United Spirits Limited (UNITDSPR) Earnings Call Transcript & Summary

Ladies and gentlemen, good day, and welcome to the Q3 FY '22 Earnings Conference Call of United Spirits Limited. [Operator Instructions] Please note that this conference is being recorded. I now hand the conference over to Ms. Hina Nagarajan, Managing Director and Chief Executive Officer; and Mr. Pradeep Jain, Chief Financial Officer from United Spirits Limited. Thank you, and over to you.

Thank you, Jacob. Hi, good afternoon, everyone, and thank you for joining us on the Q3 call today. Hope all of you are safe and wishing you and your loved ones a healthy and happy 2022. I'm joined by Richa Periwal, our Investor Relations Head, and Pradeep Jain, our CFO. As is customary, let me share some headlines on our overall business context and performance in the quarter just gone by before opening it up to Q&A. Business operations remained normal to a large part of the quarter. Our country's vaccination program has picked up pace. Infection rates were largely under control. Consumer confidence was inching up and the economy was on a brief sense of normalcy during the quarter, also evidenced by the increasing footfalls in public places. Improved mobility, combined with festive holiday season further led to demand buoyancy. Supply side remains resilient even though input costs continued to exert pressure. Global supply chains remained disruptive with shortage of containers, highest shipping rates ever witnessed and port congestion. Heavy restrictions were, however, back towards the last week of December as the COVID case count in the country mounted driven by the latest variant. In this context, we delivered a robust performance in the quarter. The quarter witnessed the ramp-up of the innovation, renovation interventions made earlier in the year. The second limited edition pack of Epitome Reserve, a new peated Indian single malt, which is only 3,600 bottles, was also launched in Goa. Black Dog whiskey and its new [ offer ] is now available in 90% top line salience markets. Our innovation of Royal Challenge American Pride was launched in Goa. With this, it has now been launched in 3 states following [ Assam ] and Madhya Pradesh. Renovated consumer bundle on Signature Whiskey has now reached more than 70% of the national market. The use of recycled glass and paper carton for the packaging has landed very well with consumers and drive differentiation. Our pocket Scotch format innovation Hipster was extended to [ J&D ] whiskey in July and Smirnoff vodka in September '21. The same is currently ramping up on distribution as per plan. As we've communicated earlier, both Signature and Royal Challenge American Pride interventions are in [ the spirit ] of strengthening our presence in the [ upper prefeed ] segment and premiumizing the portfolio. A couple of other callouts for the quarter, we launched our digital platform, In.thebar.com. This is a place where our consumers can engage with our beautiful brand home, explore the latest lifestyle trends, find our food pairings with our liquids, the best gifting possibilities and even make their own cocktails based on the occasion they are looking to celebrate. Johnnie Walker revised campaign reached 100 million-plus consumers with ReVibe The Night messaging where the focus is to reenergize socializing at our favorite food and beverage [ outlets ]. On the policy front, both Delhi and West Bengal operationalized their new policies during the quarter. Additionally, we also saw the positive trend of state tax rationalization on BIO segment continued during the quarter. Both Maharashtra and West Bengal made changes on this front. We've made progress in helping create a more sustainable world under Society 2030: Spirit of Progress strategy. We continue to reduce our greenhouse gas emissions from our own operations and enhanced our water use efficiency, our plastic waste collection drive and water replenishment initiatives are making good progress. We continue to run the Anti Drink Drive program and impart training to curb underage drinking. Let me now call out the highlights of the financial results announced on 25th evening. Our reported revenue increased 15.9% with underlying growth at 14.3%. The P&A segment grew 20%, while there was a marginal 1.7% decline in Popular. I'm very happy to share that this is our highest ever [ NS3 ] performance in a quarter. Off-trade continues its resilient performance, continued recovery in on-premise footfall caveating here that the likely -- well, the third wave now and the positivity rate going up still in many states will impact this in the coming quarter. Healthy price mix continues to be a tailwind driven by the top end of the P&A segment, growing high double digits. Inflation has been on an increasing trend during the quarter, continued management focus on favorable product mix and a culture of everyday efficiency partially offset the commodity inflation. Underlying gross margin was 44.3%, down 31 basis points versus prior year same quarter. Our reported marketing investment was 10.3%, up 125 basis points. We stepped up investment to strengthen brand equity, premiumize our portfolio and expand our digital capabilities. Underlying EBITDA margin stands at 17% for the quarter, up 159 basis points, primarily driven by operating leverage. With the full impact of the accelerated debt retirements in April 2020 and the lower interest rate, the underlying interest cost in the quarter is 56.8% lower than prior year. USL legal entity reached a debt-free status on 31st December 2021. CRISIL upgraded its rating on USL's long-term bank facilities to AAA/Stable, while reaffirming its A1+ rating on the short-term bank facilities. Profit after tax was at INR 291 crores in the quarter, a 26.7% increase versus prior year. In conclusion, I would like to reemphasize the following: we are happy with the current momentum on the demand front and are focusing on sustaining the same. As I mentioned also in my press release, external operating environment will continue to remain challenging in the near term. We are conscious of the rising inflation headwinds and are therefore working continuously to expand the pipeline of value chain productivity and revenue management initiatives. Our portfolio, with a focus on innovation and renovation, is well positioned to capitalize on the rapidly growing premiumization in the category, and we remain committed to sustainable profitable growth and long-term value to all our stakeholders. Last but not the least, we are currently in the final phase of the strategic review of our popular brands that was announced in the Jan-March '21 quarter. And as you would have seen, we have extended it by a quarter to land a meaningful outcome. With that, we can now open the line for question and answer.

