United Spirits Limited (UNITDSPR) Earnings Call Transcript & Summary

Ladies and gentlemen, good day, and welcome to the United Spirits Limited Quarter 4 Earnings Conference Call. [Operator Instructions] Please note that this conference is being recorded. I now hand the conference over to Ms. Shweta Arora, Head of Investor Relations from United Spirits Limited. Thank you, and over to you, ma'am.

Thanks, Simon. Good afternoon, everyone, and welcome to United Spirits' Quarter 4 and Full Year Ended FY '23 Earnings Call. Today on the call, we have with us our Managing Director and CEO, Ms. Hina Nagarajan, who is joined by our CFO and Executive Director, Mr. Pradeep Jain. Hina will provide you with an update on business performance, while Pradeep will run you through financial performance during the period, post which we will open the call for Q&A. With this, I hand over the call to Hina for her opening remarks. Over to you, Hina.

Thank you, Shweta. Good afternoon all, and welcome to our call. It's a real privilege to speak with you again and provide a comprehensive update on our operations, financial performance and growth prospects. This is the second full year since we launched our new strategy. Our team has been working tirelessly to deliver on our strategic objectives. We are really excited to share updates of our recent performance and ongoing initiatives with you. And as Shweta mentioned, I will cover progress on the 3 pillars [ of the strategy ], and Pradeep will provide a deeper analysis on our growth and financial performance [indiscernible] and our Prestige performance better, and you will find this reflected in the presentation. After the presentation, we will open up for Q&A to go deeper into areas you want to understand further. So jumping straight into [indiscernible] itself, so our mission is to become...

Sorry, ma'am, there is a break in the audio.

Can you hear me clearly now?

Yes. Please proceed, ma'am.

Okay. So everybody, our mission is to be top-performing CPG company in India, delivering sustained double-digit profitable top line growth, staying through to our margin guidance of mid to high teens and delivering long-term value to all our stakeholders. Next chart, please. As mentioned earlier during the call, I will walk you through the business update for the year, post which PJ will run you through the financial highlights of the year ended [ March 31, ] 2023. And finally, I will talk about how we see the future. Business update. Next chart, please. [ We continue to ] deliver a mission that we now know is built on 3 pillars: a reshape of our portfolio; creating an organization of the future that will win in the future that is getting radically redefined by big societal and cultural shift; and last but not the least, defining and executing an even more ambitious role for Diageo and society. Jumping to the first pillar, let's talk about portfolio reshape. Our portfolio reshape had called out a number of transformative consumer trends that decided what we should do for our business and portfolio. And the mandate we had set were to deliver breakout growth on Prestige & Above, create new growth engines and last but not the least, value chain efficiency extraction to fund growth and mitigate inflation. Our portfolio activations and new product offerings during the year were fully aligned with this strategy, and let me walk you through some details. Firstly, strengthening our play in upper prestige with our 3 brands: Signature, Antiquity and Royal Challenge American Pride. Royal Challenge American Pride is available now in 75% plus salient Upper Prestige market. It's the fastest-growing brand and adding absolute incremental market share gains for Diageo India quarter-on-quarter. It is recruiting consumers beyond Upper Prestige segment and delivering exceptionally well across all key consumer metrics. We've received excellent feedback on the liquid. The top box liking is 79%. That's quite high compared to any benchmark, and we are getting very strong repeats from consumers who have tried it. Secondly, Signature. [ Signature ] is to become the greenest whiskey for [indiscernible] aspiring young India. Last year, Signature had the highest growth delivered in the past 5 years and momentum well ahead of the category. It has the second highest equity amongst Prestige brands. Signature has associated itself with some of the most eco-friendly sustainable festivals in the country like the Ziro Festival of Music, Hills Festival, Spoken Festival, our own Signature-owned festival of music called the Signature Green Vibes with 4 city additions across India, and we've seen a lot of consumer love for that. And in an effort to sort of serve diverse consumer needs, we are expanding our various footprints. So Signature Rare has been launched in the East. And actually, Signature Premier has now [indiscernible] in CSD, which is a big milestone. So we are closing the year on a high note on Signature and excited to kick off the next year with bold and ambitious acts. On Antiquity, we are really proud to present to you the reimagined contemporary Antiquity Blue. You can see on the picture on the chart a [ blue bottle ] and what the new bottle looks like with that beautiful bird. It is currently launched across West Bengal, Assam and UP, and we are looking at the national rollout completion by July '24. If I can now stop and let's see a video on Signature. [Presentation]

Coming now to the next category, our Mid Prestige and Royal Challenge brands. What you see on the screen is the new Royal Challenge bundle, which has been -- which is now available in 85%-plus salient markets nationally. The brand has experienced a national volume growth in very, very high double digits. Pradeep will talk a bit more about this. Actually, this brand has grown by 40% plus. And the new brand positioning was brought to life through the strong Naya Sher, which is sung by DIVINE, Jonita Gandhi, it featured Virat Kohli. It has over 45 million views on YouTube and is available across all leading audio streaming platforms. Can we have the [ tape ], please? [Presentation]

