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United Spirits Ltd Management Discussions

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Apr 2, 2025|12:00:00 AM

United Spirits Ltd Share Price Management Discussions

ECONOMIC SCENARIO

Global Economy

The global economy demonstrated remarkable resilience with steady but slow recovery differing by regions. The journey has been eventful, starting with supply-chain disruptions in the aftermath of the pandemic, a Russian-initiated war on Ukraine that triggered a global energy and food crisis, and a considerable surge in inflation, followed by a globally synchronised monetary policy tightening. Yet, despite many gloomy predictions, the world avoided a recession, the banking system proved largely resilient, and major emerging market economies did not suffer sudden stops. Moreover, the inflation surge – despite its severity and the associated cost-of-living crisis – did not trigger uncontrolled wage-price. Instead, almost as quickly as global inflation went up, it has been coming down. With inflationary pressures abating more swiftly than expected in many countries, risks to the global outlook are now broadly balanced compared with last year.

Multilateral co-operation is needed to limit the costs and risks of geoeconomic fragmentation and climate change and speed the transition to green energy.

Global growth is estimated at 3.2% for 2023. Several factors such as ongoing geopolitical conflicts, higher inflation, a sluggish recovery in China, volatility in energy and food markets, and higher interest rates, have contributed to a moderation in global economic growth. Despite these challenges, indications of stable growth, a robust economic performance in the United States and several large emerging market and developing economies, along with inflation returning to target levels in advanced economies, suggest a diminished probability of a severe economic downturn. Furthermore, other positive factors shaping the global economy include the fading of prior energy price shocks and a notable resurgence in labour supply in many advanced economies.

Global inflation, a prominent concern over the past three years, continues to decline at a faster pace than initially anticipated. Global headline inflation is expected to decline steadily from 6.8% in 2023 to 5.9% in 2024 and 4.5% in 2025. While headline inflation has sustained a decline from its unprecedented peaks, core inflation has proven to be sticky and is expected to decline gradually. The ongoing disinflationary trend has instilled hope for further easing of financial conditions and the improvement of monetary policy frameworks.

Despite the challenges posed by the escalation of geopolitical conflicts in the Middle East and along the Red Sea route, which could potentially heighten the risks of supply disruptions, the global economy is expected to sustain its resilience in 2024. Global growth is expected to persist at 3.2% for both 2024 and 2025. Advanced economies (AEs) are projected to witness a modest uptick in growth, primarily driven by a rebound in the euro area following subdued growth in 2023, while emerging market and developing economies (EMDEs) are anticipated to maintain stable growth in 2024 and 2025, albeit with regional variations.

Indian Economy

Amid a volatile global economic landscape, India shines as a beacon of optimism, retaining its position as the world?s fifth- largest economy. As per the Second Advance Estimates of National Income, India?s GDP growth remained strong at 7.6% in FY 2023-

24 as against 7.0% in FY 2022-23, supported by buoyant domestic demand, moderate inflation, a stable interest rate environment, and strong foreign exchange reserves. Furthermore, a double-digit growth rate of 10.7% in the Construction sector and an 8.5% growth rate in the Manufacturing sector have contributed to the GDP growth in FY 2023-24.

The growth observed in the Index of Industrial Production (IIP), Goods & Services Tax (GST) collections, manufacturing Purchasing Managers? Index (PMI), per capita income, and increasing private capital expenditure collectively indicate strong economic momentum. The surge in disposable income has led to an upswing in household consumption in urban and rural regions and fuelled demand across sectors.

Despite repetitive food price shocks, retail inflation is on a downward trajectory and eased to 4.85% in March 2024. The RBI keeps the policy repo rate unchanged at 6.50% and remains vigilant to take effective measures to achieve the target of 4% inflation while supporting economic growth.

India?s economic outlook remains positive, supported by stronger consumer demand, increased capital expenditure, improving prospects of rural consumption due to easing inflation, enhancements in physical and digital infrastructure, increased spending in an election year, and proactive government policy measures. According to the IMF, the Indian economy is expected to grow steadily at 6.8% in 2024 and 6.5% in 2025. Furthermore, the Interim Budget 2024-25 lays the foundation for achieving the vision of a developed and self-reliant India by 2047. It outlines a comprehensive economic management strategy, including infrastructure development, digital public infrastructure, taxation reforms, and proactive inflation management.*

INDUSTRY OVERVIEW

India is one of the fastest growing and most diverse alcoholic beverages market globally. The alcoholic beverage sector has a high-growth potential given the favourable demographics and increasing social acceptance. The alcoholic beverages (alcobev) industry in India has experienced remarkable growth in recent years. This growth can be attributed to several factors, such as rapid urbanisation, evolving consumer preferences, a youthful demography, a burgeoning middle-class population with greater purchasing power and the growing preference for premium alcoholic beverages among consumers. Additionally, the increasing variety in the flavours of alcoholic drinks, along with expanding product portfolio by manufacturers, is poised to stimulate growth in the alcohol market.

