united spirits ltd Management discussions

A. ECONOMIC SCENARIO Global economy:

Tentative signs in early 2023 that the world economy could achieve a soft landing - with inflation coming down and growth steady - have receded amid stubbornly high inflation and recent financial sector turmoil. Although inflation has declined as central banks have raised interest rates and food and energy prices have come down, underlying price pressures are proving sticky, with labor markets tight in a number of economies. Policymakers have taken forceful actions to stabilize the banking system.

The major forces that shaped the world economy in 2022 seem set to continue into this year, but with changed intensities. Debt levels remain high, limiting the ability of fiscal policy makers to respond to new challenges. Commodity prices that rose sharply following Russias invasion of Ukraine have moderated, but the war continues, and geopolitical tensions are high. Despite the fillips from lower food and energy prices and improved supply- chain functioning, risks are firmly to the downside with the increased uncertainty from the recent financial sector turmoil.

On the surface, the global economy may appear to be poised for a gradual recovery from the powerful back-to-back blows of the pandemic and the conflict. And the synchronous tightening of monetary policy by most central banks should help see inflation move backwards too. Global growth is expected to bottom out at 2.8 percent in 2023 before rising modestly to 3.0 percent in 2024. Global headline inflation is set to fall from 8.7 percent in 2022 to 7.0 percent in 2023 on the back of lower commodity prices, but underlying (core) inflation is likely to decline more slowly. Below the surface, supply-chain disruptions are unwinding, as disruptions to energy and food markets are receding, however, Inflation remains much stickier than anticipated.

Measures to address structural factors impeding supply could ameliorate medium-term growth. Steps to strengthen multilateral cooperation are essential to make progress in creating a more resilient world economy, including by bolstering the global financial safety net, mitigating the costs of climate change, and reducing the adverse effects of geoeconomic fragmentation.

(Source: IMF Global Economic Outlook, Apr.Rs23)

Indian economy:

The Indian economy is staging a broad-based recovery across sectors, positioning to ascend to the pre-pandemic growth path in financial year 23. Continuing the recovery from the triple blow of pandemic-induced contraction & Russian-Ukraine conflict and inflation, Indias GDP growth is expected to remain robust in financial year 24. GDP forecast for financial year 24 to be in the range of 6 to 6.8%, while the latest IMFs World Economic Outlook forecasts Indias growth at 5.9 percent in 2022-23 and at 6.3 percent in 2023-2024. The Indian economy is well placed to grow faster in the coming decade once the global shocks of the pandemic and the spike in commodity prices fade away.

The rebound in consumption has been supported by the release of pent-up demand, a phenomenon not again unique to India but nonetheless exhibiting a local phenomenon influenced by a rise in the share of consumption in disposable income. Since the share of consumption in disposable income is high in India, a pandemic-induced suppression of consumption built up that much greater recoil force. Hence, the consumption rebound may have lasting power. Accelerating growth in personal loans in India testifies to an enduring release of pent-up demand for consumption. RBIs most recent survey of consumer confidence released in December 2022 pointed to improving sentiment with respect to current and prospective employment and income conditions. PMI manufacturing has remained in the expansion zone for 18 months since July 2021, and the Index of Industrial Production (IIP) grows at a healthy pace.

Enhanced Employment generation seen in the declining urban unemployment rate and in the faster net registration in Employee Provident Fund. Economic growth to be further boosted by the expansion of public digital platforms and measures to boost manufacturing output. The Governments Capex-led growth strategy will enable India to keep the growth-interest rate differential positive.

While Indias retail inflation rate peaked at 7.8% in April 2022, above the RBIs upper tolerance limit of 6.0%, the overshoot of inflation above the upper end of the target range in India was however one of the lowest in the world. The government adopted a multi-pronged approach to tame the increase in price levels - Phase-wise reduction in the export duty of petrol and diesel, Reduction in basic duty on crude and other oils and waiving of custom duty in cotton import helped along with RBIs anchoring of inflationary expectations through forward guidance and responsive monetary policy has helped guide the trajectory of inflation in the country. Retail inflation was back within RBIs target range in November 2022. The Capital Expenditure of the Central Government and crowding in the private Capex led by strengthening the balance sheets of the Corporates is one of the growth drivers of the Indian economy in the current year.

