United Spirits Limited (UNITDSPR) Earnings Call Transcript & Summary

Ladies and gentlemen, good day, and welcome to United Spirits Limited conference call. [Operator Instructions] Please note that this conference is being recorded. I now hand the conference over to Ms. Hina Nagarajan, MD and CEO; and Mr. Pradeep Jain, CFO from United Spirits Limited. Thank you, and over to you.

Thank you very much. Hello, everyone. A very good afternoon from the USL team and welcome all of you to our FY 2021/'22 first quarter results call. I'm Hina Nagarajan, Managing Director and CEO of USL, and I'm really looking forward to this first introduction. I'm joined by my colleague, Pradeep Jain, CFO of USL. Hope you and your families are staying well during this time. As we normally do, before we open the lines for Q&A, let me share a perspective on the results that we announced Friday evening. As we all know, the country experienced an unprecedented humanitarian crisis in the quarter gone by with a severe second wave of COVID-19 sweeping the country. Many of us have lost near and dear ones in this wave while fighting gallantly on the personal front. In this context, our most critical priority was to look after the health and well-being of our employees and their family and continue to play our role as a good corporate citizen towards our communities and the extended ecosystem. It will be with immense pride that in addition to the ongoing 2-year Raising The Bar Support program of INR 75 crores for the restaurant and bar community that commenced from July 1, 2020, USL and its parent company, Diageo plc, committed an additional INR 10 crores and INR 35 crores, respectively, so cumulatively INR 45 crores, in this quarter to support India's long-term public health care infrastructure. This additional mobilization commitment and our approach of one state, one district for the program has already started contributing towards expanding hospital bed capacity, oxygen sufficiency and medical equipment like oxygen concentrators and other critical patient care devices. This will continue over the next few quarters. Let me now come to the operating performance during the quarter. In summary, it's been a resilient performance amidst a very challenging external environment, albeit aided by the weak comparator of the prior year. We continue to build on our learnings from the first wave by installing more ability in our operations in the stop-start environment. As all of you are aware, localized lockdown started in April in a few markets, and most of the states had restrictions and night curfews in May, June that led to access being severely compromised. That said, it is reassuring that we were back to full operations as we exited the quarter. Based on our experience of the first wave and the continued expansion in the vaccine coverage, we are confident that the recovery will gain further momentum. Our commitment to innovation and renovation in the portfolio continues. Some of you may have seen the new and renovated bundle of Black Dog whiskey that is now present in 3 markets as we speak and will get extended nationally as the year progresses. McDowell's No.1 continue to retain its momentum after a strong performance over the last few quarters. Hipster, our perfect scotch innovation now in its second year, also continues to gain momentum and will present in key markets in India. Additionally, we have made a foray into craft whiskey with the launch of Epitome Reserve, a 100% rice grain whiskey and in-house innovation exclusively crafted by our Master Blender's. Whilst all of you would have seen the press release and the results, let me again call out the key salient points. Our reported revenue increased 57% with Prestige & Above at 58% growth and popular at 60%, lapping the national lockdown of last year. Consumer demand in off-trade remains resilient within the constraints of the lockdown. On-trade continues to be adversely impacted, both store openings and footfall. Price/mix was unfavorable during the quarter on account of high scotch parent markets especially in North India, impacted adversely by the COVID second wave. On the policy front, we have spoken of West Bengal in the prior quarter. We continue working very closely with the government in our advocacy efforts for reducing levies and having a favorable consideration on prices. We are looking forward to the new excise policy in Delhi coming into play with effect from October 1, 2021 and our role in transforming the retail landscape of the national capital city that really befits its future. Stable commodity prices and continued management focus on productivity led to 296 basis points improvement in our gross margin to 44.6%.-- Our A&P reinvestment rate at 5.2% is in line with last year, reflecting the not so conducive external environment for execution and some conscious calibration in view of the impact on the top line during the quarter. Staff cost increase in the quarter is due lapping the prior year onetime decision of the management across the Diageo Board to forgo the variable performance linked salary components driven by the global uncertainty of the pandemic. Additionally, INR 17 crores provision in the current quarter has been absorbed on account of the VRS package at one of our facilities in line with the progression to the end space manufacturing footprint. Our EBITDA margin stands at 10.4% for the quarter, significantly higher versus the negative in the same quarter of the prior year. However, it is subdued on account of the operating deleverage driven by the impact of the second wave on the top line. The full impact of the accelerated debt retirement in the last 4 quarters and the lower interest rates now stand reflected in our financials. Our interest cost in the quarter is 60% lower than the prior year. Exceptional items include the one-off provision towards an additional demand in relation to our historical customer dispute, having its roots much before Diageo's acquisition of USL. We are in dialogue with the customers to a long outstanding issue in its entirety. In view of the confidentiality, we will not be able to share more details on this. All appropriate disclosures are already reflecting in our financial results. Profit after tax was at INR 69 crores in the quarter, a 132% increase versus prior year. Let me conclude by stating that alcobev as a category is and will remain resilient during difficult times. We remain focused on what is within our circle of influence, and that is to stimulate demand through our renovation, innovation and other category growth initiatives. I also strongly believe that the embedded discipline and learning of the first 2 waves of the pandemic have enabled us to prepare for short-term disruption, and this will hold us in good stead in the coming quarters. Last but not the least, and I'm sure a lot of you have these questions in your mind, let me add the following: the strategic review of popular brands that we announced a couple of quarters ago is on track and will be concluded as per the stated time line. I'm working with my team on a business strategy refresh. And over the next few months, we will share the renovated themes once we are ready with full stakeholder alignment. With that, we can now open the line for Q&A.

