United Spirits Limited (UNITDSPR) Earnings Call Transcript & Summary

Ladies and gentlemen, good day, and welcome to FY '21 Annual Investor Presentation and Earnings Conference Call of United Spirits Limited. We have with us today Mr. Anand Kripalu, Managing Director and Chief Executive Officer; and Mr. Pradeep Jain, Chief Financial Officer, United Spirits Limited. [Operator Instructions] Please note that this conference is being recorded. I would now like to hand the conference over to Mr. Anand Kripalu. Thank you, and over to you, sir.

Thank you very much. And well, a very good morning, everybody, and welcome to this results call where we will also review our full year performance and talk about some of the initiatives that have underpinned that performance. I'm Anand Kripalu. At the very outset, I want to extend, on behalf of all of us, a very warm welcome to our incoming CEO, Hina Nagarajan, who will take over from the 1st of July 2021. Welcome, Hina, and over to you to give a brief introduction of yourself to our investors.

Thank you, Anand, for inviting me to be part of this session. Good morning, everyone, and welcome. Prior to taking on this exciting opportunity in India, I was leading the Africa regional market, ARM as they're called, for Diageo as Managing Director. Since joining Diageo in 2018, under my leadership, the Africa regional markets became a significant growth driver for Diageo Africa. I drive to deliver results, and I'm known for building strong teams that deliver outstanding outcomes with a strong commitment to Diageo standards and compliance. I have also been an active and passionate advocate for inclusion and diversity in Africa, and more broadly, at Diageo. Prior to joining Diageo, I had spent over 30 years in the consumer packaged goods businesses and held several senior marketing and general management positions at Reckitt Benckiser, Medicare, ICI Paints and Nestle India. I'm a commerce honors graduate from Delhi University and hold an [ MDA ] from the Indian Institute of Management Ahmedabad. I also have a diploma in hotel management from the Pusa Institute in Delhi. I am truly honored and delighted to lead one of the most exciting markets in the world for our industry. I know I've joined at a very difficult time, but I'm really energized and proud of USL results in such a tough year, riding on the strength of great brands and people and on the foundations of [Audio Gap] The first is that alcohol behaves like a semi essential category in a consumer's share of wallet. And therefore, we're expecting to recover faster than other discretionary categories. Scotches will continue to grow faster than IMFL on the back of the fact that consumers who consume these brands are less price-sensitive, and people have found and discovered that in-home consumption is cheaper than out of home. Whiskey continues to grow from beer, particularly in lower-prestige and mid-prestige segments, and this is expected to continue certainly as long as the pandemic persists with the fact that the on-trade is going to be relatively closed. Repertoire consumption declined during the pandemic, and people [Audio Gap] and the biggest SKUs. Moderation for alcobev is the norm rather than downgrading, irrespective of which socioeconomic class you're from, and that's because alcohol plays the role of an identity marker for consumers, and therefore, reduction in occasions and quantity is preferred over downgrading if you are trying to balance your expenses. And finally, in-home, casual get-togethers are the most sought-after occasions during the pandemic. I'm sure that many of you who are on this call are now seeing that is becoming a reality. So the real question is, how do you respond to a crisis, and our philosophy on this has been to focus on your circle of control rather than your circle of concern. Simply, focus on what you can do and must do at a time like this. The first thing, of course, was to manage the crisis. And I talked last year about the 6 Cs as our strategy for managing the crisis. First and foremost, care. This is the heart of USL where employees and their health comes first. And we are committed to the well-being of our employees and have launched significant programs to ensure that our employees are as safe and in the best -- as much in the best of health as possible. Second, communication. During the crisis [ we ] only under communicate, and you need to extend your communication, not just to employees, but also to the wider ecosystem that depends on you. Third, the consumer. Keeping your finger on the pulse of shifts that are taking place and being agile and adapting as best as possible. Fourth, putting your customer first and ensuring that you support them and they feel supported, particularly during these lockdowns when their business has come to a grinding halt, and you do that through constant engagement with them. Fifth, cost. Dramatically re-prioritizing and reallocating spend based on ROI, dialing up productivity, so keeping your foot on the acceleration of cost savings and productivity across the lines with the P&L and having a laser-sharp focus on slashing nonessential spend. And finally, cash. The sixth C, cash. Cash is, no doubt, king, a single-minded focus on receivables and managing credit, managing advances, rigorously managing inventory and optimizing CapEx spend based on business criticality and ROI. So the 6 Cs that we focused on to manage the crisis: care, communication, consumer, customer, costs and cash. But the second leg has been to say that once this passes, we will emerge stronger as a company or even in the window that you have of the undulating increases and decreases of the pandemic. With every window, we will emerge stronger. And for us, emerging stronger was on 2 legs. First, what will people say about our company when this pandemic passes? Did they say that this company stood up and emerged as a corporate citizen and did what they must do to help their people and the communities around them? That, for us, is look-back reputation. How will we be judged at the end of this crisis. And the second leg of emerging stronger is to say that we must perform better than others in the marketplace. Now Pradeep is going to take you through detailed financials a little later, but here's a snapshot of how we have performed in the previous 4 quarters. Now what you can see from the segment on the left is our [ MSV ] growth, and our growth was 19% if I remove Andhra Pradesh from the base in the most recently concluded quarter, which is quarter 4. And our P&A business, without AP, grew by 31%. Now this performance, albeit on a somewhat softer base, we believe it's strong, and in many ways, it just reflects the resilience of this business to bounce back when markets open. I also believe that in every quarter of the last year, we have outperformed competition in terms of our mantra of emerging stronger. I think importantly, we have seen a recovery of margins as well, and I think that really bodes well for the future of the business. So with that context, let me dive a little deeper into today's agenda. So I'm going to talk a bit about what's beneath those results through our strategic priorities, then hand you over to Pradeep to talk about our financial highlights in some more detail. And then I'll come back to move from looking through the rearview mirror to looking through the windscreen. So as you all know, our performance ambition is to be one of the best-performing, most trusted and respected consumer products companies in India. And this is what drives the passion with which we pursue every priority in this business. And I'm sure when you read this, you will be able to connect with some of the stuff that we have done during this pandemic. The delivery of this performance ambition is built around 5 strategic priorities: to strengthen and accelerate our core brands; to evolve our route to consumer from being a push-driven organization to a pull-driven organization; to drive productivity so that you can invest in growth and also deliver improved margins; corporate citizenship; and finally, to build an organization that is not just ready for today, but ready for the future. And let's look at each of these in some detail. First, our brand portfolio is built around some of the biggest passion points for all Indians. First, Johnnie Walker is all about progress, and that's a very emerging markets mindset to saying, "Whatever happens, each passing generation must progress." And Johnnie Walker is based on a legacy of making positive, progressive prices. Black & White whiskey rides on the passion point of food where pairing food and whiskey, making it a kind of match made in heaven. Relaxing and unwinding with Black Dog where it inspires achievers to assign pause so that they can savor their journey of success. Cricket and Royal Challenge whiskey, hugely boosted by the association with 2 brand asset icons, [ glass ] [indiscernible] and the Royal Challengers Bangalore cricket team. And finally, music with our key brand, McDowell's No.1. So let's see what are some of the things that we have done around each of these brands. On Johnnie Walker, we focused our effort this year to inspire consumers to walk back to their favorite bars with the #WalkInWithJohnnie activation. It was a simple invitation to walk into the bar with any glass bottle, and bev Ds would be reforged into bold, striding man installations that will be kept in many of those stores. With the help of renowned glass artist, we were able to bring to life striding man installations across some key partner bars. On Black & White, we've created an engaging short film, and if you haven't seen it, then I encourage you to do that. It's quite an engaging film on sharing during the lockdown. On the inclusion and diversity, a renowned musician, a mixologist and a fashion stylist came together over a brunch with Black & White to go back [ richer ] with shared stories and experiences. And then finally, Black & White pitchers and platters, a picture of a cocktail and a plate of food making that perfect, magical combination. On Black Dog whiskey, topical content with India's top comedian, Vir Das, and product-led content centered around the work-from-home team. Our efforts on the hipster pack continue to deliver momentum on this very, very interesting SKU, and is now available across all brand markets in the country, and I'm really happy to say that the momentum on the hipster pack really continues. The integration of RC with RCB, and as you can see, a special-edition RCB players, jersey IPL pack, right? So if you look at those packs, it looks like the players' journey -- jersey, and that was surrounded by in-ground activation across outlets for the time that we could keep those outlets open and also getting some key stars from our RCB team to do digital activation. Importantly, we won a YouTube Creator Award for surpassing 1 million subscribers for RCB. And by the way, on social media, RCB was one of the most followed sports teams and most active sports teams in the world. And I'm sure over the last 2 seasons, you would have also enjoyed RCB's performance on the field, both in September and October, and in the more recently suspended IPL. And finally, yaari and music and content published under the No. 1 Yaari brand theme won 14 awards across categories during the course of the year. Supporting all this has been innovation and renovation that we've often spoken about. You can see the big, bold change in terms of the RC pack. You can see the change in No #1 pack between the left and the right pack, that's the new pack. Also the pilots of No. 1 in a can. And finally, something that's just beginning to roll out as we speak, a breath-taking new -- all new, in fact, Black Dog whiskey, emboldened with a 14-year-old variant as well. And you can see the difference on the right of screen between the old packs of Black Dog and the new packs that's there below it. So that's what's happening on our brands. Let's focus on our route to consumer and what are we doing on that journey. As you know, we think of India as at least 3 Indias, right? India is too large and complex to think of as one India, and we think of it at the minimum, as 3 Indias. An affluent India of people who are globally traveled, they seek luxury experiences, and you need to unique ways to reach these people. So the middle India who are brand conscious, willing to pay for value, and this represents a bulk of the prestige segment. And then, of course, aspiring India, which are people who are price conscious, right, and they are just entering the consumption cycle. And that's where a large part of our mass business or Popular brands really, really sit. And we have a tailored strategy and a tailored organization structure to deal with each of these 3 segments. So let's talk about some of the things that have happened during the course of this year. Starting with Scotch whiskey. We've had focused interventions to win at home, and we have enabled in-home consumption through do-it-yourself drinks on digital. Winning on the store where we have gone, in a focused way, after duty-free sales and how to capture duty-free sales in duty-paid retail outlets within the country. And then winning the on-sale where we have leveraged our raise the bar (sic) [ Raising the Bar ] program extensively to bring consumers back in. We also leveraged the festive season. So the good news was that during the festive season, the markets were kind of more open than closed. We created limited-edition packs, as you can see on the left-hand side, and also some stunning new visual identities for our key brands that came up in stores during the festive season as well. And finally, despite markets being closed, the renovation of McDowell's No.1 has had a big impact in the marketplace. And honestly, you have to see some of these stores to actually believe the impact that they have. Moving on to our third strategic priority, which is about productivity. We have continued our journey of focusing on driving productivity across every single line of the P&L: on net revenue management, ensuring that our spends deliver ROI and focusing on premiumization to deliver stronger price/mix; continuing to optimize our supply footprint, and we have taken several interventions, including factory closures, during the course of the year; making sure that our marketing spends have a productivity program to, at the minimum, negate inflation; continuing our journey of prudence in overheads, and the new effort now will be on office consolidation, given the new future of work thinking; and finally, on cash, a massive debt reduction during this quarter. And many of you will recall, we started our journey with more than INR 8,000 crores of debt in this business, right? And we have come a long, long, long way since then, really bringing down the cost of capital and the interest costs for our business. Our fourth priority is on corporate citizenship, and I'll come back to more a bit later. But apart from things like sanitizers and other support that we did, as you know, we have been rolling out raise the bar (sic) [ Raising the Bar ], which is a 2-year program, and we're coming towards the end of only the first year. And we have extensively worked for the revival of the on-trade with many of the critical customers who've been going through a very, very difficult time. Good news is that we will be continuing to do that through the next fiscal. But we haven't taken our eyes off the environment and sustainability, which we also believe is a critical part of corporate citizenship. So our efforts continue to promote positive drinking and the ethical market sales of alcohol; our efforts to build a more diverse and inclusive organization, not just within ourselves, but over time, within our ecosystem; and continue to focus on the planet, optimizing water consumption and reducing greenhouse gases. And finally, on building a winning organization. And really, 4 things here. First, we have continued to raise the quality of our talent via the right hires and also through the right development efforts for helping talent that we already have to reach their potential. We've tried to build a culture that is more open, more nonhierarchical, more fair, more apolitical and, above all, inclusive so that not just for genders, but people much beyond genders. People with -- who are differently abled, people who are [ differently ] [indiscernible] all feel very much included. We are continuing the process of simplification. We have done huge work in reducing the complexity of this company, and we continue to make strides on simplifying our business. And one of the examples of this was reducing the number of layers from 16 to 9. And finally, we are continuing to engage and energize our teams through progressive policies that puts people genuinely first. I just want to conclude on this slide by saying we recently had our all-employee value survey. More than 90% people participated, so it's a very wide representation and a highly quantitative survey. And I'll tell you this, despite this pandemic, our employee engagement scores have never been higher. We are operating at the highest levels in engagement in this virtual world. And the level of pride in working for Diageo and for United Spirits has actually never, never been higher. So we really do believe that we have managed the crisis as well as we could have, and we have emerged stronger, even though the crisis is not over yet. At least, thus far, we've emerged stronger both in terms of our reputation and being -- and standing up as a good corporate citizen and also, with each passing quarter, in terms of our competitive performance. I'm going to now hand you over to Pradeep to take you through the financial highlights in a bit more detail. Pradeep, over to you.

