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 their touchtone telephone. If you wish to withdraw yourself from the question queue, you may press star and two. Participants are requested to please use handsets while asking a question. Ladies and gentlemen, we will wait for a moment while the question queue assembles . First question comes from the line of Abneesh Roy from Nuvama. Please go ahead.

Yes, thanks and congrats on good performance. I have three quick questions. My first question is to Praveen. Praveen, you've spent around three months in this new company as the MD and CEO. Your prior experience is in very different industry. So, HT Media, 6.5 years' experience and Pepsi around 20-25 years' experience. How are you finding this industry versus your earlier background, given it's a very, very highly regulated industry? And in FY '26, what are the key improvement areas you have noticed in the first three months? And you mentioned innovations multiple times. So -- and you did say that you want to double that over the longer term. So, in FY '26, will it be more of engagement with regulators or, say, improving some of the improvement areas you have seen, if you could discuss some of that? That will be the first question.

Do you want to say all your questions?

No, no, he said all this.

Okay. All right. So first, thanks, Abneesh. I do come from an FMCG background. I believe even though I was in publishing, it was very much a consumer business, okay? Overall, I believe this is a consumer product company with a difference, okay? Let's put it that way. There's legislation on pricing, there's legislation on route to market and legislation on marketing. Once you embrace that reality, you'll learn to work with those. If I may say, at times, it's a handicap versus other FMCGs. But what you do is you build your brands through experientials. And that, to me, is a powerful way of unlocking it. And as you build your brands, you tend to build pricing power. And over a period of time, I think legislation follows when they realize the pricing p ower of your brands to provide you pricing opportunities, albeit it comes a little slowly. I think in summary, there are some challenges in the consumer market of the next decade. But I think we need to learn to solve them and live with them. On go forward, I think there were some areas I spoke about. But look, as I say consistently, over the last 3 years, if you see the performance of our business, it's gone from strength-to-strength year-on-year. And PJ just spoke about some outstanding financial results. That should say how we have delivered in the last 3 years. So, as I say, that's the past, but the future holds immense potential. We'll continue to build on the innovation platforms. We've got some great work over the last 18 months. We'll build on that and sharpen it. We'll continue to reach, as I said, reshape our commercial strategy. We'll not need to replace anything much because things are going on well. So, we'll continue to focus and be bold in our ambition, but as I said, very, very grounded in our execution. And we will pick up on our digitization as we go through this. But as I said, reaffirm things are going very, very well. We'll build on our existing set of initiatives.

Thanks for thought. My second question is on the U.K. FDA. Finally, after many years, it has been announced, and I do understand FY '27 is the year where it will actually get executed. My specific question is your parent company has already said that fully the prices will be passed to end customer, which I think is the right strategy. So here, it will be just the volume uptick, which will happen? How does the consumption change? So does the duty -free sales shift here or the mid-end shifts towards the top end because of the affordability? And in terms of raw material, there will be some benefit again. When the parent company is saying it will be passed to end customer, are you also saying that even at the raw material side, any benefit happens, that will also be passed on? So, no gross margin expansion at all, EBITDA margin expansion can happen because of the operating leverage? And what portion of the volume gets benefited because of this based on whatever you have understood currently? I'm sure you would have known the numbers because that anyway is not linked to the nitty-gritty. So, what are your thoughts on these questions?

Yes. Abneesh, let me take this, right? I mean this is something that we have been consistently conveying over the last 2 to 3 years, right? So, you won't get any different response this time, which is that reduction of duty from 150% to 75% will typically lead to about high single -digit reduction in consumer prices. And you're absolutely right. We -- not just we, my sense is that the government will also insist that we pass on the pricing benefit to the consumer, and we are absolutely of the same view that we would want to pass on this benefit completely to the consumer. And therefore, keeping the consumer spent constant, it's reasonable to assume that in this part of the portfolio, a high single- digit additional volume growth should occur, right? So that's on the BIO and BII portfolio, On the BII because it's a lesser component of the benefit, right? So, the price reduction might be slightly lesser than high single digit. My sense is it will be in the range of 4% to 5%, right? Then coming to your second point, you are absolutely right. There will be a benefit that accrues into the raw material prices also. But again, we'll take a call on that as and when that happens. You yourself have mentioned that there is still some amount o f work to happen before this actually becomes legislation. So probably the benefit will start coming only in financial year '26, '27. At that point of time, we will see, right? I don't want to comment right now of what will happen 10, 12 months down the line.

