9 litres each) of alcohol per annum,” says Khaitan. However, he needed to do more as competition—in this case, United Spirits—had set its sights on sales of 100 million cases per annum. Moreover, as Rekhi points out, 8PM had started to plateau.

ON A HUNCH, Khaitan decided to enter the vodka market. It had an insignificant presence in India then and, even today, its share is about 3% of the country’s overall spirits industry. But he was convinced vodka would work. “I invested a lot of money into the printing and packaging of Magic Moments,” says Khaitan. He was proved right: Launched in 2006, Magic Moments ranked No. 7 in IWSR’s list of the fastest growing global spirit brands.

A slew of premium and super premium brands followed, including Morpheus brandy, After Dark whisky, 1965—Spirit of Victory rum, 8PM Premium Black whisky, Jaisalmer, a luxury craft gin, and Rampur, an Indian single malt whisky. “Four months back, we launched a limited edition of Rampur priced at ₹1 lakh a bottle,” says Khaitan. The 450 bottles produced have sold out, he claims. Besides, the company now exports its brands to 70 countries. In FY19, it sold 21.61 million cases (of 9 litres each) of alcohol. United Spirits reported sales of 81.6 million cases in the same period. This makes Jain call Radico one of “the most consistently performing, family-managed Indian alcobev companies”. Over the last five years, Khaitan has also focussed on lowering the company’s debt level, which currently stands at about ₹300 crore, down from ₹980 crore in 2015.

Higher profit margins from premium products, exiting from unprofitable markets, and more incentives to its sales force has helped improve bottom line as well as repay debt. The target is to make Radico a zerodebt company in the next two years while Khaitan’s passion continues to be creating and building alcobev brands. There are three whiskies in the pipeline, for instance. This is made easier by the fact that unlike earlier, he says, when “the creation of brands was a pressure, today it’s a pleasure.”

The story was originally published in the March 15-June 14 special edition of the magazine.

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