Thank you. Thank you, Anand, and a very warm welcome to our investor and analyst community. Let me just walk you through the financial year '21 financial highlights, right? Okay. So this slide is -- I mean what you see on the left are our full year number, right? But I think the story is all about the sequential quarter-on-quarter recovery that the business has staged. Anand has already spoken about the quarter-on-quarter recovery, so I will not going to repeat that. And maybe what I'll quickly move on to is the next slide, where I decode the full year 2021 net sales performance based on some 2 or 3 consistent themes that we have been talking to all of you about, right? So on the -- can we move to the next slide, please? Yes. So ladies and gentlemen, here, I make an attempt to decode the 13.2% decline that you're seeing on a full year basis on our net sales, right? Now the 13.2% decline roughly translate [Audio Gap] At the PAT level, again, it mirrors completely the EBITDA performance, right? I think the one thing that needs to be called out is that last year, we were -- current [indiscernible] year, we are overlapping 2 exceptional items in our tax line last year. So therefore, the tax line kind of provides a bit -- provides us a bit of a kicker. Having said that, we are also taking the exceptional items of about INR 150 crores in our PAT line. So overall, our PAT overall reduces from INR 700 crores to about INR 310 crores. Again, want to provide comfort that we are exiting Q4 with PAT margins that are almost in line with the established run rate, right? We'll move to the next slide, which is about the cash. As Anand mentioned, extremely pleased with what we have managed to achieve on the cash front in the year financial -- in the year 2021. Apart from the EBITDA of INR 1,000 crores, the INR 900 crores roughly on account of working capital efficiency. Now the INR 900 crores of working capital efficiencies are a combination of 2 things. We are lapping a slightly inflated base as on March 31, 2020. But apart from that, right, I think the focus on productivity and extracting efficiency through all elements of our working capital, right? And the fact that all the same operations, right, have continued to paid off -- has continued to pay us well on time. And our top line momentum across the geographies has ensured that the money is rotating faster for our distributors and our wholesalers, which is reflected in our days sale outstanding. We'll move to the next slide, which -- yes. So Anand has already spoken of that, INR 1,500 crores of debt reduction. This is the maximum we have achieved in the last 6 years. I think 2015, '16, on the back of a onetime gain, we had a higher debt reduction. But after that, this is the highest debt reduction that we have achieved in 1 financial year. Also pleased to share, we had spoken of it that, I think, in the last quarter that CRISIL has reaffirmed its AA+ and A1+ rating for our bank facilities and our debt program. The debt-to-equity ratio continues to come down. It stands at 0.1% on 2021. Interest savings, while you see only about a 13% to 14% reduction on a full year basis, but again, if you look at the quarter-on-quarter numbers, I think our Q4 numbers have reduced by about 40%, 45% compared to Q4 of last year, especially after we have refinanced our nonconvertible debenture of about INR 700 crores in the last quarter, right? Interest coverage ratio has come down a little because of our overall profit numbers coming down, as I explained a little while earlier. But like I said, that's only [indiscernible]. We can move to the last slide. Again, I want to leave the investors with a reassurance that if you look at our earnings per share progression, up till '19, '20, we have roughly been in the INR 10 per share kind of earnings per share, and we are again exiting with a similar momentum. If you back off the exceptional items that we have taken in this quarter, I think our earnings per share for the last 2 quarters has been in the range of about INR 3 to -- [ INR 2 to INR 3.3 ]. And that's well, well and truly in line with the run rates that we were operating on earlier. In fact, marginally better than that, right? Return on capital employed has come down because of the overall profit for the financial year. But again, not to keep saying the same thing, we are exiting at healthy levels, and hopefully, that should sustain going forward, right? So that was it, ladies and gentlemen, a summary of the financial highlights. I will now hand it back to Anand to wrap up the presentation.

