United Spirits Limited (UNITDSPR) Earnings Call Transcript & Summary

Ladies and gentlemen, good day, and welcome to United Spirits Limited's Q3 FY '20 Results Conference Call. [Operator Instructions] Please note that this conference is being recorded. I now hand the conference over to Mr. Anand Kripalu, Managing Director and Chief Executive Officer; and Mr. Sanjeev Churiwala, Executive Director and Chief Financial Officer, United Spirits Limited. Thank you, and over to you.

Thank you very much. And hi, everyone, and a very warm welcome to the F '20 third quarter and 9 months results call. As we normally do before we open the lines for Q&A, I just want to share a brief summary and an overview of the results that we announced last evening. As you might have seen from our published results, despite the impacts of the ongoing slowdown on the industry and the growth of the industry, we saw a sequential improvement in our top line. Net sales for the quarter grew just over 3%, up from a flat performance in the second quarter. More importantly, we're encouraged to witness some momentum in our Prestige & Above portfolio, which grew a little over 8% on a high comparator of 16% growth in the same quarter last year. This is in sharp contrast to the previous quarter, when the segment didn't grow partly also because of some internal operational challenges that we faced. We also saw a return of premiumization, with each subsegment in our portfolio growing faster than the one beneath it. Having said this, we as a management team remain resolute about driving higher levels of growth, so you will see enhanced interventions to enable this in the periods to come. And the first amongst these is the rollout of a significantly enhanced mix for our biggest brand, McDowell's No.1, and this will start hitting select states very soon. In fact, our Scotch brands had a strong quarter, thanks to the resolution of the temporary supply chain disruption in our luxury Scotch portfolio that we spoke about in the last quarter and also in terms of some improvement that we've seen in the liquidity situation in some of the key markets for premium Scotch. This is certainly encouraging in this current context of the economy, and this has also resulted in a positive price mix of 5.6% for the Prestige & Above segment. Our Popular segment, as you've seen, declined 5% in the first quarter, led by a decline in our priority states. Part of this is due to the conscious deprioritization of some of our low-margin brands for us to avoid further runaway inflation in D&A costs. On a year-to-date basis, Popular is around minus 1%, which is over the last 3 quarters. And that's not hugely divergent from the guidance that we have given typically, which is a flat to low single-digit growth for our Popular portfolio. In terms of profitability, continued inflation in our raw material costs, especially ENA, more than offset the positive impacts from the price mix. And hence this impacted the gross margin for the quarter, which came in at 44.4%. Despite considerable gross margin compression, we have delivered an EBITDA margin of 16.4% for the quarter, an improvement of 207 basis points versus the last year. This brings the 9 months underlying or like-for-like EBITDA margin improvement to 118 basis points, net of the bulk Scotch sale and any one-off restructuring costs in the base. More importantly, this EBITDA margin expansion has been delivered in what we believe is an unprecedented cost inflation environment and as a result of our continued discipline on cost management and not just by pruning our A&P. Like we have shared with you earlier, we have been prudently prioritizing credit risk over sales in credit-intensive markets. And whilst in some periods in the past we took a hit on that, you can see that, in this quarter, in the other expenses line on the P&L we have not had to make any provision so far. And that, in some ways, underscores the prudence that we've shown. The A&P investment rate for the quarter was 9.7% of net sales, which brings the year-to-date rate to 8.6%, roughly in line with our full year guidance. During this quarter, we rolled out McDowell's No.1 Platinum in 3 new states; and [indiscernible], the pocket Scotch offering, in 1 new market. Both these innovations continue to perform well. Profit after tax for the quarter was INR 259 crores, up 35%. And PAT margin for the quarter came in at 10%, a multi-quarter high. PAT growth during the first 9 months of the year was 28%. I'm also pleased to share that, during the quarter, CRISIL has reaffirmed the existing credit ratings of AA+ and A1+ on our long-term and short-term debt, respectively; and revised the outlook to positive from stable. This reflects CRISIL's acknowledgment that we will sustain the journey of improvements in margins, cash equivalents and deleveraging over the medium term. We have seen some green shoots in consumption in the current quarter. We are hopeful that the recent government interventions and the upcoming budgets would recreate positive momentum for our category. In summary. This year, as you know, has presented a fair share of challenges for our category. And while that has had an impact on our growth trajectory, we have, we'd like to believe, demonstrated agility in managing the profitability of our business, taking us even closer to our medium-term EBITDA margin guidance. Hence, as the economy improves, I am confident we will continue making progress towards our medium-term ambition of growing our top line by double digits and improving EBITDA margins to mid- to high teens. With that, I'm going to open up the lines for questions.

[Operator Instructions] The first question is from the line of Arnab Mitra from Crédit Suisse.

My first question was on the growth itself. You've seen a pretty good growth in P&A, but how much of this would you ascribe to pipeline refilling after the disruptions you had due to the licensing issue? And in a normalized state, if you could think of if that was not the case, what would have been the P&A growth? Or if you would want to call out the ex costs growth as more of a normalized trend on the P&A side. So it would be helpful to get some sense on that.

