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Portfolio reshape playing out well, for now

Continued outperformance in Prestige & Above (P&A) in Q4FY23 driven by portfolio reshape initiatives through innovations and renovations is pleasing. Further, balanced volume (~10% YoY) and price / mix growth (~12% YoY) in Q4FY23 vs largely mix driven growth in previous few quarters is also good though it had benefits of BIO normalisation. Popular portfolio underperformed with 18% YoY volume decline. Gross margins improved sequentially with some correction in glass prices though ENA continues to be inflationary. Operating margins were adversely impacted by exceptionally higher ad-spends due to BIO normalisation after three quarters; should improve with normalisation of spends in the near term. Supply agility initiative should drive margins in the longer term (over next 3 years).

UNSP under Hina's leadership had targeted double-digit revenue growth over the medium term through portfolio re-shape and has started delivering on it. We believe continued focused approach can accelerate the journey (much efficiently). Strengthening of its play in mid and upper prestige (where it has had relatively weak shares) through renovations and innovations has also started yielding results. Inflationary RM can potentially lead to some short-term pain (in terms of margins) with UNSP looking to invest behind premium brands. ADD.

* Accelerated growth in P&A segment: On like to like basis revenue grew 16% YoY (3% YoY volume growth) led by normalisation of BIO supplies. Prestige & Above segment outperformed with revenue growth of 23% (volume growth of 10% YoY) led by renovations and innovations, normalisation of BIO, mix improvement and price hikes. However, popular segment witnessed a volume decline of 18% YoY (revenue decline of 6% YoY) as consumers were impacted by inflation. Pricing growth of ~2.5% in FY23 was well ahead of its historical average.

* Gross margins improve with some moderation in input cost though volatility continues: Comparable gross margin expanded by ~200bps QoQ to 42.6% (declined ~225bps YoY). Management highlighted that ENA is likely to remain inflationary in the near term while glass prices will see some correction. Multiyear supply agility initiative should drive cost benefits over next 3 years. Comparable EBITDA margins contracted ~600bps YoY and ~250bps QoQ largely due to higher ad-spends at 13.8% (+770bps YoY and 380bps QoQ; management expects it to be in the range of ~9-10% going forward) due to normalization of BIO portfolio. Management plans to reach operating margins of ~15% in FY24 and then expand it to 16.5% over time. Reported PAT came in at Rs2bn.

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