Coming next to [indiscernible] and our flagship brand, McDowell's. As I had mentioned last quarter, there is inflation pressure in this category. We have definitely seen that the level of upgrade from Popular is slower than previous years, a direct impact of inflation on the consumer. But number one, McDowell's continues to grow ahead of the category for 3 years in a row. It has owned key calendar moments to impact the brand and culture. This year, we started [indiscernible] with 6 IPL teams as the official celebration [ partner ] to create a new language to express Yaari under the No. 1 Yaari [ Jam Fest ] 2022. During Friendship Day, McDowell's created the anthem of the Yaari song, Yaaron, as a tribute to KK. The 360-degree campaign reached 65 million people across key states. No. 1 Yaari Jam has given a further powerful musical voice to our brand purpose. Yaari Jam came back [ out ] post-COVID. It's basically a congregation, a celebration of music where consumers are looking for a real reason to connect. There were 9 big festivals across 5 states with a reach of 150 million plus across multiple media channels. Can we please have the Yaari video? [Presentation]

So after the exciting performance update on Prestige & Above, let me now [ move ] to our Luxury and Premium portfolio. Johnnie Walker, this year, we brought a brand-new offering from the house of Johnnie Walker called Johnnie Walker Blonde. It is our biggest ever innovation launch in the premium portfolio. It's now available in Maharashtra, Goa, [ the HP ], Uttarakhand, Punjab, Chandigarh and Telangana. Blonde is actually positioned between Johnnie Walker Red and Johnnie Walker Black and plays the strategic role of recruiting the next-generation, non-scotch consumer because of a really accessible liquid. The focus in coming quarters will be to enter other geographies and continue to scale up the distribution and visibility in our launched markets. [ Let's play ] the video on Johnnie Walker. [Presentation]

What you saw just now [ is an ] anthem, which [ no ] other than John Legend has sung with Raja Kumari, a very, very popular rapper. I will talk a little bit more about this in the next chart. But coming now to Black & White. In the financial year '22-'23, Black & White growth story has continued. India is now the [ largest ] NSV market globally for Black & White, and this brand is set to cross 1 million cases this year. It is gaining share in all the BII scotch category and international whiskeys. We launched Table for Everyone, which is our big play in culture, integrated activation and communications platform. We brought diversity and inclusion at this table with our very first diversity, equity and inclusion campaign called [ Cards ] for Sharing with Black & White. The hipster format for Black & White is also driving distribution, share and profitability for the brand. Let's look at the video on Black & White. [Presentation]

Coming now to the powerful USL brand, Black Dog. Black Dog is continuing its growth journey for its renovation. We've seen significant improvements in our business and brand metrics on the brand. The brand now leads the scotch category with the highest brand equity, driven by strong meaningfulness and distinctivity. Our collaboration with global icon, Keira Knightley, saw an impactful activation throughout the year across digital and out-of-home along with the launch of Keira Knightley limited-edition offer [indiscernible] credentials and [ provenance ]. Let's see the video on Black Dog. [Presentation]

