United Spirits Limited (UNITDSPR) Earnings Call Transcript & Summary

Ladies and gentlemen, good day, and welcome to the United Spirits Limited Q1 FY '21 Results Conference Call. [Operator Instructions] Please note that this conference is being recorded. I now hand the conference over to Mr. Anand Kripalu, Chief Executive Officer; and Mr. Sanjeev Churiwala, Chief Financial Officer from United Spirits Limited. Thank you, and over to you.

Thank you very much, and very good afternoon, everyone, and a warm welcome to the Q1 F '21 Results Call. First and foremost, I just hope that you and your families are all staying safe. Before we open the lines for Q&A, I want to provide some context for the results that we announced last evening. This was indeed a quarter like no other, and I do hope we never have to experience another quarter like this ever again. For the period between March 24 to May 3, lockdown 1.0 and 2.0, alcobev manufacturing and sales were completely banned in all states in India. From the 4th of May onwards, several states began allowing the sale of alcohol. Off-trade outlets began to open in May, and subsequently, over the course of the next 2 months, about 80% to 85% of the off-trade outlets gradually opened, including some that were doing only home delivery. So they were not opened for over-the-counter sales, only for home delivery in places like Mumbai. On-trade outlets, an important channel for our P&A brands continued to stay closed pretty much throughout the quarter. Our manufacturing operations also followed a sequential process with factories being allowed to operate based on the zoning criteria in line with the easing of the lockdown starting from the 4th of May. By the end of June, all our units became fully operational. Having said that, what we have witnessed subsequently in July is that retail outlets in a few cities and a few of our plants had to again shut down temporarily in line with the second wave of localized lockdown announced by various states. So in many ways, this will be a process of 2 steps forward and 1 step back till the pandemic comes more under control. During this period, a positive development on the distribution side for our industry has been that several states have allowed home delivery and online ordering of alcohol, something that we have been trying to unlock for a very long time. While this is still very nascent and the model is still evolving, we do believe that once states see the merit of the model, especially in terms of added revenue and improved compliance while enabling social distancing, there will be a stronger argument for this to sustain. On the other hand, what we also saw in the immediate aftermath of the opening of the industry was across-the-board tax increases in most states. Some of the tax increases were exorbitant, going up to 70% to 75% of the MRP, but the good news is that a few of the states have since rolled it back, including Delhi and Odisha; and we are hopeful that a few more will follow. Since these factors were external, what we did as a management team was to focus on what was within our circle of influence and within our circle of control. And I'm particularly pleased about a few things in particular that we have achieved during this quarter. Supply chain readiness. The team planned ahead and made sure that the startups and shutdowns were quick. This was despite having to navigate a very complex state-level manufacturing footprint and having to procure several permissions to operate, in fact, several new permissions to operate. The team simultaneously overcame any logistics-related hurdle, including labor shortage, and ensured that ramp-ups were faster than usual. This despite putting several safety measures in place to protect our employees, be it thermal scanning, multi-point hand sanitation, frequent sanitization of equipment and facilities and all while maintaining the appropriate social distancing in our factories. Second, we continued with the rollout of renovated mixes for 2 of our largest brands, McDowell's No.1 and Royal Challenge whiskey, in more markets and supported them with the right levels of investment. We have had an encouraging response to these relaunches and are eager to ensure that consumers across the country experience these new mixes as fast as possible. We redirected our sales force to work more effectively in a virtual world, be it in terms of equipping them with appropriate training or exchanging best practices during the lockdown or indeed even having virtual connects with our customers. Fourth, we also continued to work with state governments to minimize collateral damage to our industry, including obtaining necessary permissions for production and keeping the route to market open. In parallel to all this, we have been ruthless about discretionary costs, but at the same time, what is important is that we have not shied away from doing the right thing, from investing and supporting our customers, our consumers and communities as per need. We have also supported our TMUs and franchisees as well as our vendors to ensure that our ecosystem remains healthy during this very tough time. In service of that, we recently launched Raising The Bar to support the revival and recovery of the on-trade channel. This clearly exemplifies our commitment towards growing the category in the longer term and supporting our communities at the same time. Since we've already talked at length about this program on a separate call earlier, I'm not going to repeat that now. In terms of financial performance, you must have seen the quarterly numbers from our published results and, obviously, we will take whatever questions you have. But I think this quarter is full of aberrations, and comparing these numbers year-on-year is not really an apples-to-apples comparison. I would just like to put a few things like aging-based provisions and COVID-led obsolete inventory provisions, and these have exerted further pressure on our profitability in addition to the negative impact of the operating leverage due to significantly lower volumes in the quarter. We believe that a part of these provisions should reverse over the course of the coming year. Looking ahead, we will have to navigate several unknowns over the course of this year. As the pandemic continues to surge in India, the containment strategy being adopted by state governments in ways of localized lockdowns could lead to temporary closure of manufacturing sites and retail stores in phases. This is likely to be the environment within which we will have to operate in the next few months or quarters. And therefore, maximizing the opportunities presented to us each day while being agile to move from one day to the next will determine how successful we really are. Additionally, the real impact of recent tax-related price increases on demand will also become fully known and much clearer over the next few months, especially given the fragile state of the economy as well. Another variable to watch out for and plan for is the change in consumer behavior in the aftermath of the crisis, particularly the change in the ways of socializing and shopping. Having said all of this, we do continue to see some improvement with each passing month. Given the nature of this new reality, however, we must be cautious about extrapolating this into the future. And therefore, we will continue to closely monitor the situation and constantly evolve while staying committed to investing in our business and in our brands for the long-term success of the company. With that, I'm going to throw this open to your questions.