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

This is Abneesh Roy from Edelweiss. Hina, my first question is a tactic question. So you have been in Diageo India for the last 4 months, 3 months as CEO Designate and 1 month as MD and CEO. You have also been in Diageo Africa for 2.5 years. So my first question is essentially next 2 years, what is the number 1 priority? Will it be market share expansion against the other large players, so essentially drive volume growth ahead of the industry by pricing and being aggressive on the marketplace? Or will it be investing behind the brands, work with the regulator? Or it will be the third option, which is the current one, wherein status quo in terms of marketing, margins, innovation pace, et cetera, will continue?

Abneesh, basically, look, I said that we're working on a strategy refresh. So we will come with all these renovated themes when we are ready with full stakeholder alignment. I mean having said that, Abneesh, macroeconomic opportunities are hovering well for our industry. The market has many growth drivers, right, so young demographics, increasing number of people entering the legal drinking age, low per capita consumption and demand for iconic brands. The premiumization trend is very strong. We've been scaling up in our scotch journey. Of course, we want to participate much more in mid and upper prestige while we strengthened our core with McDowell's No.1, right? So as we move towards being a low debt company, right, we would want to unlock new engines of growth internally, maybe through more alliance and partnership. And in a sense, look, market share growths are linked, right, and the margin is given. So all these themes are in our minds. And I would say that I've got a lot of confidence in our people, our strategy, the resilience of our business and in our ability to deliver long-term shareholder value. We maintain our aspiration of developing -- of delivering sustainable and profitable growth over the medium and long term as all these growth opportunities unfold in front of that.

One small follow-up on this. So you have worked for 2.5 years in Diageo Africa. How is Indian liquor market different from there? And you had worked in India in FMCG companies prior to 2013. So in the last 8, 9 years, how much has the Indian consumers changed? In the first 4 months, is there a big realization that consumer has changed dramatically?

Yes, so I mean, first, addressing the question linked to Africa, right, so I think there are lots of similarities and some differences in the African market and Indian market. I mean the similarities are prices, demographic, volatility in the regulatory environment, sustainability challenges. I would say the differences are that Africa tend to be a larger beer market, and India is a very vibrant spirit market, right? And I would also say that India has better affordability, and the premiumization trend in India is much faster, right? So there are things that I can bring from African market into the India market in terms of amending 37 markets in Africa. So while some markets have disruptions, the other markets give growth opportunities, and I want to apply the same principles in the 36 states, stroke countries of India, right? How much has India changed? Abneesh, in the 7, 8 years, I would say that India becomes far more vibrant, and I think the premiumization trend is really taken off, right? So -- and that is quite exciting. And then the exciting development for us is online stroke home delivery opening for our market, I mean overall, e-commerce has absolutely exploded in India. It wasn't there when I left the country, but now it's absolutely exploding. Retail environment has improved massively, right? Our off-trade is very vibrant now. Online adoption is very good, and we are super excited about home delivery opening up for our industry as well. So I would say the growth opportunities and potential I see today is very exciting.

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

Hina, I was -- you highlighted about the business strategy refresh, which we shared. What you also said that you're unlocking new engines of growth. Would it be fair to say that as we look to dial up growth rates, you would kind of put preference to sales over margin expansion? Is that the way I should read at least from a broad concept point of view?

I think both are going to be important for us. I don't think we will put one above the other. Both are important. It's an and game for me, not an or, I would say.

Okay. No, there was [indiscernible] their history has been awesome in terms of the expansion that they've done, their net debt reduction. We've seen very strong headway in that kind of trend, so I was just trying to kind of compare from there on, would the focus be more on investing in the market. Because it seemed to be, as you -- logically, as you would look to drive new engines of growth, it would need funds and investments. That's what I would -- and please correct me if that is not the right way to kind of look at this?

So I mean we are always on the lookout for more growth opportunities, and so investments in growth engines will definitely be there. But we believe that we have opportunity on margin as well. So like I said, it's an and for me, and both will remain on our agenda.