Thanks, Pradeep. Thank you very much. So as I said, moving from the rearview mirror to looking through the windscreen about what is ahead. Now there's no question that we are back to having to manage the crisis in the short term, both for our employees and the communities that we serve. And I just want to say that at the end of the day, if you don't keep your employees safe, then you have no business. And at a time like this, you have to go beyond just helping them professionally. You have to help them personally. And what we have tried to do is to make sure that we do whatever we can as an organization to keep our employees at the centers of the policies that we create. So we've created things like giving almost on-the-spot salary advances; supporting and enabling vaccination; COVID care leaves, especially 14 days COVID care leaves for self and dependents; ensuring [ domestic ] medical expenses; go well beyond what's covered through the insurance policies, and we will cover any expense that's related to COVID so that employees are covered; providing employee assistance for their overall well-being, not just physical and medical, but mental well-being; free teleconsultations with doctors; enhanced medical reimbursement, right, that is necessary; and providing self-isolation rooms in partnership with some hotels. And sadly, this time around, as many people would say, last time, wave 1 was about numbers. This time, it's about names. And sadly, in the case of a demise, apart from a large payout that will come from insurance, we have committed to adding another year's salary to help people tide in some small way with the [indiscernible] the future of their lives. But equally, for the communities and the society, and we have today just announced this morning all-new set of efforts and initiatives and investment to support the communities within which we operate. So for instance, we are making sure that in at least one district, in every state or [ Indian ] territory, we will make an intervention. So we are creating 16-bed mini hospitals in 15 most needy districts, and these are mini bed hospitals that are self-sufficient but also that can be moved around to other more needy districts as and when needed, and we are investing on this. Providing oxygen plants to [ more ] government hospitals in 21 districts; and across 10 states in the country, providing medical equipment, consumables, oxygen supplies, ICU beds and so on, as requested by state governments to do this. I just want to say this, that Diageo has committed a further INR 45 crores towards this effort to help India at this time of need. Of this INR 45 crores, INR 35 crores, or GBP 3.5 million, will be funded directly by Diageo plc, and INR 10 crores will be contributed by USL. But just if you add together what we have done in wave 1, our Raising the Bar program and what we're doing now, Diageo in India, or Diageo as a group, would have committed almost INR 130 crores towards COVID relief. I really -- actually, I must say I feel very proud that our company is willing to open its purse strings at a time of dire need like this and help those who we depend on in the world outside. So that's what we need to do in the short term. And as we said, the medium term, this quarter, next quarter, you can see the state of the nation, right, successive lockdowns. I mean nobody is breathing easy. So the reality is we are in choppy waters again, right? And we are not immune from these choppy waters. However, right, and therefore, there is going to be some short-term impact on the business, right, and that's to be expected. But as the lockdowns emerge, and as we start sailing in calm waters again, and as the sun shines brightly as again, as it will, we need to make sure that we're as focused on the long term as a company and as a management team as we have been on taking care of the short-term crisis that we've been in. Therefore, we are renewing our commitment to the planet with our Society 2030: Spirit of Progress commitments, and we are making some significant commitments as part of this: achieve net-zero carbon emissions across India operations by 2025; achieve net water positive impact in India by 2026; and ensure 100% use of only [indiscernible] packaging [indiscernible]. But this is something that every responsible company needs to do. But the long-term opportunity in this industry remains optimistic, and I have to say, it is very, very optimistic. And yes, there have been lots of these [ funnies ] as we call them that have happened from year-to-year and sometimes quarter-to-quarter. But the fundamental consumer opportunity of 17 million people entering legal drinking age a year, a young population who are open to new things with the median age of 27, low penetration, particularly amongst women, low capital consumption of alcohol and particularly spirit. As you know, barriers to alcohol, breaking down with alcohol being more open and more accepting and more acceptable to people. And finally, consumers looking for better experiences. All this means that the consumer opportunity, right, is intact. To add to that is the opportunity for long-term premiumization, and you have seen how our strategy of focusing on Prestige & Above at Scotch has continued to play out in this market, right? We are playing in line with how consumers are evolving. There's an exploding middle class. There's improving purchasing power. And not only that, people are willing to open their purses and... [Technical Difficulty]

Hello, Mr. Kripalu? We can't hear [ anything ]. Seems like we lost the connection for Mr. Kripalu. Requesting all the participants to please stay connected while we reconnect them. Ladies and gentlemen, thank you for patiently waiting. We have the line from Mr. Anand Kripalu connected. Thank you, and over to you, sir.

Okay. I'm -- my apologies, folks. I'm not sure where I left off. But was this slide covered in the presentation? Can some of you text me and tell me whether this slide was fully covered?

Yes. Anand, this was covered. Anand, this was covered. Slide 44 was covered.

Okay. Slide 44 was covered. Okay. So folks -- so I just want to say that the newer opportunity, the premiumization trend is an [ additional ] category to rebound once things improve, the external [indiscernible] subside, they may [ be normal ]. But equally, I just want to say that not only the external environment, but also our business has never been in better shape. And I just want to demonstrate that the external environment remains strong. The long-term prospects are going strong, and our business has never been in better shape. And I'm going to use today's opportunity to recap some of the things we've done over the -- over the past [ 70-plus ] years that our company has been around. We have transformed the complex and fragmented USL business that Diageo acquired into not just a business but, I believe, an institution, which is built on strong reputation and a positive and consistent strategy, okay? Now firstly, we focused on profitable growth [ limited ] around premiumization and productivity. The growth was focused on Scotch and Prestige & Above, which is now 70% of our business, and renovation and innovation as a cornerstone of our strategy to build those brands. We supported this with productivity and efficiency across every aspect of the business. We demonetized a load of noncore assets. We have halved the number of manufacturing sites, we have halved the headcount. We have moved to a more asset-light franchising model for some of the popular or [indiscernible] brand. And of course, we reduced debt very, very significantly. Secondly, we have transformed the reputation, I believe, not only of this business, but of this industry. We have shown that business can be done, and we have genuinely changed the way business is done in this country and in this industry through ethics, governance, transparency across every aspect of our business. We have changed the [ nation ] of engagement in state and federal governments and moved from a negotiation to more of a collaboration and have a seat at the table because we can add international [ test ] and experience and help them to craft a win-win strategy. We were seen as a liquor company. I do believe we have moved from a liquor company to a corporate citizen now, and we have transformed the reputation for our corporate brand and our employer brand, which is Diageo. And finally, we have created big shifts in talent and culture and aspirationally [indiscernible] integrating the best of the [indiscernible] USL and Diageo. building an organization that's [indiscernible] in terms of organization design, capability, career development and being a functional rather than being a regional operating model. And instilling a diverse culture. Many of you know that there was not a single woman on the leadership team of this company, right, across the 25 people in the Management Committee when we started this journey. And today, we have a proud representation of very, very competent women at every level in this organization. So I [indiscernible] to add, there is a lot of work to be done. And then having progress as also seen around [indiscernible] or fraternity leave or travel [indiscernible] or indeed, policies that [indiscernible] equal, irrespectively of sexual orientation or other requirements. And finally, high-quality talent with strong hires from reputable Indian and global companies across diverse sectors, and we continue to develop the internal pipeline. Very often in the past, I see [ profitability ] [indiscernible] when we were -- I used to say, we are flying the plane while repairing the engine, okay? And I just want to say this, that I feel that the plane is today robust, and its engines are in good working condition. With what we've managed to do in the industry, I believe we have constructed also a solid runway. And this plane, as we have built now, is taxi-ing and almost accelerating. And I really believe that in the times to come, this plane, combining the potential of the industry and the strength of this business, will absolutely have every potential to take off. So with that, I want to thank you for your time, for listening through to this presentation, and we will now open it up to questions.