[Operator Instructions] The first question is from the line of Avi Mehta from IIFL.

Sir, I just wanted to take a comment from the press release that you have mentioned about there being a month-on-month improvement in July despite the lockdown, which is very heartening to read. Would it be possible to share how the July sales have been or try to get some sense given this uncertain environment? Any visibility would be very helpful.

So as you would imagine, anything specific is not possible for me to...

Sir, even a range would be useful, I mean, just to kind of get a sense how demand is...

Yes. So I think you have to read the sentiment. I think what we are saying is, the worst is clearly behind us. With each passing month, we are seeing improvement. But given the nature of this beast, 2 steps forward, 1 step back, I mean, we had all our factories running, and suddenly, many factories closed in Karnataka and Assam because suddenly there were local lockdowns. Now those have reopened again now. So this is a really, really dynamic situation, Avi. And it's not that I don't share, but I want to be very cautious about not misleading people, right, and reading a trend when there's not enough data points for a trend. But just take it from me that things are getting better collectively, but I can't say that they will stay better permanently, okay, because of the nature of the beast we are dealing with.

Okay. Sure. And sir, the second bit was essentially on the gross margin. Now we have seen some one-off impact, which is related to the inventory obsolescence. If we kind of remove that, would the gross margins have improved Q-o-Q and -- versus fourth quarter levels? And if they have, if you could kind of help us what has helped that to kind of drive kind of...

So I'll pass it on to Sanjeev, Avi, for him to give you -- to share as best as we can, yes? Sanjeev?

Avi, Sanjeev here. Absolutely, as you can see that the gross profit margins, the underlying GA margins have kind of declined by 508 bps. And of course, I think there are a lot of factors which are playing a big role out here. A couple of things which is worth noting for everyone. Number one, this particular quarter you will see our franchisee income has been badly impacted. It's quite soft. It's almost down by INR 40-odd crores. And just like us, where we see our business declined close to 50%, our franchisee business, they've also seen their business badly impacted, right? And on top of it, because of smaller operations, they had to face a lot of operating deleverages. Many of them have been making big losses. So we decided to kind of, in a spirit of a win-win situation, support our business partners there. So as a result, our franchisee income is lowered by 50 bps that's impacting our gross profit margin almost close to 160 bps. Second is, in line with the continuation and in line with our prudent policy, accounting policy, you just mentioned about the [indiscernible], we have ensured that we continue to provide for slow and nonmoving inventories, which could be a combination of raw material, plant material, finished stocks within our own warehouses and, of course, finished stocks lying at the corporations. What you see in the COGS line is everything to do with the inventory, which is owned by us besides the corporations. That had a major impact. We had to take a hit of INR 21 crores, which has impacted our gross profit margins by about 152 bps. Of course, we also continued to have the 2% on an average inflation, which is impacting the gross profit margin by another 150 bps. So all these 3 factors put together is about 460 bps, barring other small items. Now how do we see this as compared sequentially? I think the way I'd like to decode is, when I look at my ENA prices, which is a big component in my COGS have been flattish. I will not say benign, but at least, as we said in the previous quarters that the peak is out now and, hopefully, we should see a softer environment as we move forward, right? So sequentially, to that extent, the ENA would definitely support in not pushing that inflation any further. Hopefully, as Anand said, if we see some gradual recovery happening in the market, right, we might see a better utilization of the capacity and a better operating leverage coming through, which in this current quarter is really bad because what you see is [ 50% to 51% ] down in the industry, which means our manufacturing capacities have not been optimally utilized, leading to a lot of inefficiencies. So hopefully, yes, this is where we are in terms of the current gross profit margin and some thinking as we move forward.