*(Source: Ministry of Statistics & Programme Implementation Bureau, The National Statistical Office (NSO), Reserve Bank of India, Ministry of Finance, IMF World Economic Outlook April 2024)

Alcohol consumption surged across various demographics, as a growing number of individuals, both men and women, entered the legal drinking age. The legal drinking age in India varies from 18 - 25 years, depending on the state, highlighting the conducive environment for the alcohol market?s robust growth.

The consumer landscape in India has traditionally been a classic "pyramid", with a large number of households with low incomes forming the base, and a small number of households with large incomes the pinnacle. With growth being fueled by both the economic development and the demographic dividend, India has seen this classic pyramid morph into a diamond shape with the emergence of a rapidly growing "middle class" and the consumer landscape segmenting into three distinct groups – Affluent, Middle and Aspiring - each with distinct consumption drivers and needs.

Market segmentation: The Indian Alcobev industry is segmented into IMFL (Indian Made Foreign Liquor), IMIL (Indian Made Indian Liquor), Wine, Beer and imported alcohol. Whiskey dominates the Indian spirits industry by a very wide margin.

Consumption pattern: The states of Karnataka, Maharashtra, West Bengal, Odisha, Telangana, Delhi, Haryana, Punjab, etc. are among the largest consumers of Alcobev in India. Liquor stores serve as the predominant sales channel nationwide, especially since Alcobev consumption primarily occurs outdoors, with supermarkets and malls mainly concentrated in tier I and tier II cities of India.

While the average per-adult alcohol consumption in India remains considerably low compared to countries like the United States, there is a notable prevalence of drinkers among young Indians. This presents a tremendous opportunity to propel the growth of the Alcobev industry, on the back of the expanding working-age population. Anticipated shifts in lifestyle and aspiration among Indians are expected to increase per capita consumption in line with global trends & huge penetration headroom.

The Alcobev industry in India is thriving and is well-positioned for continued growth in the future, driven by the increasing popularity of alcoholic beverages among consumers and growing urban population. India presents robust growth opportunities for the Alcobev industry in the coming years, fuelled by positive demographics, premiumisation, and greater acceptance of alcoholic beverages in social circles, a sophisticated retail channel and an experimentative consumer base who is ready to explore.

USL has an excellent platform in place to capitalise on this opportunity with its comprehensive end-to-end brand portfolio across all price points. Unlike international and local competitors, who focus solely on specific segments, USL?s portfolio encompasses numerous major brands, which had been under-invested in the years prior to acquisition by Diageo PLC.

These brands combined with Diageo brands, benefit from USL?s leadership position in sales and distribution (with the largest share of retail business), extensive manufacturing network (~36 sites across most Indian states) and proven capability to operate effectively in a highly complex and regulated market, serving as a distinct differentiator.

The industry did experience a slowdown in FY 2023- 24, in-line with broader consumption trends and other adjacent consumer focused industries, attributed to higher inflation and consequent financial strain on consumers. However, unlike the larger fast moving consumer goods (FMCG) space, where inflation prompts a shift towards lower-priced alternatives and smaller packaging format, the alcoholic beverage industry has not witnessed significant downtrading. On the contrary, there is a shift towards more selective consumption habits, with reduced occasions of consumptions, while consumers maintaining their preference for specific brands. Notably, due to the K-shaped economic growth pattern, where the wallets of middle-income individuals are strained, but affluent consumers remain relatively insulated, the trend of premiumisation persists in the industry, with higher-priced segments exhibiting faster growth compared to lower-priced segments.

INDIAN SPIRITS MARKET OVERVIEW

India remains an attractive market with stable macroeconomic environment and favourable demographics. As a promising total beverage alcohol (TBA) marketplace, it capitalises on its status as one of the largest whiskey markets by volume. It also ranks among the countries with the lowest per capita TBA consumption globally, indicating substantial potential for expansion.

