United Spirits Limited (UNITDSPR) Earnings Call Transcript & Summary

Ladies and gentlemen, good day, and welcome to the United Spirits Limited Q1 FY '23 Earnings Conference Call. [Operator Instructions]. 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 very much. Good evening, ladies and gentlemen. Thank you for joining us on the Q1 earnings call of United Spirits Limited. As always, it's a pleasure to interact with all of you. I'm joined by Richa, our Investor Relations Head; and Pradeep, our CFO. Let me provide a context on the results that we announced Tuesday evening, and then we can open it up for Q&A. As a headline, we delivered a growth of 34% in the first quarter, lapping soft comparators in prior year. Our price mix was 16.4%. The strategic focus on premiumization reflects in our numbers. On-trade saliency was back to pre-Covid levels, and we are seeing sequential gains in the innovation, renovation best place in the market over the previous year. On EBITDA, double-digit inflation, limitations in scotch supplies in select markets as well as a onetime special grants to all employees in extremely challenging times impacted EBITDA margin delivery. Let me talk you through our progress on the pillars of our strategy, and I will come back to the financials. Our portfolio reshape strategy through innovation and renovation is on track. We have put a lot in the market mostly in the second half of last year and are confident of ramping up the same in the current year based on the sequential gains we have seen in the launch market. To jog your memory, once again, our recent innovations, renovations are impactful, inclusive and sustainable. Godawan, India's first craft single malt, with sustainability credentials has already been launched in Rajasthan, Delhi and the UAE. We've also showcased Godawan along with Epitome Reserve at the Cannes Film Festival in partnership with NFDC. The response from consumers has been heartwarming. Black Dog renovation, we launched a new campaign, SavourThePause with global icon Keira Knightley. And we have continued to scale up media reach on the campaign in this quarter, helping rephrase the brand and dialing up aspiration. The brand is performing extremely competitively in the market. Black & White continues to see great traction amongst consumers in the quarter 4 enhancement of the brand's association with Superstar Chef Heston Blumenthal on social media. Royal Challenge American Pride is now rolling out, already available in 7 states. And along with the Signature brand Mc and renovation of consumer bundle, we are sequentially improving our position with these delightful liquids in the upper category segment. We are going strong on Royal Challenge with accelerated momentum from states where we have renovated or had a route to market unlock. And Yaari Cheers and the purpose campaign on our flagship brand, McDowell's No1, reached over 65 million people during the IPL with the brand performing very competitively during the last 15 months or so -- actually more than that since the time of renovation. Touching upon the pillar about building an organization of the future, elaborating on our digital initiatives first. Our website in.thebar.com is a one-stop place to help people celebrate and create memorable moments of celebration. The bar is present at both website as well as on social media on both Instagram and Facebook. The site has been in beta mode for the last few months and have got very good initial response with 1.1 million total visits to the site and very good organic traffic every month. We also have precision factory, our powerful digital initiative that is focusing on media, data, analytics and content, helping us target consumers with the right content in the right occasion and improving the effectiveness and efficiency of our digital marketing spend. Both these are going to be continued to be scaled up as we progress in the year. We are continuously improving, investing in our tool, capability and talent. And as we improve, we are creating a virtuous circle that brings us closer to consumers to post more efficient and effective engagement and fuel growth. On the first pillar, the one of the most important pillar, Society 2030 Goals, we continue to make progress in delivering our Society 2030 Goals. We have been shaping drinking attitude towards moderation through sustained programmatic intervention. 2 of our flagship global programs continue to expand their reach in India. First one, Wrong Side of the Road, our Drink Drive program reaching 54,000 people, while Act Smart India educated 12,000 young people on dangers of underage drinking. We continue supporting customers and communities by conducting learning for life and hospitality skills, training program with 72% women participation. Under our water stewardship work, we created capacity to replenish almost 5 lakh cubic meters of water in stressed areas like Nanded and Nasik in Maharashtra and Kumbalgodu in Karnataka. We are working towards net zero carbon by 2025. The Black & White whiskey brand is using 100% biodegradable and recyclable Hipster pack now, and we will be rolling this to our other premium flagship portfolio over the next few months. We've also rolled out a blockchain-based track and trade system with Godawan, Signature and Royal Challenge whiskey, and we'll scale it up for our other key brands. This now enables us to trade back the product journey from blends to finished goods, providing auditable sustainability data, again, another significant step towards our commitments to sustainability. Coming now back to the financial performance and key highlights, which you would have already seen in the press release, but let me again call out some of the cadence points. Our reported revenue increased 34.3%. P&A grew by almost 44%, while popular grew by 13%, lapping a soft prior year comparator, but growth also driven by resilient consumer demand in the upgrade and recovery of on-premises operating fully with footfall back to pre-Covid levels. The P&A growth also reflects the ongoing premiumization trend. Growth has been partly offset by constraints in Diageo supplies in select markets on account of ongoing price deliberations with the government. Gross margin was 40.9%, down 366 basis points. This reflects the adverse impact of high commodity inflation. Continued management focus on favorable product mix and a culture of everyday efficiency has partially offset the inflation. Our marketing investment rate was 6.5%, up 128 bps. We continue to strengthen the equity of our brands and premiumized the portfolio. Staff costs includes a onetime special recognition grants to employees for their outstanding contribution and commitment in an extraordinarily challenging operating environment for the last 2 years and now aggravated by macro volatility and high cost of living inflation. Our underlying EBITDA margin was 13.8% for the quarter, up 346 bps, primarily driven by operating leverage. And PAT was at INR 210 crores in the quarter, up 204%. We are on track to close the transaction with Inbrew Beverages as per schedule. We have mentioned that we will close this by end September. We are on track to do that. Our outlook on inflation, we are seeing inflationary pressure to continue in the near term. In our assessment, inflation is a combination of some permanent resets and some temporary pressures. However, in the near term, the combination of material cost increases and external economic challenges will drive double-digit inflation for our portfolio. In conclusion, all I want to say is that we are confident of the resilience of our business and our ability to navigate headwinds as our team has demonstrated over the last couple of years. We remain focused on our strategy of reshaping the portfolio, driving commercial excellence in store and in nontrade, revenue growth management and everyday efficiency. We are confident in our ability to deliver sustainable long-term growth and stakeholder value. With this, we can now open the line for Q&A.