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

My first question is one of your key competitors, Pernod, is launching branded retail outlets. So if you could tell us, is there a good potential on this? And what would be your thought for this? And in the markets where you have [ handed ] leadership [ earlier ] in Africa or, say, any other market, does it make a lot of sense to have your own branded retail outlets?

Abneesh, thanks for your question. I mean, yes, we've read that Pernod is looking at launching these branded outlets. I mean I think the situation differs from market to market. There were some countries in Africa where it made sense to do that, both for reach and visibility reasons. And in some markets, it just did not make any commercial sense. So this is an area which we will review and wait and watch for the moment. We are focused on the strategy that I've outlined a few months ago, focusing on premiumization, our products, a broad-based participation in the Prestige segment and really accelerating our luxury and premium portfolio.

Sure. And 1 follow-up on this. So In.thebar.com, so could there be a home delivery opportunity longer term? Because you exited HipBar. You are currently focusing more on customer engagement and the branding aspect. But longer term, could this also be a home delivery platform on your own?

Absolutely, Abneesh. I mean, we are very excited about the opportunity of home delivery, which has unlocked during COVID. And eventually, yes, I mean, depending on the regulatory environment, how the model goes, there could definitely be an integration in this for home delivery.

So last question, so ad spend as a percentage of sales in the rear quarters was more like 6% to 9%, and you did say the reason behind 10.3%. So is this a one-off? Because now the cost inflation is a key concern for every consumer company. So would you like to make it lower in the near term because of the cost inflation?

So I mean, Abneesh, we have increased our A&P spend in the quarter gone by to support the renovations and innovations that I've talked about and also because on-trade was opening up and we had calibrated spend in the previous quarters, and we brought it back as on-trade came back to normalcy as well as peak season, right? So I mean, the last quarter was our peak season. So on a yearly basis, I would say that we look at the full year, and we have talked about 8% to 9% investment for the full year. This, I consider to be a very good investment and not a bad cost. So we would like to continue to invest in our brands and support our growth. And should we reach a stage where there's extraordinary change in environment, then of course, we will review every line of the P&L. But at the moment, we see our plans are focusing on investment on our brands.

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

So my first question was, if I look at the Prestige & Above growth of 20%, 12% of that is realization growth because the volumes have grown at 8%. So this is the second consecutive quarter you've seen very high realization growth. If it is largely mix-driven, is it something that can sustain this kind of a Y-o-Y increase in realization? And do you worry that once the duty free channel opens up maybe somewhere 6 to 8 months down the line, there could be a significant change because people go back to buying the scotch in the duty free channels?

Thanks very much for your questions. Look, I mean, premiumization; our renewed strategic focus on the P&A category; of course, a favorable regulatory environment, which has folded over the last few quarters; and the muted global travel has all supported this strong price/mix and growth. I mean, historically, we have seen about 4%, 5% price mix and now we are seeing about 10% to 12%. Our expectation is that this will settle over the next few quarters at maybe somewhere in the middle, right, maybe 7%, 8%. But with our premiumization strategy, we believe that is a sustainable price/mix to deliver.

Understood. And my second question was on your comment on input cost inflation. If you could just help us understand incrementally as you move into March quarter versus December quarter, what is the level of additional inflation across ENA and glass. And would you require significant efforts to mitigate it? Or it is more in a gradual curve and therefore, with productivity and things like that, you could be able to offset it like you've done in the last couple of quarters?

Yes, so Arnab, I'll take that. Look, as Hina mentioned in our opening comments, inflation is on a rise, and pretty much the 2 commodities that you have mentioned, we are clearly seeing an upward trend in that, right? And like we have always said, we are trying to do what is in our control, which is accelerate our productivity pipeline. We are trying to draw our plans to increase that realization over the coming quarters. But inflation definitely on glass and ENA is inching up, right? So we are making our best efforts to mitigate to the extent possible.

And Arnab, I would also add that we are making a very strong representation to [ say to ] government through the industry associations, highlighting that this is a very inflationary environment and a unique year and therefore, encouraging them to give us pricing flexibility just like other industries have and even the [ drug ] control -- I mean the price control drug industry has. So our representation is ongoing and able to continue that through this new excise period that is coming over the next few months.