I mean, Arnab, thanks for the questions. I don't think that is material. We monitor secondary sales very closely in our business and there has been no significant pipeline filling or stock increase that explains our performance, so I'd like to believe broadly that a large part of the performance is underlying. And we have benefited from a good winter this year and, I will say, a reasonably good festival and wedding season, right, more the wedding season, towards the end of the year. So I will say it's underlying. Now the point is that we all know that one summer doesn't make -- one swallow doesn't make a summer. It's hard to see how P&A will continue to perform, right? Previous quarter was flat. This quarter was good. What the next quarter will be, we can't tell you for certainty, but we do believe that all of this is because of fundamentals, underlying interventions that we have made, all right, including activation on our brands and a large focus from our [ sales side ] to deliver a good quarter. So I'd ask you to read it that way.

Sure. Second question was on the 2 key costs, which are staff costs and other expenses, which on the 9-month basis I think staff cost is down 13%, adjusted for the VRS. And other expenses are down about 12%. So other expenses, you did allude to the bad debt situation, but the staff cost decrease is just too sharp from a normalized, your earlier guidance which was more like a flattish territory. So what kind of explains this kind of a big dip in both these expenses? And more importantly, is it like a new normal of costs? Or could these costs come up sharply at some stage? Because these are unduly depressed right now.

Thank you. Let me answer. This is Sanjeev here. I think [indiscernible] we're looking at 9 months [indiscernible] looking at the quarter. So as we said, if we look at the 9 months number, our staff cost as a percentage of our net sales is close to about 6%, right? First, when I just look at [ this change ], as compared to '18, '19, it was about 7.8%. '19, we closed at about 7%. And now we're looking at about 6% for the first 9 months. So absolutely there is the continued ramp-up of optimizing the [ real ] staff costs. As we have mentioned in all our previous calls, we are looking at [indiscernible]. I mentioned efficiency and productivity, and that is a piece of work that is embedded in our [ operating ] program. And that is benefit you will us doing, every year, year-on-year and including the 9 months. And last is the fact that this is sustainable and will continue going forwards, but of course, there will be some variance between certain quarter and 9 months to 9 months. My sense is we will continue to ensure that, a large chunk of the inflationary impact that we see on the staff cost, which is about 8%, we should be able to mitigate that part, almost fully mitigate, and try and ensure that we get a significant [ result ]. This adds back to EBITDA margins going forward. That's where we are likely to report it.

Sure. And anything on other expenses other than bad debt, which is because even -- and looking at your full year bad debt number, there seems to be other lines also which are lower. So anything other than the bad debt which is driving the other expenses lower?

So I think, when the going gets tough, the tough get going. I think, in the last 3, 4 quarters, we have [indiscernible] overall category [ that are not ] happening. We expect that we see the cost inflation environment not benign anymore. And as such, we have ensured that across all the line items, across various targets that you've seen, we drive productivity. And that's something that we have been doing very diligently over the last 3, 4 quarters; and [ we shall ] continue that. Of course, between the other [ headlines ] and the other [indiscernible] I can [indiscernible] in one carefully [indiscernible] completely -- complete control on [indiscernible] disclosure, hence we have put a complete measure around that. And we will definitely continue [indiscernible] [ to sustain if we think ] the market is normalizing for us.

The next question is from the line of Abneesh Roy from Edelweiss.

Sir, my first question is on the regulatory side. So one is in UP [indiscernible] about the [indiscernible] getting extended. And on the other hand, [ D2C ] shops proposal is to reduce the number of bottles one can buy. So one is why there is no [ current ] thinking still. And are you and the other players speaking with the regulators? Any big impact of either of these?

Well, first of all, Abneesh, this is a [ pretty ] regulated model, right? So -- and we cannot always say that decisions taken are 100% logical or consistent with decisions around safety. As far as UP is concerned, we're [indiscernible] policy, honestly, in terms of the pluses and minuses in the policy. So I'm not going to comment on that. Equally, on the [ D2C ] allowance of 2 bottles and 1 bottle, I mean, it's speculative. I know that enough people are doing their best to convince the concerned ministry to not make any change, but the new items, honestly, are speculative. And there is very little that I can comment on this time based on speculation. Let's see what happens when the budget comes, which is, what, literally 3, 4 days away. And then the people will, I think, rally together and decide next steps.

Sir, second question is on ad spend. So it's at a 4-quarter high as a percentage of sales. So is this because of the festive? Or is this because of the new launch of the McDowell platinum? Or is it because competition has also started spending more?

So 2 points. Typically, the October-December quarter is a peak spending quarter. It's one of the peak consumption quarters, right, for our brands. And therefore, at the time of peak consumption, your brands need to be more present than the other brands will be or -- and therefore, typically you will see there's a cyclical movement of A&P in that quarter pretty much every year, and therefore you've seen it this year as well. As far as competition is concerned, I can tell you that we monitor our spend, media spend, versus other key competitors and the total market in our category. And our objective is to be competitive at the category level and for the priority brands in the category to be competitive versus other brands in the category that compete on a head-to-head basis. And I can tell you that our spends remain competitive. In fact -- [ and when don't ] spend, more [indiscernible], right? So that's how you should decode it.

And sir, last question, on demand side. So in Q2, you had mentioned some signs of revival in consumption because of the festive season. You also mentioned that now there are some green shoots which are visible, so could you elaborate? Is it more of FY '21 back ended, where I think good recoveries happen? Or do you expect prior to that, you sense some demand recovery?

