United Spirits Limited (UNITDSPR) Earnings Call Transcript & Summary

Ladies and gentlemen, good day, and welcome to the United Spirits Limited Investor Update Conference Call. This call will be for 30 to 45 minutes, depending on the questions. [Operator Instructions] Please note, this conference is being recorded. I now hand the conference over to Mr. Anand Kripalu, CEO and Managing Director, United Spirits Limited, for his opening remarks. Thank you, and over to you, sir.

Thank you very much, and very good afternoon, everyone. Thank you for joining this relatively brief call. First and foremost, I just hope that each of you and your families are really safe and doing well at this difficult time. Now the purpose of today's call is to update you about our latest initiative called Raising the Bar, and that's something that we announced yesterday. Just to be clear, on today's call, we're really not looking to provide a business update as we will share more color on that when we announce the June quarter results next month. Some of you may have seen from the press release and media article, Raising the Bar is a program meant to support the revival and recovery of qualifying bars, pubs and restaurants that serve alcohol in the aftermath of COVID-led lockdown. As you'd realize that the first phase of COVID was all about health, safety and security. But as things have progressed now, I think it is the economic restart that's of primary importance for many, many people in the country. Now as far as COVID is concerned, Diageo India has been at the forefront of supporting our communities ever since the crisis started. In March, you're aware that we repurposed 15 factories to brew sanitizers at a time when there was acute shortage. And we donated that as well as 150,000 masks to health care workers, health departments as well as the Indian Military. We also supported the hospitality sector with a INR 3 crore health insurance meant for bartenders who were really in jeopardy of losing jobs. And I don't know if you know this, that our employees have also come forward personally, right, as many as 500 of them and contributed and raised INR 40 lakhs that's going to the PM CARES Fund. So really, this is a time when both the company and our people are trying to stand up and do their little bit, to make a difference to the communities and the environment within which we operate. Now the ongoing pandemic has obviously changed our lives in many, many ways. And despite the lockdown measures, restaurants and bars continue to remain disproportionately impacted. The F&B industry, or in fact, even the larger hospitality industry, is the home to several entrepreneurs and MSMEs, and they are facing unprecedented challenges, challenges that are questioning their very survival. These restaurants, bars and pubs are an integral part of our communities and obviously a significant contributor to the economy, these in terms of employing millions of people or, in fact, their contribution to the GDP itself. They are also a vital platform for us to engage as a company with our consumers. And this is the channel where we can sample our products, bring our brands alive, create exotic cocktails and really build many, many of our brands. So it's a critical sector for our business as well as a critical sector for the economy. Now what we've learned from other markets that are ahead of us in the COVID curve is that people are quite tired of lockdowns, right? And I'm sure many of you on this call must be tired of lockdowns too. And they're very keen to come together and socialize once again. But obviously, they are concerned about their safety and rightly so. And hence, to ensure the safety of consumers, which obviously is above everything else, and to support the recovery of the F&B sector, which is to provide a safe place for consumers to come back and socialize, we are providing INR 75 crores in this program. And this is targeted at noncash support to qualifying outlets across major cities over a period of up to 2 years starting July 2020. Support will be provided in the form of measures tailored to local circumstances and needs across 3 broad areas: social distancing and help with equipment and skills on social distancing; hygiene equipment like sanitizers and other stuff that you may need, training for the bartenders and the employees there to make sure that they are able to execute and deliver products and serve with the right level of hygiene; and finally, confidence building for consumers, including digital support so that they are willing to come back. So this initiative will be owned and led by Black Dog, the Black Dog brand in India, which is our premier Scotch brand owned by USL. And really, this stands to be the biggest support ever extended to the Indian bar community by any company for sure. So by bringing international best practices, providing access to free digital support, technology, training and equipment, Diageo aims to help bars, pubs and restaurants that are serving alcohol to open their doors again when the regulators allow them to do so. Now in terms of simply the P&L implication, given the nature of this, which is a onetime cost and a quantum, the entire amount of INR 75 crores will be accounted for in this quarter -- in this June quarter as a onetime exceptional charge to the P&L. Now as many of you who are investors or certainly, well wishers of our business, I hope you see this as a bold move of an industry leader doing its bit to ensure the long-term success of our business and our industry. We don't run this business, as you know, from quarter-to-quarter. We aim to be a going concern and very often, what you do during a crisis determines how long and how successful your lifetime will be when you are on the other side of the crisis. And this is a move aiming to achieve just that. So with that, we're going to open it up for questions.