That's right. The excise cycle is on, pretty much on from now until about 2 years. We are working with [ the situation for price ].

And is there any quantification on overall [ RM ] index level, what could be the inflation that you're incrementally seeing sequentially?

So Arnab, our sense is that the total inflation in the coming quarters could range in the -- I mean, these are very broad ballpark numbers I'm giving, right? It could range from about 4% to 5% on the total portfolio.

The next question is from the line of Manoj Menon from ICICI Securities.

So one of my questions was actually just taking off from what Arnab's clarification and your response is, it was in fact one of the thing I want to discuss. So when I look at the policy changes implemented by many state governments over the last 12 to 24 months, it's extremely encouraging, something which has never happened in a cluster, it seems to be happening. So there's something definitely changing top-down. I just wanted to check, push the envelope a little more on that. Can we assume that the willingness to change the historical templates and grant price increases and treat the alcohol industry different versus what it does, so what sort of that sense on the pricing component in the other policy trend on those states, which has been adamant in the past?

I mean I think there are 2 -- Manoj, I think there are 2 different areas. And while we are seeing the overall policy changes being positive on the route-to-market side and duties on BIO particularly, and that is, I mean, basically to bring down prices on parity with neighboring states, et cetera. I think pricing remains a discussion with every individual state. And our hope is actually that the government will understand that it is a very extraordinary year in terms of inflation. And we continue to advocate and represent on pricing at the association. And our intent is to work with them on a win-win where we are able to balance the pricing and the volumes and their revenue for them, right? I mean there has been some positive price development. In [ Asam ], for instance, we got an out-of-turn price increase. So this is an ongoing conversation with sales, and I'm afraid I can't generalize one way or the other.

Fair enough. I get it actually, I get it completely. Just quickly 2 things. Actually, 1 top-down and on bottom-up, if I may. Now after about 9 months back in India since April last year, just your perspective that you would have had certain expectations on the India which you left and the India when you're back. So from a United Spirits lens, if I take it, let's say, from a functional lens, right? So one is policy, sales, marketing, HR, finance, supply chain, which are the areas which surprised you positively and which are the areas which, let's say, there's more work to do? And the last question -- that's one. The second bottom-up is, I know it's too early, it's just under a month after the implementation of the Maharashtra import [ duty ] reduction, et cetera, here. What are the price elasticity benefits early signs telling you on what -- basically what the consumer is telling you through his, let's say, behavior?

Right. So I mean, I would say that overall, I think my surprises have been pretty positive in the sense that we worked on this strategy and announced it only very recently. And I think the premiumization piece has surprised me quite positively. I mean just the consumer demand momentum right? And the market potential that is there for our alcobev has surprised me very positively. I mean, the speed of it. I could already see the premiumization trends as I came in. But the price reduction in BIO, for instance, the positive policy development in 3, 4 states almost coming one after the other has also been a very pleasant surprise. I think there's more to do clearly on inflation, as I've mentioned, right? So I mean it is an extraordinary year. There is inflation on international logistics [ inflation ] in -- within the country. And while productivity is embedded in our organization, it's in our DNA, we definitely need to do more because of the headwinds and certainly, I would say that continue to represent to the government [ of citing ] flexibility, right, would be more to do from my side. And a journey on manufacturing footprint optimization that we have that is well underway for us, but nowhere near finished, right? So I would say these are the more to do areas.

Sorry, just 1 clarification, if I may. I understand in the interest of time [indiscernible] Look, 100 factories now close to 50. So you're astutely saying there is still opportunity on cost opportunities there?

Definitely. I think there is still more to do. We have not reached an end phase yet, and this is constantly -- hello?

Yes, yes. Yes, please.

Sorry. So yes, I mean to answer your questions briefly, yes, the manufacturing footprint is not yet at its end phase and we think there is more to do. And you had a question on Maharashtra, the price elasticity on BIO. So the early signs are very positive. We've definitely seen consumer traction build behind the BIO brand with the price reduction. And our brands are actually going healthy double digit there.

[Operator Instructions] The next question is from the line of Avi Mehta from Macquarie.

Just had 1 clarification on the near-term challenges that you called out. With cases kind of moderating, have you seen demand environment also kind of improving? Is there any sense on that, if you could kind of highlight from that perspective? And b, from a regulatory aspect, we've seen [ MP ] come out with a new policy. But any other new policy discussions where [indiscernible] country?

So I think the situation on cases is varied by state, right? So some are moderating. Some are still going to the peak. And we have -- I mean in some states, the weekend closures, night curfews, et cetera, have impacted footfalls and slowdown. But like we saw in the previous waves, we expect that the recovery comes quite fast as things open up. And as you are aware, this wave is not being seen as bad as the previous waves. So people are not panicking, et cetera. So we expect normalization to come in very fast as these restrictions go away. So I would say that there is some disruption in some markets where there are closures, but it's not very much as was the case in COVID wave 2 where it was really very strong. And even internally with our people, we see a lot of absenteeism, but moderate cases, mild cases. And therefore, we are able to manage those disruptions. So overall, I think as cases moderate, we do see positive momentum come back.