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

Yes. Congrats on the good recovery. My first question is versus industry, if you could tell us how much faster you have grown because you commented that you have grown faster than the industry. When I see the numbers in the last 2 quarters in P&L, the sales is almost flat, which is commendable, given that [indiscernible] has shut, and the COVID scenario. And on marketing spend, it's at a multi-quarter low. And last quarter also on a Y-o-Y basis, there was some saving as a percentage of sales. So is there a structural lower-cost environment currently, given a lot of event activations are not possible?

Yes. So thanks, Abneesh, for the question. I just want to say that, first of all, I can't tell you [ specifically ], right? Unless you wait to look at other results and try and triangulate the data. But from whatever tracking we do, and unfortunately, I cannot say that more publicly, we believe we have outperformed competition in each of the [indiscernible] quarters, right, despite the quarter having been fairly subdued because of the environment and the way it was. Yes, marketing this quarter is actually low, but I'd like you to look at marketing costs on a full year basis, right? And we are probably about 90 bps behind what we were in the previous fiscal. We like to spend money behind news. And this quarter, we have set aside money to spend behind some significant activities, which, because of the conditions we couldn't fully execute, right? And you will see that spend coming back. I also would like you to think of A&P spend way we think about it. A&P is a just secure advertising and marketing that you see. We also think of -- are we investing behind our brands in terms of products, in packaging and competitive performance and delivery, right? And we see that. It doesn't come under the accounting line of A&P, but we see that is right investment, right? Sometimes we may move money from there to the here. Or if we are taking a pricing action in a particular state, right? We treat that -- when we total it up, we add all those [ expenses ] together and say, "This is the total amount we are going to end up with." But in terms of A&P, the way you should think about it is that I think 8% to 9% will be broadly the range that you would spend in a normal year, right? And spend may be tight. Like now, shops are all shut in marketplace, so they're not going to be spending any money. So if you think about on a full year normal basis, 8% to 9% is what we spend, which will always mean a strong double-digit spend on our P&A portfolio.

Okay. That's helpful. My second and last question is on gross margin. So good improvement on a Y-o-Y basis. But quarter-on-quarter, it's gone down by 70 bps. So any comment there? And on outlook, given inflation everywhere and the fact that the sentiments are bleak, could you see some risk because of the downtrading also?

So we're not going to comment on guidance on gross margin, at least you know that. I mean we've always said guidance is about operating margin. Now having said that, we have been -- and don't read too much into quarter-to-quarter because there are lots of [ funnies ] right now.But the fact is that the gross margins are at a reasonable level, and they've been enabled by, I would say, a relatively benign COGS environment and benefited from our productivity program continuing to be driven really very hard, okay? Now as you look ahead, you've got to expect some inflation is going to come in after a benign year like this. I don't think it's going to see a big hit on comps in this April to June quarter. I think we know that this quarter is going to be reasonably okay. But you've got to believe that some level of inflation will settle. The counterbalance to that is the fact that with the pandemic, again, in full fury, there's going to be a big supply-demand in commodities as well, whether it's glass or ENA and so on, right? And if the overall demand is down, then the prices could also soften as a consequence of that. But that's the basic situation. I don't think you should read too much into the [ general ] movement. We restate our commitment that when times are normal, when the ship is sailing in calm waters, that we will deliver mid- to high teens margins with a consistent improvement in operating margin. And that's all we really can say, Abneesh.

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

Congratulations on exceptionally strong cost control this time and productivity that it's clearly flowing through. My question was essentially on what you told just now. We have almost, I mean I -- in my view, have kind of reached that mid- to high teens marked clearly this quarter. Do you think there is more juice still and that target is still something that high teens is a much higher number in your view? Or could you kind of give us some sense how should we look at margins on a sustainable basis?

Yes. So listen, there's always more dues in every business, and there are always opportunities, right? But having said that, I'd say, listen, we need to deliver this performance consistently before we go back and take guard again on scoring the second [ entity ], okay? And we need to be out of the woods in terms of the choppy environment we're in. This is not the time for us to be relooking at guidance, and therefore, I would really, really resist from doing anything of that kind. I think in the future, once we deliver consistent performance, once the cloud is clear, right, I'm sure there will always be an ambition in every business, including ours, to improve. But for the foreseeable, this is the guidance, right, and I don't think we can add any more value to that guidance today, Avi. I'm sorry.

Yes. So sorry, if I hear you correctly, this number is something that you think is sustainable, right? Would it be fair at least in the near term? I mean I understand that we are in an uncertain world, but at least given whatever visibility you have, except the ad spend when it kind of moves up, logically, the recovery should also be playing out. So do you think that should balance? Is that what would be the aim of the management?

Don't look at quarter-to-quarter margins, first of all, right? Please look at our performance on a full year basis. We don't run the business on a quarter-to-quarter basis, and I said that before. So this quarter, we may have done less A&P, previous quarters may be higher A&P. But we're running the year, right? And that's how it's going to be. And that's what I'm saying you have to look at our guidance as a whole, right? And that's our guidance. So don't start extrapolating that. I mean one swallow doesn't make a summer. So please look at our business more holistically than just 1 quarter is what I would advise.

No. Perfect. I hear you. Okay. So full year is what I'll look at. The second question essentially is there's a lot of pain I kind of pick up over here in the smaller peers in the industry, especially given the working capital stretch that has happened, the tax increases. I wanted to understand, is this an opportunity that is worth looking at? Or is the profit pool too unattractive, given the segments that they cater to? Your thoughts on that.

So we have already announced our strategic review for parts of our Popular portfolio, okay? And I think they're very clear, actually. And we have been clear right through this last many years that the future profit pool is moving towards Prestige & Above. And that's where we want to focus, and there's a lot to be done there, right, across Prestige and across Scotch, okay? Now it's possible that some of the smaller players may have a hard time. And we still have, I'm saying, a couple of portfolio, right? And we see haven't taken a call on what exactly we're doing with it. And therefore, if there are opportunities to mop up volumes because somebody else cannot supply, oh, we absolutely remain committed to the Popular portfolio that [ there is at ], okay? And you know very well that we have recent business for which we look at it both [ individually ] and franchise business, right, which we allow third parties to manage. So absolutely, we will mop up any opportunities that are there. But I think the way we have to think about this is, what is our strategy, what do we want to do as a team rather than be, I would say, opportunistic. Because that -- there might be a short-term opportunity. But if you take your eyes off the big prize, then that's not going to be wise in terms of how management will spend its time and where management will invest resources, okay? So that's how I would want you to really think about that.

