United Spirits Limited (UNITDSPR) Earnings Call Transcript & Summary

Ladies and gentlemen, good day, and welcome to the United Spirits Limited First Quarter FY '24 Earnings Conference Call. [Operator Instructions] Please note that this conference is being recorded. I now hand the conference over to Mr. Shweta Arora, Head of Investor Relations, United Spirits Limited. Thank you, and over to you, ma'am.

Good evening, everyone, and welcome to United Spirits Limited First Quarter FY '24 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 start by providing an update on business performance during the quarter, while Pradeep will run you through the financial performance during the period, post which, we will open the floor for questions. With this, I hand over the call to Hina for her opening remarks. Over to you, Hina.

Thank you, Shweta. Good evening, ladies and gentlemen. Thank you for joining us on the Q1 FY '24 earnings call of United Spirits Limited. Before we begin today's call, I would request all of you to join the Diageo India team in observing a 1-minute silence to honor sir Ivan Menezes, who led Diageo Plc and played an instrumental role in its transformation since he took over. He was more than just a CEO. He was an inspiration and a mentor. He was a true believer of our purpose and led by example by celebrating life everyday everywhere. And we thank you all for your thoughts and messages during this period to the Diageo India family. We truly appreciate it.

We now request all participants on the call to observe 1-minute silence please. Thank you, and over to you, ma'am.

