United Spirits Limited analyst Q&A

Thank you very much. We will now begin the question-and-answer session. Anyone who wishes to ask a question may press star and one on the touch -tone telephone. If you wish to remove yourself from the question queue, you may press star and two. Participants are requested to use handset while asking a question. Ladies and gentlemen, we will wait for a moment while the question queue assembles. The first question is from the line of Jay Doshi from Kotak. Please go ahead.

Hi team, thanks for the opportunity. My first question is, we understand your base effect for first half and second half and hence and hence optically, you have anyway always guided higher growth in the second half this year. But sequentially during the course of this year, especially in second quarter, have you seen any change in the demand environment for your category if you -- and excluding the new opportunities like Andhra Pradesh or tailwinds that you have, underlying bas is, have you seen any change at all in the demand environment or it's broadly in line with your expectations, last 3, 4 months?

I would say – hi Jay. I think, look, we were saying that the growth has moderated, right, in the category for the last 3 to 4 quarters, as is evidenced from the results of all the major players. However, the 1 thing I did say for the last few quarters was that the premiumizatio n ladder remains intact, right? So the upper end was growing faster than the lower end. This is the first quarter where the top end is lagging the middle bulk end in terms of performance. And this is also evidenced in our muted price mix during the quarter, right? But considering the overall macros around luxury consumption in India across multiple categories. As of now, we believe this is a temporary blip and not structural, and we also believe that on rolling the 4 -quarter basis, the top end will continue to outpe rform the overall category growth. Apart from that, I would say that's not a significant change anywhere else.

Thank you so much. And the second question is somewhat related. So you did mention in the opening remarks that first half growth was a couple of percent points lower than what you would have liked to be. But you still maintain your guidance of double-digit growth for P&A at a full year level, which means that you're targeting or you're confident of delivering 15% growth in second half. So the difference is you miss in the first half, but you're still confident of full year level. Does it mean that you're probably -- the tailwinds that you have from Andhra Pradesh more than offset the shortfall of first half as well as perhaps some demand -- softness in demand. So is this the right way to do it? And what is the level of confidence you have at this point of time based on the visibility you have on delivering that 15% growth in the second half?

I would say, Jay, that we are -- we should be able to get to the double-digit growth on the P&A portfolio if the October -November-December season shapes out well. There are a couple of reasons. You mentioned Andhra. Definitely Andhra will help. And the second thing is we really have firepower in our commercial plans to recoup the deficit. We are firmly focused on the season and beyond -- and the execution of the commercial plans. We have put out quite a few innovations and renovations I just spoke of them in my opening. And these -- we are focusing on scaling up these over the subsequent quarters. So at this point, we believe that if the festive season goes well, October, November, December, we should be able to continue to deliver the double-digit growth on the P&A portfolio.

One final one, if you can offer some colour on the progress in Karnataka post reduction in prices for Prestige and above?

Thanks, Jay. It's early days in Karnataka. We definitely welcome the policy change, and we definitely welcome the drop, which actually helps us overcome the losses that happened in July '23 when we had a negative impact on the policy. I mean it's early days. The prices in Karnataka in general and firstly P&A, right? So P&A is a very small component of the market in Karnataka, very, very small. And despite the decrease in prices for the portfolio, the prices are still higher than many key markets around India. So we do expect some uplift, but given the scale of P&A in Karnataka, I don't think it will be a significant impact on our overall portfolio, right?

Thank you.

Thanks, Jay.

Thanks Jay.

Thank you. The next question is from the line of Abneesh Roy from Nuvama. Please go ahead.

Yes, thanks. My first question is on Andhra market. So in India, dry states are there. But for example, in Bihar, last week, 1 petrol tanker was caught full of liquor bottles, so my question is on Andhra market, how much is the real opportunity from a 1 to 2 years perspective? I'm not asking next quarter, even the Q4 or Q1 because things in liquor, when they co me back, it takes some time? Second is, do you have all the clarifications in terms of policy, which are needed already, is it there? And when you compare Andhra liquor policy to a adjoining very, very similar state like Telangana, what are the gaps, what are the positives, if you could elaborate on all this?