Got it. That's very clear. And just a bookkeeping question for Pradeep. There has been an increase -- actually, an increase in the excise duty payable in the balance sheet. Is this a timing thing? Or is this more structural in nature? That's the only question. I'll come back in the queue.

You already asked 2 questions. [indiscernible].

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

Just 2 questions from my end. So can you just throw some more light on the Scotch performance, particularly the BIO Scotch over the past quarter and the full year as well? So you'd indicated in the previous calls that a brand like Red Label did exceptionally well. Any additional color you can give us on that?

So I can just tell you that Scotch is doing strong double digit, right, very strong double digit. It's the fastest-growing segment within our business, including in this previous quarter that we are seeing, okay? And within that, BIO is growing much faster than BII and BIO is growing faster, partly enabled by some soft [ B2C ] sales, as you know. Partly, we have had some regulatory unlocks on pricing, right, in several states, actually, where BIO [indiscernible] and prices, therefore, have kind of rationalized. And I'd like to believe that our teams have also done some really good jobs on the ground to exploit that opportunity, okay, and drive that opportunity hard. So I would say it is the fastest-growing part of our business at this point, without getting into more details on the [ estimate ] numbers, Aditya.

Yes. And just a follow-up there. I mean you talked about regulatory unlock. Can you just give us an example or throw some more color on what exactly has changed?

It's basically tax rationalization and therefore some pricing direction across [ 23 ] states in the country, okay? And it is -- so if you remember, there was a big drop in prices in Delhi sometime ago, right? This is closer into line with Haryana prices. There's been some rationalization in UP. There has been some rationalization in a few other states, and there are some states where we still trying hard to get it rationalized, okay? Definitely, one thing that you all may be reading about to that connected to this is what's happening on the U.K.-India free trade agreement, right? And whether that would lead at some point in time to some significant unlocks on duty rate for imported spirits, particularly Scotch and Scotch whiskey, right? And I can tell you, there's a lot of dialogue happening and you can read about it in the papers as well between both sides on seeing what's possible in the [ near future ].

And secondly, in terms of the strategic review of Popular brands, when do you expect that to sort of get completed?

I think that we have said by the end of this calendar year, right? And I can tell you, we are running absolutely on track to make it happen by then.

The next question is from the line of Percy Panthaki from IIFL.

My question is for Hina. Since you have spent time in the African geographies, what similarities do you see there with India which can be sort of read across or kind of applied learnings to the Indian geography?

Hina, you want to take that? Or do you want to just hold until you're firmly in the panel?

Yes. I would -- actually, I'm not an active part of this panel. I'm only an observer today, so I would prefer to skip it. I mean there are similarities and differences, but let's talk the next time.

Okay. Okay. No problem. My second question is with the second wave of COVID, what is the kind of impact you are seeing on the business? I would assume that it is not as bad as the first wave last year around.

Well, it can't be worse. First year when there was a 100 more lockdown and there was 0 business, right? So it can't be as bad as that, thankfully. As you've seen the previous quarters, Jan, March was fine by and large, right? But I think as we are now getting into this quarter, I mean we are definitely seeing an impact, right, to this quarter, right? So we were strong in the previous quarter, but we are seeing a slowdown. I don't want to put a number to it, honestly. But the reality is these states are 100% shut, right? Many states are shut. But thankfully, home deliveries happen, right? [ Like in Maharashtra and Bangalore ], okay? And some states are open, but they're open from 6:00 to 10:00 in the morning or 6:00 to 11:00 in the morning, which is not normally commensurate with the time when people go and buy. But course, the off-trade -- the on-trade is largely shut. So I think you have to think about the fact that there are significant barriers to consumption, right, as we speak. So these impacts in the short term, right, is significant. But no idea of what it was when there was a full lockdown. I think the only silver lining this is that, like I said earlier in the presentation, people have seen this more as a [ friendly ] [indiscernible]. And many states have allowed retail to keep open 6:00 to 10:00 in the morning or 6:00 to 11:00 in the morning or allow home delivery rather than shutting things down fully. And I think the states also need the revenues, and they're not seeing any value in keeping alcohol completely shut. So why not keep the grocery and other [ people ] open? They're also finding a way to make sure people who want to buy alcohol are able to access.

So Anand, like in the first wave, our problem was mainly the restrictions on supply. But this time around, while, of course, there are some supply restrictions, are you worried about any demand impact because the case load is much higher? It's much more widespread across India, and therefore, in this kind of an environment, the recovery from a demand perspective may not be as immediate as, let's say, whenever the supply restrictions end?

So first and foremost, I must tell you that we've seen many markets around the world, and we've seen many incidents of this kind happen in our industry in the past. This would be -- the category is resilient, right, and the category always bounces back, without saying. Now having said that, there is some short-term dampening of attitude, dampening of spirits of people. And therefore, I would see some dampening of demand but hard to know how much it is because of accessibility and jobs being shut and how much of it is because these spirits of people are a little dampened because many more people have got impacted. Many more people have got affected by this pandemic, okay? So I think you could believe that there is some dampening of spirits, and therefore, some dampening of demand. There are also supply challenges, by the way, because many factories are getting into lockdown zone. Many factories are easing to work with limited people, with limited timing, reduced number of shifts. So it isn't only demand-led or retail opening-led. There are also cases where we aren't able to supply fully because if you have infected cases, then you have to go through all process of cleaning up your plant, and then you may be given permission to only open a shift or 2. So we are in the situation we are in right now. And I think we'll just have to wait for this to pass. The only [ measure ] we will do with this -- I really do believe this industry is like in an elastic band. Its ability to recover, right, is huge, and I think we should just remember that as we think about the business.

The next question is from the line of Ashit Desai from Emkay Global Financial Services.

My question is on hardware overheads. If you look at the other overheads for this quarter or year, we'll be largely flattish versus last year, in a year which has seen a revenue decline in double digits. And also when you compare this to the other consumer peers, we've seen a good amount of savings [ over the year ]. So if you could highlight -- I mean what has driven in this -- why savings have been low over year. And are there any one-offs that we should be aware of?

Pradeep, you want to take that?