Thank you. Thanks to all of you. The last 45 days indeed have been very tough for all of us at Diageo around the globe as we mourned the loss of Ivan. Having said that, we have picked ourselves up exactly as Ivan would have expected us to. Before we talk business, I would like to draw your attention to our press release, where you would have observed that we have introduced our consolidated performance for the first time. This has been on our mind for a couple of reasons, and we have opted to make a keen start with this in the new fiscal year. Firstly, we have now optimized our legal entity footprint and Royal Challengers Sports Private Limited, RCSPL, as we call it, effectively, is the only operating subsidiary. Second, RCSPL is now also growing in salience, especially on earnings, driven by the new media rights cycle that has kicked in from the just concluded season, Therefore, it makes eminent sense to start talking about the consolidated and stand-alone performance, going forward. Let me start by giving some context on the macro environment as we are seeing it. Things largely remained steady vis-a-vis the last quarter. Consumption was resilient in the April to June quarter, and India remains the bright spot in an otherwise volatile global macroeconomic environment. We don't see any major risks to discretionary spend over the short to medium-term, especially since the penetration for our category still remains very low. Q1 was the lowest quarter for our business, but on a relative basis, we have performed strongly in the P&A business, while the Popular segment remained under pressure. That said, our trademarks are performing competitively within the Popular segment as well. However, recent news on duty increase in our home state is not very welcome, given the fact that duties are already on the higher side in Karnataka and demand was already under pressure. Coming to the performance for the first quarter, we have delivered strong double-digit growth, both in the P&A segment as well as overall net sales. This provides us the confidence that our strategy and the virtuous cycle we have of productivity fueling brand investment and that fueling top line growth is working. And it reinforces our commitment to future-backed consumer-led approach to business. I'm also happy to inform you that with this quarter -- with the quarter close, we have successfully wiped out our accumulated losses. Briefly now on the key portfolio update. On the first anniversary of Godawan, in May 2023, we introduced Godawan 100, which is a bespoke 100-bottle collector revision, handcrafted luxury single malt that pays homage to the greater Indian bustard popularly known as Godawan. With only 100 bottles produced, each bottle is different, is made with utmost care. Every bottle has a unique etching of the Godawan on it one of the attributes that make it a collectible. We have received great response on Godawan, 100, all bottles were sold immediately, and we fetched upwards of INR 90,000 per bottle. This is really encouraging for us from a brand's equity viewpoint. Separately, we have expanded Godawan's reach, and it was launched in New York City and New Jersey in May 2023 through an immersive experience at an acclaimed Indian restaurant in New York. Godawan is currently available across 40-plus outlets, including trend-leading outlets like [ Barbar ], Junoon, Gupshup, in New York and New Jersey. Royal Challenge American Pride is now present with 80% plus national salient markets across the country. In the current quarter, we have expanded our reach to Orissa and Chandigarh. We are engaging a lot in focused activations on the brand. Our association with the Backstreet Boys concert in May 2023 helped us to bring the World of America closer to our consumers, delivering 30 million-plus impressions on social media and helps to connect with 22,000-plus consumers at the concert itself. Our other consumer-centric activations such as participating in major food festivals and bringing the American lifestyle to life with [indiscernible] has also been very well received. As mentioned earlier, we are positive that this will be our quickest 1 million [ face ] brand. Our completely renovated bundle of Antiquity has reached now close to 50% of the salient markets. We are receiving very positive reviews from retailers and consumers alike. Our renovated Royal Challenge Whiskey continues to expand its footprint, and we are happy with the way it has responded and enabled overall momentum on the trademark. Johnnie Walker Blonde was our biggest ever global innovation launch in the premium portfolio. India was one of the first markets alongside Thailand and Brazil for the launch. It is now available in 9 states across the country. Our immediate focus will be to enter new geographies and continue to scale up distribution and visibility in the launched market, driving liquid on lips through a differentiated serves along with event partnerships and on-trade activation will continue to be the key levers of building this brand. Delighted also to share that the earnings from men's IPL season has stepped up significantly as we have entered the new 5-year media rights cycle for the period 2023 to 2027. This reinforces our confidence to reap the benefits of our investment in the Women's Premier League over the longer term. As articulated in the media release, our sports business is truly aligned to our core process of celebration and gaining salience in our consolidated earnings portfolio. The multiyear supply chain agility program announced earlier in the calendar year, which aim to strengthen our end-to-end manufacturing footprint, is also on track. We are also progressing well on our ESG journey and are on track to achieve Society 2030 goals that we have set for ourselves. Towards this, I'm really, really proud to share that we have not only overachieved our water replenishment target by 25% in volume terms, but we are also 3 years ahead from the originally set timeline. So we have achieved our target in 2023 versus the target deadline of 2026. Separately, we have committed to replenish the [ mangrove ] plantations in Orissa to restore the delicate natural balance of the coastal region for climate resiliency. In addition, we have collaborated with Alwar District Forest Department to expand the forest cover by committing to plant 2 lakh trees in the next 3 months. All of this, in turn, is helping us to expand our green footprint and reduce Scope 3 emission in line with our commitment to reduce the overall carbon footprint under Society 2030 goal. Touching briefly on awards and recognitions for our brand, Black Dog redesign won a coveted gold at the DBA Design Effectiveness Awards 2023. Godawan artisanal single Malt received a silver for packaging design at the 25th FAB Awards. These are only a few. Actually, Godawan has received almost 7 awards in this quarter. Looking ahead, our focus is on continuing the accelerated growth momentum that we have now established, taking our renovation and innovation offerings to their fullest potential and continuing to work on the longer-term consumer portside-driven pipeline. We have significantly ramped our capabilities in areas of distillation, maturation, innovation and consumer insights. This, along with enhanced use of digital tools and renewed focus on effectiveness of sales and marketing, is making us future ready. With this, I hand over the call to Pradeep for an update on the quarter's financial performance. Pradeep, over to you.