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

My first question is on marketing spend. So if I see quarter-on-quarter because Y-o-Y may not make too much of sense. Quarter-on-quarter sales is down 10%, while marketing spends are up 7%. I understand there is a seasonality in marketing investment. My question is because of the gross margin pressure of say 366 bps, which must be there for you and the industry also, will the industry see much lower ad spend than the normative year, say, in the normal years, your ad spends have been more like 8% to 9%. Currently it's only 6.5%. So I wanted to understand, has the competition also cut down versus the normal year?

Abneesh, first of all, good to have you back on the call. We missed you last time. Look, I think on the question, I'm not in a position to say what industry will do. But at Diageo, we believe that particularly in more difficult times, we should be investing behind our brands. We are playing the game for the longer term. We are a brand-building company. And we will not be pulling down our brand investment, but we will rather be using these more effectively, more efficiently to drive the top line growth objectives that we have. And we have a very aggressive top line growth objective. So we would like to support that by investing into the brand equity.

And one follow-up on that for FMCG companies, digital ad spend is around 25% to 35% of the total, for traditional is now only 65% to 75%. What could be the number for you? And any sense what it was, say, 5 years back?

The digital mix of the advertising spend.

It has been increasing, Abneesh, for a very long time now for the last few years. And I would say that we have on some -- I mean it differs from brand to brand, right? On some brands, maybe 65%, 70% of our spend is on digital whereas on others, there is a more focus on in-store, et cetera. So overall, I would say that more than 50% of our spend is on digital.

About 50% would be the right weighted average number, Abneesh, across the portfolio.

My last question is coming back to the sales number. So when I see historically, quarter-on-quarter, the dip is always there in Q1 in most of the year, but the 10% to 11% dip seen quarter-on-quarter this time seems to be slightly higher. Is it because of the beer regaining some market share because very harsh summer was there? Or if you could comment in spirits, how has been your sense in terms of market share? Any sense you have got on how things would have changed, say, quarter-on-quarter?

So, Abneesh, I would say that if I just break this down to P&A first, right? So our performance at the bookings of our portfolio, right? Scotch has performed extremely competitively despite the limitation on supply. I would say, number one, continues to perform extremely competitively for the second year in a row after renovation. And in the middle, on mid and upper prestige basically, our renovations and innovations, I was just calling that out that actually, they started rolling out in the second half of last year. And we are seeing sequential improvement in our position in these segments as well, right? There has been some impact of the limited scotch supplies. And that explains the little bit of delta that you are seeing there. Other than that, there is no unusual sort of impact on our sales.

Could you elaborate on the cost supply constraint, when do you see fully resolving? And how much was the impact in Q1, if it is possible to share?

Okay. So basically, look, I mean, just to give everyone a perspective, scotch, as you know, is a very scarce and limited commodity, right? And this year, scotch is seeing a high level of inflation, and we need pricing for sustained supplies. So we have been proactively engaging to get the right pricing with a few state governments. And we will commence supply once we close the discussion. In the quarter, we have had an impact of about INR 60 crores to INR 70 crores. And this would be about -- on our P&A portfolio, about 6 percentage points of growth, right? Now we are hopeful that in this quarter, we will be able to come to the right closure on this. And therefore, I mean, we do see impact for this quarter, right? But we are quite hopeful that by the end of this quarter, we would have reached the right win-win situation for both sides.

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

My question is somewhat connected to what Abneesh asked earlier. If we see 2017, 2018, 2019 calendar year, the usual seasonality was that from March quarter to June quarter, you would see about 0.2 million cases of decline in P&A volumes. I mean this quarter, March -- this year, March was impacted by Omicron wave and June was a normal quarter, and yet we have seen 0.9 million cases of decline. So is there some change in seasonality or if you could comment on broadly -- and again, when I look at June '22 versus June '19, P&A volumes have declined. Now I'm aware about route-to-market change of AP, but adjusted for that also, it must be modest growth. Whereas in the previous 2 quarters versus respective quarters of 2019, you were tracking at a very high -- significantly higher growth -- volume growth number. I'm unable to understand this. At least to me, it seems like this quarter is weaker than what I would have expected at the beginning of the fiscal year or quarter? If you could comment on this, please.