And Avi, I mean, if your question was referring to the last quarter gone by that as the cases moderated, we did see demand pickup, absolutely. We mentioned that in our opening comments that we did see on-premise almost come back to the pre-COVID level of footfalls, et cetera, and that's kind of reflected in the quarterly performance.

No, but what I was trying to say is that is this -- is the sense then that more from a demand side, things probably are not as bad as we should kind of -- is that what we would kind of argue? Is that a comment as of now? I know things -- there are a lot of things that might change, but as of now, it does feel like that. Is that a fair read through of the comments?

Yes, that would be fair. A little bit of moderation in view of the restrictions that are coming in, right? So the first 4 to 6 weeks, right, as we kind of go into the restriction, there will be a little bit of moderation.

And on the regulatory side?

Yes, so -- yes, [ MP ] has just about come in. It's just been announced, we are looking at the full impact of that. And I think that would make 4 or 5 states with big regulatory changes. At the moment, no other big one being discussed. But the ones that have happened basically will need to fully roll out, as you know that -- you may be aware that even Delhi, I think while the route to market has changed, all the outlets have not yet opened, right? So that's still playing out, [ investing ] only started in November. So there's a lot that will happen in these unfolding. And -- but I think the developments are very positive, even [ MP ]. I think it drives more affordability, prices will come down, right? And accessibility improves because now you have some [ projects, liquor outlets ]. So I think these are very good templates that are being rolled out state by state.

Okay. Perfect.

To add to that, Avi, which is what Manoj also mentioned, if you look at the last 12 to 18 months, there are a lot more positives on the policy front, right? Earlier, if you see more balance between the pluses and the minuses, right? Call it -- Hina jokingly calls it a [ signal block ], right? But yes, we are very, very happy with our peers.

With that, if I can ask, is there any update on the U.K. trade deal as well or nothing as of now? I mean, have you heard anything over there?

No. I mean the talks are underway, as you know. And -- but we know this is on the agenda, but the timing, [ quantum saving ] is unclear to us still. So there is no update yet.

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

[ Congrats on a good set of numbers ]. My first question is, would you like to quantify if at all there was any impact coming from any market dissonances? Do you see any change in route to market over lockdown curfew in the last week or 10 days of the quarter? Was there any impact that you want to quantify?

I mean, difficult to quantify, but I can give you the Delhi -- yes, I mean Delhi example, right? So Delhi has closed down the market for us. I mean, basically, I think the stores are only operating a couple of days in a week, right? And the weekend curfews are definitely impacting the footfall and the sales, right? So I mean, for sure, there is an impact.

Okay. [indiscernible] that this is a quarter where off-trade is largely getting back to pre-COVID -- sorry, on-trade is getting back to pre-COVID, off-trade has only been improving. And after that, while it's encouraging to see 8.5% [ volume ] growth, but I think I expected a bit more. So [ that's what I was thinking ] plus we have the positive impact of restocking of Black Dog and Signature also, right? So that placement benefit also we would have bought. So that's what I wanted to sort of clarify on any market dissonance impact.

Yes, yes. So a little bit of a setback. As laid out [ by Hina ], but I mean, we can't control the pandemic, right? And we just have to get used to kind of working around it. We are very happy with the -- with how we've responded to the first 2 waves, and we believe we will absorb this also. And like Hina said, we don't expect the restrictions to continue for a very long time, right? So hopefully, it will be shorter duration.

Got it, got it. My question was [indiscernible] Okay. So my next question is on EBITDA margin guidance, right now, we have been holding on to the guidance of mid to high teens. If we look at this quarter and the previous quarter, we are closer to 17.5%. Next quarter also, there is no reason to believe that we would be anywhere below 17%, maybe. So in that light, are you just trying to defer the guidance change because you're waiting for outcome of the strategy that you're [indiscernible] or anything else that you want to highlight on that?

So actually it's nothing to do with the 2 things that you have mentioned, right? We believe that our current quarter because of the peak season, it's the highest [ tenancy ] that we clocked during a year, right? So therefore, the quantum of operating leverage that we get in our P&L in this quarter is the highest, right? Now if you take it for an extended period of time, we have, by and large, been in that range of about 16.5%, right? So and this is what we have maintained that mid-teens we've already achieved, right? On a sustained basis, right, we still have some work to do till we reach the [ height ], right? And therefore, we are just kind of hitting our milestones first towards that level. Once we achieve that on a sustained basis, then we will come back to all of you and provide the next level of guidance.

I just have 1 clarification point on 1 of earlier participant's question, if I can go ahead with that.

Yes, yes. Please go ahead.