Thank you, Hina, and a very warm welcome to all. As always, it's an absolute delight to interact with all of you. Before calling out the quarterly financial performance highlights, we'll request you all to refer to the results press release posted on our website last evening. As already mentioned by Hina, we have, for the first time, introduced consolidated financials in the press release. We haven't yet added all the details as we are already publishing rebased and reported numbers, and we did not want to add to the clutter. We will start adding the necessary consolidated financial details once we have a clear base from Q3 of the current financial. By now, all of you would be quite familiar with the terminology used in the document. The first one is reinstated, wherein all numbers are adjusted for the Pioneer Distilleries merger as it is effective April 2021. Therefore, for the previous period, the numbers reflect the merged entity. Current period reported numbers are already inclusive of PDL that makes it comparable. The second term that we have been using for the last 2 quarters is rebase. This is eliminating the impact of the strategically reviewed Popular portfolio from the base year to make comparisons meaningful and absolutely like-for-like. This hopefully provides all of you with a better understanding of the organic business performance. We have started the new fiscal year with a robust quarterly performance, both in terms of P&A and overall NSV [indiscernible]. Price/mix remained strong, driven by continued premiumization focus, headline pricing and revenue growth management initiatives. Lower Prestige and Popular segment remain under pressure, driven by consumer inflation impacting the lower [ SEG ] consumers and the high headline pricing in the Popular segment. Like-for-like, we have delivered an overall portfolio NSV growth of 17.4% during the quarter. P&A growth stands at 21.2%, with strong double-digit growth in our Scotch portfolio. Reported gross profit was INR 947 crores, with a reported gross profit margin of 43.6%. Excluding the one-off benefit, core gross margin was at 43%, reflecting the continued sequential improvement. Our marketing reinvestment rate during the quarter was 6.8% of net sales. A&P is an extremely critical component of our virtuous growth cycle. And we will continue to invest in A&P to drive sustainable, profitable growth, ramp up equity of our brands and overall build brands that are aspirational and iconic. EBITDA for the quarter stands at INR 385 crores, and reported EBITDA margin is at 17.7%. Excluding the one-off benefit of INR 13 crores, core EBITDA margin was at 17.1%. There is an exceptional charge of INR 17 crores on account of the ongoing supply agility program. Overall, our reported PAT for the quarter is at INR 238 crores, with a PAT margin of 11%. We can now open the floor for Q&A.

[Operator Instructions] Our first question is from the line of Jay Doshi from Kotak.

Congratulations on a good set of numbers. I've got a couple of questions. The first one is, now this is the second consecutive quarter of double-digit volume growth in P&A, much higher than your guidance of 4% to 6%. So I'd like to know what is driving this and whether this is sustainable for a few more quarters?

Jay, thanks for the question. So I would say, yes, the -- it is robust in the quarter, and there are a couple of factors. I think the 100% normalization of BIO, as you know, we were out of the market -- some key markets for a while and we were normalizing since the previous quarter, the 100% normalization has happened in this quarter. And I would say, the biggest reason is really the ramp-up of our innovation and renovation, right? We've done quite a few. And as I mentioned, now Royal Challenge, Signature, these are all now in 80%, 90% salient market. So that ramp-up has also given us some volume benefit over the previous quarter. We expect this to now normalize in line with our guidance, going forward. So a few one-offs in this quarter driving that.

Likewise, on profitability, we had a look at the numbers, so some of your cost line items, for instance, employee cost, was lower than the normalized level. And in A&P, there is seasonality. Does this quarter give you confidence of surpassing 15% this year? Or do you think they should still go 15% for now?

I think, basically, look, if you look at it, A&P, as you rightly pointed out, is lower, right? And I think if you sort of normalize the -- underlying is about 17.1%. And if you normalize the A&P spending to what our guidance is, 9% to 10%, you're talking another 2.5 of -- so I mean a real -- the way to look at it is we are probably at about 14.5% -- 14%, 14.5% EBITDA. So like we said, our first target is to sustainably reach 15%. And we take it from there, right?

That's helpful. Just one final bookkeeping question or -- for the benefit of everyone, what is the impact of recent tax increase in Karnataka, if you could explain us because media articles, at times, quite confusing when it comes to taxation?

So like I mentioned here, I think this was not a welcome tax increase, right? I mean the tax rate in Karnataka are already much higher. And what's -- what we've had is a 20% tax increase. which, in effect, means that MRPs of our brands will likely go up in the range of 14% to 17%. So become even more expensive in the states than they were already. It's too early, I would say, to call out impact on demand, but I mean, our experience suggests that there is generally a negative impact when prices go up so much. I mean, both divestment of our Popular business, the saliency of the state on our Popular portfolio has reduced substantively. But Popular was already under pressure because of the consumers' wallet under pressure with inflation. So difficult for me to call out quantum of impact, but it's definitely an area for us to watch.

Effectively [ 14% to 17% ] increase in MRP without any increase in net realization? And is it across all price points?

Yes, Pradeep.

Yes, by and large. By and large, Jay, that's what, right? So no realization improvement for the manufacturer and the brand owners. It is effectively the government just taking the revenue.

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

Congrats on a good set of numbers. My first question is on the employee cost. I think earlier, the expectation was that it would be in the range of about INR 140 crores to INR 150 crores per quarter. But now this is a second quarter in which it is in the 120, 125 kind of band. So is it that you've really done some work in terms of reducing the employee cost post the Popular portfolio sale, and now 125 seems to be a more sort of reliable figure on a quarterly run rate basis?