Well, FY '21, if I can tell you [indiscernible] become a rich man [indiscernible], Abneesh, but given the reality is this. Honestly, the environment is difficult to read. If I'm completely honest with you, the environment is tricky. Initially, as for the festive season, which was Diwali, [indiscernible] went well, but Diwali did not go so well this year. But again, it seems to have picked up in November, December with the business, new year celebrations and the wedding season setting in. So it is a pretty -- it's a bit of plus and minus. It's [indiscernible]. I can't really say how much this market will open up, right? And as you know, it's also contingent on larger economic situation in the country. I think the question is what can we do as a management team. We can't change the GDP growth numbers. What we can do to focus on what we believe will drive growth in a [ discrete ] environment. How can we make sure our brands are noticed more and across consumers better? How can we bring new news to our brands? And I spoke about platinum, about [ Signature ]. I have spoken about the No.1 relaunch, which is an all-new mix going into the market, right, as we speak. So we have to focus as a management team on what we can do to drive growth. And as I said in my opening comments, we are resolute about getting more growth in this business, right? And we can't change the environment, but we can change what we do. And I think that's what we're trying to do as a management team. Now how that will translate into numbers, I think you just have to wait and see, and I will also wait and see.

The next question is from the line of Avi Mehta from IIFL.

Sir, I just wanted to kind of understand more on the other expenses, the cost control. You have shown a very good ability to kind of work these line items and very commendable performance over there. Would you be able to share, adjusted for the Ind AS and the reduction in provisions, what is the other expense growth or decline like over 9 months? And if you could help us with that. Then I can follow up.

Yes. So I think the only big adjustment that we'll see is around our focus on credit management over the last [ 2 ] quarters precisely. If you recall, in F '19, we had to provide, [ first of all ], receivables [ in our ] market. Primarily it comes from the risk between market and some difficulties that we are facing. Then we have ensured that, over the last 9 months through the year, we focused on sizing that credit in those markets, and that has been sized as we look in. And as you look at, you can see in the last 9 months we did not have to provide timing in recoveries going back. And this number is because [indiscernible] does not agree with the factoring that [indiscernible] as well, and those numbers are [ effectively reducing ]. So if I look at the 9 months number: Last year, for the 9 months, we had to provide about INR 137-odd crores. And compared to that, we don't have any particular provisions we're setting there. So that's something that you can pick up from the [indiscernible] to do a like-for-like comparison. And I think what is most important is this was a like-for-like comparison, but the fact is [ all we have started to give ] and manage our overheads this particular quarter as well as the last 2 quarters, 9 months. And that's something that we'd like to see as more normal. And just looking at the base, it's something that we had last year. On the Ind AS. One must take as an adjustment [indiscernible]. That, we'll take it up [ on the deal ]. We've started taking it [indiscernible]. We will see our overall overhead kind of still in the [ positive joint ] in spite of that being hit by almost a normalization of 5% to 6% every year. So that kind of really points out that we've been driving our efficiency across all other items, including other overheads.

[ And therefore ] I need to summarize what Sanjeev said. The progress reducing overheads is actually a translation of our strategies on how we manage credit risk and how we are managing discretionary expenses, right, and is therefore not just a surprise. It's part of, I will say, a plan and a program that got us to this point.

Yes. And just if I may add because this question [indiscernible] will come up. At the end of F '19 call, when Anand and we were talking to all of you, there we clearly said the market overall thinks that the category is slowing down. We've been very clearly seeing the cost inflationary environment has an impact for us, including glass prices as well as [indiscernible] prices, which become a reality now. We have been clearly saying that, over the last [ few ] years, we have driven 700 to 800 bps improvement in the gross profit margins. We don't see that coming in through. So we have to definitely work through the reshaping of the P&L and ensure that we work through the [ complexities ] across all of the line items, and that's exactly what you'll see in the state of the P&L now.

No, I agree with that. No -- and I mean especially even more commendable because I have some -- recollect in the analyst meet that you had highlighted that, well, most of the low-hanging fruits are done. And despite that, I think your other expense is more or less flattish even if I adjust for these. I mean the fact that you kind of cut it, but where are we coming from is as we go forward. I mean, well, this is what I wanted to understand. Do you see more levers to kind of be able to maintain or at least drive this momentum? Is -- that what is what I wanted to kind of get some sense from you, if you could.

Yes. I think our guiding factor is we don't want to deep dive into each of the lines of the P&L. I think what's most important is to keep on driving the EBITDA growth and EBITDA margin growth, right? And this is what's factored across all other line items to ensure that we deliver that. Of course, year-on-year, those levers will change. This year [ around time ], we're kind of putting much more emphasis on looking at all the overheads line items because we know for sure the cost [indiscernible]. So I think the deeper dive is -- I think, going forward, absolutely we can keep a very, very close watch on our overhead spend and see how the market moves on because I think there is not an option at the moment that we're taking on. The best part is, as you already see and Anand said, November, December, if we see some revival in growth coming in, we hope we can continue with the momentum so that we can pick up a bit of [ inflation ] on everything else. But I think it's good to remain slim and thin as we move forward.

Okay. And the second bit was on the input cost. How exactly is that kind of behaving? Has there been some let-off on that inflation, or is it continuing to remain a cost pressure? And how should I see that?