One of the key trends in the Indian Alcobev market is the increasing consumption of spirits, especially whiskey. The consumption of whiskey has been steadily increasing, propelled by the expanding urban populace and the influence of Western drinking culture. Consequently, there has been a proliferation of whiskey distilleries and a wide range of whiskey brands in the market. Another trend is the escalating demand for flavoured alcoholic beverages. These offerings appeal to younger consumers seeking innovative and enticing flavours. The introduction of new flavours and variants by both domestic and international brands has significantly augmented the growth of this segment. Additionally, the emergence of craft spirits and microbreweries is expected to drive further growth in the industry.

Evolving consumer preferences, notably among the younger population, are spurring a proliferation of spirit varieties as experimentation gains momentum. Additionally, the rise of artisanal values and local pride are propelling the expansion of the TBA category, especially among more affluent consumers in India. In recent years, Indian Single Malts have risen to nearly the same prominence as Scotch Single Malts, which have enjoyed a presence in India for several decades.

Despite a slowdown in growth compared to the previous two years, which aligns with the larger consumer space, the premiumisation trend persists. There is a continued optimistic outlook for mid to long-term growth, supported by the fact that penetration is only half of that seen in the developed markets, and per capita consumption stands at half to a third of those levels.

Growth drivers: The Indian Alcobev industry offers great potential for spirits companies. The growing young population in India, increasing disposable incomes, favourable demographics, greater acceptance of alcoholic beverages in social circles, the current low per capita consumption, increasing number of pubs and bars, and increasing exposure to imported and premium alcoholic beverages are the major factors stimulating the growth of the Indian Alcobev market. Moreover, with more women entering the workforce and gaining financial independence, there has been a shift in cultural attitudes towards alcohol consumption, leading to increased consumption among women as well, which is expected to further drive the market growth.

The consumption landscape for spirits is evolving, with socialising- led consumption witnessing 1.3 times increase in its share of consumption. This indicates a move towards normalisation and an inflection point for growth within the category. The transition from solitary to shared or social consumption occasions has historically driven substantial growth for many food and beverage companies, a trend that has been notable in the spirits industry over the year.

Growing prevalence of premium Alcobev: Rapid urbanisation is expected to bolster disposable income, which bodes well for industry growth. With more Indians travelling abroad, rising aspirations, favourable environment for imported liquor and higher disposable income, consumers are upgrading towards premium segments in the country. The rise in premiumisation is evident in the heightened focus of major players on semi-premium and premium categories, with increased launches and intensified marketing efforts targeting these categories. Another emerging trend in the Alcobev sector is the increasing popularity of grain-based liquor over the traditionally popular molasses-based liquor.

There is also growth opportunity in new premium categories, which are led by Diageo, through Tequila and craft spirits. Additionally, there is a growing presence of on-trade consumption, gifting, weddings, festivals and special occasions, along with the burgeoning cocktail culture.

REGULATORY SCENARIO IN INDIAN MARKET

Both central and state governments enforce regulatory oversight, imposing numerous restrictions on the production, movement, and sale of Alcobev products. Alcobev also falls under the purview of Food Safety and Standards Authority of India (FSSAI). Moreover, direct advertising of Alcobev products is prohibited in India. Domestic Alcobev players are compelled to establish owned or contract manufacturing setups in every state due to prohibitively high inter- state duties. Licenses are mandatory for the production, bottling, storage, distribution, or retailing of all Alcobev products. Distribution is highly regulated at, both wholesale and retail levels. In states where the government controls pricing, price increases are subject to government notifications. Moreover, controlled pricing presents a substantial challenge in an inflationary environment. Additionally, in states where retailing is controlled by the state government, each player is allocated a specified quota, limiting the potential for expansion for our products. Furthermore, navigating frequent and ad-hoc changes in the route to market presents challenges in the Beverage Alcohol Industry. Recently, alterations in the route to market have occurred in Punjab and Uttarakhand, in addition to regular changes like licence renewals, demanding continual adaptation. These regulations impose significant operational constraints on industry players.

Pricing remains an ongoing challenge for the category, as continuous increase in excise duties result in rising end-consumer prices, without any corresponding benefit to your Company. Although fiscal year 2024 was one of the good years for the Company in terms of securing pricing in several states across India, it was insufficient to offset the impact of inflation.

BUSINESS ANALYSIS COMPANY OVERVIEW

United Spirits Limited (USL/Your Company) is the largest alco beverage company in India and is also among the largest consumer goods companies. Your Company is involved in the manufacture, sale, and distribution of beverage alcohol. It has a comprehensive brand portfolio with over about 63 brands of Scotch whisky, IMFL whisky, brandy, rum, vodka, and gin. 10 of these brands sell more than a million cases annually. Your Company has brands spanning across price points operating in all segments of Popular, Prestige, Premium and Luxury.