[Operator Instructions] We have our first question from the line of Abneesh Roy from Edelweiss Financial Services.

Yes. Sir, it's a commendable step in the current scenario wherein pubs are -- bars are suffering. I have 3 sub questions to this step. One is, why 2 years because most of the pain will be in the initial few months, especially once they start anywhere, revenue flow will also be here. So why not do most of this in the first 6, 9 months, so that the maximum impact is there? Second is, is there any direct benefit to your brand, essentially in terms of shelf space or in terms of visibility? And third is, will you cut down on the other fee in any way? In the bar, you would be doing your normal stuff? So this INR 75 crore investment, does it mean that the normal expense which was happening will not happen, so there could be some savings there?

So thank you, Abneesh, for your questions. Why 2 years? Well, that just gives us the flexibility, right? If we need to do it earlier, we can do it earlier, if we need to do it later, we'll do it later. The issue right now is we don't even know. There's no formal announced date even, unlike in the western world, where there's a date when bars and pubs can open, in India, there is no date. And given the way the disease is still spreading in India, we're uncertain on when this will open. I think we will use this money over these 2 years in whatever way we deem fit. We are providing for it now, so nothing stops us from spending it earlier or spending it later. So that flexibility is there. Will there be a direct benefit to the brand? Well, the whole idea here is that there is no quid pro quo, okay? This is a one-way commitment we are making. And indirectly, there will be benefits that will accrue to us because there will be a benefit to the larger industry, and we are a key player within that. Now whatever branding we can do for this initiative will be done on the back of the Black Dog brand, all right? So the visibility and saliency of that brand may get enhanced. And the details, honestly, are still being worked out on exactly how that is likely to happen. Finally, are we going to cut down other expenses? So there is no sense right now that we're going to cut down other legitimate expenses or investments that we're going to make in the bar and pub. So this will be in addition to that. However, our focus on cutting costs in the business, right, and I just want to underscore this. If we were tough on cost in the last few years, and even in the last couple of quarters, we are going to be even tougher on other discretionary costs in the business. What we are aiming to spend on is on investments that's going to resurrect the industry, our business and our brand, right? And we are going to make sure that we do whatever is needed for that resurrection because that is what's going to pay back. And just to tell you this, if you go into corporate history, there are different ways in which people or companies and corporates have behaved during a crisis. Many people have used a crisis to come out stronger than ever before, and that has determined much more longer-term success for those companies. Many companies have taken a short-term view during a crisis, and that has really accelerated their decline. And I think we want to be like that former kind of company.

Sir, that was helpful, and I'm sure the brand will get lot of benefit. So just last 2 follow-up on this. Why Black Dog? What was the thinking behind this? Why not some of the larger brands? And second, what percentage of universe you have in mind in terms of targeting in terms of bars plus pubs? Is there any number? Or is it all fluid based on the requirements?

So it's fluid right now. I mean, anyone can apply who meets the eligibility criteria. So there are 13,000 -- 30,000 bars and pubs in the country, and anyone can apply and they'll have to go through the eligibility criteria. And then city by city, we will see how many outlets we can support, right, through this exercise. So that's what we're doing. Why Black Dog? Because, a, we wanted to do it on a brand that is owned by USL specifically, right, as the listed company here and a brand that best intersects with the nature of these pubs and bars. So if you did it with McDowell's No.1 or RC or Signature, then the intersection would not been as strong with the profile of these bars and pubs. So these bars and pubs are likely to be the middle to upper profile, and therefore, we felt that Black Dog intersects the best with this profile of outlets.

We have next question from the line of Harit Kapoor from Investec.

Actually, most of my questions are answered. Just 1 question. Regarding the bars and pubs, is there any indication based on your conversations with the industry in terms of when you can see an opening? You could give me any anecdotes of whether any states are even thinking about it, et cetera? Is there a thought process already there? Or it's too early to call?