(Source : https://www.ibef.org/economv/economic-survev-2022-23)

B. INDUSTRY OVERVIEW

India is one of the fastest growing liquor markets in the world. Alcoholic beverages are considered a sunrise industry owing to its high-growth potential and increasing social acceptance.

Growth in urban population coupled with the increasing disposable income is projected to propel the market growth of alcohol. Moreover, the advent of variety in the flavor of alcohol coupled with the expanding product portfolio by the manufacturers has further projected to boost the growth of alcohol market.

Change in demographics as well as the change in lifestyle is another major factor expected to foster the market of alcohol. The legal drinking age in India varies from state to state (from 18 years to 25 years), further indicate that India is ideal for the high growth of the alcohol market.

The consumer landscape in India has traditionally been described as 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.

Consumers, especially the younger cohorts are becoming more experimentative and this has led to a surge in offerings within spirits. Artisanal values and local pride are also driving the TBA category growth in India, especially among the affluent cohorts. Indian Single Malts over the last few years have become almost as big as the Scotch Single malts which have been in India for a couple of decades now.

USL has an excellent platform in place to address this opportunity through its complete end-to-end brand portfolio across all price points. International and local competitors focus only on specific segments. USL portfolio has a number of large brands, which have been under-invested in the years prior to acquisition by Diageo.

The above brands together with Diageo brands leverage, USLs leadership position in sales & distribution (largest share of business in retail), its manufacturing network (~40 plants across most states in India) and its proven capability in operating in a highly complex and regulated market acts as a clear differentiator.

Overall, the outlook for the Indian alcoholic beverages continues to remain positive led by favorable demographics, expanding middle class, rising disposable income levels, greater preference for premium food and drink experiences and greater acceptance of alcoholic beverages in social circles.

Although the average per adult intake of alcohol is still considerably low in India when compared to other countries such as the United States, drinkers among young Indians are more prevalent. This provides tremendous opportunity to drive growth of Alcobev industry on the back of its rising working- age population. It is expected that per capita consumption will increase with changes in lifestyle and aspiration of the population.

C. INDIAN SPIRITS MARKET OVERVIEW

India continues to be an attractive market with stable macroeconomics, strong demographics (young population, urbanization, growing middle class) and an attractive TBA marketplace, benefitting from being one of the largest whisky market by volume, is amongst the lowest per capita TBA consumption countries in the world which presents significant headroom for growth. Moreover growing & rapidly premiumising TBA industry as well as new post-Covid consumer trends and emerging consumer cohorts are expected to further drive premiumization in the category. These present an opportunity to accelerate top-line growth and drive share gains in attractive profit pools while continuing to improve our margin.

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 amongst the largest consuming states for Alcobev in India. The most popular channel of Alcobev sale in India is liquor stores as its consumption is primarily an outdoor activity and supermarkets and malls are present only in the tier I and tier II cities of India.

Constantly changing regulatory environment: Frequent and ad-hoc changes in the route to market makes it challenging to conduct business in the Beverage Alcohol Industry. Moreover, controlled pricing proves to be a significant headwind in an inflationary environment. In 2022, there has been a change in route to market in Delhi, which is a significant set-back for the industry. There were also other insignificant RTM changes during the year in the state of Jharkhand and Madhya Pradesh.

Growth drivers: Indian Alcobev industry holds great potential for spirits companies given the current low per capita consumption and aspirations of growing younger population. Shifting preferences towards the quality alcohol which also includes liquor with low alcohol. The rising trend of accepting alcohol drinking and increasing the number of pubs and bar is expected to foster the market growth. Moreover, a growing number of women drinking alcohol and favorable demographics is further expected to drive the market growth of alcohol.

The revival in GDP will give a further fillip to Alcobev sales as IMFL volumes are seen to grow ahead of GDP when GDP growth picks up. The organized players stand to benefit from steady growth in the conversion from country liquor to IMFL given increasing health concerns associated with consumption of country liquor.