PJ, do you want to take that?

Yes. So Hina, let me start. So Abneesh, so look, as we have mentioned earlier, Andhra when we exited in 2019/'20, right, it was roughly about 4% to 4.5% of our national P&A salience. And I will reemphasize what I said -- what Hina and I said last quarter as well. Over a period of time, I would say probably 18 to 24 months. If all stays well, Andhra should reach about 4% to 4.5% of our national P&A salience, right? So that's broadly the number at least in my mind, right? Now having said that, right, the sales team is executing with its full vigour, and we'll have to see quarter-on-quarter where we reach, right? So that's one. On your second question on the policy, yes, I think the new policy is fully in. And all our labels and brands are registered. And as of now, we don't see any concerns. In fact, you called out the right state. It is very, very -- the policy is pretty much a mirror image of the Telangana policy. And therefore, we look forward to kind of executing as we speak.

Sure. But Telangana is a low -margin business also, right, in terms of the state mix. Is it a low - margin business?

So Abneesh, in Telangana, you have to appreciate in the last 5 years, we've got 3 price increases, right? So I think that tends to change a little bit as we get 1 or 2 price increases you get, right, that itself will tend to change. I won't say Telangana is in the highest bracket, but neither is it in the lowest bracket now. It's somewhere in the middle. It's somewhere in the line of the portfolio margin and that's where Andhra comes in now.

Sure, my second question is on the broader engagement with the regulators. So now what we are seeing is competitive politics. So for example, Maharashtra currently has this Ladli Behna Yojana, almost INR1 lakh crore kind of a budget outlay. Similarly Karnataka, INR52,000 crores Congress promised in terms of 5 Promise. So how worried are you on this freebie culture because the next 4 years, the coalition government at centre clearly will continue. And all parties are now competing with each other in terms of how many freebies each can gain. Now in Karnataka, I do think that in the top end, there is a reduction in the taxes which is a good news. So when you engage with the government and regulators and when you see all these promises being made and new state governments every few months, how w orried or how positive are you on tax implications?

Abneesh, I would say we do not comment on politics, and we do not even bring these topics in our advocacy. Our advocacy is absolutely focused on pricing, which is an ongoing discussion, right, ease of doing business and tax harmonization. And we know that given our contribution to the state revenue, we are going to remain important to the state and that we also want to build win -win with the government. So I would say at this stage, we are not looking at this, we are just unequivocally focused on growth for our portfolio. And, unequivocally focused on our advocacy agenda of ease of doing business and pricing.

Sure. Last quick question on the slowdown Every company is highlighting that. You have also seen a slowdown and you have been very proactive in terms of saying that in Q1. My question is in Q2, is the on store -- so on-premise consumption, slower than your overall numbers because the travel and rains all these would have impacted. Second is when you see the top 10 metro cities or top 8 metro cities versus rest of India, would rest of India would have grown faster than our top 8 metro cities?

I mean, overall, yes, the environment has been muted. And certainly, the rains and flooding have played a role. I mean they all will do on trade, right? So certainly, that has an impact on the quarter. I mean, in general, we have seen that the towns outside the metros have for the last few quarters, right, been faster growing and the aspiration levels are higher there. So I think that overall trend continues, Abneesh. The metros are slower. The boom towns have -- we call them the boom towns as do most of FMCG. They have been growing faster than I think on a relative basis, I would say that trend would continue.

Sure. Thanks, that’s all from my side.

Thanks.

Thank you. The next question is from the line of Percy Panthaki from IIFL Securities. Please go ahead.

Hi Percy.

Hi. Pradeep, just wanted to understand on margins, how should we look at it, because despite such a relatively weak top line and operating deleverage on account of the top line declining, we have posted a very good margin close to about 18%. So if basically, we are going to do a double- digit top line in the second half, is it possible that the margins will go closer to 20%? That is part 1 of the question. And part 2 of the question is that if we look at ahead from FY '25 -- let's say, if we look at FY '26, '27, et cetera, on whatever base we have made for FY '25, should we still be taking further margin expansion? Or you feel that the margin expansion has been front-ended and after FY '25, we should see very minimal kind of expansion?