Okay. Okay. And sorry, you said [ ENA ] glass, also if you kind of highlight, that will be useful how is that doing.

Yes. So glass is -- the overall industry is in shambles, the glass industry. And over the last few quarters because of the lockdown situation, because of some other industries, the way it has played out, many of the glass industries have been under a lockdown situation and is gradually opening up. So to that extent, we will see some inflation in glasses. Not that it will be flattish, there will be some inflation, but not the kind of inflation we saw a year back. That's for sure. So yes, I think it's good to kind of build in normal inflation happening in the glass.

Perfect. This is very intensive and extremely helpful. Just one last bit on inventory. Was -- on -- we have been extremely prudent in our credit policies. I don't think there's a credit risk with the corporation sales, but I would love to understand your thoughts on how do we look at corporation sales and the credit that we kind of provide on such sales. That's all I'm asking.

So I think as compared to many other FMCG players, we are very lucky in a way it's speaking that 70%-plus sales is happening for corporations. And as you are aware, corporations are basically state government bodies and, to that extent, the credit risk completely secured this as a government sovereign debt. As such, there's no problem. Some states, yes, we did face delays in payment, which we have called out. Things are improving. But the provisions that you see is essentially not because an expected credit loss might happen. It's just because the aging of the inventories lying with these corporations, right, is not looking great. Why? Because we had a complete lockdown situation for 33 days. Thereafter, the economy opened slowly. It took time for the supply chain to ramp up. So as a result, towards the year-end, when we see -- towards June end, you see a deteriorating aging situation. Of course, because we are following a prudent policy, we just provided the basis as aging. But as we move forward with some better deflation happening and some scheduled supply is happening, we should see the aging situation improving in the subsequent quarters, and you see a part of that reversing. So yes, it's not about any credit risk, it's just about the prudent accounting policy.

And if I can just add a line to what Sanjeev said is that I don't think that credit coming in the way, as we speak now, of sales, right? We're not having to curtail credit because they're not at alarming level. At the time we used to, in the past, curtail even sales to make sure that credit doesn't go out of control, we're not in that situation, which, actually, coming out of the COVID crisis, is not a bad situation to be in from a pure credit and cash standpoint.

Yes. Anand, I will just add something more, and I know this question will come up subsequently, Avi, so let me just finish this off. When we look at our overall debt situation at 31st of March versus 30th of June, we are in a far better situation. There has been an aggressive drive on collections. As a result, we are comfortably placed. Our overdues have come down significantly. We have also reduced our overall working capital. As a result, we've been able to repay debts also, right? And this is a time when cash is the king. We are in a difficult situation. Our balance sheet is very, very healthy. Our working capital is at a very, very optimal level. We've been able to reduce our receivables and bring down the risk, actually. So I think it's all to really serve the market well as and when the market opens up.

[Operator Instructions] The next question is from the line of Abneesh Roy from Edelweiss.

Sir, good sales performance, given 5 weeks of lockdown and 25% sales coming from pubs was not there. So wanted to understand some insights on 2 benefits. So one is, of course, duty-free shift. So have you seen a better performance in the mid and premium in the big cities, I think, wherein the bulk of the duty is [indiscernible]? And second, beer companies clearly are suffering because of the bulkiness of the purchase and refrigeration. So any impact that you had? Versus beer industry, how has spirits industry done in the 3 months?