Your Company produces and sells around 61 million cases. McDowell?s No.1, Royal Challenge, Royal Challenge American Pride, Signature, Antiquity, Black Dog, Director?s Special Black, McDowell?s

Rum & McDowell?s Brandy are some of the marquee brands owned by your Company. In addition, your Company also imports, manufactures, distributes, and sells various iconic Diageo brands such as Captain Morgan, Johnnie Walker, J&B, Baileys, Lagavulin, Talisker, VAT 69, Black & White, Smirnoff and Ciroc in India under different licensing agreements.

Your Company has a strong distribution network, and its route to customer is superior in the industry with more than 80% of sales comprise from P&A portfolio out of the total branded spirits sales.

Diageo Relay B V (wholly owned subsidiary of Diageo plc.) holds 55.88% shareholding in your Company. Our new mission is to be the Top Performing CPG Company in India delivering sustained double-digit, profitable top line growth and long-term value creation to all our Stakeholders. For this, the Company has been working on the following three pillars:

Your Company has been striving hard with a strong focus on premiumisation and at the same time also trying to maximise value from brands in the popular segment.

Strengths

Your Company has 7 trademarks which sell more than a million case every year, of which 1 sells more than 30 million cases annually. The Company?s export business is also growing.

Your Company has pan-India manufacturing presence with 36 facilities and robust distribution network of more than 70,000 outlets, which provide access to vendors, suppliers, and distributors.

With high brand equity and leadership position, your Company is able to have a significant influence on industry issues through representations made on behalf of the industry.

Your Company has a wide range of portfolio spanning across categories of Scotch whisky, IMFL whisky, brandy, rum, vodka, and gin, and in various price points from Luxury, Premium, Prestige to Popular.

Your Company?s rich heritage ensures long-lasting relationships with most of the raw material suppliers, which enables it to ensure uninterrupted procurement at competitive rates. This, in turn, helps the Company to ensure continuous production and supply of its products through the length and breadth of the country.

The in-house Technical Centre and its tie-up with the global giant Diageo PLC enables your Company to undertake research on new products, analytics and sensory sciences, process R&D, special spirits, and flavour management. Your Company?s professional team of expert scientists work constantly with perseverance to renovate the portfolio. The strong marketing team creates impactful communication to convey the renewed brand salience.

Your Company?s workforce of about 2,598 regular employees are the key strength in achieving the goals laid down by the Company. Your company has built internal sufficiency with ~50% of positions being filled with internal talent during the year. Overall gender representation is 17%, however, gender representation in the executive population stands at 27%. Industrial relations during the year were cordial.

BUSINESS PERFORMANCE

Our mission is to be a top-performing consumer packaged goods company in India, delivering sustained double-digit, profitable topline growth and long-term value to all our stakeholders. During the year in review, we made strategic investments and implemented several initiatives aligned with the three identified pillars of our mission, keeping us on track to realise our goals.

1. Portfolio reshape

We continue to maintain strong emphasis on brand innovation and renovation, prioritising portfolio premiumisation. Our marketing campaigns have significantly enhanced consumer engagement and contribute to building long- term brand equity.

Godawan, India?s first artisan single malt, continues to expand both across India and globally. Godawan 100 collector edition was awarded "Single Malt Whisky of the Year" at the prestigious London Spirits Competition 2024. Additionally, Godawan Single Malt Rich and Rounded and Godawan Single Malt Fruit and Spice each received a gold medal at the competition, underscoring our commitment to innovative and sustainable luxury in the Alcobev industry.

The renovation of Black Dog continued to gain global recognition, notably winning gold at the prestigious DBA Design Effectiveness Award and silver at the Pentawards – a leading global platform and community for packaging design.

Furthermore, we scaled-up Johnnie Walker Blonde following a successful launch in FY 2022-23. Our enhanced presence, marked by marquee associations, notably our partnership with Lollapalooza, has significantly bolstered the overall equity of the Johnnie Walker brand.

Continuing our cultural engagement, we maintained our commitment to the platform Walkers & Co., which was launched in the previous year and featured collaborations with John Legend and Raja Kumari. This year, we partnered with the Aravani Art Project, a cis-trans art collective dedicated to amplifying the representation of marginalised communities in popular culture.