So Jay, let me tend to take that. So 2 points. You've asked the seasonality question. I think the way I will look at it is that when COVID wave 1 happened, there was a bit of an inflection point there, right? So if you look at the last 3 years, I think there is absolutely no change in the quarter-on-quarter seasonality, barring a little bit here and there, right? But if you compare the Q4 the April-June seasonality versus pre-Covid, yes, you would see a little bit of a shift, right? So that was a bit of an inflection point to answer your question that the seasonality has changed a little bit, right? So there was a onetime inventory correction that all of our bids when COVID wave 1 happened, et cetera. And then we've just stuck to that. It just helped us, right, to kind of -- so that is the first part of your question. And second part, if you look at it, one is you answered it yourself. One is an Andhra adjustment. That was a large business for us, right? Large business not just in top line, even bottom line from the franchise part, right? So excluding that, we are in the positive zone on a 3-year zone also. And as Hina has already responded to Abneesh's question earlier, we have lost about INR 70 crores of NSV, right, in the top end of our P&A segment. So once you factor that in, I think we are by and large in the same zone, right? And that's broadly what our assessment is.

Understood. Second question is you had articulated your aspiration for double-digit sales growth last year. And then now the Popular business being divested, I'm assuming that expirations should have moved up inch, given Popular was anyway not growing. So if you could share your revised aspirations for the business? And more importantly, what is the growth construct that we should think of in terms of the contribution of volume and contribution of pricing plus mix in this 10% or 10%-plus growth aspiration?

Yes. Thanks, Jay, for the question. So I mean, as we have said since the time of launch of strategy that in one way, we had already factored the going away of Popular when we said we want to target strong double-digit top line growth. And we are still sticking with that aspiration of double-digit top line growth, right? So basically, that said, I think we -- in a year which is so volatile, et cetera, I mean, we are not in a position to change that guidance right away, right? I mean it's a very difficult macroeconomic environment, and we will stay with the guidance that we've given, right?

So, no, my question is different, Hina. I understand I'm not asking about near term. It's essentially in the medium term or maybe next year if things are normal, if you were to sort of pencil in 10% revenue growth, will it be 5% volume in...

I'm sorry, I'm coming to the price mix and the volume question. So look, on the price mix, we have had because of the COVID wave hit us, right? So our price mix and our cost growth, we have had a price mix, which is quite high. And we have said that on a normalized basis, we would see about 7% to 8% price mix on a steady-state basis, right?

So just building on that, Jay, broadly, if you are saying that as a portfolio, as a portfolio, if you're looking at double-digit growth, right? Our price mix would be in the 7% to 8% range, driven by the consistent premiumization of the portfolio and volume will be 3% to 4%. That's the broad math.

That's very helpful. Final bookkeeping, Pradeep, if I may. This quarter, employee cost at a ballpark INR 25 crores, INR 26 crores of onetime grant. So what is -- what should be the normalized employee cost that we should sort of model going forward? And if you can give us an idea of how it would be once the divestment of Popular business is concluded?

So Jay, I don't want to comment on the -- post the divestment, we'll come back. I mean we'll pretty much start seeing the P&L once we close the transaction on September 30, right? You'll start seeing the real excluded P&L. But I think the staff cost is about INR 167 crores currently, right? You knock off INR 26 crores out of that. That's broadly the organic run rate that we can look at.

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

My first question is on the P&A growth. So while some people have looked at it sequentially, what I'm looking at is on a 3-year CAGR basis, after adjusting this INR 65 crore of scotch issue, which has happened this quarter. And if I -- even after adjusting that, the 3-year value CAGR is only 4%. And I mean, this is a completely normal quarter after adjusting the INR 65 crores, the base quarter, which is Q1 FY '20 is also a completely normal quarter. And therefore, whatever happened in COVID times or didn't happen plus/minus really irrelevant at that -- on this 3-year sort of comparison. So what is the reason that the growth is so low, only 4% and our target is double digit? So what really will need to change for the growth to accelerate from 4% to 10%, 11%, whatever that number is?

Yes. So Percy, you're right. I mean adjusted that. But I think what you're probably not excluded is the Andhra sitting in the 3 year ago base, right? Now that is a large business, and that was a large franchise royalty business. So I'm not talking about the bottom line here. We have brought all that, right? We've recouped all that, et cetera, and our margins are kind of come back to the pre-COVID levels. But on the top line, if you adjust for Andhra, that 4% move was about a 7.5% -- 7% to 7.5% broadly, right? So -- yes, and then if you look at our P&A performance, here, don't look at one quarter, look at it on a 4-quarter basis. Have we picked up momentum versus our historical run rate? The answer is an emphatic, yes. Right? Yes, one quarter, maybe we are a little short of the double digit, et cetera. But if you look at our 4-quarter rolling number, et cetera, we are significantly ahead of the double-digit.