Growing prevalence of premium Alcobev: Rapid urbanization is expected to enhance disposable income, which is favorable for the growth of the industry. With more Indians travelling abroad, rising aspirations, favorable environment for imported liquor and higher disposable income, consumers are upgrading towards premium segments in the country. The rise in premiumization is evident in the increased focus of the big players on semi-premium and premium categories with an increase in launches and increased marketing of these categories. Another trend which is gaining traction in the Alcobev space is the growing popularity of grain-based liquor as against traditionally popular molasses-based liquor.

D. REGULATORY SCENARIO IN INDIAN MARKET

Regulatory oversight of both central and state governments encompasses a slew of restrictions on production, movement, and sale of Alcobev products. Alcobev also falls under the purview of Food Safety and Standards Authority of India (FSSAI). In addition, direct advertising of Alcobev products is not permitted in India. Prohibitively high inter-state duties compel national Alcobev players to set-up owned or contract manufacturing setups in every state. Licenses are required to produce, bottle, store, distribute or retail all Alcobev products. Distribution is also highly controlled, both at the wholesale and retail levels. In states with government control on pricing, price increase is based on government notifications. In states where retailing is controlled by the state government, there is

a specified quota that each player can sell, capping potential to increase market share for our products. These regulations make operations restrictive for the industry players.

Pricing continues to remain a challenge for the category since with continuous increase in excise duties, end consumer prices continue to experience upsurge with no benefit to your Company. However fiscal year 2023 was overall one of the best years for the Company in terms of securing pricing in several states across India but not enough to mitigate impact of inflation.

E. 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. 8 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 72 million cases. McDowells No.1, Royal Challenge, Royal Challenge American Pride, Signature, Antiquity, Black Dog, Directors Special Black, McDowells Rum & McDowells 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 Haig Gold Label, 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 almost 70% of sales comprise from P&A portfolio out of the total branded spirits sales.

Diageo plc holds 55.88% shareholding in your Company. Our new Mission is to be 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, Company has been working on following three pillars:

1. Portfolio re-shape

a. Breakout growth on P&A: Accelerate in Luxury & premium segment, strengthen play in Upper Prestige, Reshape value proposition in Lower & Mid Prestige

b. New growth engines and

c. Value chain efficiency extraction.

2. Be an Organization of the Future

a. Digital Acceleration

b. Talent & culture as growth drivers

c. Speed & Simplicity

3. Diageo in Society

a. Driving ESG from grain to glass

b. Moving India towards Drink Better, not More

c. Leading in Inclusion & Diversity

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

Strengths

Your Company has 8 brands in its portfolio which sell more than a million cases every year, of which 1 brand sells more than 25 million cases each annually. The Companys exports business is also growing.

Your Company has pan-India manufacturing presence with approximately 40 facilities and robust distribution network of more than 70,000 outlets, which provide access to vendors, suppliers, and distributors.

With high brand equity and significant market share, 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 Companys 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 flavor management. Your Companys 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 Companys workforce of about 2,957 regular employees are the key strength in achieving the goals laid down by the Company. Our team has enabled us to emerge as the leading player in the industry, despite facing various industry headwinds. Our overall gender representation is 15%, however gender representation in the executive population stands at 26%. Industrial relations during the year were cordial.

F. BUSINESS PERFORMANCE

Our Mission is to be a Top performing CPG company in India delivering sustained double-digit, profitable topline growth & long-term value to all our Stakeholders. We are happy with the progress we made against each of the three pillars to our Mission of delivering sustained double digit profitable topline growth.

1. Portfolio reshape

We saw certain transformational consumer energies that defined the choices we made for our business & portfolio. Our new product offerings during the year was aligned with strong consumer trends and our recent innovation and renovations are impactful, inclusive, and sustainable. We optimized our spends across our marketing channel, with particular focus on increasing the percentage of spend to upper- and mid-funnel channels and launching creative new marketing campaigns.