Only thing I'd add to what PJ said is it also opens up the opportunity of exploring our global portfolio, okay? As we see reduction in duties, there will be some opportunities, and that will be very exciting from a consumer front.

One quick follow-up on that, Praveen and Pradeep. Can competition also increase? Because if you can bring the global portfolio, there can be some companies which are not there in India or maybe existing companies can also bring more portfolio. In terms of competition, are you worried or because approvals are so high and there is a loyalty factor, it is not much of an issue?

Competition never worries you. It energizes you. That's the way to look at it.

It will increase the pie. It will increase the pie.

You can see, any play by a competitor will expand the play. To me, that's an exciting space to be in. And we just need to play our space well.

Sure. My last and quick question there, and I'll end there. 9% plus P&A volume growth ex of Karnataka and Andhra, will it be below 4% kind of volume growth? And if you could talk about Karnataka, the tax cuts, how has that helped? And has it fully already benefited? Or is there still some lag effect before the full benefit happens?

No. So Abneesh, let me just understand your question. You have said our P&A volume growth is in the range of...

9% plus. If I knock off Karnataka, where the -- I think volume growth would have been good because of the duty -- tax cuts and Andhra, which was almost zero in the base, then the balance, say, 25 states or whatever 24 states, the growth rate there will be, say, 4%, 5% only because, obviously, Andhra will be contributing 3%, 4%?

So, in terms of total value, absolutely. Yes, in terms of total value, right, our overall growth rate is about -- full year is about 8.2%, right? And Andhra has contributed about 3.1 percentage to this, right. So, ex Andhra, our NSV growth for the year is about 5.1%.

And Karnataka, is there a big benefit already in terms of volumes and...

Karnataka, Abneesh, the numbers are immaterial, right?

Not material, even...

It's such a small salience in the overall pie, right? It's immaterial.

Okay. Thanks a lot, sir. That's all from my side. Thank you.

Thank you. Thanks, Abneesh.

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

Yeah, hi. Good evening. So, my first question was on the innovation bit. I think it was mentioned in the presentation that 2x innovation. I just wanted to understand the nature of this innovation. Do we view this -- given that there has been already a sizable chunk of the global portfolio in India now, is this more likely to be Indian -centered innovation where you're launching more Indian brands? Just now you've done a McDowell's No. 1 Oak Wood barrel as well. Or it would be still more heavy set on the global portfolio? And in that context, do we expect in order to support this, this 9% to 10% A&P to sales ratio to actually go up in the next 1 or 2 years? That's my first question.

Look, first, I'd say innovation. As I said through the discussion, innovation strategy isn't about only chasing trends. It's about shaping, okay? And it's built on 4 key pillars, if I just want to remind on the -- which is about premiumizing our trademarks , addressing the consumer repertoire, driving occasions and getting pack price to play. Now we will -- it will be both international, our global portfolio, as well as our local trademark. It's going to be through this. And as we look at it, we keep looking at opportunities on how to unlock value, how could we reimagine categories and how do we stay a step ahead of evolving consumer aspirations and a competitive player within that. That's how I would put it.

Yes. And Harit, I'll just add, right? I mean, again, we would want to be consistent. For us, it's and strategy, right? It is our global trademarks, and it is our USL trademarks, right? And honestly, all of you should keep us under pressure on that front, right, that we have to innovate across both portfolios and grow both portfolios on a sustained basis.

And Pradeep, the 9% to 10% A&P spend, given that pace of innovation seems to be accelerating, at least from an expectation perspective, should that still be maintained?

Absolutely, yes. Praveen is smiling as you are...

No, I just -- would that go up is my question. Would that...

Our desire will be to grow it, right, if you look at the Diageo flywheel, right? But obviously, we will try and balance it for sufficiency and effectiveness as well.

Great. And my second question was on a couple of the numbers that you gave on the P&A side. Growth as far as, one, the Lower Prestige segment is concerned, where 8% is the highest growth, we've seen in 3 years and 11% in the Luxury and Premium portfolio, which is ta d lower than what's been seen in the last couple of years. So, what have been the moving parts there? I understand in the Lower Prestige, there's also one of the brands, which could be on the block. But just what are the 2 -- what are the moving parts, which have played out on a better -than-expected Lower Prestige number and probably slightly weaker-than-expected Luxury and Premium growth?