Okay. So Hina, let me take that, and then we can probably build on that. So first part of your question, Percy, look, if you look at the last 3 years, I would say, right, post COVID, right? It's a kind of new normal. I would say the A&P reinvestment rates between the first 6 months and the second 6 months of the fiscal are dramatically different, right? Because -- and that's in line with the business sales seasonality, right? I mean if I'm not wrong, the delta A&P reinvestment rate between the 2 halves is somewhere between 3 and 4 percentage points, right? So you normalize for that, I think we are back, Percy, to our full year margin expansion in that broad range of, I would sa y, anything between 70, 80 to 100 basis points, right? And that we have always maintained that as a forward -looking organization. Over the next 2 to 3 years, we do want to reach a sustained high teens, right, which is what our guidance has been for the last 5 to 7 years, right? So that remains very much our objective. And that's a perfect segway for me to respond to your second question as well. You're right that once we reach, let's say, that sustained high-teen kind of a margin, probably the margin expansion will moderate significantly. Though we may still want to target a little bit of expansi on year-on-year, but it's going to significantly moderate, right? So that's where I'll probably leave it.

And I would just add, PJ, to that, that as we go along, I mean, I have mentioned this quite often that we want to invest more in our brand and we will continue to invest in growth, in innovation, renovation as these sort of multiply. So Percy, we would want to invest more behind our brands and, therefore, balance between the margin and investments, right? So hopefully, that answers your question.

Got it. Very helpful. Just 1 more question on the other expenses part. So in the first half, we have seen a Y-o-Y decline in the other expenses of maybe around 5% or so, that also ties in with some of the cost efficiency initiatives that you have been talking about. So if you can explain this line item? And what is the story behind it as to how you are seeing savings on this? And where you are in that journey of savings? Do we see most of it sort of fructify this year or do you have a sort of horizon of the next 2 to 3 years where some more initiatives would also come through?

So Percy, 2 parts again, right? But let me take the broader point first, right? I think in the May annual investor communication, we had shared a status of our multiyear supply agility program. If I remember, we had said that 40% of our benefits had already been incorporated into the P&L up till March of '24, right? And the full benefit of the program will come only by March 27, if I'm not wrong, right? So you're absolutely right that journey continues. And obviously, some add-on initiatives would have come, right, as part of that program, right? Now to the first part of your question, we are lapping a slightly higher base of other expenses in the prior year same quarter, right? Now that has not impacted us in the current year. Let me say, right, that was a bit of an inefficiency in the last year first quarter, we made the necessary process interventions. And we have kind of eliminated that cost, right? So that has also given us a benefit in this quarter, and that will probably stay that way.

Right. And lastly, just 1 data point, if you can give me at the overall industry level, what is Andhra Pradesh sales as a percentage of India?

I said that, it's about 4.5%, when we exited. And our share in that market was exactly in line with our national share. So it kind of would also mirror the industry.

And do you think you can ramp that up like very quickly in a couple of quarters? Or do you think that's more of a...

Percy, our sense is that, look, our brands have not been there for the last 5 years. So it'll take a little bit of time, right? So we believe that we should be able to be reach -- Andhra should be able to reach that 4.5% salience, hopefully over the next 18 to 2 4 months. I don't know Hina what you feel about that, but that's broadly my sense.

I mean our aspiration would be to do it as fast as possible, but the reality is that, yes, we have to bring back the equity of the brand. They've been out for a while. So I would agree PJ that -- I would imagine 18 to 24 months is the right frame, if it comes faster, damn good.

Thanks Hina and Pradeep. Very helpful. Thanks for your answers.

Thank you.

Thank you.

Thank you. The next question is from the line of Krishnan Sambamoorthy from Nirmal Bang Institutional Equities. Please go ahead.

Hi, Pradeep. Pradeep, you mentioned that you were a couple of percentage basis points off in terms of your targeted growth. How much of this impact came through the route -to-market change in the northern state that you have highlighted? Could you quantify that? And als o how significant is it as a proportion of the national volumes? And would this also impact the third quarter numbers?

Okay. Hina, you want me to take that? Or you...