Coming now to what I talked about, which is, next chart right, please, the Walkers & Co. platform. To celebrate and enable a community of bold [indiscernible], we keep walking at the heart of all we do. Our vision is to inspire collaborators to take bold strides towards collective progress. We brought together 2 iconic creators who championed this narrative, John Legend, the second youngest and the first black man to win all the 4 big awards, Emmy, Grammy, Oscar and Tony; and renowned South Asian female songwriter and rapper, Raja Kumari. They cocreated this inspiring anthem titled Keep Walking. On the 4th and 5th of March, we hosted the first ever Walker India store at Mumbai and Gurgaon, an experiential concept of 4,000-plus core consumers across the spectrum of culture, art and entertainment to witness this collaboration come alive on stage while experiencing our brand Johnnie Walker in a very immersive format. Coming now next to Godawan, our exciting new launch in the Indian single-malt category. Godawan continues to be rolled out. It has, in fact, last week been launched in New York in the U.S. I'm very proud to say that Godawan [ won multiple ] awards during the year. It has won the Grand Gold and Gold awards at the Monde Selection world quality awards at Brussels; the Silver at World-Spirits Award Austria; Superior Taste Award at the International Taste Institute Brussels; Brand Innovator of the Year [indiscernible] for Alwar distillery at Icons of Whisky London. Also very pleased to say that our Alwar distillery where Godawan is made is the first spirits distillery in Asia to receive the prestigious Alliance for Water Stewardship certification. And we have tied up with SOURCE Global, a technology that helps us extract water from air. We are building a 200-panel water farm expected to generate 9,000 liters of water from air in the first 6 months. And Godawan will be the first beverage alcohol brand to use SOURCE water. I can't leave [ without talking ] a little bit about [ Nao Spirits ]. Nao Spirits has grown very strong double digit in the financial year gone by. Their innovation called Broken Bat, which was launched in [indiscernible], is quite exciting. It's an invite-only launch, was hosted along with the screening of the World Cup finals because this limited addition is dedicated to the 1992 Cricket World Cup. So super exciting. And Nao Spirits continues to power ahead with both their brands Greater Than and Hapusa. I can't skip the Women's Premier League acquisition as part of RCB. The 4 pillars behind this investment are women as a cohort becoming increasingly influential in India; our narrative on diversity and inclusion [indiscernible] in India cricket; and also creating another profitable business growth stream for the future. RCB is one of the most followed and loved T20 teams and is recognized as one of the most engaged sports teams on social media platforms. RCB has adopted the philosophy of play bold, which resonates both on and off the field. India tennis icon Sania Mirza has been appointed as the mentor of Royal Challengers Bangalore women's team in the Women's Premier League. The pioneer in Indian sports for women, a youth icon, someone who has played bold and broken barriers throughout her career and a real champion on and off the field, we are proud to welcome Sania Mirza as the mentor of the RCB women's cricket team. In addition to the Godawan award that I talked about, we had several other awards during the year for our brands. If you look at the left, multiple awards for our marketing initiatives for Johnnie Walker drone show, Signature augmented reality campaign, Johnnie Walker ReVibe brings consumers back to the on-trade after a long shutdown and also a design excellence award for Black Dog renovation. And to the right, more awards for our whiskey and scotch brands. So you see Black Dog featured very, very prominently there along with Johnnie Walker Blonde. So very pleased with all the awards and recognition for our innovations and renovation. Coming now to [ 1 of our ] 2 pillars. But before I go there, I just want to say our profitable growth is based on the virtuous cycle of driving top line growth through sustained A&P investments and driving improved price and mix and driving productivity to fund those A&P investments, which in turn drives top line growth and give us further ability to invest in our brands. So we think this is a very virtuous cycle. It's working for us, and we want to continue to sustain momentum behind this model. For the multiyear [ supply agility ], next chart, please, we're going to unlock numerous benefits across the value chain. A few of the many benefits include conversion cost [ optimization ], enhanced capacity utilization, optimized footprint by state, enhanced return on capital employed, ESG benefits and co-location with ENA distillation. This program is on track as per our plan. And the [indiscernible] going to flow down with it. As you know, it's a multiyear program. So over the next 3 years, we will make sure that we achieve and implement all the measures that we have taken under this program. All right, coming now to the second pillar of our [ vision ], organization of the future. I'm going to give a very brief narrative on this. We've done a lot during the year, right? But [indiscernible] a few things, right? We are continuing to focus on [indiscernible] and talent development, many coaching programs, career programs. One particular one that I'm super excited about is launching the Diageo Digital Now, which is partnered with Circus Street, to create a customized learning plan for each employee in the company to transform our digital capabilities in this very fast-changing environment of digital. [indiscernible] side, we