Brand Signature reinforced its position as the most distinctive brand within the upper prestige segment, building on the transformative renovation initiated in FY 2022-23. This year, the brand was propelled forward by three significant initiatives that underscored our commitment to sustainability and positive community impact: the launch of ‘One With Nature My Signature,? campaign; featuring film actor Ayushmann Khurrana, reinforced our commitment to environmental consciousness. Alongside, being the title sponsor of the Ziro Festival of Music; emerged as a pivotal activation, blending sustainability with cultural expression to enhance brand visibility and engagement. Complementing these was our Signature Green Vibes? platform, which cultivated a community dedicated to sustainable living and responsible consumption. These initiatives, along with other innovative interventions resulted in the growth that outpaced the category.

Antiquity Blue underwent a comprehensive transformation introducing a fresh brand visual identity. This new brand visual identity was effectively communicated across the brand?s key markets, with targeted interventions in digital and out- of-home (OOH) media. Additionally, Antiquity elevated its communications by being showcased at key art events such as the Kala Ghoda Festival in Mumbai and the Jaipur Literature Festival.

Royal Challenge American Pride, our American bourbon- based IMFL whisky, is one of our most successful innovations and among our fastest-growing brands. It is on track to become the quickest brand in our portfolio to reach one million cases. The brand was scaled up across India with comprehensive portfolio of SKUs.

In the highly competitive mid-prestige segment, we accelerated our strategy for Royal Challenge following a significant renovation launch in the previous year. The Naya Sher campaign was amplified across major platforms, including the Cricket World Cup and the brand?s key activation platform, the Indian Premier League (IPL). We also expanded the brand?s influence by signing the RCB Women?s IPL team, diversifying our equity play. Additionally, we strengthened our partnership with the RCB Men?s IPL team to boost our cultural engagement. The brand enhanced consumer loyalty with its largest engagement initiative to date, the Game Nights Platform.

In the lower prestige segment, we rebranded our flagship whisky, McDowell?s No. 1, to House of McDowell?s, marking a strategic shift towards premiumisation. This reflects our response to evolving consumer tastes and desires. We introduced McDowell?s Distiller?s Batch Single Malt, demonstrating our commitment to innovation and setting new industry standards. Our renovation began with McDowell?s No.1 Whisky, introducing Premium Smooth, which has been scaling up nationwide. Popular film actor Kartik Aaryan was appointed as the brand ambassador for House of McDowell?s, enhancing our brand equity through strong awareness and recall. The brand?s narrative on friendship evolved to "Yaaron Waali Baat" from "No. 1 Yaari," highlighted through a comprehensive 360 campaign and a major thematic TVC. This was supported by a broad renovation launch across markets. Throughout the year, we maintained brand salience with major interventions that emphasised the brand?s ethos of friendship and inclusivity.

2. Be an organisation of future

We are building an organisation of the future through significant, structured investments in areas such as Digital, Luxury, and Innovation, aimed at delivering disproportionate business impact and securing future growth. Over the past year, our talent initiatives have focussed on targeted development plans for leaders and successors, and on enhancing internal recruitment to accelerate organisational self-sufficiency. We have continued to champion inclusion and diversity, achieving an 88% Inclusion & Diversity Index in ‘Your Voice?, our employee engagement survey, and launched two Employee Resource Groups – the Spirited Women?s Network and the Rainbow Network. To thrive in a continuously volatile operating environment, it is essential to be fast, agile, transformational, and responsive to changing dynamics. Consequently, we have embarked on a systematic culture change effort to embed speed and agility within the organisation.

Significant strides were made in our digital transformation journey, which commenced in FY 2022-23. Our consumer- facing digital initiatives were scaled up across three identified key areas – Digital Marketing, Owned Platforms, and Consumer Data. These efforts have effectively kept us on track with the objectives set at the beginning of FY 2023-24.

Digital Marketing: We have established the ‘Precision and

Digital Factory? to refine our digital marketing practices and introduce best-in-class processes, capabilities, tools, and partnerships. These improvements are strategically designed to enhance Diageo?s position in digital marketing. During the year, we enhanced the effectiveness and efficiency of our digital marketing through expanded always-on social content, increased programmatic marketing, more cost-efficient media buying, and sharper, more personalised media targeting based on consumer interests, affinities, and first-party data.

Owned Platforms: Led by in.thebar.com, our Diageo-owned digital-first platform serves as a central hub for all related to social celebrations and alcoholic beverages, focussing on robust content creation and community engagement. Over the year, we transformed in.thebar.com into a content-first platform, significantly increasing monthly visitation and organic traffic tenfold, improving website metrics such as bounce rates, and tripling the time spent and engagement rates – all the while achieving a 50% reduction in costs.