And just a little bit far, do these new investments -- when you kind of look at new opportunities, you highlighted towards alliances. Is it fair to argue that the capital intensity is also going to be remaining under control? Is that why alliances would be the preferred route? Is that right way?

Yes. I think that would be fair to say. I mean we are looking to -- in fact, this is something that I carry in from Africa in my learning that partnerships can be very valuable in driving growth. And yes, it would be fair to say that. And I think Pradeep would like to add something.

Yes. Sure. Avi, again, whether you look at our manufacturing footprint progression, right, or whatever -- as Hina is kind of talking about new growth engines, absolutely, I mean that is something which we'll be very, very conscious of, right, on the capital intensity.

[Operator Instructions] The next question is from the line of Aditya Soman from Goldman Sachs.

So 2 questions. Firstly, you indicated that, I mean, you want to do more in sort of middle and upper prestige. If you look back since Diageo took over, we haven't seen a very significant headway as far as market share goes, in particular, Smirnoff. Where do you think the opportunities lie, whether it's in the existing brands or new brand? Or where you think the weakness lies in gaining more share in middle and upper prestige? And then moving on, I mean, to my second question, just in terms of non-whiskey spirits, is this an area where -- which you feel could be a significant contributor? Or at this point, we'll focus on sort of whiskey, in particular, in building a partnership?

Yes. Okay. So I think addressing your question on headway on middle and upper, I think both renovation and innovation have a role to play. So we know that we are aware that Royal Challenge whiskey, for instance, has had a mixed bag performance, right? So we've renovated. We were quite challenged in some markets, we've corrected that, and we're beginning to see some headway with that. But we are also in the process of finally looking to contemporize the brand to address the new entrants that are driving growth in this segment, right? And we have potential also in our brands that exist in upper prestige, so we will be looking to track those buttons. And innovation will always play a role. So as consumer needs evolves and as we look at what those needs are, we definitely have more innovation on the agenda. Coming to your second question on non-whiskey spirit. So yes, we look at rice as a category together, right? So off late, we have seen a lot of traction on gins. And you might have thought that we've actually started putting a lot more might behind both Gordon’s and Tanqueray, which are our brands in the gin category. And we started accelerating them much more in the market with a lot of traction. We are also conscious that vodka itself is a large category, and we actually have a power brand, Smirnoff, in this category. So we are looking at an action plan on Smirnoff where we are looking to revitalize the brand and get a fair share of the category. And you will see initiatives rolling out in the 9, 12 months in this category as well. So we are going to be looking at the rice definitely.

That's very clear. Just a follow-up on the first question. You mentioned upper prestige. But we see Blenders Pride is significantly larger than anything USL or Diageo has. So -- and for the consumer to make a switch, what do you think will be the sort of key drivers of that given how large a share say Blenders Pride already has?

I think that's fine because consumer needs are evolving. We are looking at changes in aspiration levels, the desire for experiences from the consumer, and you are seeing a lot of experimentation on flavor profile, et cetera. So we have opportunities. And as the market evolves, we will be tapping into those new opportunities.

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

I had -- the first question was on your margins this quarter. So you have highlighted relatively benign commodity costs helping the gross margin. If you could just talk through going ahead incrementally, what -- as we speak in June, July and going ahead, do you anticipate inflation coming in glass prices as well as ethanol? Or do you anticipate that commodity costs are largely rain down, and therefore, gross margin profile would not be under pressure?

Yes, sure. Arnab, I'll take that. So look, there are 2 items which are a big portion of our cost portfolio, glass and the neutral spirit cost, right? You're absolutely right, there are some inflationary trends on the glass line, right? In fact, as we speak, we have given some price increases, so that will lead into the P&L for the coming quarters. On neutral spirit, as all of you are aware, a lot of it is spread to the ethanol blending policy and the prices that the government declares, typically, those prices get declared in October, November. So we should be stable right now, but it's a wait and watch til those policy prices are announced. As an ongoing, what do we keep doing, we have shared earlier also, as a management, we try and target at least 1.5% to 2% of net sales as ongoing productivity, which is value chain extraction and efficiency extraction. And we will again continue to do -- as Hina mentioned, we will continue to do what is in our circle of influence, and then we will see what happens.

Sure. My second question was this negative price realization growth that you have, price/mix being negative, I think, 4% this quarter. Is it purely a one-off COVID impact of prestige and state mix? Or is this something which is going to continue going ahead into the year?

Yes. So look, as Hina mentioned, India is a kind of portfolio of 36 states and union territories, right, not severely impacted, where the scotch mix is very, very high. And in the quarter that just went past, not severely impacted because of the COVID impact. If you look at our historical trends, right, over the last 12, 16 quarters, by and large, we've delivered a positive price/mix revenue, right? So I would want to believe it's a one-off. But it's an outcome of the state and the brand mix, right? One would want to see it reversing in the coming quarters.