continue to do many wellness sessions and also [ sessions ] which help new people who join our organization to learn more and more about our business. On the culture side, we launched market-leading policies. We launched pregnancy loss guidelines. For those who may unfortunately experienced pregnancy loss, we now provide expecting mothers up to 26 weeks and their partners 10 days of paid leave support in case of the unfortunate event of a pregnancy loss. Gender identity, sexual orientation and gender expression [indiscernible], which strengthen our commitment to LGBTQ+. Disability inclusion guidelines and [indiscernible] women's network and the rainbow network to reenergize our employee resource groups. On the simplification side, radical liberation, where we cut 150,000 hours of wasteful work last year, is in Phase 2. And we're being used to continue to liberate our teams to focus on growth. And of course, the other big area for us is footprint and legal entity optimization. On the digital side, next chart, please, we continue to build thebar.com, which is our platform for all things social celebration, and continue to use technology across the length and breadth of our organization: Salesforce automation; blockchain-based track and trace; artificial intelligence for image recognition to help strengthen our market presence and reach; predictive analysis for sourcing; and also the Diageo Bar Academy, which is our portal for our customers and bartenders who learn a lot and get education through the year on various aspects of bartending. Coming now to the last pillar, [ Diageo in society ]. Since the acquisition, we've had a strong track record in sustainability, and we wanted to go much, much further. The 3 goals that we have built in our Society 2030: Spirit of Progress goals is driving ESG from grain to glass; moving India towards drink better, not more; and leading inclusion and diversity. I will give you a few highlights of these during the year. On Learning for Life, which is our program for giving people business and hospitality skills, we have enrolled 1,400 students against a target of 1,100, 59% women have completed the program and 868 placed with an average salary of INR 12,000 per month. On the water stewardship side, we continue to replenish -- our target is to replenish more water than we consume by 2024. We have launched collective actions in Maharashtra and Rajasthan. And we are targeting to replenish 225,000 cubic meters of water this year. Our water use efficiency metrics are well on track as per the targets of this year. Our carbon footprint, we continue to drive down greenhouse gas emission, and it has reduced from 27,000 tons to 2,800 tons, an 80% reduction over the F '20 emissions. And we are sustaining 0 fossil fuel use across our distilleries. On the positive drinking side, next chart, please. All right, just stay with this. On the [ positive ] drinking side, we have educated 104,000 young people [indiscernible] consumption as against a target of 70,000. We created awareness amongst 172,000 consumers on the risks of drink driving against a target of 110,000. We've developed partnership with 25 regional transport offices across India to make drink drive a module before licenses are issued. And we continue to spread the message of moderation. Next chart, please. On the inclusion and diversity side -- can we go to the next slide, please? Yes. On the inclusion and diversity side, 50% of our India Executive Committee remain women. 35% of our [ leadership team is ] women. [ Overall ], our company has 26% female employee representation now, which is a 2% increase from the last year. 50% of our new hires during this period have been women. We've also hired 60 workers and full-time employees who are differently-abled working across [indiscernible]. I'm very proud to share that Diageo India was recognized as a Silver Employer by Pride Circle on their India Workplace Equality Index. This index really measures the level of inclusion and diversity in Indian workplaces. And we are very proud to see the recognition for our ongoing initiatives on being a progressive company. One very [indiscernible] for us is our Your Voice results, next chart, please. Overall employee engagement survey results we do every year [indiscernible] score, which is 2% above last year, and this is 4 points higher than Diageo overall and 14 points higher than any external benchmark. So it's a very strong result. We've improved all our engagement scores with 95% of our people saying they are proud to work for Diageo. [indiscernible] about the score, you see to the right on top, 85%, which is our psychological safety score where 85% of our employees say they are able to raise ideas, concerns and opinions without fear. This is 4 points higher than 2022 and 9 points higher than Diageo overall and really shows us that our initiatives to make people comfortable to express themselves is working. Our biggest opportunity area, like in adaptability and agility, is the 79% score that you see to the right. And radical liberation is one of the initiatives, amongst others, to -- for us to continue to make our company more agile, more adaptable and keep up with the fast-paced environment we are facing. Next chart, please. Just to share with you a couple of recognitions on ESG. So Sustainalytics has rated us as a top-rated ESG company in the list of 2023. And [ Alwar, as I spoke about ], is now AWS certified. We have progressed significantly on our ESG journey from now a BB rating to an A-rated organization, which I'm very pleased about, but good milestones to have achieved. Keep going, please. Next chart. With this, I will hand you over to Pradeep to take us through the financial performance.