Consumer Data: This crucial element has become a foundational aspect of our marketing strategy, supported by advanced marketing technology, facilitating precise and strategic consumer engagement. During the year, we completed the marketing technology setup, with platforms like CDP and Salesforce Marketing Cloud now enabling direct, one-to-one consumer communication. We have also greatly increased our collection of compliant first-party data, achieving a 3.5x increase in data scale, which facilitates omnichannel and personalised communication at significantly lower costs than traditional media buying.

3. Diageo in society

We are committed to building a more sustainable, responsible, and inclusive business and society. Our ten-year ESG action plan, ‘Society 2030: Spirit of Progress,? outlines strategic priorities focussed on promoting positive drinking, championing inclusion and diversity, and pioneering grain-to- glass sustainability. We aim to drive significant impact across our value chain, affecting communities, suppliers, partners, customers, and consumers.

We are committed to moving India towards the principle of

‘drinking better, not more? – an approach deeply rooted in our social values and consistent with our business model as a producer of premium beverages. We actively shape drinking attitudes towards moderation and address harmful drinking through multi-year programmatic interventions targeting drunk driving and underage drinking. Our commitment to championing responsible consumption is further demonstrated through our DRINKiQ platform and the ‘Wrong Side of the Road? programme. Additionally, we uphold responsible brand marketing through self-regulation.

Inclusion and diversity are integral to our values. In India, we are among the industry leaders in promoting gender diversity and have extended our I&D initiatives to include people with disabilities and the LGBTQI community. Our partnership with the Skill Council for People with Disability has successfully trained 110 individuals with Speech and Hearing Impairments in F&B skills, securing their employment in premier hotels.

We ensure a progressive portrayal in all creative outputs, especially for our iconic brands like Johnnie Walker, Black

& White, and Black Dog, where women are central to the communication narratives.

We maintain a strong commitment to making our brands ‘Sustainable by Design? to minimise emissions throughout our value chain. In alignment with this commitment, we introduced a 25% recycled PET (r-PET bottle) for one of our brands, implemented biodegradable packs, and successfully eliminated mono-cartons from 90% of our product portfolio. Over 99% of the materials used are widely recyclable, positioning us to achieve our goal of 100% by 2030. Additionally, we are dedicated to the responsible collection and recycling of pre- and post-consumer plastic waste; this year, we collected 24,132 metric tonnes of post-consumer plastic packaging under our Extended Producer Responsibility (EPR) initiative. Furthermore, our artisanal single malt, Godawan, focusses on water conservation and biodiversity.

Our regenerative agriculture programme involves over 5,000 small-holder farmers in Punjab and Haryana. We are also collaborating with government bodies and local communities to restore natural water resources. Our community programmes on Water, Sanitation, and Learning for Life have empowered women, with 50% of beneficiaries being female.

Our ESG Risk Rating has improved from 23.0 to 20.6, according to Sustainalytics, and we have maintained an ‘A? rating with MSCI for the past two years. Furthermore, our ESG score in CSRHUB has improved from 75 in 2022 to 88 in 2024.

BUSINESS REVIEW

Your Company continued its journey of premiumisation by improving the mix of P&A net sales salience to 87% in the financial year 2023-24. Our portfolio is uniquely positioned to seize the abundant growth opportunities presented by the Indian market. Your Company has been unwavering in its pursuit of achieving double-digit top- line growth and aims for mid-high teen operating margins. To accomplish this goal, your Company is exerting maximum effort to fortify and accelerate the growth of its core brands, enhance its route-to-consumer strategy, and capitalise on economies of scale. Simultaneously, your Company remains firmly committed to upholding the highest standards of corporate citizenship. Its integration with Diageo?s brand portfolio has enabled your Company to establish leadership in both volume and value terms.

Your Company has fortified its entire portfolio through a blend of innovation, renovation, and rationalisation. Prestige and above brands accounting for ~87% of net sales remain the primary focus, with an emphasis on renovation to align with evolving consumer preferences. Your Company?s robust performance in the Prestige and Above segment reflects its commitment and the efficacy of the premiumisation strategy. Your Company has also prioritised optimising value gains in the Popular segment.

During the year under review, your Company?s sales volume was 61.4 million cases resulting in a drop of 15.2% compared to the previous year. This is largely on account of the slump sale of the business undertaking associated with 32 brands and franchising of 11 Popular brands to an unrelated party. The transaction was a conclusion of the strategic review of the select popular segment brands and was approved by the Board on 27th May 2022.