Yes. So I think we have seen -- and inflation that we talk about is largely ENA for us. And when I look at the last 2 quarters and especially the last completed quarter -- we have seen some inflation-based -- some softening coming in. I think the peak is all behind us, right? We had the peak of the inflation before quarter 2. And I think October -- September, October was the peak. We've seen some softening happening in the last 1 or 2 months. And our sense is the worst is behind us and we should start seeing some stabilization coming in as we move forward.

Okay. And then last bit, if I may squeeze in, is just on the employee costs. Is this decline because of some change in the way you are now approaching the employee remuneration? I mean, have you kind of done that? Or is it more to do with reduction in manpower itself which you have kind of done?

It's part of a larger productivity agenda. We're trying to drive efficiency across everything else that we do in the business, including also efficiencies across how we manage various functions. And that's something that we have been doing over the last 2 years, and a large part of that is specifically [ the numbers now ].

Yes. At the end of the day, you can't risk [indiscernible] right? So -- and we haven't reduced any [ more tally ], I think. I brought 2 directors, [ on top of my hands ]. So it's really about the efficiency of the organization structure and delivering these results and more productively, and that's how you want to look at it.

The next question is from the line of Latika Chopra from JPMorgan.

The first question is around the recent tax hike in Telangana. And there was a news around license fee hike in Uttar Pradesh. Does any of these worry you at the margin from a demand perspective going into Q4?

So UP, we have not recorded the new policy, by the way. And there are some positives there. There are negatives -- and negatives there. And I don't want to comment on it, but we are happy to apply [indiscernible] once we've recorded the policy [ through ]. As far as Telangana is concerned, there was a sharp price increase that happened in the middle of December. And it's basically INR 20 [indiscernible], which is quite material at the lower segment of the market. And it becomes less material as you go to the higher segments in the market. Now the typical reading, by the way, Latika, has been that, [ as you're aware ], this is not the first time that there's been a material price increase in terms of excise duty. Happened in Maharashtra last year. It's happened in Karnataka in the past. And how does this behave? How it behaves is for 2, 3 months there's a slowdown. That slowdown is partly because consumers-led portfolio because -- decisions, but it's more because trade tends to down stocking in industry. When a -- price increases happens, that downgrade happens. And they try and get as much old stock as they can, et cetera, et cetera. And consumers were out looking for old price drop. But we have typically found that the category is quite resilient and elastic, right, or inelastic actually. And 3 months later, the [ category ] bounces back. There are multiple examples in our space of this happening. So there's a short-term impact. Do I believe that, that INR 20 will have a long-term negative impact? I don't because the absolute consumer price in Telangana actually is not very high compared to many of the surrounding states like Maharashtra and so on and so forth. So the absolute consumer price is still not something that's completely out of whack where it will go. It will go out of, I would think, completely in terms of affordability. The other thing to think about is, because the price increase is flat irrespective of the segment, you should believe that a INR 20 miss at the bottom end of the market is hugely impactful for the consumer, but INR 20, as you become more premium, is a small increase in price. And therefore, many think this may lend itself to a bit more premiumization and a bit more of people buying more premium brands, which then is in line with the strategy as well. So short term, yes, impact. Medium term, it is unlikely that -- in our industry that people stop drinking, all right? We haven't seen that. There's no data to believe that, that will be the case from whatever we have seen so far.

Yes. This is very clear. The second bit, again on gross margins. And I heard Sanjeev mentioning that you have seen softening in ENA prices over the last 1 or 2 months. Now for this quarter, you had a very good mix. And we did see a sequential dip in gross margins, so how should one read this? Is it, it was state mix which also played its role? And is it right to say that this is probably the bottoming out of gross margins in Q3 and one should start expecting improvement even on a sequential basis going forward?

So I think your hypothesis is correct, Latika. We also think that the gross margin seems to have bottomed out. The last 3 quarters was largely impacted initially because of the glass, but we have not been able to -- we have not given any glass price increases over the last 3 quarters. What we've seen recently is basically, the ENA inflation, which has played the biggest part that we have, we think that has bottomed out now. And my sense is, that gross margins profile, that it will go forward. You should not see further deterioration dropping in. And of course, there is this impact of the price mix and the [ blank ] mix that we see, and this is also affected with other things. So mix, I think we are in a good position now. The ENA prices seems to have stabilized. I think the worst is behind us. And if we are kind of able to kind of [ pulled off the margin profile ] going forward, [ which is all then ] operating leverages that we have seen, that should help us bring our EBITDA margins beyond what we have had.

The next question is from the line of Harit Kapoor from Investec.

Just had one question regarding the liquidity thing that you had called out in Q2 and you said now that things have eased a little bit. Would this mean that in some of the northern states that you were kind of restricting sales at the P&A portfolio things are now back to normal?

So yes, that's back to normal in the sense that we're not restricting. That doesn't mean there are no market challenges that exist in some of those states, but clearly we aren't restricting. But I'll tell you one thing: We're also not letting go. So with many of the customers, we have once bitten twice shy, so we know how much credit to play with. So very tightly controls from the center here on credit by customers, customer-wise. It's controlled from here. And for many customers, we can stock as much as they pay back. So we're not increasing the exposure at all, but I will say it is not a hindrance today to deliver what the demand is, all right? Earlier, we were holding back. And I said, even if I lose market share, I don't mind. Let somebody else take the credit risk. We are not willing to do that. Today, we are not advantaged.