Yes. Okay. So I think it's important for me to again reemphasize what Hina and I had communicated last quarter, which is that '24/'25 fiscal will actually be a story of 2 halves, and our second half growth will be much higher than first half, right? With that said, and that having been understood by our stakeholders, I would say that almost a lion's portion of what we are saying as a couple of percentage points behind is on account of the disruption, right? I hope kind of that answers your question.

That does and also will this -- sorry.

If it will continue into the quarter, so I would say all the disruptions barring 1 are now resolved. So there is a disruption in 1 of the northern states, which is continuing, and that could impact the quarter, but the others have now been resolved. So we expect that this will not impact Q3.

Okay. My second question is on realization per case, which has been healthy. It's usually this kind of realization per case is usually seen in the third quarter. And you also indicated that there has been lower BIO sales. So is this state mix, which is lea ding to better realization per case as well as overall profitability?

I mean I would say probably the fact that we mentioned that the BIO salience is lower in this quarter. I would expect logically BIO has to come back in October -December, if we have to deliver on our promise, right? And right now, we are banking on the fact that it will come back in October, November, December. And if that happens, actually, the realization per case will get an uplift, right? As we also mentioned, our price mix is actually a little lower than our historical run rate for the quarter. So Krishnan, my point would be that if BIO does come back, which we are expecting it to come back, et cetera, the NSV per case will get an uplift actually.

That's great. And lastly, on last quarter, you called out a couple of one -offs from a cost perspective, material costs and other expenses, if I'm not -- if I'm not wrong. Any one -off that you want to call out from a cost perspective for this particular qua rter, which led to elevated margins.

No, nothing in this quarter. It's just that -- as I mentioned to, I think, Abneesh's question or Percy's question, I think, which is that last year, the second quarter had some one -offs in the overheads, right, which were not one -offs really. They were ine fficiencies, which we have addressed and therefore, those have been eliminated. And therefore, the margin pickup is looking very promising.

Got it. Thanks Pradeep. Thanks Hina.

Thank you. The next question is from the line of Harit Kapoor from Investec. Please go ahead.

Hi, good evening. So just 2 questions. You spoke about Middle India and how the demand is stable. Is that view also coming from the fact that last year or November, you said that some of the inflationary pressures were impacting demand. And as you lap that base up, you expect that growth kind of revised a little bit largely on a counter base effect. Is that the way you're thinking about it?

There would be a little base effect. But I think in general, I would say that for the last couple of years, we were seeing a lot of up grades at every level, right? And then we started seeing some inflationary pressures in Middle India. I think the sense of inflation stabilizing and then the expectation of good monsoon giving expectation of good consumption, et cetera, we could see stable deman d and consumption seems to have sort of, how should I say, so got itself concentrated in that middle segment of the market, right, so where the top end is a little bit slower, the lower end continues to sort of reel under inflationary pressure. But like I said, I mean, even during this phenomenon, people don't go away from our category, right? So they will just adjust the frequency of drinking or whatever. So at the moment, I would say it's just concentrated in those sort of mid -prestige, upper-prestige categories, and we are continuing to see stable demand. So it's not just base effect. I just think that because of the pressures there, it's just concentrated there.

Got it. Got it. And the second question is on the cost side, especially on the RM cost. So as I understand, quarter 4 onwards, the inflation in ENA has not been very dramatic. And you're probably just a couple of quarters away from lapping up kind of a high base. Is the way to think about it that as you lap that base up, if prices stay stable, you could be entering into a phase where this kind of significant double-digit inflation in ENA is kind of behind you? Or is that too much of a hypothesis and you have to wai t for some of the external policies, et cetera, to play out?

No, no, Harit. So let me correct you there. First of all, ENA inflation still remains in the 11% to 12% range. Even in the July - September quarter, we have rate to rate -- rate per BL to rate per BL, it's an 11% to 12% inflation, right? So it remains very high. Like I said in my opening comments, what is providing an overall cushion in the commodity basket is the deflation in glass and things like closure -- the PET related items also being limited right? So that's helping, right? But you're right, the ENA inflation has been high. So therefore, what is critical to wait and watch now is the new crop, right? Good monsoon, I've also picked up some comments about the paddy acreage being high, right, [indiscernible] being high, et cetera , right? So let's wait for the new crop to come in December, January, right? And hopefully, if all stays good on that front, you are right. If the new crop is good, we could see some relief on that front in the, I would say, February until June kind of period right? So let's wait.