Sorry, sir, before we just proceed, may I take a minute to reconnect Ms. Hina. There was some slight audio break in the line. I'll just quickly reconnect her and then you may proceed, sir.

I will wait for your prompt.

Yes, sir. Yes, sure. Mr. Jain, you may please proceed. We have Ms. Nagarajan reconnected.

Well, thank you. So thanks, Hina, and a very good afternoon to all of you. As always, it's a joy and a privilege to interact with this audience. Okay, go to the next chart. Yes, so what I wanted to share was, if you clearly look at our annual growth metrics, you see a ramped-up growth momentum. And I will cover this in a little more detail in the subsequent slides. Our margins have remained resilient in an extremely inflationary environment. We have improved our performance on the key levers of pricing, productivity and mix management. And to round off, right, there are 3 or 4 things that we are extremely proud of during 2022-'23: progressing the portfolio reshape in line with our strategy and vision; closing out the plant sale and the franchising transaction; launching the multiyear supply chain agility program; and at the end of March 31, 2023, we are almost on the verge of wiping out our accumulated losses, and therefore, looking forward to get back to dividend distribution for our esteemed shareholders in the coming financial year. Next chart, please. Okay, so what you see on the slide on the left hand is our reported NSV growth, less the strategically reviewed portfolio, we have removed it from the base, and the decision that we took of exiting Andhra Pradesh about 4 years ago, right? So those are the numbers that would be our reported NSV growth. And what we have done on the right-hand side is we've also eliminated the COVID impact, right, the COVID impact in the numbers. And therefore, what's present on the right-hand side is the right organic growth of the business like-to-like, right? And this gives a true picture of the accelerated momentum. We can focus on the 2 right-hand side charts that clearly reflect the momentum in our business. The Prestige & Above for 5 years, from '16 to '21, was at 8%. In '21-'22, it moved up toward 13%. And in '22-'23, it has given us 17% growth. And similarly, if you look at the overall portfolio, from '16 to '21, we are at 5%. In '22, we went to 9%. And in just concluded financial year, we are at 15%. Next chart, please. Okay, so this one is critical. This one is on an annual basis, and this plays to the feedback that we have received from this audience on multiple occasions that you do not have visibility to our growth construct in the Prestige & Above segment. And this lays out 2022, '23 financial years, the annual growth construct achieved during the years, right, on our rebased portfolio. It reflects the premiumization of the category and how we are feeding into it. And it also kind of substantiates the point that Hina and I have consistently made over the last 4 to 6 calls of sequential momentum in our Mid Prestige and Upper Prestige performance, and that will reflect, right? So let me just get you focused on the chart. On the left-hand side, you will see each of our subsegments of the Prestige & Above segment broken up individually and the growth that we have recorded in each of these subsegments during the financial year. As we have always said, the Popular and the Low Prestige segments are under pressure, driven by the huge consumer inflation impacting the lower SEC consumer, right? And from there onwards, if you look at our performance, Mid Prestige have grown 43% during the year, Upper Prestige has grown 32% during the year and Luxury and Premium has grown at 37% during the year, giving us a combined portfolio growth of 20% for the financial year '22-'23, right? If you focus on the right-hand side, right, I would request the audience to focus on the column in the middle of those 3 columns, that gives us that out of the INR 1,600 crores of growth that we have recorded in our rebased portfolio how much have each of these segments contributed, right? And therefore, we do want to share that almost 1/3 of our growth, actually a little higher than 1/3 of our growth, almost 35%, has come from the Upper Prestige and the Mid Prestige segments, where our innovation and renovations have been put in the market over the last 4 to 6 quarters and where we have been traditionally weak over the years, right? Next chart, please. So building further on what I shared on the first slide, right, I have already shared the growth construct and how Mid Prestige, Upper Prestige are improving their contribution into the growth construct. I think this chart now is focused on the value chain efficiency. Pricing and revenue growth management on the top right, enterprise productivity on the left and overall working capital efficiencies to extract free cash flow from the business in the bottom right. Hina spoke about the virtuous cycle, right, and our proven productivity muscle is a big enabler of the virtuous growth cycle. Next chart, please. Now Hina has already talked about A&P being such a critical component of the virtuous growth cycle. I mean I prefer to loosely refer to it as the only good cost in the P&L, right? So the point we wanted to make was that we will continue to make A&P investment to drive sustained profitable growth and build brands that are iconic. And looking at the chart, you will see that, that as we kind of step up A&P investments, it reflects in the NSV realization per case on the right. Next chart, please. So this is a directionally visual depiction of our portfolio on the 2 key financial metrics of EBITDA margins and return on invested capital. I think what we want to convey through this is not only is our portfolio complementary in terms of offerings and price ladder, but hugely complementary on these 2 financial metrics, which makes it almost an all-weather portfolio. Next chart, please. And to round it up, right, just wanted to finish with the return on capital employed. Now the number is showing a dip. As all of you are aware that we are sitting on surplus cash on our balance sheet right now. And hopefully, we shall address that as well in the current financial year. Just wanted to take the opportunity to reassure that we remain committed to create value for our esteemed stakeholders as we reset the portfolio for a sustainable and successful future. With this, I hand over back to Hina to conclude the management presentation for today, post which we will open up the floor for Q&A. Hina, back to you.

Thank you, Pradeep. Just looking ahead, we'd like to conclude by saying, look, the environment remains challenging. We are seeing continued inflation headwinds [indiscernible] lower end of Prestige. Both of us have reiterated that Popular and Lower Prestige is seeing the impact of inflation for our consumers. We see inflation on our key commodities is not abating yet, right? So we expect volatility to continue. Also seen during the year that [ the pace ] and quantum of route to market changes has been reasonably high. And every time that happens, business does get adapted to the route-to-market changes, and we have to look elsewhere for growth, but that is business as usual for us. And in our industry, headline pricing trails inflation. But we feel extremely confident that our strategy is working. We feel very buoyant about the future. Our future-backed strategy, that is focused on a buoyant macroeconomic outlook for India, lifestyle changes, premiumization, [ a million ] new consumers coming into alcohol and India becoming one of the most affluent [indiscernible] the next few years. We have a very resilient and complementary portfolio [ with offerings ] right across the price ladder, as PJ said, also on the financial metrics. Our [ proven ] productivity muscle, we have a strong sustainability agenda, something that's only going to be even more important as we go along and a license to operate actually. And we feel [indiscernible] in this. And last but not the least, our competitive advantage of our people and culture. So we feel very optimistic about the future. [ We feel confident ] about our strategy. And that strategy is working, and we will continue to perform. So with that, we would like to now move on to questions and answers.

Ladies and gentlemen, before we go ahead for the Q&A, since there is still a break in the audio line from Mr. Hina Nagarajan, we would like to reconnect in a different method. So we request all participants to please bear with us for another minute while we reconnect Hina Nagarajan. [Operator Instructions].

Ladies and gentlemen, thank you for patiently waiting. We have the line for the management reconnected. We will now begin the question-and-answer session. [Operator Instructions] The first question is from the line of Abneesh Roy from Nuvama Institutional Equities.