And Percy, I would say that our strategy that we announced a year ago is exactly about this. This is exactly what's changing. We are breaking our growth on luxury and strengthening our presence in upper prestige and reshaping our value proposition in mid-prestige and lower prestige. And all the renovation, innovation work that I called out a couple of times, all that has happened to strengthen our participation in these segments, and it is giving a sequential gain when we are rolling this out. And you know that innovations and renovations in our industry takes time because of the registration, legal registration state-by-state, et cetera. So we have confidence that these are working and that we will be able to scale them up in this year.

Sure. I was also a little surprised on your volume guidance of about 3% to 4% in the medium term, 3% to 4%. And this is -- now we are going to be only a P&A company. So this would imply that the overall sort of industry volume growth, which includes the regular segment, which we will not participate would be even lower than this 3%, 4%. So then are you saying that basically, the spirits business, which is likely to grow even below overall FMCG industry in volume terms, that doesn't seem intuitively right.

Yes. So Percy, I think what I did respond to is on our as of the portfolio, which is -- which has a huge negative on account of Popular, right? Now once our post the Atlas -- sorry, post the divestiture, right, our portfolio will become 85% weighted towards P&A. Obviously, the mix is going to change a little, right? So we will be -- as Hina and I have mentioned in the last quarter, we want a little bit of peace time to revert before we come and discuss what our go-forward guidance will be. Right now in this extremely volatile conditions, we don't want to discuss the guidance, right? But we'll be happy to discuss that once a little more stability is back.

Sure. And my last question is on the margins. You have done 12.5% this quarter even adjusted for these one-offs in the scotch portfolio and the extra employee cost, et cetera, you would be close to a 13.5% or maximum 14% versus the last 3 quarter average of 17%. So -- and now this is very clear that it's because of higher input costs. And you also mentioned that this double-digit import cost inflation will last for a few quarters more. So in this kind of a scenario, the adjusted margin of 13.5% to 14% that we are seeing right now, is there any reason that in the next 2 to 3 quarters, the margin will improve from that level? And if so, what would be the drivers for it to improve for the -- above the 14% mark?

Yes. So Percy, let me take the first part of your question. So I mean we've already stated in our press release. Our underlying margin adjusted for the onetime employee grant is about 13.8%. Hina has already spoken about the range of the revenue loss that we have had, right? So that broadly would be another 70 to 80 bps probably, right? So that's broadly where we are right now. 2 things. I mean, all I can say is, yes, inflationary trends will continue. So therefore, margins will be under pressure in the next -- in the current quarter as well as the next quarter also, it will be under pressure. And we continue to -- I mean, some of the stronger actions that we have taken on the pricing front, which we are talking about, right? And we continue to advocate and we continue to build and expand our productivity pipeline, right, which is -- which are the things under our influence. And last but not the least, the big one that we are banking on, Percy, is mix, right? What is reassuring is that our renovations and innovations that we kind of ruled out in the last year are beginning to pick up momentum in the markets. We are seeing sequential gains. And if we can continue that momentum, I think mix will be a big, big driver of our, call it inflation mitigation or call it our margin holding strategy over the next 2 to 3 quarters. And if Hina, wants to add.

No. I mean, the thing is that we are hopeful that we will get pricing as we go along, yes.

Absolutely, right? And then the last thing, which is that Q4 -- I mean the April-June quarter is our lowest sales quarter, so we'll get operating leverage also, right? We will be upwards of INR 2,500 crores, hopefully, in the next 3 quarters.

So what kind of pricing should we sort of pencil into our model over the next 4 to 6 quarters in total?

Percy, that's very difficult for me to say. I mean, I -- honestly, if you ask me, and I've been in a free pricing category, right, I'm seeing enough CPG reports, et cetera, inflation becomes an opportunity to enhance margin actually, right? Because you price ahead of inflation and when inflation unwinds a little, you don't obviously price back. Right? So that's a difficult one for me to say in this category, right? Our desire will be that in a normal ongoing business, we should get at least 2/3 from pricing, but this category is very different, right? So all I can say is that Hina and my aspiration, the kind of efforts we are making is, we are trying to beat what we have achieved in the last 5 years, right? And if we can achieve that, then we would want to build from there onwards.

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

I just had -- wanted to just speak on the last -- first on the pricing. Have you received any hikes in this repricing actions in this quarter or any company UP, HR state?

Yes. We will see pricing -- fresh pricing from UP and Haryana in the quarter gone by. And prior to that, we've had pricing from several other states. So we had some states like MP, Rajasthan, Punjab. So yes, the answer is, yes, we have received pricing and we have received fresh pricing from UP, HR, Haryana.

And any rough quantum of what kind of ranges are these in? Is this like to offset in that particular geography, the inflation, double-digit inflation to some extent? And how typically [indiscernible].