Just one follow-up. I mean because last time when we saw this lockdown, we didn't see a big negative price/mix. So this is more driven by mix actually or more state composition? Just to get a sense which has contributed more to this negative number.

The headline, Arnab, that is the impact on north has been far more significant in wave 2 compared to what happened nationally. Nationally it was rather consistent across the country, whereas scotch, which is a big, big salience for the north business, has got impacted in the current quarter. That's why you see the swing in price/mix versus the wave 1.

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

Hina, my first question pertains to the observations or the comments that you've made, the tailwinds that Indian alcobev has in terms of per capita income, young demography, and then you stressed a lot of premiumization also. But this factor have been there for the last many years, and despite that, the overall sector growth has been mid-single digit at best. And that is like as good or as bad as hair oil sector growth, which is highly penetrated. So what is -- and then you bring a very fresh pair of eyes to the problem statement here. So in your early assessment, what is driving down the sector growth from realizing the potential that you spoke about?

I mean, look, I think we are seeing positive developments on the regulatory front, right? So that is one. The second is I think the demographics are there, and they are accelerating, right? So we are seeing increased -- for premiumization, we have seen increased experimentation. I mean just to give you an example, you would have read about our foray into craft whiskey, right? So this is something that is helping us premiumize the whiskey portfolio, right? And we have full intent to do that. So there is a lot more role for innovation to play. There is a -- there is vibrant movement. The millennials are driving experimentation. As the millennials mature, they are gaining much more purchasing power. So I would say that the potential is there, and it is something that we need to take full advantage of and take -- maximize the growth opportunities. So it is there, and I think it is accelerating.

Sure. This is helpful. Second, on inflation, not to dwell much on the near-term inflation, but how do you see government ethanol policy impacting ENA prices structurally from hereon?

So on this one, I mean our own assessment is that over a period of time, right, fundamental economics will prevail, right, as this becomes very, very attractive for the ethanol manufacturers, right, or for the ENA manufacturers. We also expect a lot of capacity to come up. So while in the shorter term we could see some inflation headwinds, but over a slightly extended period of time, we believe that as additional capacity comes up, et cetera, the market will find its right balance. So over a longer term, we don't see any big worry on this front. In the shorter term, you're right, right, we could face some inflation headwinds, which we will always, like any forward-looking company, manage through a combination of ongoing productivity and pricing.

Sure. And by shorter term, you mean 1 or 2 years to come up capacities or it takes longer?

I mean typically, in the India environment we see in India, with the India entrepreneurial spirit, et cetera, typically, these things come very, very quickly, right? So let's see how that pans out, right? And we continue to do whatever we are doing to ensure that we are not adversely impacted by that.

Next question is from the line of Krishnan Sambamoorthy from Motilal Oswal.

Hina, this is regarding the ongoing strategic of the Popular segment. Your thoughts on -- your own thoughts on how critical this is from a medium to long perspective, what are the key gains that are expected? And also since you've given a time line until December, is there -- are you looking at ramping up the scope compared to what was envisaged earlier? And will there be more such reviews in the future?

So I would say that we proactively started the strategic review of our Popular portfolio, and that is on track, right? And we are looking to conclude it as per the stated time line. So we are working through with our advisers and looking to drive it to a tangible decision whichever way it goes. So as and when we reach that decision, we will transparently share with you, right? So I mean that is -- we are not increasing the scope of the review at this point in time.

Okay. And your thoughts on medium to longer-term benefits from this review?

Well, depending on the decision, right? So I mean once we come with the decision, we will also transparently share with you what that means for our business, right?

Understood. And the possibility of more such reviews, I mean this will be an ongoing thing that you would be looking at maybe every 3 years?

I mean, yes, as the market evolves, every business -- we conduct regular portfolio reviews, and that's business as usual. So I mean we will continue to do that as we evolve, right?

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

I have a follow-up question on the Popular portfolio that you have retained. This includes Celebration rum and the Director special brands. We've not been investing behind this portfolio for a long time. So going forward, would there be any growth plans for this portfolio? Or this is something you would also relook into the future?

Yes, I mean this is something that we are looking at and actually is part of the strategic refresh that we are doing. So again, we are looking at the role in the portfolio, which markets, et cetera. And we will come back with the theme on that as and when we close the strategy refresh out. But I mean we -- I can say that we see a role in our portfolio for the brands. And it will play a role in our strategy by state.

Okay. Okay. And my second question is on your state presence. We may have exited few states or few markets or may have limited presence in certain markets due to various reasons, be it compliance or other things, whereas your competitors, larger competitors would still have a decent presence in these markets. Do you see any possibilities where you can reenter these markets maybe through a different routes or have a some sort of presence?