Yes. So duty-free, it's just too early to read this, right? So we are doing things as best as we can to woo people who would have bought duty-free stocks, right, to woo them through either direct contact or running promotions that are like duty-free promotions, okay? But finally, it is duty-paid, and the prices are the prices that will be there in duty-paid versus duty-free. And it's too early for me to see or read that those sales are actually shifting. Anecdotally, I can tell you that some of it has to shift, right, because if people aren't traveling, and you know that I've said this before in the past that people don't down-trade easily in this category. If you're used to drinking Johnnie Walker Black Label, you don't easily down-trade, right, to Johnnie Walker Red Label or to [indiscernible], right? You will find that few thousand rupees extra so that you can continue to drink your brand of choice. So I think it will, but I don't have enough data points to tell you for sure that it's happening already, right? But I cannot believe that part of it will not move. All of it won't move because there is a price elasticity of demand as well. As far as beer is concerned, again, we do believe that there is a shift happening to spirits, right? And spirits is advantage over beer for all those reasons. There's an interview in the papers also today from one of the senior beer company leaders who's talked of the fact that beer is stressed because it's easier for people to just carry home spirits and consume spirits and because as long as the bars and the pubs are shut, those tend to be more beer occasions when people go to those kinds of venues to drink. Now your option is to actually take something home and have that with a small group of friends because you're not having that in open spaces in large groups. Again, the data is just too short, but anecdotally again, I must say, that is absolutely what we believe is happening and will happen on both these points. Let's wait. So that's belief based on consumer trends and insights. Let's wait for data to corroborate that this is indeed the case.

That was useful. My second and last question is on home delivery. So there are 2 subsets here. One is Mumbai kind of city, wherein just home delivery was there. So has the performance in Mumbai also been largely similar to your overall India performance, given there will be more of bigger packs buying by consumers? Second is, in the 6, 7 states where home delivery has been allowed, any impact you can share? There was a reversal in Jharkhand, but how is the performance in the rest of the states. It's a short period, but any insights?

Yes. So it's -- so home delivery itself -- so first of all, actually, Abneesh, it is a fact that it has started in a few places, okay? That's the big win, okay? And we need to just evolve this model. Now the contribution is still relatively small in places where over-the-counter sales is also being allowed, right? It's relatively small, but not immaterial. If I look at places like Odisha or West Bengal, it is not immaterial, right? So it's picking up slowly, okay? But if you look at Mumbai, it's either home delivery or no sale, right? So everyone has found a way to contact their nearest store and get home delivery happening because over-the-counter sales are not being allowed. So there, it is material. Now I don't have the data off hand on whether Mumbai is selling in line with what it would have sold if retail stores had been fully opened. But I can tell you, it's significant. The amount of home delivery sales happening in Mumbai is significant, okay? So that's really what I can tell you, but I think on this -- the fact that the seeds are getting sown for an alternative route to market for the future is the big aha, and we have to sustain this because this can be the biggest unlock for an industry, which was constrained by accessibility, okay?

So why is Bengal, Odisha doing better?

No, it's not about doing better. There, there are national players that have already -- they are operating there. So the Swiggys and the Zomatos and the HipBars are all operating in Odisha and Bengal, okay? And even Amazon and Flipkart and so on have got permission -- Big Bazaar, I think, they've got permissions to start in West Bengal, and they're all perfecting their model. So I think just more scale players versus a retailer doing the home delivery on his own, right? And there also, the ordering can be done more efficiently through online portals and stuff versus calling up the conventional call-up, it's like the [Foreign Language], send Johnnie Walker or send McDowell's No. 1, all right? So that's what's happening. So it's a crude -- it's not an organized home delivery model. It's a local store-led home delivery model, right? And the big bang comes when you have scale players coming in and doing this.

The next question is from Arnab Mitra from Crédit Suisse.

My first question was on the tax increase and price increase from states. So we know there's been a lot of 2 steps forward, 1 step back even on the tax. So if you could help us understand at a national level what is the approximate higher consumer price that all the set of tax hikes that have happened till now is leading to? So what is the range of higher prices that consumers will have to shell out? And any price hikes you've got from the state governments in terms of your own realizations?