Some extent, yes, Avi, right. But clearly, I mean, the inflation is double digit, the percent is much lower, right? So like I said earlier, we are really counting on mix. I mean, obviously, we are not leaving any stone unturned, right on pricing. But we would want to dial up the mix factor, which is our interventions of Signature, Royal Challenge, American Pride and the renovation of Royal Challenge.

Okay. Perfect. And just lastly on the input inflation or input cost environment. You had earlier highlighted that E&E transient is what you felt. But in this comment, at least to start now asking that some of it is structural, some of it is transit. Could you clarify what did you mean by that? And is it fair to extend what you said to argue that 1Q is probably the bottom on the gross margin because mix will steadily improve more or less inflation behind us. Is that the right way to look at things or no?

Probably inflation is certainly not behind us. Like, I mean, we would want to be candid on that. We do expect this double-digit inflation, right, to continue at least for the next 2 quarters, right, which is July, September and October, December. And once we start lapping, probably the inflation versus prior year will reduce. So inflation will continue, right? What we meant by part of it is we believe that some part of the inflation is also on account of the geopolitical factors, let's say, what's happening in Ukraine, big player in green, et cetera. So that's impacting the sentiments, et cetera. So some part of that would hopefully unwind, right? And some part of it is probably more longer term, right? Whatever the Indian government is doing on account of the atonal blending, et cetera, will probably is more. So that's what we meant, right? That it's a combination of 2. We will have to wait for the next at least 4 to 6 months to see how much of it is -- how much of it unwinds after that and how much of it is reason to be.

The next question is from the line of Bhakti Thacker from Investec.

This is Harit here from Investec. So I just have 2 questions. Firstly, on the pricing side. So, Hina, I think in the quarter 4 call, you mentioned that you're hopeful of getting a [ 52% ] kind of weighted average price hike. I just wanted to know what's your confidence level on that? Is there a probably an increased outlook given the multiple states that I'm giving you pricing or you kind of still hold to that broad range?

So I would just say that our pipeline of initiatives and the advocacy efforts are all to try and get that done, right? And our pipeline is actually a little bit bigger than that, right? But I mean, basically, we are pushing for this. And we are hopeful that in the quarter, we will be able to get bio pricing, et cetera, realized and come close to that aspiration. So I mean, there's no guarantee in this one, right, because it's not in our sphere of direct control. But yes, I think there are enough and more conversations happening to try and get there.

Yes. And also, Harit, if you look at -- again, if I look at the last 6 to 8 months, there are 9, 10 states which have given us pricing. So that's reassuring, right? That's reassuring, right? But what I do also want to say is that there was a little bit of a negative carry forward also, right? When the bio prices got adjusted last year in Maharashtra, et cetera, the industry, I mean, the regulator did kind of also made the industry participate in the reduction of the consumer price, right? So there is a little bit of negative carry forward also that we are carrying into the P&L in F '23, right? And that's why it makes it a little more challenging. But I think what is reassuring for us is that we are seeing a lot of fresh pricing coming from the state.

Okay. And my second question is on the rollout for some of the initiatives that you've taken. Can you give a sense on where -- you didn't mention the multiple states to already rolled out some of the initiatives. Could you give us also how long will it take for national rollout for some of these going forward over the next 2, 3, quarters?

So maybe, yes, even the [indiscernible] Royal Challenge, American Pride, Hina, is in 5 states right now.

Almost 7 states now. So another quarter or 2, will be...

Another 4 to 5 months, I think we should have -- we should reach it at 75% of NSV trading, right? Signature rollout is pretty much national. Godawan is early. And anyway, that's a category that will take a little bit of time, right? It's a very, very high-end premium category. We are launched in 2 states and the UAE, et cetera. So that will be anywhere. That is a much longer gestation period.

And just a follow-up on this given that it's a fairly a volatile environment. Is the focus on the current year to kind of see soon some of the things that were done in the second half of last year and probably new initiatives could only come post. Is that better way to think about it? Or am I getting wrong?

Our first priority is definitely to start building up and scaling up what we've rolled out in the second half of last year, and that will be first priority. So that doesn't stop us from looking at new innovation and renovation initiatives. But it would be fair to assume that in the first 5, 6 months, we will be focusing on leveraging what we've done, right, from the previous year.

The next question is from the line of Krishnan Sambamoorthy from Motilal Oswal Institutional Equities.

In the last couple of years, you would have seen some benefit coming from duty paid sales rather than duty free sales which get booked as a part of Diageo. How significant was that? And would that be a bit of a barrier particularly in FY '23 over the, let's say for FY '21, '22?

So actually, we find that there's been sort of a fundamental change in this Covid period where basically, the duty free sale because of the pricing of RBI coming down due to state positive development on the sort of route-to-market changes that have come in Delhi, Maharashtra et cetera. The prices have kind of reasoned out, right? So we don't see any fundamental shift back to Q3 And any sort of incremental cannibalization of domestic sales because of that so far. I mean we basically activate in our stores as fantastically as duty free stores activate in theirs. So at this point in time, we don't see a significant shift taking away sales from the domestic market.

This is to even as people have started traveling internationally and therefore -- so therefore, that's even where you've not seen any evidence of that slowing down.