Okay. Good. No. So again, I think it's been a consistent narrative. So Lower Prestige, I think the Andhra is a big kicker, Harit, right? So, Andhra is a big Lower Prestige market. And as McDowell's has come back into the market, that has provided a fillip, right? So that's one big driver on Lower Prestige. And the top end Luxury plus Premium, 11%. Look, stand-alone, it's very, very healthy, right? If you look at our sources of growth, that segment still contributes to 41% of our value growth, right, which is in line with the 41% that we experienced in the prior year also, right? So, from a sources of growth perspective, I don't think we've moderated at all, right? But yes, this segment was growing at almost like 25%, 30% 2, 3 years ago. So sequentially moderated. We have discussed some hypotheses around it, repertoire consumption, the post -COVID revenge consumption kind of moderating, right? And a little bit of tailwind that we had when global travel was off from duty free to duty paid, that also moderating, right? So, these are the 2 or 3 things. But again, I do want to reemphasize that we don't see anything structurally wrong in terms of Luxury and Premium consumption in India. This is a temporary blip. We believe that another 3, 4 quarters down the line, we should come back to a healthy growth. I don't know Praveen, if you have something to add?

Nope. Pretty much you've covered all.

Great. Those were my two questions. Wish you all the best and, Praveen, especially to you, all the best for your new stint. Thank you.

Thank you. We have our next question from the line of Percy Panthaki from IIFL Securities. Please go ahead.

Hi, Percy.

Hi. Congrats on reaching that target of high teens margin. What I wanted to ask is what next? I mean is there a plan? Or is there a possibility of going beyond 20% over the next few years? If so, what would be the drivers? And if not, what would constrain us?

Okay. Percy, now this is a trick question, obviously. I don't want to get carried away by this, right? So, look, we've always maintained that once -- so the idea is to sustain at this high -teen level, right? And once we are able to establish sustainability at this high -teen level, right, we will figure out what the next set of inflection point is, right? But I would want to believe that in the next couple of years, right, the margin will be range bound, and we just have to focus all our energies into getting back on a sustained P&A double digit, ideally total portfolio double digit.

Got it. But if you can just explain the up elevators, down elevators for margins because see, there is premiumization happening. I'm sure there are cost -saving plans in place , supply chain efficiencies, etc. So -- and you know, Pernod is making sort of 22% to 23% kind of margins. And sort of we are a direct competitor. We have similar portfolio to them. So, what really prevents us to go to that level, not immediately, but at least over the next few years?

Yes. So again, Percy, a couple of you know, thoughts on this, right? If you look at some of our charts that we have just taken you through, headline pricing has been very, very good for the last 3 years, right? Now having stayed in the company for 8 years, I can say, this comes in peaks and troughs, right? I mean 5 years from 2017 to 2022, we had headline pricing of the average of 0.2% to 0.3%, right? The last 3 years, it's been in the range of 2%, right? So therefore, I don't want to comment, right, in terms of what these numbers will be, right? I mean we just have to incorporate that into our algorithm. Like a forward -looking organization, we will obviously continue to drive the productivity muscle, right? Now will that and headline pricing, as Praveen mentioned, offset inflation? Last 2, 3 years, we've been fortunate, it has been, and therefore, the margin expansion in some years that may not do that, right? But over a longer period of time, it does, right? So that's what I will say at this point of time, right? And like a good organization, absolutely year-on-year, we try and aspire for a marginal margin expansion, which is the leverage growth.

Percy, just to add to what PJ is saying, I think important to sustain now while investing for driving growth. And we spoke about innovation. We spoke about some capabilities. All of this will help us sustain and build growth. So important to look at both e nds of it, which certainly means that any opportunity on expansion will be focused around growth.

Thank you. The next question comes from the line of Vismaya Agarwal from Citi. Please go ahead.

Hi, Praveen, Pradeep. So, I just wanted to get your -- if you could shed some more light on the renewed emphasis on the on -premise channel and this bit here? And also, what will be the initiatives here and maybe even how big the on-premise channel is for you guys?

Too early to say. Clearly, it's to say whether how big the channel is and how big the opportunity is. What we all know, it is a very, very important channel where you can drive sampling and build habit over a period of time. In terms of consumer spaces, as I call it, it's a massive connect platform. And that's where roughly one-third of our business happens. And therefore, clearly, a big area of opportunity. We certainly play that opportunity. As we look at it, we believe we have some opportunity to dial up our play, and that's the focus we'll bring on, on-premise.