Okay. So 1 of the previous participants asked a question on India-U.K. treaty. Now of course, it's there in the paper. I just wanted to double click on that. Is there something to do with state tax also and the central tax also? Or whatever reduction happens directly flows into your calculation completely and there's no state involvement in that?

So let me take that. I mean the component is central tax, right? It has nothing to do with state tax. It's the basic customs duty. However, we don't know how it will play out, right? So once [ this assumes the ] decreases, we don't know how much the quantum will be, what will the phasing be. And we don't know whether the [ state ] will have any actions -- will take any action. So it will have to be a balance between what gets reduced at the central level and what [ is safe to do ], right? So -- and that's very difficult to predict, quite honestly. So overall, the customs duty reduced and the states don't put any additional taxation, it would be a favorable outcome for cost. The quantum of the timing will decide how much, right? So it's quite difficult to quantify that.

Okay. Perfect. But [indiscernible] if the central were to reduce from [indiscernible] then assuming no state involvement, direct benefit goes to [indiscernible]

Direct, no. So I'll just caveat that. Consumer prices will [indiscernible] Consumer...

Yes, yes. Absolutely, absolutely, absolutely. Yes.

There will be no benefit. Benefit will come in terms of hopefully a higher demand.

Higher demand, yes.

Volume, volume. Yes, yes.

The next question is from the line of Jaykumar Doshi from Kotak.

A couple of questions from my end. First 1 is on -- there are some favorable policy developments on the BIO front at the state level. And if there is more favorable sort of reduction in tariffs through U.K. trade, then where do you see your BIO salience? And if you could give some color, what is BIO salience today as a percentage of your overall sales in value terms? Where do you think it can sort of go in the next 3 to 5 years, along with your initiatives of premiumization and some external tailwinds? And my understanding is that you would be making a distribution margin of somewhere around 10-odd percent on BIO portfolio. So is that understanding correct? And if so, then does it mean that if BIO salience close up, is it EBITDA margin-dilutive if it ends up cannibalizing some of your BII product? That's the first question.

Okay. So let me take that. I think we responded to this in the earlier question also, but let me repeat this, right? So overall, our spot salience -- just a minute, there's a call. Yes, can you hear me?

Yes, I can.

Sorry, there was a call coming in. Yes, yes. So I think that overall, our scotch salience between the bottles in India and the BIO is in the range of about 22% to 24% depending on the quarter, right? So that's broadly the salience of the business. And yes, and it's split broadly 50/50 right now, right? Now clearly, as Hina has articulated in our strategy, we want to just break out on the growth front on this. So a simple logic of math, the salience will continue to go up, right? So that's the response to 1 part of your question. The range of EBITDA margin that you have mentioned is absolutely right. There, broadly in the same -- it varies, but broadly in the same range of a weighted average. So that's absolutely fair. I think what we want to share, again, is that -- it's highly EBITDA rupees per case accretive. I understand the percentage part, right? So yes, you're right, the percentage is lower than our portfolio percentage. But this year [ up waiting ] that we get on rupees per case, that just provides a significant operating leverage on your entire business algorithm. So just bear that in mind, right, and we'll be happy to share more detailed numbers in of 1 our session, et cetera, but that's broadly the concept. And again, as we have mentioned earlier that we do not invest anything in fixed assets and long-term capital assets, right, for this part of the portfolio. So it's again hugely accretive on our return on [ income ].

So is there any room or any sort of potential for United Spirits to negotiate or renegotiate that with the parent. Is this a global norm in terms of 10% distribution margin?

Yes, yes, yes. So I should have clarified that, yes. Sorry, sorry to kind of butt in, but I should have clarified it. It's all driven by international transfer pricing, right? And therefore, I don't think there is any room for negotiation, right? That just exposes the global cooperation to huge tax exposure, right? So it's all driven by the global [ profit ] pricing now.

Correct. That's helpful. Second, on home delivery, which states are leading today? Do you have any data in terms of any color in what is the salience of delivery sales in the states that are leading? Some color, if you can provide.

Yes. So I'll take that. I mean, the home delivery was a great unlock that came during COVID as you know, it's in 6 states. And basically, I would say that these models, like they always take time, right? So my experience even from China tells me that e-commerce model, home delivery models take a lot of -- undergo a lot of change, take a lot of time till they reach tipping points. And then 1 day they do and they become very attractive. I would say of the -- all the states, I mean, for instance, as an example, West Bengal is growing some traction. And basically, West Bengal, I think 3% to 4% of our sales are coming through home delivery. So that's very promising. And the others are evolving. So we remain very excited about this channel.