So we have received actually price increases over the last few months in 7 or 8 states, okay? Modest, but still meaningful, okay? We've got some price increases. So as far as the -- I'm not going to give you an average rate it increased, but let's put it this way. The big outliers were states who had done 70%, 75% increase or 38%, 40% increase, those have corrected, right? Andhra Pradesh has not corrected, but our business in Andhra Pradesh is down to almost nothing because of the route to market changes and regulatory challenges that we are facing, right? Amongst the balance, Delhi and Odisha were amongst the highest states in terms of tax increases, [ which have been corrected now in terms of tax increases ], which I believe the consumer will accept because it's more routine, right, the range of tax increases there. There are a few states that are still there in the 25% to 30% range, right, where we are still trying our best in those states [ to have the tax decreased ] down because those states are also seeing a sharp drop in revenue, right? And unless revenue also grows, it's a lose-lose model, right, [indiscernible] plays for a lose-lose model in the business, right? Everybody on the win-win model. And therefore, we are still talking with those states with data to see whether they will temper it down, right? And then there are lots of states that were more nominal, right, up to 10-odd percent kind of increase or low double-digit increase. And I'm saying, unless we see a crash of excise revenues, we're letting it be. And there are also some states that have not taken any tax increase, right, which continue to operate like normal. By the way, there are also some states that have taken a meaningful tax increase where volumes are doing extremely well and are not suffering. So again, it's just not easy to read because it's kind of a mixed bag, yes? But giving you an aggregate number is oversimplification of what's happening and almost misleading because the differences can be many. So the way I want you to think about this is to say, if it is more nominal tax increases, which is up to kind of double-digit price increase for the consumer and the revenues are going up, we'll leave that as it is. Where the tax increases are in the 30% range [ 25% to 30% range and where we are seeing ] drop in revenue, we are aggressively going after those states with data to try and get it tempered. So that's -- there's some tax increases in most places in our country, but none of them are such that it is detrimental to the industry, right, or detrimental to excise revenues. So that's the way we are approaching this.

Very helpful, Anand. And just a last question. On -- I know you answered to Avi's question that there are a lot of uncertainties and there is also restocking in the trade channel, so very difficult to read the near-term trends. But from whatever data you've seen, see, the way I'm coming from is you have that 25% on-trade, which is going to be literally 0 for some time. Do you get a sense that the off-trade or the outside on-premise business can actually make up for part of this based on whatever you have seen till now?

So I'm not going to say whether we can make it up because that's like telling you that we are selling equal to pre-COVID levels. And I'm not willing to make that statement today, okay? Now some shift from the on-trade to off-trade is bound to happen. I mean it's obvious, right? Some sales of the beer consumption of the on-trade will move to the spirits consumption in the off-trade, right? All this is logical, and it's going to happen, right? Now the question is how much and to what extent? And will it compensate for the entire on-trade business? And I think I would just be misleading you, for instance, that it's going to fully compensate for the on-trade business. Now having said that, it will be our intent to activate the off-trade as best as we can to capture as much of that shift as we can while it's opened, right? That is going to be the endeavor of management in our commercial and marketing team. That's what we are going to go after, right? And hopefully, the on-trade will selectively start opening as well as people get tired of these lockdowns and, say, [Foreign Language] we want to go out and have a drink somewhere, let's go to a place that's not crowded and let's go to a place that's safe. And that's where our Raising The Bar program comes in, right, to create those safer environment for consumers to go out, but go out safely. So I think you will just have to wait and watch this space. As we get more data, we will share it with you, right? But as you understand, it's just so dynamic that I just do not want to give people the wrong message.

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

Anand and Sanjeev, you did talk a lot about the supply side. There has been a lot of skepticism on how consumer attitude towards alcobev consumption will be affected due to this pandemic. I just wanted to check with you, if you could tell us about any 2 to 3 key aspects of consumer behavior, which have surprised you either positively or negatively over the course of June and July month versus your expectations, say, 2 months ago. This could be on mix trends. In the earlier call, you had talked about worries on the down-trading aspect. Has something of that sort panned out? How has been Scotch sales? Has there been supply disruptions which have weighed on that portfolio, large pack sizes versus small ones, any certain [ state ] specific and any of this which probably surprised you versus your expectations a few months ago?