I think it's too early to call because I'm not deciding this and somebody else is. And unfortunately, the whole COVID thing has been 2 steps forward, 1 step back in many, many places, okay? And therefore, it's a very, very dynamic and unpredictable environment there. And even where they have allowed on-trade to open, they haven't allowed serving of alcohol, and there are huge restrictions about early closing. So I think as we get more noise of these kinds of outlets opening up in other COVID-related countries, right, I think that might provide a lead indicator of when our government is likely to do it here. So I would think that it is going to take some time, Harit. I don't think it's going to happen overnight, bit by bit. And hence, the context of also the 2 years, which gives us enough space to deal with this. So unfortunately, I don't have better news than that, and we are not hearing anything more tangible from the ground either.

That's very helpful, sir. Kudos to you on this initiative.

Thank you. Thank you very much.

We have next question from the line of Manoj Menon from ICICI Securities.

Anand, first of all, yes, congratulations on a good initiative. Second, the question -- 2 parts to the question. One, if it's feasible, if you could just help us understand some of these eligibility criteria. I'm just trying to understand what are the constraints you are looking at? Secondly, does it also include some sort of an exclusivity and kind of some real longer term benefits?

So your second question first, Manoj, there's no exclusivity here. So this is -- I said clearly, no quid pro quo. This has got no I'll get this back in return directly this volume commitment or my brands must be exclusive during this period and so on. So you have to look at this as really a leadership move in the most magnanimous way of doing what's right at an absolutely unbelievable crisis time that nobody could have anticipated, okay? Now will indirect benefits come over time, do we think our relationship with these on-trade stores will be better, will those owners feel better towards Diageo as a company that's come out and supported them, et cetera, et cetera, et cetera, right, those are all possible, right? And those are indirect benefits. But there's no clear I'm giving you this and you'll give me this kind of contract. As far as eligible criteria are concerned, there are some, and I'd encourage any of you that has the time to go on to the Diageo Bar Academy global website, just diageobaracademy.com, and go into the section on Raising the Bar, right? So outlets across the world are going to be going on to that website. Now the kind of criteria are: they must be a registered legal entity for tax purposes or whatever is equivalent in each jurisdiction; they must have operated for a minimum of 12 months before the introduction of any national or local lockdown restriction; they must be licensed to serve alcohol, obviously; they must demonstrate at least one way in which they are themselves raising the bar in their community like, including promoting inclusion and diversity or creating job creation or providing training and skills for disadvantaged groups of society, promoting positive drinking or tackling harm or antisocial behavior, right, focusing on sustainability or community support. So we want also the outlet to be doing their little bit in the communities within which they serve, right, also in service of the larger good. So that's also a little bit of a criteria there. And if nothing else, it also cajoles many of these outlets to do the right thing in their small way. And if thousands do the right thing in a small way, what starts as droplets can become a sea or an ocean. So that's how we are thinking about this whole thing for now.

Understood, sir. Just 1 last thing. Just trying to understand the thought behind Black Dog because you could have also looked at a scenario of multiple brands for multiple regions rather than 1 brand. Because the logical extension of seeing Black Dog would mean it appears very much a Class A or an A+ sort of an outlet would be the key ones where you would be doing it because the brand also need to have some relevance or you're not really looking at from this construct?

So I think the brand will have relevance. I think there's no brand that had relevance across tiers, right? So you have to choose, and we've chosen 1 brand that we believe has the best fit for now. And the idea was to do this behind 1 brand and not fragment and be de-focused about the entire initiative at all. So choose a brand. And by the way, different brands have been chosen in different countries. So it's Guinness in some countries. It's Ciroc in some other countries. It's Don Julio Tequila in some other countries. But we try to stick to 1 brand, right? And obviously, we have a choice of brands that are owned by USL. And you see, I think at the end of the day, there are very few bars of this kind that will not serve Black Dog at all. The volume may not be huge, right? It may be bigger in some and smaller in others, but the opportunity for consumers consuming something else to once in a while upgrade and drink something better, that exists, and that's in line with strategy. So I think having to choose one, then like I said, this is the best intersection that we had in our portfolio.

We have next question from the line of Neeraj Parkash from Nepean Capital.

I just wanted to know what percentage of sales goes towards bars and restaurants, considering you're spending a substantial amount of money. Just wanted to understand what is the revenue contribution from them versus, let's say, home consumption?