Godawan, Indias first artisan single malt with sustainability credentials has already been launched in focus states in India and also in the UAE. We have also showcased Godawan along with Epitome Reserve at the Cannes Film Festival in partnership with NFDC. The response from consumers has been heartwarming.

We also launched a limited-Edition Pack on Black Dog in select markets which was created in partnership with Keira Knightley.

We launched Johnnie Walker Blonde, the smooth, bright and light Scotch variant from the house of JW, with its flavour notes of sweet vanilla and apple, drizzled with caramel, and the smell of bright berries and toffee, and brought a ray of sunshine to December.

Johnnie Walker Blonde is a more accessible style of Scotch thats focused on introducing drinkers to the amazing flavours of Scotch Whisky. Blonde is price positioned in between Red & Black and will play the strategic role of recruiting the Next Gen non-Scotch consumers in the casual get together occasion stealing from International Whiskies & Premium Beer.

We also launched Walkers & Co-a platform with the aim to celebrate & enable a community of "bold boundary pushers" in India resonating with the JW philosophy of celebrating the spirit of progress everywhere. It is inspired by the iconic rallying cry of Keep Walking by Johnnie Walker. Globally and even in India, it has inspired creators and collaborators to take bold strides towards collective progress.

This year Walkers & Co has brought together John Legend, the second youngest and the first black man to win EGOT (Emmy, Grammy, Oscars, and Tony) awards, along with the path breaking, renowned Indian female rapper, Raja Kumari, to co-create an inspiring anthem titled Keep Walking. The anthem embodies the spirit of the creator community bold enough to take leaps and strides with the sheer belief in their purpose.

In the Upper prestige segment, our new American Bourbon based IMFL whiskey Royal Challenge American Pride is performing well in most of the launch markets and rolled out pan India progressively. The key focus is to continue to scale up distribution and participate in consumer occasions in priority markets.

The Signature renovation mix included an all-new blend driving the unique proposition Crafted from Nature; given the 100% natural liquid of Islay, Highland, and Indian whisky, put together by master blender Caroline Martin, New Packaging leveraging recycled materials. Also, the use of recycled glass and paper/ cartons for the packaging now has 100% coverage across the country and has landed very well with consumers, reflecting the growing appreciation for brands building sustainability into their actions. In addition, signature premiere variant is doing well in our priority markets.

We launched and rolled-out the new Royal Challenge -renovated with an accessible liquid with huge appeal to LDA-35. Royal Challenge Whiskey is witnessing strong positive momentum nationally. We launched a renovated

Royal Challenge with an all new liquid profile, packaging and brand world & retail identity that has been created for the Middle India LDA-35 consumer, exhorting them to "Choose Bold". The bundle is rolled out to ~70% of salient markets and building on its growth momentum.

Our flagship brand McDowells No.1 is one of the most valuable spirits brand in India.

During the financial year ended March 31, 2023, your Company was able to drive productivity across all line items in the profit and loss account. There are initiatives to create more efficient trade spends under Net Revenue Management program, marketing efficiency and effectiveness for above-the-line spends as well as better overhead management in terms of creating a fit-for-purpose organization. On the cost front, a strong pipeline has been created on each line item in materials, manufacturing, and logistics to counter inflation with benefits to continue to accrue in the coming years. Your Company has also embarked on a multi-year Supply Agility Programme. The programme is expected to strengthen your companys end-to-end supply chain thereby making it fit for the future. This is in addition to everyday efficiency savings as we continue to build a more agile and sustainable business.

2. Be an organization of future

Digital transformation is a key initiative for us in India. On the consumer side of digital transformation, we have been scaling up three critical levers - digital marketing (Precision and Digital Factory set up to set up hygiene and best-in-class processes, capabilities, tools and partners to get Diageo to play catch up and get ahead on Digital Marketing), owned platforms led by in.thebar.com (Diageo owned digital-first branded platform that becomes the one-stop place for all things social celebration and all things alco-bev, through three components of content-community-commerce. And a central platform to enable our first party consumer data and analytics capability) and e-commerce/home delivery in West Bengal.