Yes. Anand, I'll take that. Yes. So Ashit, in the NDS accounting, as we have explained earlier also, the entire sizable component of the Andhra Pradesh unwinding costs sit in the other overheads line. If I kind of make it like-for-like, we continue with a run rate of about 5% to 6% efficiencies on a year-on-year basis on the overheads line, right? That's broadly the run rate that we have established. And in fact, in 2021, because of the COVID-led restrictions because travel, et cetera, was restricted, we would have delivered slightly higher than that, right? So that's what the noise is an account of. The Andhra Pradesh unwinding costs have gone in 2 sections. One is about the gross margin line to the extent of the franchise business that we have to surrender and all the unwinding costs sit in the other overheads.

Pradeep, can you quantify how much are the online income?

[indiscernible].

We normally don't share that throughout the year. Yes, we normally don't share that, Ashit, but do get in touch with Richa after the call. She'll be to help you out.

Okay. Okay. And if I may take one more question. I had a question on working capital. Probably, if you look at the improvement in working capital, this has been driven by increase in payables and other current liabilities for the receivables and inventory largely remaining similar. Are these sustainable? So firstly, are these sustainable? And secondly, do you see any room for improvement in reducing inventory and receivable days also going forward?

Yes. Yes. Ashit, let me take that, right? See, comparing the absolute may not be the right bench. The scale of the business has come down versus last financial year, right? What I would want to share is that if you look at the last 3- to 4-year progression, our working capital has always run -- net working capital, right, has run at about, I would say, around 30% of our net sales value, and we have ended the 2021 in the range of about 26% of net sales value, right? And obviously, the NDS accounting kind of determines a lot of things, et cetera. On an underlying basis, we have improved our working capital across accounts receivable, inventory marginally and across accounts payable, right? So roughly, you'll see a 3% to 4% improvement. Like I said in my presentation, the improvement, part of it is driven by the fact that all the corporations have behaved, right? All the corporations are paying up on time. So therefore, it becomes a slightly high base to lakh. But as Anand has mentioned and we have maintained that we continue to extract efficiencies across the value chain. It's an ongoing journey, and we will task ourselves to continue to extract working capital efficiencies year-on-year.

Next question is from the line of Harit from Investec.

Yes. I just have 3 questions. Firstly, on the -- it has been 1 year since you've relaunched McDowell's No.1 and Royal Challenge. I understand it was a bit translated because of COVID. But if you could just give us a sense of -- as per your action standards, how both these brands have kind of performed in their launch now over the last 12 months.

Okay. I think please restrict to 2 questions. Otherwise, others are going to be very unhappy with us. So as far as the renovations are concerned, I would say the following. No. 1 is being extended almost everywhere in the country and have done exceptionally well in most parts of the country, right? So we are very delighted with that. As far as the RC is concerned, the rollout has been more limited. We have not managed to get to every place that we wanted to get to. And there has been some other moving parts. So I'll say this, that in some states, RC has met action and really done well. And in many states where there have been other things that have happened like pricing movements and so on, the performance has been below what we would have ideally liked. But it's a very unstable time. And we still believe that it has potential to deliver. But right now, it's still a bit mixed.

Okay. So is there -- I mean just a follow-up to that regarding RC while [ all ] have done well regarding RC, is there a -- are you kind of relooking at it or you're just waiting until the environment kind of settles down until you get actual -- a bit more -- a little more on -- in terms of demand-led data on how things are panning out?

No. Listen, we are constantly evaluating how brands perform, right? And I think the team will then come back with whether we need to change something or just wait for market to smoothen out and invest more and do whatever we have to do. So I mean I can't tell you more than that. But just recognize that we have our finger on the pulse. And if something needs to be done differently, it will be done. If it needs to be [indiscernible] towards what we have, then we will do that. But that's getting too much into the future. I'm just telling you current [indiscernible].

Okay. Then second question was on the data point on franchise income. So in [indiscernible] could you help us understand what has been the kind of dip in franchise income for this year. You had mentioned in the beginning of the year that there'll be significant reduction. If you could just help us understand what range has it been at for FY '21?

Yes. Pradeep?

So look, we haven't shared the exact franchise number. But what I do want to share is that we took this question 2 quarters ago. We have a master franchisee in the south part of the country, right? And it is not just one geography. The franchisee operates across 4 or 5 states, right? And Andhra was a big, big, big component of that master franchisee, right? And therefore, with Andhra going away, with Andhra going away, that has not just impacting the Andhra business but the franchisees ability to kind of perform sustainably in the overall south geography. So we have taken a bit of a hit, right? Now we've never shared historically the exact number, so I don't want to kind of divulge more details on that one. But it's been a sizable number. That's all that I can say.

Okay. Okay. So ex Andhra or probably ex south, would you have seen more or less...

Yes, yes, yes. Barring for the April, June lockdown period, I think our franchise income is absolutely stable and [ solid ].

The next question is from the line of Tejash Shah from Spark Capital.

My first question pertains to Andhra scenario. So in past, you have spoken about a couple of states like Chhattisgarh, [indiscernible] where our sales had gone to almost 0, and then things normalized pretty soon. But in '18, we seemed to be winding down for good, it seems like in terms of now. So I just wanted your perspective on the same.

See, I have said this before, right? This industry, [ where I belong ] is that one of the constants is the [indiscernible], right, and this is a constant game that happens, right? [indiscernible], right, [indiscernible] our sales that come down to zero. [indiscernible] our sales have collapsed now. Now [indiscernible], and we are performing really well in that state. And so growing [indiscernible]. Now [indiscernible], all I can tell you is that our product business is pretty [indiscernible], right? We are engaging with the state government and [indiscernible].

Mr. Kripalu?

Yes?

Sir, sorry to interrupt. But your voice is not clearly audible, sir.

What do you do with this mobile phone connections nowadays? That's why everyone uses Wi-Fi now. Is this any better?

This is better, sir, yes.

All right. So we are continuing engagement with the [ AP ] government and talking to them. And we're also thinking about what are the other unlocks that we could get, right, which includes using other routes that are available to us as per the laws of the land, right? And then not just true for me, by the way. It's true for largely like-minded industry that wants to do business the right way, okay? So there's nothing more to say on this, right? Right now, the only silver lining is now [ AP ] has come off the base for us, okay? And therefore, we'll see real performance on that base without [ AP ]. But it's not as we are writing off the stage, right? We are doing what we can. But right now, options are limited. They just are.

Sir, but I just want to follow up on that. So is it the same for other peers, 2 peers as well? Or is it alcohol as of now and others are continuing?