Yes. So Percy, absolutely fair question. Look, we will maintain our original stance of -- look at the 4 quarter averages, right? I think that will give you a reasonable sense of the number, right? And there will always be quarterly variances, right, on account of actuarial valuations, retirals, et cetera, et cetera, right? So we maintain the number -- the two numbers to be -- just look at the 4 quarter trailing average. I think that will be the right number.

Okay. So the 4 quarter trailing average is about 140 approximately. Okay. The second question...

Our cycles are -- the annual increment cycle comes around September, October, et cetera. So that's what we'll start kicking in, broadly.

Understood. Understood. Sir, second question I want to ask you is that now compared to pre-COVID period, is there now a permanent change in the phasing of the primary sales across the 4 quarters? The reason I'm asking this is that pre-COVID Q1 used to be about 23% of the annual sales. And now it has come down materially, it's around 20% to 21% of the annual sales last year. And Q2 has sort of increased its salience now versus what it used to be pre-COVID. So is this sort of a permanent kind of a change in the phasing of the primaries or is this just some sort of vague reason -- the reason why I'm asking is that if basically, I take a normal Y-o-Y growth in Q2 this year, then the sequential growth will be significantly ahead of what it used to be pre-COVID. So the question is in light of that data.

So let me take a shot on that.

Pradeep you say that, and I'll add if necessary.

Hina, you can add, right? And again, pardon all of us, both of us are in different locations, so just pardon for that. So Percy, look, I think you've hit a very, very important point, right? And our perspective on this is there is a little bit of a shift. As the salience of the top-end brands increases in the overall portfolio, there is a little more nuanced seasonality to that part of the business. right? So what do I mean by that, right? Honestly, we have not looked at it so much from a quarter-on-quarter basis, but I think for us, the July to December and then the Jan to June, those are two very, very relevant distinct halves, right? Because in one, in July to December, you were selling into the season, into the festive period, right? So therefore, that's a very, very distinct half, right? And then Jan to June, you were kind of drawing down, et cetera, your inventory levels. So you are right. I think pre-COVID, the seasonality between these two halves used to be, if I remember, 51-49, right? I have some broad numbers in my head. And post-COVID, as the salience of the top-end portfolio has increased, this number has moved more towards 54, 46, right? 54 in July, December and 46 in January, June, right? I hope that answers, right? Because -- and the simple reason is the top end of the portfolio is more driven by festive season, et cetera, et cetera. So it's a lot more skewed towards the October, November, December quarter and a little bit in January also.

Very, very helpful, Pradeep. My last question, if I may, is on the other expenses. Again, I asked this because post [ hiring ] of the Popular portfolio, we are still grappling in terms of what is the sustainable number here. So in 3Q, 4Q, you had a number of about INR 325 crores to INR 330 crores. In Q1, again, it has dropped materially to INR 290 crores. So is there sort of any one-off saving in Q1? Or is it that your plan of cost saving in terms of reducing manufacturing locations, et cetera, et cetera, is playing out well? And if that is the case, then probably this lower number is something which would be sustainable in future as well?

I mean this is the entire other expenses. Look, Percy, it's a combination of variable and fixed, right? Very, very top line, 60% of that base is variable expenditure. So that should swing pretty much in line with volume, right? Obviously, netted off with whatever productivity, I mean, inflation and productivity that we drive. And there is a fair amount that sits in that chain. So therefore, there is inflation also, and we drive productivity also, right? And the balance, 40%, is largely fixed corporate overheads, et cetera, on which we do derive operating leverage. right? So therefore, I think that's the broad sentiment that I can provide and -- yes. And then hopefully, the number will kind of fall into a reasonable logic, based on this.

[Operator Instructions] Our next question is from the line of Jeetu Panjabi from EM Capital Advisors.

Hina and Pradeep, I thought the numbers were really good. Congratulations. So two questions, right? Just from the sense you're getting from what you achieved this quarter as well as what you're sensing in the market in general, do you kind of feel that this year-end and this season would be a very, very good season for you guys, just based on the plan that you're working towards?