Congrats on very strong P&A growth. My first question is on P&A only, if you could give us some clarity on how Upper Prestige has done within this. And in FY '24, would you expect a good double-digit growth trend to continue here? Given Diageo is also back and big fat weddings and a lot of the office MICE events, travel, et cetera, is back, but on the other hand, when I see other discretionary segments like QSR, apparels, they are seeing challenging times in terms of demand. So I wanted to do a clarity on FY '24, how do you see in terms of growth trend?

Sure. Abneesh, good to see you on the call again. So I would say that, Abneesh, overall, the trend we are seeing is that the upper middle and the high-income consumers remain resilient. Consumption and demand remains resilient in those segments. And the category growths are pretty robust in Upper Prestige and Mid Prestige. So we do expect consumption demand to remain so going into FY '24 for the reasons that, a, socializing is back with a bang. All the bars, hotels, everything is full, right? We are seeing more and more new consumers come straight into the upper end of Prestige also. And also travel is revitalized. You're seeing a lot of tourist traffic. So our outlook for F '24 remains buoyant for the Prestige categories. And as Pradeep had shown, Upper Prestige has done a very robust 24% growth, and that is coming on the back of the renovation of Signature, the launch of Royal Challenge American Pride and now we are rolling out the renovated Antiquity. So we feel confident that our innovations, renovations will continue to fire in the market, and we will continue to see very good growth on this category.

My second question is on the cost side. So in terms of advertising spend, I understand this quarter was high because Diageo came to normalcy. But you also mentioned that ad spend is the only good cost in P&L. So I wanted to understand for FY '24, do you think it will be in the overall 8% to 9% as a percentage of sales? And specifically in first half, because Diageo is still coming back to normalcy, are there higher ad spends done? So in first half, would there be higher ad spend? Because last year, in fact, it was very low in the first half. So I wanted more sense on that.

I would say, Abneesh, and Pradeep feel free to add after I've spoken. I would say, Abneesh, I think, as we said, it's a good spend and we do want to create brands for the long term and continue to actually scale up both the Prestige renovation, innovations. And BIO, which is largely now normalized in the market, right? So we will look at a normalized spend of the range of about 9% to 10% on an annualized basis. And clearly, yes, you are right. I mean, normally, the first half tends to be a bit stronger because of season, right? Because we have the festive season, especially in Q2. So we do expect to do a business as usual in a normal year. What we would -- we do upweight A&P in the second quarter, particularly -- I mean, in the third quarter, which is the festive quarter. So I would say that I think you expect an annualized spend now of about 9% to 10%. Pradeep, please add if you want to add any other comments.

No. So nothing really major to add, Abneesh. Hina covered everything, 9% to 10%. And if you see this, that's by-and-large the earlier reinvestment rates grossed up for the divested portfolio, right? And I just clarified, which Hina has clarified in the latter part of the response. On the Indian fiscal year, our peak A&P typically happens from July to December, right? So as we build into the season, et cetera, right, this time was a bit of a blip, right? So therefore, hopefully, that will get corrected as we progress.

Sure. One follow-up on the cost was, what is the outlook on, say, glass and ENA? And we are seeing deflation in -- generally in most commodities. So you will also benefit because of the packaging cost and the distribution costs becoming lower. So apart from these and the Telangana price side, is there anything more which can help us in terms of EBITDA margin improvement in FY '24?

So let me take that, Hina, if you're okay. So Abneesh, again, it's a running set of initiatives, right? As you're aware, our mono carton removal program started sometime in Jan, Feb, so that will reach its full realization as we get into the financial year '23-'24, right? Similarly, our supply agility program will also start ramping up on improvement. Having said that, to your core question that have the commodities really scaled back, on neutral alcohol spirits, I'm afraid, probably no, right? And if you look at it, it's an election year approaching, the minimum support prices will see higher price increases. We are hearing El Nino, et cetera, the buffer commodities remain, the agri commodities, et cetera. So therefore, ENA, our sense is will probably remain inflationary. Glass, there has been some green shoots, right? The natural gas pricing intervention made by the government has provided some support. We are in discussion with suppliers if we can get some rollback on account of that.

So one last quick question on the talks with the regulators. We have seen Haryana, for example, allow -- corporate officers are allowing beer and wine at workplace. So I wanted to understand for spirits, how is the advocacy talks going on with government. I know these things take a lot of time. But is it that now beer and wine are getting a bit more flexibility from regulators? And could this be replicated in more states, you see that because then it will become a challenge for the Spirits business.

I mean our advocacy, Abneesh, continues. It's a regular ongoing initiative for us. It's not that we stop or start every now and then, right? I think there are many big areas of advocacy related to pricing, can we get sort of inflation-indexed pricing, route-to-market discussions, et cetera? I mean, Haryana has been relatively a more progressive state. So they've started with beer and wine. I mean we are in discussions with them to see whether we can get spirits included. I mean, as of now, we don't see that this will become something across states. Every state has its own policy. But we are watching and working through this space.