Got it, got it, sir. And second thing was on the balance sheet side. You've organically continued to reduce the debt, so I was just wondering. In the near-to-medium term, any resumption of the asset monetizations that are likely possibly going forward? Or that's for the near term. Or medium term doesn't look likely.

So let me take 2 parts of the questions. Absolutely, we are working towards ensuring the cash flow that we generate for the company year-on-year kind of stays intact. And to that extent, we are very tightly monitoring our CapEx program. And so you'll see the last-- over the periods this is tightly managed in the bank, but we will continue to drive those same efficiencies. When we look at our working capital, I think we have been doing excellent work in terms of reducing our working capital and average working capital year-on-year. In spite of the liquidity trends and issues that we have, we have still very tightly been able to manage our working capital, so absolutely while this quarter we have not reported the balance sheet. But I'm very, very sure, when we look at the full year results and outcomes, you will see similar outcomes in terms of debt reduction as well as working capital efficiency we have been driving into the business. Sorry. I don't remember [indiscernible] part of your question.

Yes. The other one was on the asset monetization, sir.

Yes. The asset monetization program we have been working for the last 4 years will still continue. And as I've mentioned in the previous calls, whatever assets that we're monetizing now will not give me operating profit or margins coming out of, but it will definitely give me cash. And just to kind of give you the numbers overall: We still roughly have INR 1,500 crores of portfolio that is to be monetized. This will have a combination of the treasury shares. It's about -- my sense is about INR 1,000-odd crores within market value, plus a combination of residential and commercial properties that we have scattered across South India. A large part of that is kind of the [ litigations that are there ] right now, which we are still [ fighting ] it out, but that's the portfolio that we have. My sense is we will continue to drive this monetization but do expect any benefits coming above the top line or within the operating profit, but yes...

Cash.

The cash is absolutely flowing.

The next question is from the line of Amit Singh (sic) [ Amit Sinha ] from Macquarie.

Congratulations on good numbers. Sir, my first question is I wanted some commentary on the competitive intensity which you are seeing at this point of time. One of the global players has launched their IMFL brand recently. So on a longer-term basis, I mean, let's say the kind of intensity which used to exist -- and I know, I mean, it has always been a high-intensity, competitive-intensity market, but I mean, if I had to just compare between, let's say, 4, 5 years back and now, I mean, how do you rate it? Some commentary there would help us.

Yes. So listen. It is an intensive category competitively, no debate about that. And more players will keep coming in as the attractiveness of this category becomes more and more visible to everyone. We all look at the same data, at the same opportunities in terms of consumers. I do want to reiterate that India is a growth market, and the short-term slowdown should not be decoded in anything other than the fact that over a broad basis it's a growth market. Category growth is everything in this market. And honestly, more competitors come in and invest more, right? I feel that on other categories -- from my experience in the past, categories grow faster than the intensity of that category and the competitors of that category increases. Categories grow faster, right? Now the only question then is to say, right, how do you stay competitive, whether it's in terms of your brands, the offers that you have and your pricing. And that becomes then part of strategy. So honestly, I welcome competition because finally the consumer gets a better deal. And honestly, we will only grow faster. The question is to hold or grow share in that increased competitive environment, and that's precisely why we are doing a lot of the stuff that we are doing as a business. Now some of the shorter-term challenges in terms of competition have been some amount of price-based competition that some of the competitors have employed as a strategy. That is not our strategy, right? I just want to be clear that in this category and in our industry it's so easy to forgo margin and get volume, but you can never get your margin back easily, yes. So just like we prioritize credit risk over net sales sometimes, sometimes we prioritize margin over short-term volume and share because even this -- being this protected is important because that gives you the right to invest and the right to grow later, right? So that's a philosophy we pursue. Now we're not stupid about it. If somebody is running over the market, then we will respond, but we don't respond immediately the moment something happened. So I think there are 2 kinds of competition really, short-term tactical, price-based competition; and longer-term strategic competition where people are launching new brands and investing into the category. And I think you have to deal with each in terms of what is the process.

Sure, sir. Secondly, in the starting remarks you had mentioned that you were planning to -- or I mean there is a renovation plan for McDowell No.1 brand. Just wanted a few highlights there, if you can tell us in detail. I mean what is the time line? And is it a new liquid? Or there is a new packaging which is involved here.

So I said it's all new, okay? So -- and it's rolling out as we speak, and that's why I'm sharing with you. Because it's currently being produced. The labels have been registered [ and may be hitting ] the market, right, any moment now. So it's all new. It's a new, more environmentally friendly carton. It's a new bottle that is slimmer and taller. There's a whole new representation of the key brand [ asset ], which is the [ embrace ] on the back. And of course, there's a new liquid, right, a new, improved liquid. And we have done extensive testing, right, on this liquid both in terms of research as well as actually in some test markets to prove that it is going to make a big difference to this brand. As you know, it's the heart of this business in many ways. And we are very hopeful and confident, in fact, about the impact that this can have as we roll it out.

The next question is from the line of Nillai Shah from Morgan Stanley.

