By Saabira Chaudhuri 

BANGALORE, India--United Spirits Ltd., India's largest spirits maker, two years ago promised BN Raghuveer some new signage to spruce up the front of his liquor store.

His shop, Cyber Wines, never got its face-lift. The sales executive who had made the promise had left the company, and there was no record of the agreement to be found, Mr. Raghuveer said.

That kind of disappointment, he recalled, was typical before Diageo PLC acquired a majority stake in United Spirits. Now, he said, the Indian company pays him faster and orders and agreements are documented.

Cleaning up relationships with retailers is one of the ways Diageo, the world's biggest spirits company, hopes to outflank competitors such as Pernod Ricard SA. India's expanding middle class, young population and love of hard liquor increases its appeal to global distillers, despite a patchwork of regulations that make the world's largest whiskey market by volume also one of the toughest places to sell alcohol.

Over the past decade, Diageo made a handful of faltering attempts to enter the Indian whiskey market. Then, in 2013 and 2014, it amassed a 54.78% stake in United Spirits, whose distribution network reaches 81,000 outlets across India.

Diageo's timing isn't great. Growth in domestic Indian spirits is slowing, with whiskey volume growth dropping to 4% in 2014 from 13% in 2010, according to Euromonitor. Still, executives see an opportunity to move existing drinkers into more expensive potables while gaining new customers as rising wealth helps fuel changing attitudes toward alcohol.

The British company hopes to boost profits in the market for Indian spirits, while increasingly pushing global brands such as Smirnoff and Johnnie Walker through United Spirits' reach.

"India will be a real difference maker in the shape of Diageo over the next decade," said Chief Executive Ivan Menezes last month after the company reported its fiscal half-year net sales in India rose 6%. Diageo in 2013 named Anand Kripalu--a veteran of Unilever PLC and Mondelez International Inc.--as CEO of United Spirits, charged with turning India into a profit engine. That won't be easy.

Industry players say United Spirits was mismanaged in its pre-Diageo years under Chairman Vijay Mallya, who inherited the leadership of the company. Mr. Mallya is credited with expanding United Spirits to a company that sold 120 million cases of liquor, at the time of its sale to Diageo, from three million cases.

The company's net worth plummeted 84% in the four years ended March 2015. Contributing to the decline were 9.95 billion rupees ($146 million) in provisions on loans improperly made by United Spirits to some of Mr. Mallya's United Breweries Holdings Ltd. entities, according to a PricewaterhouseCoopers investigation asked for by United Spirits' board. Mr. Mallya disputes the findings.

"There are no allegations against me," he said. "In no communication to any regulatory authority has USL assigned responsibility, or found anybody culpable."

For more than a year after Diageo bought control of United Spirits, "nothing happened--it was a complete mess financially and they were just trying to understand the company," said Edelweiss analyst Abneesh Roy.

The Bangalore-based company's board has demanded Mr. Mallya resign as chairman. He has refused.

Diageo, which is contractually bound to support Mr. Mallya as chairman, has said it is considering its options and declined to comment further on the relationship. Mr. Mallya said in an interview last week that he is engaged in talks with Diageo and would be willing to make a "clean break" from the company for an appropriate settlement.

The distractions with United Spirits' chairman aside, the 57-year-old Mr. Kripalu is trying to engineer a fundamental strategy shift in the company's business model: moving United Spirits' focus to profit from volume. India makes up roughly 40% of Diageo's volumes but contributes just 1% to operating profit.

United Spirits' margins are a fraction of those of Pernod, which bought Seagram Co.'s India assets in 2001 and since has operated only in the premium end of the market.

"The core element of our strategy is winning in prestige-and-above whiskey," Mr. Menezes said. "That is the main battleground, the real profit pool, where historically USL has underperformed its key competitor."

Confronted with a 150-brand portfolio, Mr. Kripalu is focusing on 15 brands with the biggest promise of profit. He said United Spirits will consider what to do with the rest.

Unlike Pernod, United Spirits will continue to sell across different price points, but the company has exited states such as Tamil Nadu, where unfriendly regulations made it hard to turn a profit.

Following changes to packaging and marketing, along with some price cuts, the market share of United Spirits' Royal Challenge whiskey has jumped to 45% from 10% in some states, according to Edelweiss. Overall, however, United Spirits' market share dropped to 39% in 2014 from 42.7% in 2010, according to Euromonitor.

Pernod's share climbed to 11.2% from 8.1% over the same period. The French company logged revenue growth of more than 18% in India last year.

Pernod expects India to overtake China soon as its second-largest market. "We have the flexibility to raise investment significantly if we want to," said Sumeet Lamba, Pernod's executive director of business development in India.

With an eye to bridging the profit gap with Pernod, Mr. Kripalu is working to strip out cost. United Spirits now sells a range of its low-end spirits in uniform bottles made with less glass, or in single-serving paper boxes. Some of these measures are starting to bear fruit. In November, United Spirits said its fiscal first-half margin on earnings before interest, tax, depreciation and amortization was 12.52%, up from 9.77% a year earlier.

Mr. Kripalu's biggest challenge, he said, remains navigating India's regulatory system. Imported spirits are taxed a minimum of 150%, and each of the 29 states separately regulates domestic liquor manufacturing, pricing and distribution. Some ban alcohol entirely, while others curtail its distribution.

Long-term, Diageo is banking on changing attitudes toward alcohol to lift sales and ease the regulatory burden.

"In the past, there was a fine line between having one drink and being called a drunkard," said Mr. Kripalu. "In traditional functions such as weddings you would never have alcohol being served, but today in the most conservative weddings there is a cocktail party.

Write to Saabira Chaudhuri at saabira.chaudhuri@wsj.com

(END) Dow Jones Newswires

February 11, 2016 21:00 ET (02:00 GMT)