So the revenue is, let's say, about 1/4 of the industry's prestige and above revenue, okay? So about 25-odd percent, give or take a few points, okay? So -- and the rest is really what is picked up in the off-trade. So 1 is the revenue part. But I'd also urge you to think about in a media-dark industry like ours, the role of the on-trade in brand building, creating cocktails, being able to get bartenders to communicate with consumers, being able to do proper marketing of your brands at the on-trade store, and that has a ripple effect in the off-trade, because when you get exposed to certain things in the on-trade, then you take that away, and then when you want to consume that at home, you go and buy it from the off-trade. So actually, the revenue contribution is obviously 1 important criteria, and you can look at does that make sense and so on, but think also about the long-term value of that channel in a media-dark industry like ours, where you cannot actually advertise the product, ensure the product is being consumed.

We have next question from the line of Kiran Naik from Mody Fincap.

Sir, this INR 75 crore, how we are going to spend? Can you...

How in the sense, so I explained that in my opening comments that this is going to go towards making the outlets safer when consumers start coming back. So once the regulators allow the opening of these bars, pubs and restaurants that serve alcohol, we're going to provide equipment and know-how to guide those outlets to become safer for consumers and even support in communication terms, the fact that these outlets have now implemented certain safety procedures, so they are relatively safer for consumers to go back to. So like I said, consumers want to go back. When the regulators allow the opening, they will only be worried about should I go or should I not go because what if the place is not hygienic and safe. And this will provide that reassurance and also the training and the equipment for those outlets to ensure that they can run a relatively safe establishment. The money is going to be spent on that.

We have next question from the line of [ Ajay Vora ] from Edelweiss.

Sir, just a basic -- I just want to understand your perspective on this whole home delivery thing, which is getting initiated. So firstly, in terms of how do you see that panning out? And eventually, what is your perspective on what sort of boost it can provide to the whole industry?

So if you compare the alcohol industry in India with pretty much any of the other countries in the world, the per capita number of outlets where you can buy a drink or have a drink is amongst the lowest in the world. For a country of 1.3 billion people, there are only about 75,000 to 80,000 places where you can buy a drink or have a drink. So accessibility, as we know, it's like distribution, right? Accessibility, we believe, is one of the biggest barriers to consumption. Now opening physical stores has always been a politically trying subject. Now with the advent of technology, the opportunity to do what other e-commerce and home delivery players have done could open up a big opportunity for this industry, right, and remove the biggest barrier of accessibility, right, both for people in general, but let's say, for women. Women don't want to go to a retail store. They don't feel comfortable going to a retail store in India in many places, in many cities. They can sit and browse and buy. And we all know that when you start buying on any of the online platforms, you end up buying better products, you end up buying more thing, right, because you're just setting in the comfort of your home, sitting and browsing and you choose what you wanted to buy. And you always buy more than if you're just walking to the next door store and buying something over the counter. So I think that's the vision or possibility. Now we've been trying this for a long time. That's why we invested in HipBar recognizing that long term, this is an important thing for us to crack as an industry. And sometimes in life, what you cannot crack during peace times, you are able to crack during war time. And I think because of the concerns about social distancing and crowding at stores and so on, states has started selectively allowing this to open in a formal, legal way, right? And it's still a few states only, and it's still very small in terms of contribution, all right? Our objective right now is to partner with the states to get stability and try and make sure the models here stabilize and then become here to stay, right? Scale of opportunity is step 2. First is to create proof of principle properly on the value that this can generate for the states, for the consumer and what it can provide in terms of safety at a time like this of ordering from your own home. So once that happens, I believe that more and more states will pick it up, right? In the past, no states did it. Whichever states did it, had to pull back. But now that states have done it, and we know COVID is here to stay, it's not running away tomorrow, right, if these things stabilize, and I think we'll have the benefit of time to make it stabilize in a few states, I'm hoping that the resistance from other states will break down and more states will be open to that. And if that happens, I think, long-term, it can be a big unlock to this industry because one of the biggest barriers to shopping in this industry and buying in this industry would be removed.

So sir, just 2 things on that. One is, why do you think the -- meaning, what is the reason why states are having so much of resistance? And secondly, sir, generally, how do you -- how are you seeing the early progress in the states where you have got the approval with the partners like Amazon?