I think a great question. Jeetu, we have seen robust sort of the premiumization consumption, continues in the mid, upper and the higher ends of the market. And I think if you look at on-trade socialization, if you look at the revival of global travel, all indicators are that the season will be good. The pressure, if any, is only at the lower end, Popular and the bottom end of Prestige, where I think consumers are feeling the pressure on the wallet, and that has been slow for a few successive quarters. So our McDowell's and our brands are performing competitively. So no reason to believe we won't have a good season. I think we will have a good season as we go into the festive season.

Okay. Wonderful. The other question is, it's fantastic again to see you giving consolidated numbers and putting in the cricket franchise into the overall accounts. My question is, I also heard that you've now wiped out all your accumulated losses, is that going to translate into the company start paying out dividends and cash flow is going to be going to shareholder pockets? One thing. And two, is there anything else you think you'd be doing as you access the cash flows from the cricket franchise?

So Pradeep, do you want to take that?

Yes, Hina, I'll take that. Yes. So Jeetu, we have stated this earlier, pretty consistently in our calls, right, that once the mother ship, which is USL, wipes out accumulated losses, we would want to come out with a formal dividend distribution policy. We are working on that, a few scenarios, et cetera. And hopefully, over the next 3, 4 months, we will issue out a formal dividend distribution policy, right? And then all of you will have access to this. So therefore, yes, I mean, the simple answer is we would want to get back into dividend distribution base, right? Now having said that, I mean, we continue to explore any opportunities, et cetera, for moving our business for the longer term, et cetera. In case that comes, obviously, we have the cash and the leverage ability on our balance sheet to be able to do both, right? And that's what we would want to do.

Our next question is from the line of Abneesh Roy from Nuvama Institutional Equities.

And congrats on a good set of numbers, including with -- from IPL. So wanted to understand in IPL, now all the key teams are doing well, in fact, in Q4, you won the rights for the women's IPL team also. So if you could share over a longer time frame, how would you see revenue and the EBITDA scale up from both the teams together? I'm not asking for any specific guidance, but just the way men's team is now doing so well, would you expect that the women's team, overall, over a longer time frame will also be quite profitable?

Let me ask our cricket enthusiast, Pradeep, to answer that question.

No, Abneesh, I mean, like Hina mentioned, my response will be more as a cricket consumer, right, and not as the CFO of USL. Look, I think our bet is on cricket and the women cohort, right? I mean that's what we have to fundamentally believe. Even if you look at the trajectory of the men's IPL, the first 10 years were an EBITDA loss-making proposition, right? But it is -- but at that point of time, no one thought that the media rights will reach the scale at which they will reach, right? What the men's IPL trajectory reinforces our confidence is that at some point of time, the women's cricket will also hit that inflection. And that's what we are backing on. And so far, there is nothing that is kind of pointing to the reversal of that, right? So therefore, we remain equally confident that in 8, 10 years' time, et cetera, women's cricket will also hit that inflection point, and it will be as profitable, if not more.

Actually, you're paying off the figures even today, Pradeep. So I mean if you look at women's cricket popularity, et cetera, the metrics are all in the right direction, right?

Yes, absolutely. And broadly, I just want to also kind of manage expectations. Look, the RCB P&L gets capped for 5 years, right? The media right auction happens once in 5 years. So, broadly, it's a cap. Obviously, we'll continue to drive some accretive revenue growth management, et cetera, et cetera, local sponsorships. But fundamentally, it's a INR 300 crore profit from men's IPL and INR 90 crore loss for Women's Premier League, very broadly, right? And that's the way it will stay for the next 5 years now.

Sir, one follow-up on the cricket-related question. We are having the World Cup in the coming months. In the past and given you would be tracking this very closely, would you expect some kind of an uplift because of the cricket-related demand, people would see more in terms of the bonding? So do you expect some kind of uplift because of the cricket World Cup also this time? It's happening in India, the timing, et cetera, will be quite suitable also.

We do see, Abneesh. We do see an uplift during cricket. I mean, IPL, et cetera, I mean it is a very big social occasion, right? So I mean, we activated Royal Challenge this time around IPL, and it is very much about people getting in, especially because in-home consumption has become far more normalized after COVID. I would imagine that there will be some uplift. I don't know a quantum uplift measure. But definitely, it is a very big celebration and social occasion.