We also have precision factory, our powerful digital initiative that is focusing on media, data, analytics, and context helping us target consumers with the right context in the right occasion and improving the effectiveness and efficiency of our digital marketing spends. Both these are going to be continued to be scaled up as we progress in the year. We are continuously improving, investing in our tools, capability, and talent and as we improve we are creating a virtuous cycle that brings us closer to consumer towards more efficient and effective engagement and fuel growth.

We are building an organization of the future by making strategic and structural investments and aligning with the changing needs of consumers and the market. In the past year, we have focused on our talent strategy to build the leadership capabilities that ensure we perform ahead of our competitors and secure tomorrows future growth. Our strong process for calibrating and validating talent at all levels has helped us develop and maintain robust succession plans for critical roles. We are also championing inclusion and diversity through a holistic approach that is helping us deliver game-changing work and culture that speaks to wider, more inclusive cohorts and consumer groups.

3. Diageo in Society

Your Company is committed to building a more sustainable, responsible, and inclusive business and society. Society 2030: Spirit of Progress is our 10- year ESG action plan and our strategic priorities are to promote positive drinking, champion inclusion & diversity and pioneer grain-to-glass sustainability. Our priorities are focused on driving the impact we can have throughout our value chain across communities, suppliers, our partners, customers, and consumers.

We want to move India towards drinking better, not more - an approach that is rooted in our social values and aligns with our business model as a producer of premium drinks. Your Company has been doing this through shaping drinking attitudes towards moderation, tackling harmful drinking through sustained multi-year programmatic interventions on Drink Driving & Underage Drinking and marketing our brands responsibly through self-regulation. Your Company champions health literacy and tackle harm through our DRINKiQ platform and Wrong Side Of The Road program.

Inclusion & Diversity is deeply embedded in our values. In India, we have been a pioneer in this space for our industry with regard to women representation in our business. We have extended our I&D agenda to people with disabilities and the LGBTQI community.

We want to drive progressive portrayal in every piece of creative work, particularly our key iconic brands like Johnnie Walker, Black & White, Black Dog all have

women at the heart of their communication narrative, owning the stories we tell.

Our recent launches were sustainable by design including Godawan which aims to preserve ecology with a specific focus on water and biodiversity conservation. We have initiated phased removal of mono-cartons from our premium scotch brands: VAT69, Black Dog and Black & White and have initiated regenerative agriculture program with small-holder farmers in Punjab and Haryana. In addition, we are working with the Government, Panchayat and community to restore natural water resources.

Through community programs on Water, Sanitation and Learning for Life, we empower women in our local communities. 50% of the beneficiaries of our community programs were women.

This year, our distillery in Alwar, Rajasthan earned the prestigious Alliance for Water Stewardship (AWS) certification. It is the first spirit distillery in Asia to receive the coveted AWS certification.

Your Company has been included in the list of "2023- Top-Rated ESG Companies List" for its ESG performance in the year 2022 by Sustainalytics, a global independent ESG rating agency.

G. BUSINESS REVIEW - REVENUE AND REVENUE MIX

Your Company continued its journey of premiumization by improving the mix of P&A net sales salience to 81% in financial year 2022-23. Our portfolio is uniquely positioned to access the high growth opportunities that the Indian market provides. Your Company has been relentlessly striving to achieve double-digit top-line growth and has an aspiration to deliver mid-high teen operating margin. To achieve this, your Company is taking all possible efforts to strengthen and accelerate its core brands, upgrade its route to consumer strategy and leverage economies of scale. At the same time, your Company has remained committed to the highest standards of corporate citizenship. Its integration with Diageo brand portfolio has enabled your Company to establish leadership in terms of both volume and value.

Your Company has strengthened its entire portfolio through a mix of innovation, renovation, and rationalization. Prestige and above brands which represent about 81% of net sales are the core focus of your Company, wherein it has laid emphasis on renovation to keep pace with evolving consumer preferences.

Your Companys robust performance in the Prestige and Above segment is reflective of its commitment and success of the premiumization strategy. At the same time, your Company has ensured that it optimizes value gains in the Popular segment as well.