So the first thing I want to say is that we will stick to the right way of doing business. And if that means that we are out of the market, so be it. I mean do we see a possibility? Of course. We are continuing to advocate with the government there to come to solutions that are acceptable and help us do business in the right way. And we have seen that markets come back, right? So it's not -- no situation remains permanent. I think we've seen market close and come back with good solutions. And when one door closes, there are opportunities in other states, and this is an ongoing part of the environment in India. So we are very sure that those markets which are closed today will be back one day.

And this also -- just to add to what Hina has mentioned, I mean we've seen that play out over the last 4 to 5 years, right? If you look at Uttarakhand 3 years ago, right, that's back with a bang last year, Chhattisgarh was closed for about 2 to 3 years, et cetera. That's back with a bang, right, last year. So I mean this is very, very clearly playing out, and we are confident that no market will remain closed permanently for us, right, it will call. It requires a little bit of effort on the advocacy and the work with the government, but hopefully, they'll all come back.

The next question is from the line of Namant Satiya from Ambit Capital.

Yes, this is Alok here from Ambit Capital. Firstly, you mentioned that volume growth and margins both would be equally important. In that context, I just wanted to check over the last 4, 5 years, whatever cost savings that you are seeing be it terms of ad spend item or employee costs, et cetera. You do not think that would have possibly impacted United Spirits' revenue growth momentum, right?

Sorry, I'm not clear about the question.

Yes. Yes, just repeat the question.

Your voice was not very clear, so I didn't get the question. Can you repeat that?

Okay. Sorry. So you had mentioned previously that volume growth and margins, both will be equally important for you in your strategy going ahead. Just wanted to check, in the past, we have already seen very healthy EBITDA margin expansion. But the sense that I get is you remain confident that with the current cost line items at which business is operating, there has not been any revenue impact, so to say, because of the past cost savings.

So yes, I mean, so let me just try and interpret your question first, right? Your question, if I understand it right is that in view of the aggressive cost savings program that we have ran over the last 4, 5 years, we've not forgone any growth opportunity, right? And is that the question?

Correct. Yes.

I mean one would -- yes, so one would tend to agree that I don't think we have cut anything vis-a-vis the consumer or the customer over the last 5 to 7 years, right? I mean ongoing efficiency extraction, absolutely, that any organization should continue to do, and we have done the same. But I don't think we have compromised anything for growth of the organization. Does that answer?

Yes, yes. And my question was on the distribution. So while, of course, it's a complex environment to run the liquor business in India, but do you think there is hope for you to do differently on the distribution side at least in the states where there it's privately held? Your thoughts around that, please.

So look, here, Hina, and my view would be that alcobev category, the distribution is capped by the government of the outlet access, right? I mean the entire category is like 50,000 to 60,000 outlets, right, where out of which 80% to 90% of the business is probably done by the 35,000 outlets. So distribution is not really a big differentiator, right? It is the battle in the store, right, of what we typically focus on.

What I would say is I think the opportunities are coming with the route to market and policy changes that we are seeing in Delhi, for instance, right, where the retail environment is expected to change dramatically and become much more positive, right? And definitely, we see opportunity there. And then we see a lot of opportunity in new evolving channels like home delivery, where though it's very nascent today, and we know that it takes time to build. We expect that it will reach a tipping point one day and then really explode, right? So in that sense, there are definitely positive distribution opportunities that we see.

Right. So my question was more on is there scope to work even more closer with the retailers and distributors that you are currently operating with or you think that you're operating in the best possible integrated manner?

Than's an ongoing part of our business. I mean we continuously look to -- we work very closely with them all the time. And as and when we see opportunities, we take those opportunities to expand presence and visibility.

Yes. And vary from state to state, I would say, like Maharashtra is a close to a classic CPG, FMCG model. And we have very, very strong distributor relationships and we continue to work with them in terms of what we can do in terms of joint business planning and how to expand the business.

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

My first question was around the demand landscape. If you could share exit June rates both for off-trade and on-trade recovery versus pre COVID levels? Just trying to gain a sense of where we ended the quarter with. Any early thoughts on how July is shaping up for you?

Yes. I mean so as we exited June, we were back to full operations as far as the off-trade is concerned, right? Now on-trade, of course, remains restricted. There are restrictions on capacity, on timing and being the size of social gatherings around the country. So on-trade still remains subdued. And as you know, I mean, also global travel remains muted, right? So I would say off-trade is looking promising. And on-trade, we are hopeful that it will start opening up as the COVID rate sort of come down and recovery and vaccination coverage goes up. We are hopeful that on-trade will also start opening up slowly but surely.

Sure. The second bit was just checking on your thoughts on potential foray into non-alcobev space. We saw this clarification being given in your memorandum of association.