Absolutely.

And Krishnan, there would be some impact without doubt, right? But the reality is, I think the larger point Hina is making is, I don't think it will be material enough to change our aspiration from what we do in the domestic market. I think the lines are completely blurred, driven by the combination of reduced price arbitrage between duty-free and duty pay, right, obviously, driven by the reduction of taxes locally and the fact that all the industry players are doing a phenomenally good job of activating what we call the modern off-trade, right? Let's say, the top 2,500, 3,000 stores out of that 65,000 base, et cetera, which is -- I mean, the shopping experiences have delighted them.

Sure. My next question is on the -- Hina, you mentioned particularly on Godawan and Black & White. You have a blockchain-based packing system. Can you just elaborate a bit on that? How does that -- how exactly does that benefit you, particularly over the medium to longer term period?

Yes. So I think the track and trace system is particularly, I mean, as we stated our ambition on sustainability, right? We talked of sort of going Net Zero on Scope 1 and 2 by 2025 and going Net Zero on carbon footprint on Scope 3 by 2030. So basically, how it helps us is to track from green to end of life cycle, our carbon footprint, and we are getting more transparency of data. And we are building this database to be able to rigorously track as we take our carbon footprint reduction initiative. We're able to audit the data, measure it and then to report it very transparently, right? So the whole idea is across the value chain to have that visibility right from the time of forcing to making to the consumers, et cetera, and be able to keep ourselves for accountable and then reporting this transparency outside. So that's how the track and trace system helps us. And it's actually a first of a kind in the industry. And I would say that first of a kind perhaps even amongst broader CPG. And we are quite proud of the fact that we are taking this significant step to get to our goals.

The next question is from the line of Himanshu Shah from Dolat Capital.

A couple of questions. Can you just elaborate more on this cost issue. Basically, are we looking for renegotiation of prices with the government, local government because of the inflationary pressure? And therefore, we have reduced our supply? Or it has been more of an import issue of scotch because of this Russian and Ukraine?

The former, right? So we are asking for price increases from the government to in line with the inflation that's happening on scotch, and therefore, we have reduced supply.

Okay. So this has been more from our end, we have deliberately reduced the sales?

Yes, we just -- while we are doing the discussions with the government, we have had measured supply so that we can get the price increase in and get a more sustainable pricing and supply system established with the government.

Sure. Secondly, in our annual report, Pradeep, if you can help the rates and taxes cost line item has gone down from INR 150 crore run rate to INR 40 crores in FY '22. So what is driving this reduction? And is this permanent one or it shall come back in FY '23?

I mean you'll have to -- I maybe request Richa to get back to you. If you could just be in touch with Richa -- that's what -- and Richa will have to help you with that. I don't have a line-wise annual report account recorded in my mind, right? But we definitely answer that, right? There could be a change of the own manufacturing to the third-party manufacturing, which leads to a change in the accounting lines of capture. That's the only calculated kind of response that I can place, but please be in touch with Richa. She will provide a very comprehensive response to that.

Sure. No issues. And just a couple of more questions. Can you help me with the share of volume of BII and BIO in FY '22? What will be the volume share of BII and BIO of our total volumes?

It's about 50-50, broadly.

So I'm asking for BII plus BIO put together as a percentage of total volumes of ours.

Volume, well, I have the value mix blocked in my mind. It's about 20%. BII plus BIO total, it's about 23%, 23%, right? Volume will be significantly lesser because of the per unit value business. I would probably -- I'm taking a completely rough guess. Again, Richa could help you with that. I'm assuming volume would be about 8% to 10% probably.

Okay. And just one more. If the Diageo volumes grew at a much faster pace than the overall company average, will that pull down our margin? Can you confirm on that because of the distribution arrangement that we have with Diageo Plc?

Yes. So again, I think I would want to respond it the other way, right? Yes. First of all, mathematically, if you say that Diageo will continue to gain salience, right, it will mathematically reduce our margins, right? Because we make a 10% EBITDA, right? But the 10% EBITDA is after a very, very healthy A&P spend. And after a full absorption of all the overhead -- entire overhead structure that we have put in place to kind of execute our Diageo business, right? So that is one. I just want to provide that assurance to you. The second thing I will say is that all the renovation interventions that Hina has talked about for the last 2, 3 quarters, this significantly uplifts the USL mix advantage, right? So if you see the kind of interventions we have made in upper Prestige, right? And then with Prestige and the Godawan the world and the investments that we have made in the spirits of the world, et cetera, they are all geared towards premiumizing the standalone USL portfolio also, right? So therefore, our role as the USL management is to unfold, right? We have to work on our Diageo Global brands also. That obviously is a huge premiumization opportunity. And simultaneously we're also ensuring that we are building the USL portfolio also towards the premiumization. So we'll have to balance these multiple parts, right? And that's why our guidance remains in the longer term, the mid- to high teens, right? And yes, we should be able to balance all that with these competing process.