During the year under review, your Companys sales volume was 72.5 million cases resulting in a drop of 8.4% compared to 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 27 May 2022.

Net sales/income from operations (net of duties and taxes) of your Company increased by 10.1% in the financial year ended March 31, 2023 which stood at Rs103,737 million (previous year Rs94,237 million). With continuous focus on premiumization, overall Prestige & Above segment represented 66% of total volumes (Vs 54% in the previous year) and 81% of total net sales (Vs 72% in the previous year) during the financial year ended March 31, 2023. The Prestige and Above segments net sales were up 22.8% with strong double-digit growth across the higher value sub-segments. The Popular segment represented 34% (Vs 46% in the previous year) of total volumes and 18% (Vs 26% in the previous year) of total net sales during the financial year ended March 31, 2023.

The Popular segments net sales declined by 25% during the financial year ended March 31, 2023. The decline this year was on account of the slump sale and franchising transaction mentioned above.

H. NET DEBTS

Your Company has a healthy balance sheet and is net cash surplus as on March 31, 2023. Net cash position of your company on a standalone basis stood at Rs11,043 million (including current investments) as at March 31, 2023. This strong position enables your company to undertake value- accretive business decisions swiftly."

Significant improvement in your Companys overall financial flexibility, corporate governance and compliance framework has led to further improvement in our credit rating. CRISIL has reaffirmed its AAA / Stable rating on United Spirits Limiteds long-term bank facilities. These ratings will enable the Company to access more economical sources of debt leading to lower interest cost and increased shareholder value.

I. OUTLOOK

Your Company remains the leader in Indias Alcobev industry by virtue of strong portfolio and benefits from the guidance of Diageo plc, the Companys ultimate holding Company. Diageo continues to strengthen the Company with changes at management & distribution levels, revamp of brand promotions strategy, enhanced supply chain efficiency, focusing on lean portfolio, engaging with the government, and improving work culture and driving gender diversity. Your Company looks on track to deliver on its medium-term goal of delivering doubledigit topline growth and achieve mid-high teens EBITDA margins led by better pricing and cost optimization. Regulatory overhangs will continue to pose challenges for the Alcobev industry. As seen in the past, your Company is well equipped to overcome such challenges.

J. RISKS & CONCERNS, OPPORTUNITIES & THREATS Risks & Concerns

• The industry is exposed to multiple regulatory risks emanating from state taxes, adverse ruling from courts and changes in regulations with respect to pricing, licensing, working of operating facilities, manufacturing processes, marketing, advertising, and distribution.

• Further due to regulated nature of the industry, your Company is exposed to the restrictions by the state governments on production, movement and sale of spirits.

• On the macro-economic front, signs of slowdown of the global economy and challenges related to global supply chain being vulnerable to geo-political risk poses threat to raw material movement and associated cost & availability of the same. Any adverse war related scenario leads to rising commodity prices which also impacts India, which is a net importer of energy and rise in crude prices presents a risk to Indias economy.

• Another concern emerges from the dependence on state governments to get price increases or changes. Margins may get severely impacted due to commodity cost inflation.

• Significant changes in route to market strategies by various state governments pose a concern on establishing distribution network with new intermediaries. This also poses credit risk in case the existing distributors default due to the closure of their respective businesses.

• Prohibition in certain states poses a threat to legitimate sales and gives rise to inter-state smuggling impacting industry growth. This may also lead to a proliferation of country liquor sales in absence of / curtailed availability of branded products.

• The Company continues to work to promote responsible drinking and to mitigate risks due to drinking and driving through its Responsible Drinking initiatives as highlighted in the CSR Report appearing in Annexure 6 of the Directors Report, showcasing the corporate social responsibility initiatives of the Company.

K. OPPORTUNITIES

• Your Companys strong focus on premiumization coupled with rising disposable income and evolving consumer lifestyles presents significant opportunity to grow sales and expand margins.

• The conclusion of strategic review of selected Popular brands is a strategic move to Reshape your Companys portfolio and will enable sharpened focus of management time on Prestige and Above and delivering our mission of double digit profitable topline growth.