So that, Latika, is just an enabling provision for us to do brand extension work, right, to undertake brand extension. And I mean as far as a stand-alone business in this respect, we have no intent right now. But no alcobev space is developing in the western world, right, so we'll watch for it. And whether there's a future possibility or not, we don't know. We'll continue to watch that space.

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

Yes. I just had 1 question on the gross margin side. So in spite of the product mix and state mix being adverse for the quarter, you've seen a sequential kind of improvement in the gross margin. I just wanted to get your sense on kind of how you're thinking about this from an annual perspective because, on the one hand, your product, which will continue to improve state mix or normalize on-trade and improve. On the other hand, you have some level of inflation coming in especially, as you mentioned, from glass. So should we see an improving trend in this line item going forward? Or it should be similar or bad? If you can better confirm that.

Yes. So Harit, look, it's a conglomeration of multiple drivers, right? You're right, there will be a little bit of inflation, as we have already spoken of, but we continue to press all levers of mix management, ongoing revenue management efficiencies and our pipeline of the cost productivity initiatives, right? These are the 3 things that we continue to proactively work on. In some years, the inflation is kind of slightly higher, so therefore, we take a little bit of a backseat. But in case the inflation is kind of stable, the prices, et cetera, we do see a little bit of higher margin expansion, right? So that's broadly how we think about it, right? The intent always is to continue to extract ongoing efficiencies across the entire value chain of the customer.

Got it. One more question was on the renovation side of the portfolio. So you mentioned there is a Black Dog renovation. You put that out in 3 markets. I just wanted to get your sense on in terms of the overhaul of Black Dog, is this a packaging innovation, a blend plus packaging innovation? What happened on that side, if you can give a little more color as well as what's the kind of market expansion will be in the next 3 to 6 months on this?

So Black Dog started rolling out, and the renovation is now available in 3 markets, right? So it's in Punjab, Haryana and Telangana. And by December, we'll be rolling it out nationally. It is a full change. So on the Triple Gold Reserves, there's a liquid change. There is a packaging change across. And we've also launched a new 14-Year Old whiskey within the portfolio, right? So Black Dog was a bit slow in the past, and this is our renovation to contemporize the brand and get consumers to reappraise it as a premium contemporary scotch. Actually, we have a lot of Black Dog lovers in the country, right? And really the positioning platform of flavors of all. Our initial feedback from these 3 markets is very, very positive. People are really appreciating the liquid change on Triple Gold Reserves and the 14-Year Old. And we are seeing very good repeat rates of-the-shelves from markets like Hyderabad. So I would say I'm very confident that this change is going to sort of revitalize the brand.

The next question is from the line of Sunita Sachdev from UBS Securities.

Welcome, Hina. I just had 2 very short questions and all the best things here. Just wanted you to talk around your strategy around the BIO business since that is of strategic importance for Diageo as well. How do we run with it going forward? How does that business do? And if you can provide any more color on that business, that would be appreciated. And secondly, given your comments that you were excited about the online business, a little surprise that you've exited the HipBar investment. So these are my 2 questions.

Thanks. So BIO I think we've been on a continuous journey of scaling up, and premiumization is growing, right? And we will continue to drive that as a key part of our portfolio. And we will be looking at levers such as newer additions in the portfolio as we go along to continue to build this part of our business. So it is a critical element of our portfolio and will remain so in the coming years. Your question on HipBar. I think HipBar, when we -- so I would say that we are very excited about home delivery. And look, I will say that HipBar, when we entered HipBar, right, it was a very differentiated model. It is the only one that has home delivery license in Karnataka. Since then, there have been newer entrants, and the models are evolving, right? So my experience, and I tell you my 3 years spent in China, I learned a lot on e-commerce on this front. Basically, look, one, this takes a long time to evolve, right? So there is a maturing period where it will be a few years before we see it's gaining scale. And in this period, there will be a lot of test and learn with different models to cater to the environment that exists in the country. So at this point in time, right, we feel that HipBar model maybe is not as differentiated as the Swiggy's and Zomato's of the world. It's not differentiated enough, and it is not appropriate for us to invest in an exclusive alcobev-only home delivery platform, it makes sense to release the promoter to do in other parts of the business. But we will continue to work with retailers, regulators and delivery platform to determine what are the best models that evolve in this space. And we will continue to sort of look at this space and be very active to participate in the opportunity that we think can be a game changer in the future.

Sure. Apologies for pressing on the BIO question a bit. We all know it is strategically important for Diageo and USL. We wanted a little more insight into how that pans out for USL. And what are -- are we just getting a marketing fee or do we take part to -- in any other way in the profit pool? I wanted to know more about what you from Diageo and -- coming from Diageo think about the India as a delivery business, I guess, the retail?