Yes. So the resistance is coming -- generally wherever there's resistant, it's from the retail trade. And they're worried that any of these national players will then circumvent them, build their own national warehouses and start servicing consumers directly. And they do not want to lose 2 things: One is the direct touch and the relationship with the consumer that they have; and second is, in many cases, they've paid high license fees, and it will mean loss of business, okay? So wherever the resistance is there, it's from that. Now wherever it is beginning to work now, the retailer is part of the solution. Even the license that Amazon has got in West Bengal, they have to pick up from the retail and supply. They cannot pick up directly from the companies like it's happening in many other sectors. They have to buy from the retailer, they cannot even buy from the corporation depot in West Bengal directly, okay? So the retailer is part of the solution. Then the retailer may see far more traction of business because many more people now are buying and that retail store is servicing them, okay. So that's really what's -- the reason for some level of resistance. Now what is the flavor right now? It's just too early days, and it's right now at -- more at a pilot stage, right? Now there are some states where retail sales are not allowed like Orissa or Mumbai City, right, only home delivery is allowed, right? There obviously, 100% of whatever is selling is home delivery because you cannot go to the retail store to buy. In other states, it's a smaller contributor. But these things also take time to build and establish and literally, it's weeks since a start has happened in a few states. So you'll have to watch this space. We are watching this space closely. Our industry association has created a task force to then partner with state governments to help the state governments to work their way through this. So we're doing everything we can to make sure that it succeeds and stabilizes.

We have next question from the line of Shirish Pardeshi from Centrum Broking.

Anand, this reminds me your Amitabh Bachchan moment in Cadbury, and really congratulate from my heart. It's a good initiative. Just 2 questions. You mentioned that this 13,000 outlet which contribute about 25% of prestige and above, this is for the whole United Spirits basket? Or it's only prestige and above?

So it is prestige and above for the industry. I mean the United Spirits' contribution will not be very different. And it's not 13, it's 3-0, 30,000.

Okay. In this, out of 30,000 outlets what you have just mentioned, how many in your assessment are open now?

Open to serve alcohol, almost 0.

So across the country, they're not open?

Yes, yes, yes. Even in states where F&B outlets have opened, they aren't allowed to serve alcohol. And they, in any case, are forced to close by 8:00 p.m. or 9:00 p.m. depending on lockdown timing, right? So they're still not open. So you can't go out and have dinner and have a drink together right now.

So that's why, if I understand correctly, you said, from July, you are hopeful that some partial relaxation will happen and they will open partially?

Well, I haven't said July because I don't know, honestly, the time. But I think with each passing month, like everyone else wants some semblance of normalcy to come back at certain places where the situation is still not fully in control and are still increasing, I have to believe that in other places, slowly and selectively, it will start, whether it will be July or August or September, honestly, I don't have the data point to give you a better idea of that.

Okay. Got it. And just last question on these 5 top metros, Bombay, Delhi, Calcutta, Madras and Bangalore, what is the 30,000 outlets spread?

So I don't have the numbers handy of whatever is specific contribution.

Like this would be 1/4 or 1/3 or maybe 1 just...

No, I'm not going to give you a number because it might be wrong. I mean, it would be a very material part, okay? Because obviously, these are the major cities, and they are the large contributors. But you see, we have not -- we have said metros and key cities. We've called out in the specific announcement, we've said, Mumbai, Delhi, Bangalore and key cities, but we would be happy to do it in NCR, for instance, which may include Gurgaon or Noida. We are happy to look at other cities where people come and apply, and selectively, we'll decide, okay, on what best we can do, right? The idea is to -- wherever we do it, we have to do it with quality and make an impact from it, rather than just spread yourself so thin and do a little bit everywhere, and you make no impact at all. So -- because ultimately, even though INR 75 crores is a large amount, resources will be limited. And therefore, you have to be choiceful.

We have next question from the line of Vishal Punmiya from Nirmal Bang Institutional Equities.

Sir, just adding to the previous question. So you mentioned that the program would be focused in the key metro cities. So what would be the on-trade consumption percentage for these cities because the 25%, 30% would be out of pan-India, right?

Well, the 25%, 30% is definitely pan-India. I mean, I don't have off hand the specific contribution of the on-trade in each of the cities, that's micro information, but -- so -- I mean, I just don't have the data. And...

Would it be very different from the 30%?