Largely through give or take a bid for the multinational players, right? Some people are doing a little more business than others, right? We're doing almost nothing, right? And I think we are more governed by whatever we do, we'll do it right, okay? And that's it. But I would say, by and large, for most of the international players, [ AP ] has become -- is no business at all. And I think that's still even in the beer business, by the way, but anyway.

Sure. Second question is on ethanol blending policy. So now it's been placed for 1 or 2 quarters now. So any visible impact of the same on ENA pricing?

I mean I'll just say this, and then if Pradeep wants to add, he can do that. So I'll tell you the ethanol blending policy is something that I've also learned don't predict, because you just don't know when a new policy comes with a new price, okay? All I can tell you right now is that -- and it does some [indiscernible] and then there will be a section upwards or downwards depending on the policy of the ENA prices. And we have seen that happen historically, and that's how ENA prices went up significantly because of the push towards ethanol blending. Now is this possible? I think that oil prices going long and so on and fuel prices hitting what they are in India, it's always possible that the government will look at the ethanol binding policy. Just 2 things from our side, I'll say is this. One is that the immediate future seems okay, and some inflation may come but it's regular situation, and we can't build our plans based on a discontinuity on the ethanol bending policy. And the second thing is that we are progressively increasing our in-house distillation to make yields, right, so that we can securitize ourselves better in the times to come on this physical raw material. And that's the only way of hedging again some of these policies in the fullness of time.

The next question is from the line of Alok from AMBIT Capital.

Yes. Congrats on a good set of cost savings mechanism. My 2 questions. First question is on the realization. So is it possible to elaborate further on what led to this strong realization improvement in P&A? Is it more to do with the duty-free versus duty-paid stock that consumers have bought? Or any price hikes or state mix that you can call out? And secondly, within the states where home delivery has been allowed, can you share how are the numbers stacking up? How is the growth, et cetera?

So home delivery -- listen, it's happening today at 6 or 7 states, right? Today, all the sales in Maharashtra are home delivery. West Bengal is doing reasonably well. The other states, it's kind of small and a bit of a chisel, right? But we know that some of these things just take time for them to evolve. I'm hoping that home delivery is there to stay, right? And one more states will open this up. We have continued to talk to states. They have a resistance because of concerns from the retailers particularly, and the retailers are worried about the home delivery or more importantly e-comm business, feeling some of that business. And that's the type flow are working. Your first question was not clear. Was it about P&A or BIO? Or what was it of Scotch? I'm not sure what the question was.

Sure. So I will repeat it. So it has more to do with the realization growth that we have seen in the P&A portfolio. So I wanted to check whether it is more a function of some state mix changes, some price hikes or you think it's more of previously duty-free paid stock being bought by the consumer, which is now that demand is moving to [indiscernible] from [indiscernible].

Yes. The P&A realization per case is what you're asking for.

Yes. Yes.

Yes. So it's really all of the above. All the reasons we have said have contributed to be, right? First of all, there's a premiumization in the portfolio is catching on much faster, as we have said. There is some price increases that we've got. Contrary to our thinking, as we were entering the pandemic, we thought we're not going to get any pricing. But we have -- well, I would say we're pleasantly surprised that we have managed to get some pricing. But there are a few more difficult states that we're still trying to address. And state mix, I cannot confirm to you because I haven't looked at that data closely enough, right? But certainly, brand portfolio premiumization and pricing are key contributors to that. And also the fact that, yes -- sorry, yes. Basically that, yes.

[indiscernible]?

No. That's all. That's all for me. Pradeep, anything to add on that?

No, Anand. I think you've covered it. I think that the premiumization is working at 2 legs. Within the overall portfolio, the P&A sale is going up, and within the P&A sale is the Scotch portfolio going up, right? So literally 2 levers of premiumization within the overall portfolio.

The next question is from the line of Arnab Mitra from Credit Suisse.

Yes. First question was we just kind of entered into the excise cycle for FY '22. So any kind of positive outcomes in terms of pricing or taxation from any of the major states? Or any states where you have a worry other than West Bengal where I think there are challenges? But from an FY '22 perspective, how is that looking from a tax and price point of view?

So I would say we have not had any significant adverse taxes, right? There were small movements here and there, but nothing significant to be a disruption, okay? I think that's the first thing, which is good news, right? Pricing, like I said, there have been some positives on pricing, and I think more than [ W ] states, we have received some level of pricing of the others, right? I'm not just talking about the excise cycle, but in the run-up to the excise cycle as well, including some price increases that the market has taken in the state of Maharashtra, okay? So I would think that that's all good news. Yes, West Bengal, like you said, we still have to fix the policy itself, and we still have the [indiscernible] where we have not been able to crack pricing, which is a very important state for us. And we are at its -- we still believe there's a possibility of getting it before the 1st of July that on pricing with the state government. You never know for sure.

Sure, Anand. And just last question for me. So if I look at your 4Q revenue number, it's about 3%, 4% higher than what you had done in the second quarter. And why I'm saying second quarter is that I know third quarter is a seasonally strong quarter, so not a right comparator. So with all the reopening happening, is it that as the [indiscernible] happens, there is a compression in the retail sales? Or is it more of a West Bengal effect, which is playing out in 4Q which is possibly not the case in 2Q? If you could just help us understand that sequential movement in the revenues as the reopening happens.

Arnab, it's very hard to read this because even though the on-trade was open, it was opened with very low footfalls, okay? And we know that when the on-trade has been completely shut out also, the off-trade has been pretty robust, right, and pretty strong. So honestly, it's not easy for me to respond to your question.

Yes. Maybe I can just give a headline response, Anand, which is that Q2 and Q4, the 2 lap-up issues are very, very different in scale, right? The West Bengal policy came sometime around October, 4th of July, I think, right? So that impact is very high in Q4, right? And similarly, I think the scale of the impact of Andhra Pradesh, right, have diminished as we have produced -- as we have progressed over the quarters.

Thank you so much. I think, Stephen, I think we are out of time. So I'd request you to close the call.

Sure, sir. Over to you for any closing comments.

No. I just want to thank everybody for their continued interest in the company, for their insightful questions, as always, and I look forward to continuing to engage with you at least until the time that I'm here, which is the next 5 weeks or so. So until then, stay safe, everybody, and thank you for dialing in.

Thank you. Ladies and gentlemen, on behalf of United Spirits Limited, that concludes this conference. We thank you all for joining us, and you may now disconnect your lines.