Can we just talk a little bit about the market share trends that you witnessed over the first 9 months of the financial year, especially in Maharashtra?

Maharashtra is definitely we have shown very strong market share, but I really don't want to get into a share discussion at a micro level, okay...

Maybe just overall pan-India, just how is...

No. I'll just give you a sense for it. So we don't really discuss yet because I don't have any data that we can share publicly, but I'll just give you our sense on this. So first of all, India is not a winner-take-all market. It's a growth market. And as I said in the earlier question, category growth is everything in this market, okay? So it's not taking a share of the pie that you'll see. It's about growing the pie, and that's the heart of the strategy that certainly we are pursuing in this market. Now typically we operate 5 segments in the Prestige & Above category, okay? So there is Bottled in Origin. Scotch is largely a Bottled in Origin product. Bottled in India, upper Prestige, mid-Prestige and lower Prestige, right? Now I'm not going to get too specific, but what I will tell you in our transparency is we are winning in several of these and we are losing a bit in a couple of these. And you will see information, right, in the foreseeable future that will be addressing any of the places where we have felt a bit challenged, okay? So that's how broadly it kind of pans out. I'm not going to give you numbers and so on and so forth because we honestly don't have what we can share, but that's the broad situation.

Got it. And any price increases that have come by in the last 3 to 4 months?

So last 3, 4 months, I don't think there's any price increase. As we know, that in the previous 6 or 8 months, we got 17 states. And we've said that before, but typically price increases don't come in the run-up to the excise cycle. And as you know, March, April is the excise cycle across most states in the country, so this is the time, Jan and Feb, when our efforts need to be seriously intensive both in terms of our own PR efforts with the states as well as the industry association. And given the COGS environment, I can tell you that we're leaving no stone unturned to make the case for price increases this excise cycle. How much we will get, time will tell.

Got it. And Sanjeev, just one question for you, the tax rate for fiscal '20 in both the stand-alone and the consol business, please, if you have it.

Yes. I suppose we have this quarter benefited from the tax rate that's issued, the effective tax rate is 45% [ there ], as compared to the HY tax rate of 35%. So we very clearly adapted for the lower tax rate, which is we're getting benefit, yet in the first quarter we had to reverse some deferred tax because of that, about INR 60-odd crores, but that was noncash. So on an overall basis on ETR we're getting a 9% cash benefit.

And the consol...

Consol is the same...

I'm asking you that because there is some one-off that's happened on account of PDL in the first or the second quarter. And the tax rates generally in the consol have been much higher than the standalones. So just to get a sense of for this year what's going to be the tax rate in the consol business.

I think, in terms of full year basis, the tax is a little bit closer to around 25%, 26%. The first quarter, we mentioned this, are around taking down, writing off some of the deferred tax assets that we have because of the reduction in tax. And it is about INR 60-odd crores to the [ tax period ], but that's only for the first quarter. So if you really see the 9 months versus the 3 months, the current quarter, you will see a reflection [ of our ] 35%. [ Or the way I'll see the ] 9 months, because [indiscernible], I will say this is about [ 31% ], yes.

Okay. So in the last 3 months -- last 3 quarters of the financial year, 25%; and the first quarter, whatever was the impact because of the PDL, right?

Yes. So if you look at the 9 months, this will -- kind of gives you an understanding. And even better, if you look at the current quarter, the effective tax rate goes to 25%.

The next question is from the line of Vishal Biraia from Aviva Life Insurance.

Sir, could you specify something on the change in mix among the states? Are there some states where [ we've sold in malls ] where we make higher profits? Just anything on the sort.

So we don't really share statewide performance. Honestly, I think that's getting into granular detail too much as an extent. So I would say that -- so if we talk about price mix being very positive in the Prestige and [ Above ] portfolio, that [ means sort of what you read in the state mix that we had booked ], honestly. So you've got to believe that the state mix is [indiscernible]. The price mix is less pricing and more mix, honestly, in the quarter. And that's because our portfolio has done well with the more premium part growing faster. So -- and that hasn't been kind of neutralized because of the bad state mix. So I will say, nothing to worry about at least from a state mix standpoint.

Okay. And so within the P&A segment, was there a mix improvement within that segment?

Yes. Because actually it was a 5.6% price mix. And as I said in my opening comments, each segment in P&A grew faster than the segment below it, right? So Bottled in Origin scotches grew faster than Bottled in India scotches that grew faster than upper Prestige that grew faster than mid that grew faster than lower Prestige. So every segment has grown faster than the segment below it, and that has obviously given rise to premiumization and price mix.

Okay. Sir, the last question is how has Andhra Pradesh done for us. Or has -- or that -- have the sales bounced back?

So as far as Andhra Pradesh is concerned, the previous quarter was strong, okay? So what happened in the previous quarter was the government took control of retail. So retail, on 1st of October, changed to government retail. And [ through November and ] December, I will say that we are very pleased with our performance in Andhra Pradesh. Now with the start of this new year or new decade, actually, there have been some shorter-term challenges in terms of the orders that we have been getting and the collections that we are getting, but our teams, the [ PR teams ], our teams on the ground are working intensively with the Andhra Pradesh government to just go create a better solution for the future. So no alarm bells yet in terms of performance and we're trying to make sure that it stays that way, but you have to watch this space because there is an emerging situation because of these short-term ordering issues that we have been facing and short-term collections. Because you know that the Andhra Pradesh government has a huge deficit and a huge gap. And they're not paying not just alcobev companies, but they're not paying a lot of others. So we'd like to work with them to make sure that we get to the best [indiscernible] that we can.