Net sales/income from operations increased 3.1% y-o-y in the financial year ended 31st March 2024, to Rs 10,692 crores as against Rs 10,374 crores in the previous year, driven by continued premiumisation, resilient consumer demand and competitive performance of our innovation and renovation offerings. Overall, Prestige & Above segment represented 82% of total volumes (Vs 66% in the previous year) and 87% of total net sales (Vs 80% in the previous year) FY24.

The Prestige and Above segment?s net sales were up 11.9% with strong double-digit growth across the higher value sub- segments. The Popular segment represented 18% (Vs 34% in the previous year) of total volumes and 10% (Vs 18% in the previous year) of total net sales during the financial year ended 31st March 2024.

With a balanced revenue distribution, your Company maintains an optimal mix across segments, carefully aligning premium and popular offerings. This strategic diversification mirrors a sophisticated grasp of varied consumer demands and an unwavering dedication to delivering excellence across different price points. It not only fosters stability but also enables your Company to tap into varied market segments, facilitating broader growth opportunities and market penetration.

NET DEBTS

Your Company has a healthy balance sheet and is net cash surplus as on 31st March 2024. Net cash position of your Company on a standalone basis stood at Rs 1808 crores (including current investments) as of 31st March 2024. This strong position enables your Company to undertake value-accretive business decisions swiftly.

Significant improvements in your Company?s financial adaptability, corporate governance standards, and compliance framework have led to an enhancement in its credit ratings. CRISIL has reaffirmed its ‘AAA/Stable? rating on United Spirits Limited?s long-term bank facilities and reassigned the short-term rating to A1+. These ratings will enhance your Company?s access to more economical debt sources, thereby reducing interest costs and increasing shareholder value.

OUTLOOK

Your Company maintains its position as a leader in India?s Alcobev industry, benefiting from a robust portfolio and the required support and guidance of Diageo plc, the Company?s ultimate holding Company. Diageo continues to reinforce the Company?s capabilities through various strategic initiatives, including organisational and distribution reforms, revamped brand promotion strategies, enhanced supply chain efficiency, portfolio optimisation, government engagement, and efforts to foster an inclusive work environment and drive gender diversity. With these measures in place, your Company is poised to achieve its medium-term goal of delivering double-digit topline growth and mid-high teens EBITDA margins, driven by improved pricing and cost optimisation. Despite regulatory challenges looming over the Alcobev industry, your Company has demonstrated resilience in the face of such hurdles in the past, positioning it well to navigate through them in the future.

RISKS & CONCERNS, OPPORTUNITIES & THREATS Risks & Concerns

Due to the regulated nature of the industry, your Company is vulnerable to restrictions imposed by the state governments regarding the production, transportation and sale of spirits.

Opportunities

The Alcobev industry in India is undergoing a transformative shift driven by premiumisation trend, as value-based consumption increased. Your Company?s strong emphasis on premiumisation, combined with rising disposable income and evolving consumer lifestyles, creates substantial opportunities for sales growth and margin expansion.

Prohibition in certain states poses a threat to legal sales and fuels inter- state smuggling, hindering industry growth. Furthermore, it may lead to a surge in country liquor sales due to the absence or restricted availability of branded products.

Concluding the strategic review of selected popular brands is a strategic move to reshape your Company?s portfolio. This decision has enabled management to concentrate efforts on Prestige and Above segments, driving forward mission of achieving double digit profitable topline growth.

The Company continues in its endeavours to promote responsible alcohol consumption and mitigate the risks associated with drinking and driving through its ‘Responsible Drinking? initiatives as highlighted in the CSR Report included in Annexure 6 of the Directors? Report.

Renovation and revamping of key brands to upgrade them presents opportunities for margin expansion.

Strong emphasis on achieving the restated mission and adherence to Diageo policies are expected to bolster your Company?s sales and margins.

India is home to the world?s largest population, with 1.44 billion population (as of 20th April 2024). The country boasts the world?s largest young population, with a median age of 26.7 years. ~25 million Indians are expected to enter the drinking age every year which represents substantial growth opportunities for the industry.

Threats

The stringent enforcement of distribution strategies by states limits the growth prospects of the industry.

Stringent pricing control by states poses a threat to margins.