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

I just wanted first to understand the Telangana price change. If you could help us understand what is the expected benefit? And how should we look at that?

Yes. Let me take that, Avi. So Avi the price increase is effective, right? And it's about a 6% to 7% price increase, right? So it should give us, hopefully, about INR 40 crores to INR 50 crores annualized number, but the only thing I would want to caution is like, I don't think we should look at it as one state, right? There is always a portfolio, right? And we are always trying to balance our margins as well as our growth, right? So my only guidance will be don't look at it as one state and layer that on incrementally in your modeling. Multiple things happen, right, in the entire pricing cycle.

So Pradeep, even positive -- I'm sorry, this INR 40 crores to INR 50 crores is given, right? I mean, so it's logically...

Absolutely. Absolutely.

Okay. Okay. Okay. So in this context that you've got like a benefit that has come in, and hopefully, it continues in the other states. But you're kind of focusing on investments. There's also the input cost headwinds that you highlighted. How should we look at the full year margins for FY '24 when we take the ranges base of 13.5%? I mean how should we kind of -- how are you looking at it internally? And if you could help us understand within the quarters, just from a priority perspective, if you could give us some sense on how do you internally see this?

Yes. So Avi, I don't think I would want to get into quarter-wise, right? As we have shared multiple times earlier, we do manage our business on a full year basis. I think we did spend some time on this in the last quarter. If you look at the two broad one-off impacts, right? And we called it out very, very transparently in our financials, right? There is a one-off credit that we have in that 13.5%. And then there is this inflated A&P for the quarter, right? Neutralized for these two, I think right now, the business is sitting at about a 14% EBITDA margin, right? And as mentioned in the last quarter, our first milestone is to get to about 15%, right? So that is what we will target to achieve on financial year '23-'24 basis. Once we achieve that, we would want to move on from there, right, back to probably the 16.5%, 17% that we were operating at during the '19-'20 period. Does that help?

Sorry, it's 15% in FY '24 and not by end FY '24, just wanted to clarify that.

Yes, that will be our aspiration, right? Obviously, subject to many things happening. But yes, that will be our aspiration.

Okay. Perfect. And just lastly, this gross margin impact is because of a timing impact that is -- it was during the year only? Or was it I mean how much was the quantum that was just earlier -- prior year period that has come in, is that what you were signaling by the last clarification that you mentioned?

I didn't get the question, Avi.

So you said that there is a onetime gross margin benefit in the year, which means that this -- I thought the 4Q impact was just from during the year provisions. It's not. It's something that's from earlier year.

It's for the prior years also, right? So it's in the quarter. The quarter impact is -- we called it out in our press release as well as enough financials, that will give you a good sense.

No, no, perfect. And I just wanted to thank you for the additional disclosure on the portfolio. It's really, really helpful. Thanks a lot of this.

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

Thanks for showing this portfolio construct. It helps a lot. My first question was, if I look at this year's volume growth of 12% and Hina is commenting on the policy in terms of the group rate, especially in the Mid and Upper Prestige and onwards, and then when we try to reconcile that with our old transcripts where you guided for about 4% to 5% volume growth, I don't know, but there seems to be a disconnect. So is it more a function of SKU in terms of volume towards the lower Prestige, et cetera? Or do you want to revise that guidance of 4% to 5% volume growth?

Pradeep, do you want to take that?

Yes. So Alok, I mean we are sitting in different places today, right? So do pardon us for the lag, right? So if I get your question, your question is that we had deconstructed the broad 10% to 12% growth earlier and the volume growth has come much higher there -- much higher than that. And therefore, would we want to revise our guidance? Is that the question, Alok?

Yes, yes, absolutely. Because there's a lot happening, mid-Prestige is otherwise showing strong double-digit growth in terms of value terms. So I thought I'll just get a sense on that.

Right. So look, I said are we completely out of the volatile period? I would probably say no, right? The commodities remain on a boil. It's still a fairly inflationary environment, right? So therefore, I would not want to say. Probably, on the demand side, we are back to steady state. But on the cost side, we are still not, right? So therefore, we would want to wait a little more. But our aspiration will be to continue to deliver on the momentum that we have generated in the last 2 years, right? There is no reason why we would not want to deliver the growth that we have delivered in 2022, '23 and maybe a couple of quarters down the line, we should be able to talk about guidance as well. I don't know, Hina, whether you want to add to that.

Well, I would just say that, I mean, as we started rolling out our renovations, innovations, I mean, we do get that volume uplift, which is a little bit higher than our business-as-usual situation, right? So I can't say that's the norm. And absolutely, I think we are in a very volatile period. Route-to-market changes, we don't know what will happen during the year. So there are so many factors. So I don't think we can give you a guidance on volume. I mean we will stick to our guidance of double-digit top line growth in terms of value. And at the appropriate moment, we will review this guidance.