Yes. Thanks, Latika. So I mean there are, obviously, shifts that are happening. I don't know about what has surprised us and what's not, but there's shifts that are happening. Obviously, shifts away from large parties, large banquets, large weddings to smaller groups, socializing, absolute shifts to larger SKUs, right, because of in-home consumption and in-home purchases and to store at home, which I think is actually a great attitudinal bust, right, which is going to be extensive, but it's a big attitudinal barrier that was there about alcohol at home and consuming at home for a lot of people. And hopefully, that would have broken down as one of the, I would say packet benefit of this entire thing happening. Down-trading, I cannot read yet, right? But I will say this, right -- and I can't read because the data is too erratic. There is no massive trend of down-trading, right? It's kind of balanced. In some states, you can see a bit of it. Some states, you don't see, you see the converse, okay? So there's no massive absolute crash to the bottom of the pyramid kind of shift from Prestige & Above down to the bottom of the pyramid. There's no rapid movement of that kind. And what I do know in our category is that whenever there has been shocks in this category, right, the basic category trend comes back, which is about people drinking best, right, and not down-trading, right? And once the shock is over, I think that our longer-term strategy of focusing on premiumization, investing behind the more premium brands, I think that will absolutely continue, right, because I think that strategy will be the right strategy, right, when peace times come after this war period is actually over, right? And then the other consumer change, obviously, is the shopping. So the way of socializing is changing. People are not going out. So there's so much more expectation on shopping from home, and that is an opportunity that was shock for us till now, and that could open a change. And maybe that's been one of the surprises about how permissions for home delivery and e-commerce in certain states started. In peace times, my god, we would have gone on and on and on lobbying with the state governments. We wouldn't have gotten the permission, I can tell you that, right? And the fact that it started and, hopefully, other states will follow. And that's our effort, anyway. So those are the broad trends. Now I'm surprised by the amount of shift that we -- that's at least we are reading from beer to spirits. I don't think we anticipated that because we don't also read beer as closely because we're not directly in that business. And that shift, right, and the function of both the on-trade, the bulk and the need for chilling in a fridge, right, I don't think we read that much. So I will say that's a positive surprise, right? We don't know still the numerical impact of that. That's a positive surprise and a nice surprise. In crisis times, it's good to have a few positive surprises as well rather than only negative surprises, which we are all getting used to. So those are the kinds of things, Latika. But I will tell you this that we have our insights team tracking consumer trends continuously to keep a finger on the pulse because it's very dynamic, and we are redeploying resources in the business towards emerging opportunities in an absolutely agile way, right? So we said suddenly that, listen, key accounts is shut right now, on-trade is shut, let's move many of those people to focus on enabling home delivery and e-commerce to happen, right? So the way we're playing this game is to read consumer insights and trends, fix the ones that we believe are meaningful for the business and put resource behind them to exploit that opportunity and try and be the first off the block to make it happen. So that's what I can tell you that we're doing. We haven't just left it to fate, we're actually doing it in a scientific way.

Sure. And just on Scotch sales. Is there any supply disruption which is still there on Scotch imports or it's normalized now?

Scotch imports supply disruption? No, nothing material. No. Nothing that is coming in the way, nothing that is stopping us from doing what we need to do in terms of our business. No.

The next question is from the line of Amit Sinha from Macquarie.

My question was on the competitive intensity within the whiskey space. So just wanted to understand, I mean, is it fair to assume that the larger players and the bigger brands would have done well in the last 2 months or so? And yes, I mean, any color on market share, even if it is a very small period, will be helpful.