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

Congrats on a good set of numbers. My first question is on the premiumization trend increase in the realization per case that you have seen at 11%. And you mentioned that it would stabilize at somewhere around 7% to 8% versus a historic trend of 4% to 5%. So what I wanted to understand is 2 things. One is this 4% to 5% going up to 7% to 8%, is this overall industry phenomenon driven by the consumers maturing? Or is this something specific to United Spirits? And secondly, if it is specific to United Spirits at least partially maybe, can you give us an idea as to what exactly are the measures you have taken to boost this from 4%, 5% going up to 7%, 8%? What are you doing differently now versus a year or 2 ago?

So I would say I think it's a combination of both, right? So I think there is a definite premiumization trend acceleration for the market. And everybody, every player will be taking advantage of that. I think there are a couple of areas where it is unique to USL is that -- one is that our Prestige & Above portfolio, right, is growing ahead of popular and that is a shift from the previous periods, right? And this is a shift and the strategic focus we have driven now in our new strategies. And even within P&A, right, as I mentioned in my strategy that we are now looking at broader-based participation across the various categories within Prestige. So lower mid, end and upper. And we are strengthening our presence in all these 3, right? So with the renovations, innovations that we have driven, like the Signature renovation and Upper Prestige, which is very differentiated and will grow faster. And similarly, the launch of Royal Challenge American Pride, which will again make us grow faster in Upper Prestige. So that will also give us the [ upweight ] on price/mix. So there are a couple of factors unique to us and overall industry trend as well.

And is BII, BIO portfolio within the P&A growing faster than the other subsegments of P&A?

Definitely. I think that we've seen for the last 2 [ years ], that phenomenon we've been seeing. And actually, for us, the renovation of Black Dog, for instance, has really accelerated the growth of that brand. And Black & White whiskey is also doing very well. So definitely, they are growing faster, yes.

And this 10% margin, distribution margin, does it apply to BII also or that's relevant only for BIO portfolio?

Sure. Yes, yes. So Percy, for the global brands, yes, it applies similarly because the liquid comes from there, right, and the related party transaction. So therefore it applies. But for the USL brands, everything is housed in the [ USL ]. For or example, Black Dog is a USL brand, right, so everything is -- we retain everything.

Understood. Secondly, on cost inflation, I think Arnab had asked this question and you had said that there is a 4% to 5% kind of cost inflation. Just a clarification here, is it 4% to 5% incremental March quarter versus December quarter that you expect? Or is it 4% to 5% versus 12 months ago that -- what you're witnessing?

[ Versus prior, versus prior ].

Sorry, I can't hear you.

Versus prior year same quarter.

Versus prior, but is there any additional sequential inflation versus whatever inflation you've seen in December quarter? Do you see any further inflation in March quarter on a sequential basis?

Yes, yes, yes. Percy, right. So 2 things, right? I mean just I'll provide the headlines. One is ENA was reasonably flattish, right, for the last 3 quarters, right, versus prior year. But now as we have always said that the inflection point is the regional blending prices announced by the government, right? So we know that the oil marketing companies have given some increases to the ethanol producers. So that will lead to some amount of inflation in our ENA portfolio, right? And similarly, the import from glass, right, be it soda ash, be it furnace oil, be it furnace oil, they are just rapidly growing, right? In fact, they've gone up by almost 40% to 50% in the last 6 to 9 months, right? So there is some amount of sequential inflation also.

So does this hit the bottom line? Or is there any way that you can sort of mitigate it through some measure?

Percy, that's the one which we all said, look, we run productivity on a quarter-on-quarter -- literally on a day-to-day basis, what we call everyday efficiency, right? And in a year in which inflation is a little muted, we carry some part of that productivity into our margin benefits, right? Or it gives us a little more [ scale to flowback ] for growth, et cetera. In a year in which the inflation is higher than the productivity, yes, we take a temporary short term kind of uplift, right? So -- and like Hina mentioned, we continue to work with the state government for pricing [indiscernible], right? So we are at it, whatever we can control, we are at it. [ Let's see where we end up ], but yes, inflation is on the [ upside ].

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

Two questions. The first is if you could share the brand spend breakup between BIO, BII and the other P&A brands. That's my first question. And also, if you could share how is the share of different channels or mediums looking in the overall brand spend mix for you now?

Yes. So Latika, let me take that. We don't dabble in that right? I mean all we can share is they follow pretty much [ realized ], right? So our reinvestment rates are obviously higher at the higher end, right, and lower [ results ], right? That's all that we'll be able to share [ at this time ], right? And on channels, I mean, honestly, we just don't have that level of data granularity in the country, right, to be able to track it, right? Broadly, we know that our off-trade is roughly about 75% -- 70% to 75%, and on-trade is about 25% to 30%, right? And like Hina mentioned, that's what it was coming back to, right, October, November, et cetera. But now with the revised set of restrictions in the third wave, we could again see a little bit of a dent in that, right? But otherwise...

No, I think -- sorry, I think I didn't ask the question rightly. I was talking more about brand spend breakup for the channels, whether digital, off-line, those mediums.