On a macro-economic scale, the global economic slowdown, inflation and vulnerability to the global supply chain due to geopolitical tensions threaten the cost, movement and availability of raw materials. Any adverse scenario related to geopolitical conflicts leads to rising commodity prices, impacting India as a net importer of energy.

The surge in the number of restaurants, cafes, and pubs in India presents a significant opportunity for your company to tap into the thriving Alcobev market.

Intense competition prevails in the segment, fuelled by the lucrative growth prospects of the industry.

The consumption of spurious liquor poses a risk to the growth trajectory of brands in the Popular segment brands.

Low per capita consumption, rapid urbanisation, favourable macro economic indicators, higher disposable incomes and evolving lifestyles bode well for the industry as a whole.

Decrease in consumption due to inflationary pressures and other macroeconomic factors.

INTERNAL CONTROL SYSTEMS

The Company maintains an adequate system of internal controls commensurate with the nature, size, and complexity of the business operations. The Company has ensured that stringent and comprehensive controls are put in place to ensure.

Effective and productive use of resources

Safeguarding of the Company?s assets and interests

Transactions are approved, registered, properly reported and

Checks and balances guarantee reliability and consistency of accounting data

Regulatory compliance is ensured by adhering to various laws, regulations, and prevailing statutes. An extensive programme of internal, external audits along with periodic reviews by the management is carried out to ensure adherence to the best practices and oversight monitoring by the Board establishes a strong control environment. The management has evaluated that the internal controls over financial reporting are operating effectively by adopting the required procedures.

The control framework prevailing in the Company was regularly reviewed and controls were monitored to ensure that corrective measures were taken on time for minimum failures.

KEY FINANCIAL AND OTHER RATIOS

Key financial ratios arising from the financials as given below for the financial year ended 31st March 2024, and 31st March 2023.

Rs Crores

Particulars

31-March-24 31-March-23

i) Key financial numbers (Standalone financial statements)

Share Capital 145 145
Reserves & Surplus 6,818 5,799
Total Equity (Net Worth) 6,963 5,944
Gross Debt (excludes accrued interest and lease liability) 0 1
Profit after tax (PAT) 1,312 1,052
Share Price (Rs) 1,134 756
Other Income 335 74
Revenue from Operations 25,389 27,578
Total Expenses Cost 24,021 26,534
Less: Depreciation 264 271
Less: Finance Cost 76 104
Total Expenses (excluding Depreciation and Finance Cost) 23,681 26,159
EBITDA 1,708 1,419
EBIT 1,779 1,222
Inventory 2,063 2,230
Trade Receivables 3,128 2,383
Trade Payable 1,827 1,738

ii) Debtors? Turnover Ratio

Average Receivables 2,756 2,343
Revenue from Operations 25,389 27,578
Receivable Turnover 9.2 11.8
Receivable Turnover (in days) 40 31

 

iii) Payable Turnover Ratio

Average Payables 1,783 1,633
Cost of Goods Sold, Advertisement and Sales Promotion, other Expenses 8,441 8,348
Payable Turnover 4.7 5.1
Payable Turnover (in days) 77 72

iv) Inventory Turnover Ratio

Average Inventory 2,146 2,197
Purchases (COGS & Excise Duty) 20,745 23,276
Inventory Turnover 9.7 10.6
Inventory Turnover (in days) 38 34

v) Invest Coverage Ratio

Interest 76 104
EBITDA 1,708 1,419
Interest Cover 22.5 13.6
Interest 76 104
EBIT 1,779 1,222
Interest Cover 23 12

vi) Return on Capital Employed Ratio

EBIT 1,779 1,222
Capital Employed 7,204 6,127
Return on Capital Employed 24.7% 19.9%

vii) Net Profit Margin Ratio

PAT 1,312 1,052
Net Sales (net of excise) 10,692 10,374
Net Profit Margin 12.3% 10.1%

viii) Operating Margin Ratio

EBIT 1,779 1,222
Net Sales (net of excise) 10,692 10,374
Operating Margin 16.6% 11.8%

SUMMARY OF KEY RATIOS LEVERAGE RATIOS

Particulars

F24 F23
Debt-Equity Ratio NA 0.02
Interest Cover 23 14

VALUATION RATIOS

EPS 18.04 14.46
P/E Ratio 62.9x 52.3x

PROFITABILITY RATIOS

Return on Equity 18.8% 17.7%
Return on Capital Employed 24.7% 19.9%

LIQUIDITY RATIOS

Inventory Turnover Ratio (in days) 38 34
Receivable Turnover Ratio (in days) 40 31
Payable Turnover Ratio (in days) 77 72

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