Would it be very different -- I don't want to hazard a guess, honestly, because I just might give you wrong information. I wouldn't like to do that. But what we can do is, we'll get a judgment of what is the industry contribution in at least Mumbai, Delhi-NCR, Bangalore, what is the on-trade contribution for the industry? We'll see if we can pull that out. And if it's fine, then we will try and share that information off-line. If it's really important for you, we'll try and get some -- at least some guidelines, we'll try and get it to you.

Yes. So secondly, on this -- the number of restaurants that you mentioned, 30,000, do all these restaurants have hard liquor license or they are a mix of hard liquor as well as beer plus wine?

No, there are hardly any outlets that are only beer now and that do not serve spirits. There are hardly any with no overlap. So basically, it's the same number.

We have next question from the line of Santoshkumar from Spark Capital.

This is Tejash from Spark Capital. Sir, just -- sir, on your online sales point. So do you think that online sales in longer and not necessarily near term, can neutralize, to some extent, the distribution mode that an incumbent like us enjoy, and it creates a kind of level playing field for new entrant on distribution front?

Well, yes, it could. But I'll tell you one more thing, by the way. Distribution in India is not a challenge for most people. With 75,000 to 80,000 shops, right, distribution is not the challenge. We're able to see new brands from small local players get distribution, okay? So that's not difficult, really speaking. I think what will happen is that online, the role of brands becomes even more important. And the role of brand building becomes even more important. And the role of understanding digital and specific competencies of that kind becomes even more important. And that you will find that many of the other players may not have those competencies as good. They can actually get distribution done by just paying much higher trade margin and getting distribution done. But really getting brand preference through understanding digital and having the capability to do that and make sure that your brand is the one chosen on online platforms, brand building through online platforms, digital engagement, I think those are the areas where actually it may actually be advantageous to companies like ours who also can tap into global expertise and local expertise, can afford to buy and build centers of excellence of this kind compared to the other company. That's how I would see it.

Sure, sir. This is helpful. Sir, second, sir, we picked up from media that Jharkhand has discontinued delivery of liquor, home delivery of liquor. So based on your...

Sorry, who has, who has? Sorry, sorry, who?

Sir, Jharkhand government, Jharkhand.

Jharkhand? Okay.

So based on your assessment of situation so far, what of all -- as you rightly said that what you can't achieve in peace you perhaps achieve in war time. So what of all the measures or changes we are seeing in government's approach to the sector you believe will stay with us once the situation normalizes? Or you believe it's too early to say on that count?

Yes. So it is very early to say. So for instance, we're trying our hardest to get some of the tax and fees reversed on the back of what Delhi did, okay? We are absolutely all over this, and let's keep our fingers crossed, right? Because I don't want very high tax increases to be a legacy of COVID in our industry, right? A few percent, 3%, 5%, we can live with, right? But if it's very, very high percentage, then there's going to be an impact on the industry, all right? And we want to try and make sure that doesn't happen. So that's one of the negatives we want to try and revoke, right, and make sure it doesn't live with that. And then home some of the positives, and one of them is the benefits of home delivery and e-commerce should live with us after the crisis, right? That's one of the benefits that has come out of the crisis. So I think we are trying to evolve this with every passing day. I mean, really, it's a very dynamic situation. Everyone knows that. Nobody is also being very consistent on policies because they don't know what's going to happen? It is 2 steps forward, 1 step back. But rest assured that we are doing everything we can to make sure that the industry comes out and stays healthy when we are on the other side. And if we can take the last question now, please?

We have the last question from the line of Pranav Bhavsar from ASA Capital.

My question was, do you expect any market share gains or -- from this strategy, sir, or fortify your position?

No, I'm not going to comment on that really because I'm saying, clearly, there's no quid pro quo, right? If anything comes, that's like -- that's separate, right? But this is not being done with the objective of building market share. This is being done with protecting the overall business, right, for the industry and ourselves in the medium to longer term, right. Anything else would be, I would say, an added benefit, but not a targeted benefit to doing it.

Understood, sir. Thank you so much, and best of luck.

Thank you very much. And I'd just like to thank everyone else for joining this call today. Thank you for your support, as always, and stay safe.

Thank you very much, sir. Ladies and gentlemen, on behalf of United Spirits Limited, that concludes this conference call. Thank you for joining with us, and you may now disconnect your lines.

Thank you very much.