Sir, last question, your BIO portfolio now has come back. It's doing well, so you could update, is it meeting your initial expectation? Second is in terms of market share, when I see clearly, it seems that now you are doing far better than what it was 3, 4 years back versus your key competitor. Also, your key competitor is embroiled in some of its own legal issues. So I'm not going into that. I'm just asking, what would be your sense in terms of market share and in terms of BIO? Would you be happy with the way things have gone versus initial expectations?

Yes, I would say, yes, BIO has come back as per our expectations. And if you remember, I mean, last quarter onwards, we had started putting A&P back into that portfolio to continue building the brand. And I -- definitely, I talked about Johnnie Walker Blonde, which is actually really doing well. So yes, the answer is yes. And the second part of your question, Abneesh, was market share? Yes. I would say, yes, we continue to perform very competitively across segments on market share.

Our next question is from the line of Prakash Kapadia from Anived Portfolio Managers Private Limited.

A congrats to the team for wiping off the accumulated losses. That's a big, big milestone. Could you give us some sense on -- Delhi market, have things stabilized? However growth rates been in the last few quarters, are they better from where they were? And I had one more question. Media reports suggest bottled India brands, growth has slowed down post the excise policy reduction, where premium and higher brands are growing much faster after the price cut by almost 25%, 30%. So what are you seeing in some of the bottled in India brands, such as Black & White and Black Dog? If you could give some sense, that will be helpful.

Sure. So look, on Delhi, no comments on competition or anything. But in general, because of the route-to-market change, the market has shrunk for us. And we have stabilized at a certain volume. We are supplying all our brands, but it is a fraction of what it used to be, and it is stable. Our focus has been on whatever we lost in Delhi to grow and pick that up in the rest of the country, there's 36 other states -- or 35 other states would have to do it, so we are focused on that. Actually, our experience is not showing that just because BIO is growing, BII has stopped. BII also continues to have very robust growth as of upper Prestige, mid-Prestige. So because, like I mentioned initially, the penetration of our category is still quite low and because this category is now seeing, across various segments, a lot of innovation, renovation, and consumers are experimenting much more, so they don't stick to only one brand, but they're trying many different things; growth across the segment still looks very healthy. And BIO is not like slowing down the others, right? But we see a lot of upgrades directly or entry directly into the upper category.

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

Congrats on a good set of numbers. A couple of questions from my side. First, if you can give some sense on RM scenario, and how should we think about gross margin trajectory in the near term from RM?

Yes. So Tejash thanks, let me take that, right? So again, let me cover the 2 core ingredients. Alcohol spirit, it's playing out pretty much the way we had thought, right? And we had called out three factors, which are unfortunately all headwinds, exactly playing out their role. The ethanol fuel lending policy, the union elections and therefore, the increase in minimum support prices on the feedstocks and El Nino factor, right? And whatever you are reading is pretty much what is the reality. So therefore, neutral alcohol spirit does remain inflationary. Now we are doing tactical things, right? Right now, we are doing tactical things in terms of increasing our physical coverage, going slightly long on physical storage contracts. And obviously, the longer-term intervention of increasing our co-location footprint, that as part of the supply agility program is anyway on, and we are trying to improve our grain indexation coverage, right? So that's on neutral alcohol spirit. It does remain inflationary. Now coming to glass, again, it is a completely sell-out market right now. The glass industry capacity utilization is close to 100%. On top of that, there is consolidation in the industry happening. So therefore, it does remain inflationary. April, May, June has been quite inflationary. If you also remember, the real inflation in glass, right, last year started somewhere around the August/September mark, right? So therefore, we are still lapping low basis of glass in the prior year because we had -- our suppliers had longer-term contracts coverage in places, right? So therefore, the inflation still remains high, right? So we'll have to just watch out. I mean there is some unwinding. The natural gas was released, right, so some unwinding happened on account of that. Soda ash is beginning to unwind, right? So again, we'll have to see how much coverage we have, et cetera, and then. And the last thing is furnace oil. We do expect -- crude has come down, but so far, furnace oil hasn't yet come down to the levels that we had thought. But hopefully, it does track crude and over the next 3, 4 months, et cetera, as it comes down, hopefully, we'll get some releases, right? So that's, broadly, the inflation scenario.