Yes. The only addition I would make PJ, though, is that I do think that structurally, right? I think the policy and the aspiration to really accelerate the blending rates, et cetera, right. It's still on the agenda. Yes, so structurally, I don't expect that ENA will slow down on inflation at least in the short term, short to midterm. So we'll watch and if there are any policy upsides that will be great for us. But -- I mean, my personal expectation is that it will not show up in the next at least 18 to 24 months.

Those are my two questions. Thank you.

Thank you.

Thank you. The next question is from the line of Tejash Shah from Avendus Spark Institutional Equities. Please go ahead.

Hi, good evening. Thanks for the opportunity. My first question is our growth target for second half is robust mid-teens. So just wanted to know is it largely driven by our low base effect, which will play out or is it more to do with Andhra tailwind that we will be seeing now? Or are you actually seeing some early signs of consumption buoyancy for the second half?

I think we sort of said it in a couple of answers earlier. Basically, I think it's a combination of base effect, it's a combination of Andhra, and it's also our confidence in our commercial plans and the scale -up of our innovations, renovations and the com petitiveness of our portfolio. Demand significant trend of change is yet to be seen. And like I said, we need to wait a couple of quarters to sort of comprehensively say whether there is a change or not. But definitely, I think our own plans, the fact that Andhra has opened up and the base effect.

Sure. And Hina, a hallmark of your tenure, so just staying with that innovation and renovation part has been a strong focus on innovation and renovation. So just wanted to -- in your observation, is this helping to attract new customers? Or is it more abou t premiumizing the existing customer base?

I would say the answer is both, right? So I mean -- let me give you some examples, right? So Johnnie Walker Blonde for instance, is attracting new customers into scotch just because it is a very accessible liquid. It is a scotch, but a very accessible liqu id, very mixable, right? And the new generation consumers like those kinds of liquids. So it is definitely attracting new consumers, but it is also helping to premiumize, say, from primary scotches or even upper prestige, right? So it is actually doing both.

And if I may squeeze last one. You mentioned some disruption in Northern state. Could you elaborate the nature of the disruption and the significance of the state to our business?

PJ, would you like to take that?

Yes. Okay. So look, it's, first of all, a very key state, right? And we don't want to call out the name, right? But I think your channel checks will any way kind of allow you to get to the name, right? Very, very rich in mix, right? Top end is very, very s alient, et cetera, right? And effectively, I would kind of call it down to that some constraints on ease of doing business in the shorter term, right? So the efficiency with which the permits would used to get issued or the labels used to get registered, et cetera. So that continues to be a bit of a barrier. And we do expect this to kind of debottleneck itself over the next 2, 3 months, et cetera. But it has been on for the last 5 to 6 months, which has impacted us in the April-June quarter as well as the July-September quarter, right?

Got it. Very clear. and all the best. And happy Diwali to the team in advance.

Thank you, you too.

Thank you. The next question is from the line of Himanshu Shah from Dolat Capital. Please go ahead.

Hi, Himanshu.

Hi, thanks a lot for the opportunity. So one of our competitor is looking to sell its core lower Prestige brand. Can management tell you what their thought is on this particular portfolio? Would we be keen to acquire considering our balance sheet strength and one of our largest portfolio's alliances in that particular category. And even if we don't acquire, should it help us as the competition, presumably defocus on it or something?

Himanshu, I would say that our own brand, right, has a flagship for us in our portfolio, and has, as you know, a leading position in that category. And for us, I mean I don't really want to comment on the competition. I think what we are focused on is really building our flagship brands. And we're focused on the strategy that we have, which is that we see legs of premiumization for the brand. And as you can see that we have launched the X series, which is sort of in the higher price points, non-whiskey portfolio, right? So I wouldn't -- we're not banking on getting any benefits from any action that anybody else might take. We are just very focu sed on growing our own brand through the premiumization and through the investments that we are making on the core offering. And McDowell's will continue to remain a very flagship core sort of portfolio in our sort of overall portfolio with significant scale for us.