So we don't have data to share really. But I can say this, that we would believe that companies with scale and with strong cash flows should be able to come out stronger from a situation like this, all right? I don't have data to bear it out. But that's the belief that we have the staying power, we have the cash, we have the relationships to leverage that to our advantage, okay? So that's what I would say. I obviously can't tell you about shares and stuff like that, but what I will tell you this, that our ability to start-up after the lockdowns were lifted, right, has been better than what I would have expected, particularly in terms of supply chain, ability to service the market, right? I think we were pleasantly surprised about -- I was really worried, by the way. It's very easy to stop a supply chain, but to restart a supply chain, starting from your vendors, raw material to the vendor, to the truck, to arrival in your factory, to making it in your factory, then trucks to send to dealer, that whole thing had been stopped suddenly for 6 weeks, right, or 5.5 weeks, right? I've been pleasantly surprised by how given the strategy that we pursued of keeping our TMUs and franchisees supported in the business, making sure their employees were paid, right, minimize the impact of migrant labors on our supply. Those kinds of things, I think we've been pleasantly surprised to what's happened. And therefore, I think in the opening up, right, I think we have done well, right, in our ability to supply when things opened because in the beginning, it's all about who can supply, right? I think we've done well there, right? I'm pleased with how we've done there. But that's really all I can really share. I can't share relatively small players, big players, what happened at this point.

Sure. Sure. And in that context, I mean, how would have your franchisee? Because you very clearly mentioned that the franchisee income in the quarter was hit. And -- so given that these guys are smaller with lesser resources, overall, supply chain disruption would be much bigger. Is it fair to assume that in the near term, franchisee income will continue to be hit?

That's absolutely right.

Okay. Sorry, go ahead. Go ahead, Sanjeev.

Yes. So just like our business have been impacted this quarter, our franchisee business have also been impacted. Again, even at the bigger scale. So rightly said, there are smaller operators. As a result, they do get into a lot of inefficiencies during this time. What we have done is, just to ensure that we create a win-win situation and a good relations with our working partners here, we have decided to share the pain also with them. So while we have a [ contract with phase of ] fixed income, they always cannot get into a situation where they say, "Hey, you make losses and we'll make all the profits." So that doesn't really work with us. So we have ensured that they do get their fair share of income, and we have kind of worked together with them. This quarter, as you would see, our franchisee income reported as [ sales stock ] is about INR 40-odd crores lower. When I look at on an annualized basis, in a pre-COVID environment, we earn about INR 160-odd crores of franchisee income. Our sense -- and it's too early to really give a number to it. We don't know how the thing will pan out. But of course, the business will remain slow, and their businesses will be getting impacted. We think that the franchisee income should be about 40% probably lower going forward in the next 2 quarters. But we'll keep on revisiting and recalibrating these numbers as we move every quarter because it's too difficult to say how exactly their business will recover from the crisis. And it's the same situation for us. We have been kind of living and breathing every day, every quarter.

Yes. Sure. My second question was on your basically McDowell's No.1 renovation. And just wanted to ask, in how many states have you relaunched the new bottle? And how has been the consumer response to that?

So we are in about weighted 1/3 of the country, okay? But we are rapidly rolling it out during this period, right? So over the next -- over July, August, September, we'll see a rapid rollout to at least 2/3 or 75% of the nation in terms of the weighted contribution of the brand. And I'll say that I'm very encouraged by the response from the marketplace. Obviously, again, the reading has been complicated because things started, things shut and so on. But I would say that, by and large, wherever we have gone in, right, I think the response has been very encouraging. And like I said, I want more and more consumers throughout the country to experience this new bundle in terms of the new McDowell's No.1. So we're continuing to roll out and that you only do if you feel that you've had -- your action standard kind of met in places where you started rolling it out, right? So we are extending it now.

Sure. Sir, just a very small bookkeeping question. So you mentioned that aging-related provision impacted the other expenses this quarter. Is it possible to share the number of this provision?

Sanjeev? I think we -- yes.

Yes, it's about INR 44 crores.

[Operator Instructions] We take the next question from the line of Manoj Menon from ICICI Securities. We seem to have lost the line for Mr. Manoj Menon. We move to the next question. The next question is from the line of Harit from Investec.

I just had 2 questions. One was on the franchisee income again. So when you say that you booked INR 40 crores lower number this quarter, it would basically imply that the franchisee income is next to nothing in this quarter. In that context, I also wanted to check that are these very temporary arrangements now with the franchisee to support them? And once things get back to normal, you will kind of get back to your normal run rates on the franchisee income?

Sanjeev, you're on mute I think.