Sure, sure. My second question was for this quarter if we see within COGS, the purchase of finished goods has jumped, so this probably means that the sales of BIO beer, because it also resumed, has been quite good. So anything to call out over here or going ahead, we should expect this kind of bumped up run rate in that and would that have also lifted gross margin to some extent?

Yes. So let me take that. So look, our normalization started sometime in mid-November to late November, right? So when we say that this is full normalization, this is the first quarter of 90 days, which were fully normalized, right? And therefore, obviously, a little bit of pent-up demand for our brands, et cetera, leading to higher rotation also during the quarter, very difficult to quantify. We don't believe there is any pipeline-filling impact during this quarter, right? So I would say now it's pretty much normal and it will pretty much continue like that.

Okay. Got it. The last was a bit on the theoretical front, but I just wanted to get a sense if it's possible. Usually, when a renovation or innovation happens that typically leads to what percent of the volume in the first 18 months? Any sense that you can give in terms of percentage of overall volumes or something of that sort just to understand this piece of new launches and innovations a little better going ahead?

Sorry, I don't quite understand the question. What do you by percentage of volume?

Basically, what I'm saying -- trying to get is, for example, RC American Pride is something that we relaunched or launched this year and going ahead also, there will be new renovations, innovations. So that will initially help because gradually, you go pan-India. Of course, every brand will have a different saliency, but anything just to get a theoretical understanding what is the bump up that we can expect going ahead with the slew of launches that you are planning?

Yes, I think typically, for -- I mean, you can -- like let me give you an example. McDowell No.1 was we launched 3 years ago, and we're continuing to see market share, competitive performance, right, even after 3 years. So it's difficult for us to say that it will grow up to 1.5 years and not grow after that. It really depends on how the proposition is addressing consumer needs, right? And it can be a permanent growth phenomenon. I mean, as you see, even the regular brands in the market, some of them just grow consistently year after year, even though they don't have renovation. So I would say that it depends on the strength of the proposition and the connect with the consumer needs, and we are very -- actually, our products are performing really well against that, right? So the Signature renovation, the Royal Challenge American Pride they are really addressing untapped needs in the market. So I don't expect that the result will peter off in 18 months or whatever. We'll just see. But we expect this to remain powerful over the next couple of years.

The next question is from Harit Kapoor from Investec.

I just had some quick ones. One was on pricing growth. I mean, last year, you mentioned FY '23 that you'll be happy to get about 1.5%, 2% at an overall portfolio level, given that you're already 0.5% in the Telangana, I just wanted to make your sense about how you look at the pricing growth and what's your aspiration for that as to F '24?

So again, I will provide a slightly theoretical construct, right? I mean I've already shared the numbers in the document this time, right? So we are clocking about -- between a combination of headline pricing and our revenue growth management interventions, we're clocking close to INR 200 crores, right, in the financial year, which on a rebased NSV base of about, let's say, INR 8,100 crores, that comes to almost 2.5%, right? So clearly, it's one of the best years, one of the best years we have had. Now to your question, Harit, see, on a steady state, broadly, if you take an inflation of 4%, we have always tasked ourselves that we should try and neutralize 50% of that 4% inflation through management productivity, right? And the balance 2%, right, should ideally be neutralized through a combination of headline pricing, revenue growth management and your mix management interventions, right? So that's the broad construct that we try and aim for. Now in reality, it varies, right? I mean, on pricing, if you look at our 5-year trend that we've shared in the document, you will see that probably for the last 3 years, we hardly realized any pricing, right? And therefore, you have to press some of these levers a little extra, right? And despite all that, at times, you end up diluting margins that we have done over the last couple of years, right, in this extreme inflationary environment. Does that help?

Got it. Yes, yes. This is helpful. The second question was on the innovation and renovation plan. I mean you've done quite a few things over the last 12 months and specifically over the last, I would say, 3 to 4 months as well. I just wanted to get your sense about over the next, say, 6 to 12 months, is it going to be about making sure you execute some of these plans, which you've already put out in terms of the Royal Challenge blend or American Pride, the base Royal challenge as well as Antiquity Blue or we should expect more from United Spirits' table even in the next 12 months on renovation and innovation.

Harit, I always say we have an and-strategy, not an or-strategy. So I mean, clearly, the first priority is to scale up and build what we have launched as renovations and innovations because in our category, I mean, like Royal Challenge is a big renovation. So we are going to build the full muscle behind it, right? But that -- our innovation pipeline continues, and you will see more, right? So whether in the existing categories or we are watching momentum in newer categories and we will see, right? When the momentum is right, when the categories mature, we will bring in more. So it will be an ongoing sort of innovation launch plan. So the pipeline is developed and my team is working on that. And we will see more excitement as we go along.