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

My first question was on the renovation and innovation. So this time around, are there any different initiatives that are being considered from a sales incentive or a distribution side, specifically with the on-trade channel, especially now that on-trade is coming back after sort of a distressed period. Do you see that as an opportunity to outspend vis-a-vis competition in that channel? That's my first question.

I mean on-trade is back and therefore, our spend is now back in terms of the split of spend on trade activation and off-trade, right? So during COVID, it was only off-trade. So all our activations have been done in the off-trade. Now that on-trade is back, I mean traditionally, our split of on-trade and off-trade is about 30-70, right? So 30 on-trade and 70 off-trade, and we are back with the bank activating with on-trade in that split of spend. And we have taken the opportunity as on-trade has opened up. I mean I talked a few -- a couple of quarters ago about Johnnie Walker, Revive the Night, which was a very, very big initiative on Johnnie Walker in the on-trade, welcoming people back and celebrating the after hours, right? And Black & White has a table for all sharing and food bearing activation that we do. So certainly, I mean, as on-trade has opened, we have taken that opportunity and we are back very strong on the activation of on-trade.

Yes. So my question was, do you believe this is your internal data point that you could be outspending competition or it's broadly in line with your shares, et cetera?

We don't track that, right? I mean, honestly, we don't track a channel by channel spending of competition, et cetera. We have a commercial calendar, right, that we created at the beginning of the year, and we try and stick to our commercial calendar.

And we do what is right for the brand actually, right for the brand activations and the consumer. So we take a consumer-backed length of what makes sense and spend, and we think we are well spent in the on-trade.

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

A couple of questions. First, Hina, you spoke about in earlier calls that vodka and white spirit will be our focus area in the coming years. So any update on the same?

So, I mean, on gin, we have -- we see white as a full category, right? So we don't see it separately. And while on the white, we have been activating our 2 brands, Tanqueray and Gordon's, which have been growing very, very healthily, strong double-digit growth there. And then our investments in Nao Spirits, which is working well. I mean, Nao has done extremely well in the quarter gone by. I think they've tripled their volumes vis-a-vis the same period last year. So our activations remain very strong in white. And Smirnoff, we launched our vodka brand. We launched the hip pocket scotch -- pocket scotch format, the same Hipster format. We launched in Smirnoff, which is doing very well. So we remain committed to strong activations in these categories, and we continue to see growth in these categories.

Sure. And so the second question pertains to the overall guidance that we have given. Now you spoke about that you need some stable environment for us to actually follow up on that guidance. Now stability has been in use in global economy and local economy for a while now. And looking at geopolitical scenario, nothing concern that situation will go back to stability and in coming years also. So keeping that as a backdrop, our double-digit guidance, is the current quarter just an aberration? Or you believe that many more things need to fall in place at the macro level for us to follow up on that guidance?

So I would say that, I mean, we have factored the macro instability and volatility in our plans, and we are still committed to the double-digit growth guidance, and we are fundamentally working on the strategic pillars, which we think are validated and are working for our business. So we will continue to invest behind it and continue to drive to that aspiration and ambition. Now look, I can't predict the future. I mean if something goes absolutely wrong in the macroeconomic environment, and we never imagine the war, right? Nobody could have imagined the war scenario after so many years. Now something again happens like that, we will have to review it. But at the moment, I think we are still committed to that guidance.

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

I had 2 questions. If I look at the last few years, 5, 6 years, around 38% of our raw material costs have been packaging related costs. As we move towards more premiumization, how will these packaging costs shape up? And also, if you could give some color, the current gross margin fall of 370 bps, how much of it is packaging related? How much of it is crude-based derivatives or some color on that? That would be helpful.

Yes. Okay. I don't know whether I'll answer your question completely or not, right? Broadly, if you look at our COGS or our material costs, right? Glass is the big one that gets counted as packaging costs, right? And the methyl alcohol spirit is counted as the raw material, right? So between these 2 materials, 65% to 70% of our comps is covered, right? And the rest is largely kind of which is -- which will be the crude-based derivatives, right, which is the PET, the carton, the paper, et cetera, et cetera, right? So that's broadly what the landscape of our COGS portfolio, right? And to answer the latter part of your question, both the critical commodities, which is the methyl alcohol spirit as well as glass is inflating close to double digit, more than double digit right now. So that is what has led to the gross margin dilution.

But I would make a slightly separate point, I mean, as we premiumize our portfolio -- I think I would say as we premiumize our portfolio and work towards more sustainability, right, I think we are going to look at what we can do on packaging, not just from the cost point of view, but from the ultimate format point of view. You may be aware, we've already announced that on our premium portfolio, we're going to remove the outer cartons in a phased manner over the next year. And this is primarily on account of sustainability, but it helps us on cost as well, right? Similarly, on glass, we have been working on lightweighting glass because of the carbon footprint that glass contributes to. So we are looking at timelining initiatives, market bottle use, so -- where it makes sense, right? So we would probably see lightweighting of packaging for sustainability and therefore, some benefits on cost as we go forward.

Sure, sure. That is helpful. And lastly, Pradeep, on interest cost, it's a non-debt expense. What is that? Can you explain that in the P&L?