Okay. And it can't complement us if we had another brand in the same category?

No, I don't think we need another brand because we have the brand possibility to expand with its own offering. So we would -- we've been trying to simplify our brand portfolio, as you know, since the time I've come in. And even since the time of acquisitio n, right, I mentioned, I think we have been mentioning that we used to sort of support 30-odd brands, and we brought it down to 18. And since the time I've come in, we sort of said that we will focus on our mega brands, and we invest in 8 or 9 brands. So we would be interested in growing our existing brands.

That's it from my side and the best for second half and Happy Diwali to management team.

Thank you. The next question is from the line of Latika Chopra from JPMorgan. Please go ahead.

Hi Latika.

Hi, Hina and Pradeep. Thank you for the opportunity. Just 1 question I had was on your views on Indian single malt. Do you want to expand and have a bigger presence in this category? How you're thinking about the growth trajectory for this sub segment? And you did talk about white spirits to the extent of new flavour launches with Smirnoff. Any more colour on the gin brands that you've acquired in the recent past?

Yes. So 2 questions. First, let me address the Indian single malts. Look, we see a very good growth trajectory for Indian single malts overall. And I think they are certainly adding to the luxury repertoire in India, right? And as a luxury subsegment, we feel there is enough headroom, both for our global single malts and the Indian malts to sort of grow and improve penetration. I mean we've got Godawan and we are super confident that Godawan is basically superior in terms of product. And I talked about 67 -plus awards and more coming all the time. So we are very focused, Latika, on expanding the distribution and growing our Godawa n brand. And as I mentioned, bringing more variance within the Godawan portfolio like a special 1 that we have brought with Taj Hotels. So yes, the answer is categorically, yes, that we would like to grow our presence in this category and that we do have a winner of a brand in Godawan to do that. So we will definitely keep focusing on enhancing our presence in the category. Your second question on gin. Gin is a fast-growing category, and we've got the brand from Nao Spirits, which, of course, they manage but they are -- Greater Than is the largest volume brand within that portfolio, and they are continuing to focus on that brand. We are building Tanqueray. Tanqueray has a significant place in the gin portfolio. We expanded the portfolio of Tanqueray variance with Mallaca and Rangpur quite recently. And we are -- as I mentioned, we are activating to scale. We have tied up on E mily in Paris, so we are looking to grow that end with Tanqueray. And of course, Nao Spirits is continuing to grow Greater Than. So we have a portfolio ladder, which plays very well in the gins category.

Sure. I'm just trying to understand how big probably over a period of time, these single malts -- Indian single malts could become as a part of your business. I'm not sure if you want to launch more brands or you just think Godawan is good enough to build your shares in this particular segment?

Look, Indian -- I mean single malt by virtue of the preciousness of the liquids, right, tend to remain much smaller than the ma ss brands, right? I mean, they are rare liquids, they are more aged liquids and special liquid. So that is why while they're growing quite fast, I mean on the absolute basis, it will just be a few hundred thousand cases, right? And I don't expect that nature to change as it hasn't for global single malls, right? So it will be about bringing precious liquids, it will be about bringing the rare liquids, the really fine liquids that we have in our portfolio. I would want to grow the Godawan brand for the reasons I just outlined on the previous question, which is that we would like to have a limited number of brands that grow within those brands strategically because it is quite difficult to build new brands in India. So we have a very powerful brand in Godawan and huge scope for bringing many more variants under it.

Understood, thanks.

Thank you Latika.

Thank you.

As that was the last question. I now hand the conference back to Ms. Shweta Arora for closing comments.

Thank you. On behalf of United Spirits Limited, I wish you and your loved ones a very happy and safe Diwali. Please feel free to reach out to me should you have any further questions. Thank you all for joining. Have a good evening.

Thank you, everyone. Happy Diwali.

Thank you to all. Happy Diwali. Bye.

Bye.

On behalf of United Spirits, that concludes this conference. Thank you for joining us, and you may now disconnect your lines.