• Renovation and revamping of key brands to upgrade them presents opportunities to expand margins.

• Strong focus on accomplishment of restated mission and adherence to Diageo policies is likely to aid your Companys sales and margins.

• Low per capita consumption, rapid urbanization, favorable macroeconomic indicators, higher disposable incomes and evolving lifestyles bode well for the industry as a whole.

L. THREATS

• Strict imposition of distribution strategies by states restricts growth prospects of the industry.

• High competitive intensity in the segment due to lucrative growth prospects of the industry.

• Consumption degrowth due to inflationary pressures and other macroeconomic factors.

• Global supply constraints.

• High pricing control by states pose a threat to margin.

• Proliferation of spurious liquor consumption poses a threat to growth of the Popular segment brands.

M. 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 Companys 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 program 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.

N. KEY FINANCIAL AND OTHER RATIOS

Key financial ratios arising from the financials as given below for the financial year ended March 31, 2023, and March 31, 2022.

(Fig in Rs million)

Particulars	31-Mar-23	31-Mar-22
(i) Key Financial Numbers (Standalone financial
statements)
Share Capital	1,455	1,453
Share Suspense		2
Reserves & Surplus	57,990	47,468
Total Equity (Net worth)	59,445	48,923
Gross Debt (excludes accrued interest and lease liability)	11	3,417
PAT	10,517	8,509
Share Price (?)	756	888
Other Income	742	337
Revenue from operations	275,775	307,731
Total Expenses	265,333	296,393
Less: Depreciation	(2,706)	(2,886)
Less: Finance Cost	(1,039)	(880)
Total Expenses (excluding Depreciation and Finance cost)	261,588	292,627
EBITDA	14,187	15,104
EBIT	12,223	12,555
Inventory	22,300	21,643
Trade Receivables	23,828	23,021
Trade Payables	17,383	15,279
(ii) Debtors Turnover Ratio
Average Receivables	23,425	22,311
Revenue from Operations	275,775	307,731
Receivable Turnover	11.8	13.8
Receivable Turnover (in days)	31	26
(iii) Payable Turnover Ratio
Average Payables	16,331	14,546
Cost of goods sold, advertisement and sales promotion, other expenses	83,599	72,766
Payable Turnover	5.1	5.0
Payable Turnover (in days)	71	73
(iv) Inventory Turnover Ratio
Average Inventory	21,972	20,727
Purchases (COGS & Excise Duty)	232,756	266,333
Inventory Turnover	10.6	12.8
Inventory Turnover (in days)	34	28

(Fig in Rs million)

Particulars	31-Mar-23	31-Mar-22
(v) Interest Coverage Ratio #
Interest	1,039	880
EBITDA	14,187	15,104
Interest Cover	13.7	17.2
Interest	1,039	880
EBIT	12,223	12,555
Interest Cover	11.8	14.3
(vi) Return on Capital Employed Ratio
EBIT	12,223	12,555
Capital Employed	61,278	54,977
Return on Capital Employed	19.9%	22.8%
(vii) Net Profit Margin Ratio PAT	10,517	8,509
Net Sales (net of excise)	103,737	94,237
Net profit Margin	10.1%	9.0%
(viii) Operating Margin Ratio
EBIT	12,223	12,555
Net Sales (net of excise)	103,737	94,237
Operating Margin	11.8%	13.3%

SUMMARY OF KEY RATIOS LEVERAGE RATIOS

Particulars	F23	F22
Debt-Equity Ratio	0.02	0.12
Interest Cover	13.7	17.2
VALUATION RATIOS
EPS	14.46	11.70
P/E Ratio	52.3x	75.9x
PROFITABILITY RATIOS
Return on Equity	19.4%	19.1%
Return on Capital Employed	19.9%	22.8%
LIQUIDITY RATIOS
Inventory Turnover Ratio (in days)	34	28
Receivable Turnover Ratio (in days)	31	26
Payable Turnover Ratio (in days)	71	73

# -Debt Equity and Interest coverage ratio has shown improvement during the financial year 2022-23 due to repayment of all the outstanding loans.