Yes, sure. Again, I don't think we have historically shared that right now. I will -- yes. We'll have to kind of reflect on this, whether we want to share this, Latika, right? But overall, 8%, 9%, our sense is that we won't be dramatically different from the rest of the industry in terms of the channel spending.

Sure. The second thing was any specific or any meaningful changes that you're currently working on from a [ GTM ] approach, considering you will look towards a more stabilizing environment post pandemic that you may want to highlight, which is also helping with this whole P&A growth being pretty good.

I mean 1 thing is, Latika, that with the positive developments on the regulatory side, I think the opportunity to create a much better shopper environment and retail environment is a really big opportunity, right? And obviously, as the accessibility and affordability of our brand is growing in the different states, which we talked about on the regulatory development, we are definitely looking to transform the retail landscape for shoppers and invest in that, right? So that is a big truck in addition to our premiumization strategy. And we will continue -- I mean, we've done a lot of investments. We -- even for #1, we did the [ yaari ] We invested for Johnnie Walker, for Black Dog, for Black & White. And we will continue to increase this investment, expand this investment as we see the opportunity.

All right. And just lastly, any flavor on the CapEx? And how should 1 think about dividend payout eventually now that you are debt-free?

Yes, so for CapEx, no change. Pretty much it will be the same, right? I mean our philosophy remains of keeping an asset-light model, right? So that we will continue, Latika, and you would have seen that in over the last 3, 4 years, CapEx has been pretty much in a narrow range, and that's what will probably continue. That's one. And dividends, actually, debt-free is not really the trigger. The trigger is unfortunately the wipeout of the accumulated losses, that's the company's tax requirement. But again, you guys are as close to the numbers as we are. Hopefully, over the next 3 to 4 quarters, we should be able to wipe that out also. Therefore, we should be into the dividend distribution.

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

Touching on the earlier -- the question which was asked on Maharashtra policy change, I was more curious. You did mention it's growing double digit. Is it volume double-digit growth we are seeing? And maybe if you can help me, what was the contribution from Maharashtra a year ago and now in terms of overall portfolio?

So Shirish, let me take that, right, and then maybe Hina can build on it, right? So I mean, we've never shared [ state-by-state ], et cetera, that just makes it too complicated on an ongoing basis, right? So we don't want to [ dabble ] on that, right? But I think suffice to say that now that we have seen this rationalization of state taxes in the BIO portfolio in 5, 6 states over the last 18 to 24 months or 36 months, et cetera, we get a significant multiplier, right? We get a significant multiplier on volume, right, and therefore, the growth becomes very, very healthy, right? I mean that's all. I don't know whether Hina wants to...

No, I think that's [indiscernible] this year.

Clearly, I got that, what you're saying. I mean I don't want you to give a specific answer, but can you give the range, what is the lowest and what is the highest? I mean, is it fair to say that the growth is between 10% to 50%?

Yes. So yes, it's more towards the higher end, more towards the higher end.

Okay. And [indiscernible] when we see the mix change between BIO and BII, was it towards the BIO side or it is more of the [ rub-off ] effect which we have seen in BII portfolio for us?

I think it varies by state to state, right? So in some places where the BIO prices are more favorable, sometimes the mix switches to BIO, but I also think that there is a core group of customers who are being addressed by our different brands, right? So I mean Black & White, for instance, is really addressing the young casual drinker, food pairing, et cetera. Whereas Johnnie Walker Red Label, it has its own set of customers. So I think it's not possible to generalize this phenomenon, which has -- which switched massively. I think there is, in some case, a movement into BIO where the BIO prices become more attractive. But equally, there are a core set of consumers for each brand who remain loyal, right, to the brand.

Okay. Just let me harp on a [indiscernible] a little more deeper. This growth, what you have mentioned is seen on on-trade or off-trade channel or both are seeing the similar growth?

Both. So I would say the consumer demand momentum is there in both the channels. I mean, when COVID closures happened on on-trade, we saw the off-trade more than picked up the volume and in-home consumption became very big. As the footfalls have come back to on-trade, they are also picking up demand momentum. So both of them are [ similar ].

Okay. Just last question on Pradeep, the change in mix and portfolio, how one should look at the tax [ rate ] for next 4 to 5 quarters or maybe next 2 years?

Tax?

Mix change.

So when you say tax, is it what, indirect taxes, direct taxes? Sorry, I didn't get the question.

Tax rate for the company.

Effective tax rate.

Yes. So this is the direct -- this is the effective tax rate -- effective direct tax rate, right?

Yes.

Okay. So that, by and large, given that the 25% range only, we don't have any big variances. I mean, obviously, at times, things like when we have done raise the bar, et cetera, et cetera, we obviously don't consciously [ give ] a tax reduction on those kind of spend, et cetera, and that's when the effective tax rate kind of goes up. But otherwise, the effective tax rate is in a narrow band of about 25% and around.

The next question is from the line of Prakash Kapadia from Anived Portfolio Managers.