Yes. Yes. So let me take that, Sunita, since this does come up repeatedly. Look, we are a national distributor, right? USL is the national distributor for the Diageo Global brands, right? Extremely high pricing, therefore, extremely gross margin accretive, right? So therefore, clearly, as Hina has called out, remains a very, very high focus, right? It allows us to tap into the premiumization space. The brands have a fundamental global equity associated with them. So therefore, very, very strategically important, right? Now on the margin perspective, what I want to share is that ultimately, we need a portfolio of brands to play our margin game also. What this allows us to do is this is extremely high on the return on invested capital, if you see, right? We do not invest anything on -- in our manufacturing capacity, right? All we are doing is getting the product from abroad, distributing it and the margins are in line with any independent third-party distributor margin, right? So therefore, very, very high return on invested capital, and it has a very, very solid base in our portfolio that we would want to build and grow.

All right. Pradeep, one request, if it's possible to add disclosures in your press release every quarter on the BIO business, that would be very interesting -- that would be very helpful.

We'll have to explore that. I don't want to make -- we don't want to make any commitments right now, but yes, we'll happy to consider that and come back to you.

Next question is from the line of Chanchal Khandelwal from Aditya Birla Capital.

Welcome, Hina, on board. Just a few questions on the balance sheet. Today you have the best balance sheet in the last 5 years from United Spirits' perspective. What are the kind of CapEx planned for next 2 to 3 years? And given that you want to reduce the volatility of ENA, what kind of alliance or investment you will do to reduce this volatility?

Yes. So let me take that. So in terms of capital -- CapEx intensity, if you look at our run rate through the last 3, 4 year, right, post acquisition, they have, by and large, been in a particular range, right? And we pretty much expect that range to continue, right? So there is nothing right now that we are seeing which will dramatically kind of change it, right? So that's one. And second thing is, yes, in the Indian environment, we believe that alliances is the way to go. That's exactly what we have done on our manufacturing footprint also, which includes a lot of co-located distillation facilities, right? And we will continue to progress on that premise as we reach our in-state manufacturing footprint.

Pradeep, can you elaborate co-location of distillation facility, and a little more your ability to make sure that the supply of ENA is secured and the volatility of ENA is reduced?

Yes. So basically, it provides a supply security, right, with the third-party manufacturing partners, they have a co-located distillation facility. And therefore, the native spirit supplies are secured, and it does come with a set of cost advantages also.

Sure. One more question, if I may. If I look at competitor spirits you have. I mean, if I can name Pernod at one end, where if I look at the sales per case is far superior. You have Radico on the other hand who as have gained market share. I mean if I look at the state mix or brand mix that you already play, if you can and if you want to answer on how will you play it out? At which other states, which we'll focus now for you to improve your premium at -- you started saying that premiumization is what India has a big opportunity. Or anything you want to call out, which other states, which other critical areas you want to attack, so that you become far superior than competition in Indian market?

I mean it's difficult to outline which states are important. I think all states are important for different parts of our portfolio. That would be my answer, right? So I think being very clear, we are very clear about clearly defining which parts of our portfolio are important. I mean market which is a popular -- I mean lower prestige dominated market and McDowell's No.1 will have a big role to play in both attracting people from the lower segment and catering to the aspiration of the consumer. And we have the best of portfolio to be able to play that in every state to an advantage. So I would say that I think -- and as an ongoing part of the strategy, we clarify which portfolio plays and which stays, we're going to continue to make that sharper and sharper, and then bring our renovation and innovation to take advantage of that.

The next question is from the line of Shirish from Centrum Capital.

I have 2 questions. The first question is that in quarter 1, what is the weighted inflation we have experienced? And how much price increases we have tried to mitigate bridge cost inflation? And my second question is in relation to the previous participant's question. I think our channel suggests that mid premium segment is picking up very quickly. And the regional players also trying to throw in their hat. While it may be true, but the important factor which I wanted to have your candid view is that when the off-trade is becoming little more important during this lockdown period, do you see any abrupt or -- I mean, different behavior from the competition? And if that so, what is our thought and how we are trying to explain our position to the retailer?

Okay. So maybe I'll take the inflation and the pricing question first, and then I had to request you to summarize your -- and repeat your second part of the question so that Hina can take that, right? So Q1 versus Q1 of prior year, I think inflation, there was hardly any inflation, right, at least in the core raw and packaging materials. But like we said in the earlier part of the call, we have given glass price increases as we kind of exited the quarter, and therefore, you will see the impact of that in the subsequent quarter. Pricing, again, we've got pricing from a few states, right, as the excise -- pricing cycle finished. And you'll start seeing a little bit on account of that in the coming quarters, right? Pricing would be in the range of about 0.5% to about 0.6%. That's roughly the national weighted average that we get pretty much, which we have got over the last 9, 12 months, right? So that's a bit on your first question. If you can just repeat your second question, which was largely around mid prestige. You made the point about new competitors coming into the category, but we didn't exactly catch as to what was your question.