Sorry. Can you all hear me? Yes. The franchisee income for this quarter is about INR 10 crores. And for a similar -- I think the corresponding quarter, you had about INR 50-odd crores. So as compared to INR 50 crores, you see about INR 10 crores now, hence is a decline of INR 40 crores. Now this INR 40 crores will basically true-up of impact that we had on the franchisee business. And of course, we saw a decline in business right from the beginning of the first quarter with the overall -- the GDP and economic conditions were going down south and, of course, a much bigger impact during the current quarter where we saw a big lockdown. As a result, when we discuss with the franchisee partners and we looked at the income earnings of the operations, we felt that it's quite prudent that we can share a part of the pain. And hence, we kind of [ let go ] about INR 40-odd crores. And as I said, going forward, looking at the current set of economy, the way things will move, the current -- the impact of the pandemic, we don't really know how things will be. But our sense is the franchisee income would be about 40% lower. Now we'll keep on revisiting that every quarter. But yes, I think the business will be down, and to that extent, our franchisee income will get impacted by 40%.

Okay. My second question was on the new launches for No.1 and Royal Challenge. Is this change also to do with the mix in terms of the liquid? And if so, is this a more premium liquid mix that you've changed there or is it just a packaging and communication change?

It's all new McDowell's and Royal Challenge, right? So in McDowell's specifically, pretty much all aspects of the mix have been improved, including the liquid, okay? Now whether it's more premium or not, I don't know. But consumers prefer it to the earlier liquid, right? That is one of the [Technical Difficulty] in market feedback that we have. Royal Challenge is also an improved liquid. And again, that is preferred by consumers based on our test results, okay? So it is not just "a packaging upgrade" which is more smoke and mirrors, right? It's not old wine in new bottle to put it literally, okay? It is new wine in new bottle. So that's how I would like you to see it. And it is, therefore, a comprehensive improvement in the product offer and the mix.

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

Sir, a few questions. The first one is on -- what would be your capacity utilization for July? If you could give us some perspective there?

I can't give you a capacity utilization number, right? I would only say this, that we are not capacity constrained, right, unless it's shut, of course, right, which is also the case in a few places. And therefore, it is now demand-led production. So the capacity utilization is based on the demand, right? And we are working as hard as we can to make sure that our factories are able to meet the demand. And I would say, by and large, right, its demand-led now and not supply-led. So we can -- I just say this, we can produce in all factories to pretty much pre-COVID levels of capacity. So if the demand goes at pre-COVID levels, we could produce at pre-COVID levels in our plants, right, with all the new norms in place.

Okay. Sir, second question is pertaining to this -- for this quarter, we would have seen higher sales in the [indiscernible] semi-urban market and rural market as compared to the metro, which was shut due to lockdown. So is there a shift that you would see that some of these customers who are in the semi-urban India or rural India are demanding a different kind of product or -- the premiumization that could have happened has not happened because of this geographical change in distribution or it is still -- it is just because of COVID that people are down-trading?

No, no. First of all, I'm not clear that people are down-trading, like I said earlier, right? And if they are, then it's because of COVID. Also, see, most of our sales happen in urban and large towns. The consumption may happen as product finds its way through unconventional challenges to consumers in smaller towns and rural, okay? Now -- so that's how it flows. And I think -- I don't think they want a different product, right? But we have products that can service the bottom of the pyramid to the absolute top of the pyramid, right? And they could move to any of our brands within that top to bottom of the pyramid, right? I don't think they want something different or new, right? They may choose something else from the portfolio, right? In the short run, if they choose to down-trade because of economic challenges, job loss, whatever else it may be, right, then they will hopefully choose one of our brands that are there lower down, right? And then hopefully come back when the sun shines again. Hopefully, they won't stay unemployed. Hopefully, they'll come back and they'll have the same aspiration when they come back that they had before, right? And they'll come back and then hopefully buy again. So I think any trends that we are seeing right now, we have to believe they are shorter term and COVID related. Longer-term trajectory, we believe, at least right now, will go back to where it was pre-COVID. The only question I do not know is how long it will take, right? That's the only question I don't know the answer.

Just one last question on the receivables. Could you give some perspective as to what is the increase, if at all, in the receivables from the states as of 30th of June?