I had two questions. Post the duty reduction, what we've seen in Maharashtra, how are the prices comparable with key metro cities on some of the Scotch brands? And how are consumers looking at BIO brands from here on? Because now with the reduction in the Scotch duties, custom duties, Red Label is almost 25% cheaper than maybe a Black & White or a Black & Dog (sic) [ Black Dog ]. So what happens to some of these BIO Scotch brands? And is there a room for price reduction in the BIO segment to push from our end to the government? Are we thinking on those lines, working on those lines? So some thoughts would be helpful.

I mean, Maharashtra, basically, the prices and consumer prices came down by about 35%, so 35% to 40%. So I would still say that Delhi is the benchmark on pricing. Maharashtra is just marginally above the Delhi pricing and therefore, now very affordable. And so you don't see much need for in-state move -- I mean, interstate movement, right, of products. So -- and I know that people in Maharashtra are really appreciating this price change. So obviously, that is impacting positively on consumer demand. And like I mentioned, I think, again, the interplay on categories is right. And it is on loyalty to certain brands and the reason for adopting these brands. So I'm not sure what your question was on the price -- working on the price. Was it related to BIO?

Yes, yes, BIO. Because after the reduction of the Scotch, imported Scotch. Now Red Label is 25% cheaper as compared to a Black & White or Black Dog. I'm talking more of Maharashtra prices. So what happens from a consumer standpoint? How do they look at this segment now? So you know...

So I caught that and I said that we've been sort of seeing some shifts in some markets, but hard for consumer group that stays with the brand. And actually, our renovation also are driving continued engagement with, say, Black Dog, right? So I think you had a follow-up question on working with the government on drop-offs, and I didn't understand whether -- because the drop-offs BIO...

It was BIO. So is there a room for reduction in BIO prices from here on, say, Black & White or Black Dog because...

BII.

Yes. Yes, BII.

I think that is something that we continue to work with the government on. But I mean as far as the pricing ladder that exists on -- in the market, at this point in time, that is not a focus area for us.

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

Congrats, Hina and Pradeep, on a good set of numbers. [indiscernible] So on one of my question, since you have answered the 10% margin is what you would look at in BIO. And if you look at EBITDA per case for this quarter, it's [ 217 ], probably the highest EBITDA per case you would have made in the last 18, 19 quarters. My question is twofold. One is, do you as an organization look at EBITDA per case for Prestige and Popular? And what is the fixed cost per case which you've done in the organization? The reason why I'm heading into this is that would decide on Popular, how much part of the cost will retain in the company where Prestige will have to sell their cost or what's the decision framework you will take when you are deciding on Popular? Whatever you can share at this stage will be helpful.

Yes. Sure. So let me take that. I mean, obviously, we will not be able to divulge any details. But again, long story short, we do take most of our decision based on EBITDA per case, which is a fully loaded [ cost count ]. We don't take dramatically only on marginal costing basis, et cetera. We do take an EBITDA per case decision because we genuinely believe that all costs are kind of variable in the longer run, right? So therefore, that's 1 sense of philosophy. And the other one, which you just mentioned yourself, which is that our EBITDA per case is the highest in the country, it's the highest historically in whatever, last 18, 20 quarters, et cetera, exactly driven by the operating leverage and the premiumization, right, and the premiumization element, right? Even though in percentage, et cetera, it doesn't give a huge kicker because it's 10%. But the sheer impact it has on our rest of our overhead with the overhead disruption, et cetera, it gives us a huge kicker, right? And we will want to continue this trajectory.

Will you be able to share the EBITDA per case between Prestige and Popular at some point?

We don't share that, right? So I have given some examples on the BIO earlier, et cetera. And you should be able to draw out your broad estimate.

Just 1 more question from my side. If I look at the advertisement spend, again, because, I guess, in many quarters, and I'm sure you've invested a lot in renovation, innovation. The 8% to 9% [ spend ] which you are guiding for, I assume that it's the 8% -- the margin guidance of mid-teens, isn't it lower? I'm saying that the organization has a right to have a 20-plus percent kind of margin in 1 to 2 years. Any thoughts?

I mean I think, look, our strategy is looking at accelerating top line growth and the principle is that we get operating leverage as we go along with that. And in this front, we will focus on our key brands and invest behind them, right? And the thing is that A&P doesn't necessarily need to be expanded to do that. We get a lot of A&P efficiencies and effectiveness to the operating leverage as well, right? So at this point in time, we have efficiency. And over a period of time, of course, I mean, we are guiding to mid to high teens. We've just started the strategy. It's going to take a few years to get there. And when we are in a position to give the next guidance after a few years, we will definitely come back to you and give the next guidance. But for the next few years, I think we are focusing on delivering this strategy and our guidance to you. All right. So thank you very much. I just wanted to say we will now draw the call to a close. Thank you very much for your participation, and have a great evening. And please stay safe, stay well. Thank you so much.

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

Thank you.