Principally, India requires leased assets and the lease rentals that we pay to be accounted for as interest. So that's the larger component of it. And then there are some old litigations, et cetera, on which we have to accrue interest, right, so which we are accruing on a quarter-on-quarter basis. So that also comes and fits in this side.

The next question is from the line of [ Chinmay Gandre ] from Reliance Nippon Life Insurance.

I just wanted to understand your comment on -- I mean, you did mention that ex of A.P. maybe -- I mean the sales pre-COVID on a 3-year basis with respect to Prestige has grown 7.5%. But my understanding was, so it is to contribute maybe 4% to 5% in terms of our volume mix in Prestige. So if I give that adjustment also, I mean, the [indiscernible] increased more than 5%. So I just wanted to get this thing sorted.

We haven't done the numbers for accurately, right? I mean if I -- broadly, if we say that if we lower on the BIO fuel impact that Hina mentioned and Andhra, we will be upward of 5%, right? That we are very, very sure of, right? Yes, it could be off a little bit here and there.

Sure. And secondly, so I mean, just on the raw materials, I mean, we did see some kind of a softening of crudes from the high levels to maybe near 100-ish now. So any of our raw materials, are we seeing some kind of relief or -- especially with respect to your discussions with glass. Can you throw some light on this?

So I mean there is a -- typically, there is about a 2- to 3-month lag. I think the reassuring part is crude has come down much below 100 recently. So hopefully, yes, even though it's a small part of our portfolio, but it should hopefully provide us the release over the next 2, 3 months, right? But I think what is very, very critical for us is the neutral alcohol spirit and the glass. Right now, both of them are kind of on a boil.

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

I just have extension to the comments that you made on margins and another one on revenue. So just to start with margins because we just talked about it. Could you give us some sense on both ENA and glass inflation? Is it worsening as you exited the quarter? And clearly, we will see price and mix impact to increase sequentially. So -- and so does it -- is it fair to say that glass margins bottomed out in Q1 for you?

Yes. So Latika, like I said, right now, both the commodities are on a boil, right? We are not seeing any respite. We are not seeing any respite. So as Hina mentioned in her opening comments also, we do expect inflation to continue, right? And therefore, the next 2 quarters are very, very critical. But yes, we do expect the inflation to continue. But having said that, what -- as kind of months past, the negative carryforward of the pricing that I mentioned to, et cetera, will wear down and our fresh pricing will kind of stand -- start contributing to the P&L, one. And the second thing that will happen is that the sequential momentum that I talked about and -- that Hina talked about on the innovation, the renovation of the portfolio, that would also start contributing in higher sales.

Sorry, Latika, just to add to that, I think also the productivity, I've mentioned that we are going for 2x to 5x the productivity of a usual year. We also see some spilling of initiatives as we go through the year, right? So we see the minds of all these 2, 3 things helping us on the gross margin.

Very clear. The second one was on demand. And I know you talked about various parts disruption, supply disruption we've talked about Andhra Pradesh. But I wanted to get a broader flavor on -- in your assessment, how has the consumer behavior towards predict consumption and it's the broader inflationary pressures on consumer wallet? Are you sensing that the lower prestige is facing some kind of demand concerns? And another aspect I wanted to check with you was that during the whole pandemic period stay at home, it seemed that spirits consumption definitely benefited, right, probably say versus beer. Now with the whole reopening thing, do you sense there is some bit of a pull back on off-trade, even though on-trade has normalized? Any broad thoughts here?

Yes. So I mean on the broader demand question, I think -- look, I mean, let's see the top end and the premium end, we are seeing absolutely no stoppage, right? So we are still seeing very strong demand at the top end and the upper end of the portfolio, right? So there is no demand gap there, I would say, no slowdown. And that's to be expected, I guess. At the lower end, Latika, it's very difficult for me to say because I mean, if I look at the pre-COVID and the post-COVID, and as I look at the 2-year period, actually, the market was just about leveled off in terms of where we were pre-COVID levels, if I look at the industry as a whole. Now how this will grow as we go forward is very difficult to tell right now. I do not have a friend to tell me that. All I can say is that, yes, on Popular and the lower end, we do see a little bit of slowdown. We do see a little bit of slowdown. Again, I expect that, that would be the case, right? So how much of a slowdown is very difficult for me to say. But we don't have enough data -- consistent data without the funding effects of the basis of previous years to be able to say that I'm actually seeing a big slowdown or a smaller slowdown. So this is an area of watch for us.

I think we should -- yes, we should pretty much wrap up the call now. It's already past 6:30.

Sure. Ladies and gentlemen, that was the last question for today. Please reach out to IR Head, Richa, for any other queries. I now hand the conference over to Ms. Hina Nagarajan for closing comments.

Thank you. I think I would just like to say, again, thank you very much for continuing to engage with us and discussing our business and your commitments to our business. And I do want to leave by saying that we remain confident in the resilience of our business and industry in the -- despite the short-term challenges. And we are committed to delivering long-term value to our stakeholders. And we are pressing on with our strategy. So thanks again for joining us, and I look forward to meeting again next quarter. Thank you. Bye-bye.

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