The next question is from the line of Jaimin Shah from RWC Partners.

Great set of numbers. 2 questions. The first one is could you talk a bit on how should we think about gross margin and EBITDA margin? Because the last time we saw this EBITDA margin, the gross margin was fairly high. And if what Sanjeev was mentioning on ENA costs, if gross margin will kind of come back up even if, let's say, 100, 200 bps, how much of that will be reinvested in business? That's question one. And the question one (sic) [ two ] is could you talk a bit on the Bottled in Origin segment's broad numbers on how big is this one in terms of overall salience in terms of sales now.

So let me start with the second question first. The Bottled in Origin segment, how big is this, et cetera? It's still relatively small, but I think that there is potential for growth, okay? And what can unlock growth is obviously the aspirations and the wallets of Indian consumers who aspire to drink global brands and nothing less, some moderation of customs duties in the fullness of time and indeed some moderations of the excise levies by some of the states. Now in recent period what has happened is actually some states have actually reduced the price of [ glass ], okay? We've seen a bit of that in Maharashtra. We've seen that in Karnataka. We saw that and have seen that in Delhi most recently. And every time, I can tell you, there is a reduction in price, there's an explosion of growth. We had an explosive growth in Karnataka after a big reduction. That was the time when Johnnie Walker Blue Label in Karnataka was the most expensive in the world. It was INR 42,000. It came down to INR 17,000 in one swoop, okay? Now obviously we are not drinking Johnnie Walker Blue, but the price reduction translated to Johnnie Walker Black and Red as well, all right? And we saw an explosion of growth there. We are seeing the explosion of growth in Delhi today, okay? So I think the elasticity for BIO, the aspiration is intact. The affordability is the gap. The affordability can be bridged by higher income for people, lowering of customs duties or lowering of excise duty by the states. And anything that improves the value for money, right, or the affordability of BIO, I think it really can lead to absolutely explosive growth. So we're excited. Diageo probably has the most formidable portfolio in the world in BIO and particularly in Scotch whisky. So as the segment explodes, I'd like to believe that we are the biggest beneficiaries of that happening, all right? So it's all music to our ears as in -- as it happens. On your second question -- or the first question, about GM and EBITDA. We don't give GM guidance, all right? We have consistently given you EBITDA guidance, 2 things that we've said: mid- to high teens in the medium term. And that we will consistently improve EBITDA margins year-on-year, right? That is what we've been aiming to do. We've already thrown a bit of light on what's happening to GM and the impacts on COGS and so on, but I think what you have to decode from our results is the fact that we're not only managing GM. We're managing all lines in the P&L to deliver the guidance that we've given you on our EBITDA, right? And that's really the only guidance that you should take away.

Okay. So should I think about -- let's say gross margin does come back to the levels we have seen, let's say, 2 years back. The EBITDA margin should improve from here on. And we don't -- as in we will require some investment back in the business, but largely that will be kind of pass-through.

Well, that's speculative, and I can't ask you looking this way because it may be incorrect. I think what we said earlier is that COGS, at least ENA, seems to have bottomed out for now, right? Who's to know how this will evolve in the medium term? At some point in the future, there will be another glass price increase, something that happens, okay, but for the moment, I think we've said that it's bottomed out, right? And we have delivered the guidance broadly despite having peak costs, all right? So let's see. We're beginning to see some more [ of these ] signs of softening of ENA. If that really happens and becomes a reality, we will see how to use that extra margin that we get in service of this business.

The next question is from the line of Aditya Soman from Goldman Sachs.

Congrats on a good set of numbers. So just one question from my end in terms of you clearly indicated that your growth in the upper end of P&A has been much stronger, but is there a risk that you are actually losing a lot of market share at the bottom? Because if I look at sort of the absolute cases added year-on-year, that's about 300,000 cases added. Some of your smaller competitors which are sort of one-system scale have also added a similar number of absolute cases or if I look Y-o-Y, and the growth has been much stronger. So is it that you are losing, as you indicated, some market share at the lower end and gaining at the upper end?

So I'm not going to get into a segment-by-segment analysis of shares. I think I've been transparent enough to say there are some segments we are winning. And I'd like to believe there are more segments that we are winning than we are losing, okay? So it's not as if there are some big losses happening. In segments where we are challenged, right, you will see interventions happening. At the end of the day, we've got to deliver a certain overall set of results for this business, yes. And that is driven by [ practically ] growth and market share and not just one or the other, all right? And therefore, we have to look at this holistically, and that is what we are trying to do.

The next question is from the line of Nitin Gosar from Invesco Mutual Funds.

Sirs, a couple of questions. As management, how do we see over a period of 5 years from now P&A and regular mix turning out to be?

I mean in the -- 5 years in the future?

Yes. We already hit 30% on P&A.