Okay, okay. Yes. So, Vismaya, right now, I would say, by and large, stable, right? It's good to see that. So, it's kind of neutral alcohol spirit. We have started lapping the high prices of prior year. So, in terms of inflation percentage, that has moderated. And on the reverse side, glass, we have started lapping the low prices of prior year, right? So there also, the deflation has kind of gone up to flat levels, right? So therefore, the 2 are kind of neatly squaring off against each other. But can't complain about inflation right now. I think our next inflection point will be somewhere around Septemb er, October, when government announces the ethanol fuel blending price-led prices for neutral alcohol spirit, right? So that would be the next inflection point. So, commodities, nothing else. Margins, I've already communicated our point of view to Percy, so nothing else.

Understood. And I guess just one last bookkeeping one is, any particular one -off in the other income in the quarter because it seemed a bit higher than usual?

The other income has one noncore asset disposal in the Jan-March quarter, and that's a big one, right? Honestly, we thought we won't be able to comp lete that deal in our lifetime, but finally, we did manage to do that . There is almost, I think, INR90 crores to INR 100 crores profit on account of that disposal of a bungalow in South Mumbai.

Thank you and all the best.

Thank you.

Thank you. Ladies and gentlemen, we will now take our last question from the line of Himanshu Shah from Dolat Capital. Please go ahead.

Hi. Thanks for the opportunity. Sir, just a couple of questions. One on McDowell's X -series, almost a year since launch, but we haven't -- at least from our channel checks, we are not seeing much of action. Any specific thing over there on vodka, brandy, run, all 3 segment side? So, this is the first question. Second, on the UP market, while it is seen as a very large growth market, a lot of investments from our peer sets, both on the beer as well as on the IMFL side in those markets. But we seem to be lagging in that market. Any specific if you can share to drive the share over there?

Well, first, let me take the McDowell's X-series and its rollout. Yes, so its rollout. Look, like in any rollout, it's a slow process in India. Each state is unique, and you need to -- in this category and you need to make sure that you get the legislation and all clearances before you take it to market. We've rolled out to 5 markets already. And if I remember right, we roll out to another 4 markets in the coming couple of quarters. So clearly, that's in play. Yes, like in every launch and every innovation, there will be some things which are doing very, very well and some things which are a little slow. And I do know that rum is doing exceedingly well in whichever market we have done. So that's a positive as we take it. But it also tells us we need to work a little harder on some of the other spaces as we build it. That was on McDowell's. Your second question was UP. UP is a very, very competitive market. I don't know the landscape of India well enough in this sector as yet, if I may say so. But UP is a very, very competitive market. We -- for the last few years, we have struggled to really grow our share in that state. And now we're working very hard. We've just recently done a few set. First, the market has opened up. The category has seen opening up. In fact, this -- earlier this month, with the new excise law, pretty much the number of our retail outlet selling spirits has doubled . We've launched double Oak barrel. Recently, it's been around 3 months, and it's getting seeded into the market in UP. We also launched the McDowell's X-series, and it's done reasonably well. We believe we have a whole set of initiatives, route to market, our own go -to-market capability and some of these innovations. We're about to launch a McDowell pocket -sized product. So, each of these, we believe, will unlock some opportunity in here.

Sure, sir. That was useful. Just one last question, a bookkeeping questi on to Pradeep. Pradeep, the INR37 crores impairment of interest on receivables, is this a onetime entry or this will be a recurring phenomenon every quarter, every year? How should we read it? And if you can deep dive more the context behind this particular revenue reversal?

Okay. First of all, the context is Indian Accounting Standards, right? Beyond that, I will not be able to comment, right? But this is a one time with specificity to one particular customer, right? So therefore, it is one time. And it stays within the P&L, right? While you are seeing the INR37 crore impact in the revenue line, right, it gets recognized over a period of tim e in the interest line, right? So that's the only point, right? And it is absolutely governed by Indian Accounting Standards, AS 115, if I'm not wrong, right? So, I mean, Shweta will be happy to talk you through that separately offline.

Sure. That's it from my side. Thank you and all the best.

Thank you.

Thank you, members of the management team. On behalf of United Spirits Limited, that concludes this conference. Thank you all for joining us. You may now disconnect your lines.