RED HERRING PROSPECTUS Dated August 24 ... - Globus Spirits

Ethanol as a Fuel
Ethanol is used as an automotive fuel by itself and can be mixed with gasoline to form what has
been called "gasohol" FUEL ETHANOL- the most common blends contain 10% ethanol and 85%
ethanol mixed with gasoline. Over 1 billion gallons of ethanol are blended with gasoline every
year in the United States. Because the ethanol molecule contains oxygen, it allows the engine to
more completely combust the fuel, resulting in fewer emissions. Since ethanol is produced from
plants that harness the power of the sun, ethanol is also considered a renewable fuel. Therefore,
ethanol has many advantages as an automotive fuel. (Source: www.ethanolindia.net)
A major contribution to the improving prospects for the Brazilian alcohol industry has been made
by flex fuel cars. These cars which are able to run on any mixture of hydrous and anhydrous
alcohol as well as gasoline have proved to be enormously popular. Introduced in March, 2003,
sales in the first 13 months (March/March) have risen to almost 95,000 units, which compares
with 37,000 units for ethanol-only powered vehicles sold in the same period. Forecasts for the
future development of sales are similarly optimistic. The Association of Car Manufacturers in
Brazil – Anfavea – expects to see the market share of flex fuel vehicles rising to 23% by 2008.
Meanwhile, all the country’s major car manufacturers have flex fuel engines in their ranges. As a
result, the Association of Sugar Cane Growers in the state of Sao Paulo – Unica – anticipates
total fuel alcohol consumption in Brazil rising to almost 17 billion litres by 2010 from the current
11.5 billion litres. (Source: All India Distillers’ Association, July 2004, Volume IV, Issue 7)
Risks and concerns/opportunities and threats
In India, excise duty on alcohol is a State levy, not a Central levy and each State has its own
control measures to determine the excise duty structure and also the distribution system of
potable liquor. Moreover, inter-state sales of IMFL attract export duty in the state of
manufacture and import duty in the state of sale. This results in high prices at the consumer
level and acts as a big trade barrier. Therefore, for all practical purposes, a Company has to
have a manufacturing set up of its own or a bottling tie-up in a State to sell in that particular
State in order to maintain economic and commercial viability.
State level levies prevent economies of scale, increase costs and inefficiencies, hamper growth
and reduce government collections. Steps have been undertaken to introduce uniform excise
duty across the States and revenue sharing agreement for all Inter-State sales. When these
regulations are put in place, they will provide a stimulus for the growth of the liquor industry in
India.
The liquor industry is suffering from over-taxation and over-regulation, which has impeded the
profitability even in the face of continuing growth in demand for liquor products. Further
widening the scope of service tax and increase in the rate of service tax has had a direct impact
by way of increased expenditure on the Company.
Distribution of IMFL is also regulated in some states either through auctions or through
government procurement agencies (as in Tamil Nadu and Andhra Pradesh etc.) These
regulations create monopolistic environment, stifle entrepreneurship spirit and hamper growth.
The present distribution system is affecting the revenue collections of the states, and the state
governments are increasingly looking to liberalize the distribution system. Uttar Pradesh is a
good case in point where the excise revenues witnessed a substantial jump once the distribution
system was de-regulated in financial year 2001-02. Stagnating excise revenues (from liquor) are
also forcing state governments to re-look at archaic systems.
Recently, Madhya Pradesh and Rajasthan Governments had also de-regulated the IMFL
distribution system to improve its revenue collections.
The industry is also constrained to cope with a ban on advertising of products. Advertising, the
most effective tool for building brands and communication about products has been denied to
the liquor industry.
Keeping with its commitment with WTO, The Government of India has been consistently
reducing the import duty on foreign liquor and spirits, although some measures of protection
have been granted by the imposition of countervailing duties. Lowering of duties has facilitated
the entry of large liquor MNCs in India and the domestic brands are beginning to loose
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