I mean we have 2/3, 65% is P&A today, value. I mean I can't give you a number, but you can do arithmetically progression of the guidance we have given. So P&A continues to grow, I don't know, double digits in the fullness of time because we are committed to making it grow at that level. And Popular is low single digits. Then we can mathematically, I think, evolve how those ratios will move. So I'm not going to give a guidance on that, but you can easily do that, I think.

Yes. That should be helpful. And to support that kind of P&A growth, the existing investment that we're doing on A&P, will that be good enough? Or we need to elevate it once the gross margin in Scotch is giving us much more headroom.

So I've always talked about A&P. And I said that there's no precise science, by the way, actually based on my predecessor and my career experience, on what's the right level of A&P. It's something that we will start to see and evolve in the playbooks, right. So as you all know, 2 years ago, in good faith, we increased A&P very significantly. And we've [ cut this a bit ] in the last year, okay? I think the important thing is this: Are we funding all the new news? So are we putting on money [indiscernible]? Are we putting on money behind great innovations, right? And are we competitive in the amount of media spends that we are incurring, right? And I will say it sticks to all of these 3 parts, okay, and that's how we think about it. So we will not underfund any of our brands competitively or underfund innovation, right, and new news, because that's the most important thing that [ will provide effectively ] growth at the end of the day. And at an overall media level, I will say, our spends are competitive in the categories. And that's really how you should read it. Now whether it's plus 0.5%, minus 0.5%, I mean, honestly, there's no precise science. This is based on management judgment and prudent management of the P&L as we need to [ move and ], other lines of the P&L are moving in opposite direction sometimes.

Right, sir. One last question. You mentioned about enhanced intervention and McDowell will seek that kind of intervention. This is more to do with change in product proposition or -- the major [ easy ] product is carrying. Has it lost something and need to reposition it to some different level? What are we trying to do over here?

So first of all, I think you have to wait and watch the space to see the full mix of McDowell's No.1 as it rolls out into the marketplace. I will say this: So first of all, brands are not relaunched only when there is trouble. Brands are relaunched because consumers change. Consumers evolve, and technology changes. Packaging changes. Product knowledge changes, and you improve things to take it stronger, okay? So I'd like you to just recognize that it's not that there's a problem and we're trying to fix it, right? I -- and it's an enormous brand with an enormous franchise, right, at the end of the day, and we are trying to make it stronger, all right? And I said earlier in the call it is all new, so you have to believe there will be a new proposition. There will be a new pack. There will be new bottles and new liquid. It is all new, all right, but more than that, I think you have to wait to see it and, hopefully, taste it as well. Okay, can we make this the last call, please, last question?

Sure, sir.

Thank you.

The next question is from the line of Mayur Gathani from Ohm Portfolio Management First.

Sir, I just want to know. What is the update on the shares with IDBI? I mean there was a hearing that was due.

Yes. I suppose the discussions are ongoing and will take a bit of time. Our conditions have been accepted, and we are waiting for decisions to come through. So as such, there is no major update for this quarter. And as and when we get some updates, we'll look at making a...

[indiscernible].

[indiscernible], yes. That's it.

All right?

Okay. On the other expenses. So you mentioned there was some one-off in the last 9 -- in 9 months FY '19, but there's nothing much in this quarter. So what was that amount? I missed it. You did mention it in the call somewhere.

Yes, I did mention. I do remember that number, INR 137 crore.

INR 137 crores. That was one-off in the other...

Yes.

Sorry. I missed that amount again...

You're talking about staff costs -- are you talking about other...

Other expenses.

Yes...

[indiscernible]

Yes.

Yes. So [ other expenses ], as I mentioned, we -- in the last year -- or this is precisely the 9 months corresponding period. We had 130-odd crores of provisions for receivables. So some of that is the [ market changes ] that we have, specifically in the North market. That was one, but you don't see repeating of this in the first 9 months, so this is kind of a good credit management. And secondly is because of the impact of the lease accounting, so the Ind AS 116. That's about INR 46 crores. So I suppose we have to [ force ] your like-for-like [ studies and everything ] [indiscernible] analyses, pick up this INR 137 crores from that Ind AS [ and adjust INR 38 crores ] in the current 9 months, right? And after all these adjustments that you will do, you'll kind of still see the whole efficiency coming in the other way.

Okay. And how much of debt did you repay back this quarter, sir?

We have not kind of -- definitely we have repaid debt, but unfortunately it's not something we project to the stock exchange because we're not supposed to report the balance sheet for this quarter. But the [ sail in terms of ] debt reduction is still continuing. And when we will see the full year numbers, possibly we can kind of almost extrapolate reduction that we've seen in the previous years.

Okay. And would you be able to give any time lines saying that debt was INR 2,400 crores in September quarter? I mean in a matter of 2 years' time, we should be close to a 0 debt level.

So the -- for any finance professional, I would never say that we can hit 0 cost debt level, rather look at the optimal capital structure program for -- what will be for the company considering the growth requirements and the capital requirements. But of course, we do have a [ neutral ] cash flow, and over time, we'll determine as to how to make best use of it.

So on behalf of the management team here, I just wanted to say thank you to all of you who've logged in today for the call, and thank you for your continued interest and faith in our company.

Thank you very much, sir. Ladies and gentlemen, on behalf of United Spirits Limited, that concludes today's conference. Thank you all for joining us, and you may now disconnect your lines.

Thank you, operator. Thank you very much.

Thank you, sir.