Question. Yes.

Just to rephrase the question, during this lockdown period, off-trade is becoming a little more important in terms of consumer traction and the exposure. So I would suspect that the competition would have been a little aggressive on that front. Of course, once the on-trade opens up, you will have your merit to say that this will tighten. But my view is how would you manage if this lockdown get a little extended? And how you have managed the competition?

I mean we've figured it very much to the off-trade as well, right? As off-trade became more important as in-home consumption picked up, right, we have also pivoted very quickly. And I would say I'm very proud of the team and the agility they've shown in pivoting to off trade and to using digital for in-home consumption and really moving our content to that. So I would say that's part of doing business and managing competition, and I think we've done it really well, I would say. So I'm quite pleased with how fast we have moved there. We have also deployed resources additionally into off-trade and invested as the market has evolved. So -- and we continue to watch this mix of channel. And I'm confident that with the learning that we've had over the last 2 waves and what we've seen as changes, if we see changes further, we will be able to adapt very quickly to that.

The next question is from the line of Siddharth Gupta from Voyager Capital.

Welcome, Hina, back to India. And let me just say I'm very excited for the future of this company, both as a stakeholder and also as a fact that I've recently turned 26, I'm legally be allowed to drink, so also as a consumer. But let me get to the question quickly. So from a very basic overlook, if I could see, roughly about 50% of our sales has come through what you're planning in your strategic -- to offload in your strategic review. So what effect do you think we did come on our OPM, which is roughly hovered between 12% to 16% over the past 2 years, right? And secondly, when it comes to -- what I've noticed is that the firm hasn't really been -- I know that advertising is banned in India for alcohol. But I have seen competitor brands using quasi marketing on social media a lot more than our brands. Is that something that's on the table? Because as you said, millennials are ready to tap in and spread -- spend more money on premium products. But I haven't been seeing a lot of activity from United Spirits on this front. So could you answer those -- to those question, please?

So just to again frame your question, Siddharth, your question is that what could be the implication on our business depending on the outcome of the strategic review. Is that the right understanding of your question?

Right, sir. Sir, because from my understanding, the total volumes of the top, the mass brands which you are seeking to offload is roughly 49% of your sales volume. And because our OPM has been hovering between -- anywhere between 11% to 16% over the past 4, 5 years, how would this fall in revenue be compensated in the OPM? How much percentage-wise OPM are we expecting an increase?

Yes. So Siddharth, I don't think the numbers that you have are right, right? But let me just respond at a slightly elevated level. Exactly what Hina mentioned earlier in the call, we are midway through our strategic review. We haven't reached any concrete outcome, right? And a plethora of options is possible, right? And depending on whatever option emerges as the final recommendation, we are live to the implications of what it will have on our business model and our overall margins, et cetera. And we are working proactively to figure out a way of ensuring that we are absolutely covered on that front, right? That's what we would want to say at this point of time.

Right. So -- but are we -- so what is the OPM that we're targeting over the next few years, if I can reframe my question in that sense? Because that has largely -- if I exclude the years where we were making losses, we've actually been stuck in this OPM margin for a very long time now. So is there a strategic target of moving parts to a certain level of profitability? Or are we not having that number on the table and just targeting pure numbers as profits?

Yes. And we have maintained what we have said earlier, which is the mid- to high teens, and we remain absolutely committed, right? If you look at our progression over the last, whatever, 5 years, right, let's say, post the acquisition, we have gradually inched up our operating margins from, let's say, high single digit. We are broadly there in mid-teens, right? And therefore, we would want to remain committed to the mid- to high teens that we have all maintained.

Okay. Right. And if you could answer my other question, with regards to the marketing endeavors because that's also another thing that we've noticed over the past few years that our sale hasn't grown at an exponential rate. It's grown incrementally, which has been great. We have done amazing work on the debt reduction front, which I commended team management for. But what is it in the terms of innovative advertising or the outreach methods that the company plans on adapting?

Yes. So I think we do what is possible within the regulatory framework, right? So whether it is brand extension or whether it is being able to doing visibility at the store level and digital, we -- I would say that I'm very pleased about the pivot we've done to digital advertising. And our work is actually quite breakthrough. And it is addressing the target audience quite sharply. And actually, we have bigger commitments to become even more targeted, yes, and focused on our -- and using -- we have some very good tools that we use internally to make our marketing programs much more focused to the target audience that we are seeking through digital. And we will continue to drive that. And we have seen very good ROI from that. So our return on those investments is really good, and we will keep dialing that up.

I now hand the conference over to Ms. Hina Nagarajan for closing comments.

Yes. I would just like to say thank you very much for your time and the engagement on this call, and I wish you a good day.

Thank you very much. On behalf of United Spirits Limited, that concludes this conference. Thank you for joining us. You may now disconnect your lines. Thank you.