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On the way to a ‘breakout growth’

Revenue growth print (at 18% YoY) was robust (ahead of consensus estimates) on the back of 14% YoY volume growth in Prestige & Above portfolio. Gross margins contracted to a multi-year low (39.5%), with costs control and cut in discretionary spends (including ad-spends) translating to a decent (in the current context) EBITDA margin print of 15.5%. We note that the current performance needs to be seen in the context of some operational headwinds (scotch negotiation in select states, Delhi RTM changes and inflation woes). Management has highlighted good growth momentum and strong mix improvement from recent innovation and brand renovations.

UNSP under Hina's leadership is targeting double-digit revenue growth over the medium term through Portfolio re-shape. The key pillar of Portfolio re-shape includes (1) strong growth on P&A, (2) new growth engines and (3) value chain efficiency extraction. In our opinion, (select) part of the street getting concerned on no immediate (optical) benefit, is too myopic. We believe focused approach can accelerate the journey (much efficiently). Inflationary RM can potentially lead to some short-term pain (in terms of margins) with UNSP looking to invest behind premium brands. Retain ADD; TP Rs940 (DCF based).

* Good growth momentum: UNSP reported revenue growth of 18% YoY and 33% QoQ to Rs28.8bn. Overall volume was up 8% YoY and 20% QoQ. The highlight of the quarter was a healthy mix (product + state) improvement (1) A good 340bps QoQ (~500 bps YoY) reduction in excise, (2) Prestige & Above segment reported a strong 14% YoY growth (up 6% on 3-year CAGR basis) while Popular segment saw 2% YoY volume growth. The management has highlighted good growth momentum and strong mix improvement from recent innovation and brand renovations (growth in P&A was broad based). Besides, consumer demand in off-trade continues to be resilient with a rebound in on-trade demand. It has also highlighted that scotch price discussions have concluded in a few states.

* Good EBITDA (margin) print despite inflation woes: Gross margin contracted 560bps to 39.5% (a multi-year low). It has highlighted continued double-digit RM inflation – even in the near-term, management expects inflation challenges to continue. Reported EBITDA margin came in at 15.5%. There was a good 11% cut in both staff costs and ad-spends (increased 13% QoQ though). Absolute EBITDA grew 11% YoY to Rs4.5bn. Interest cost was (further) down to Rs141mn versus Rs166mn/Rs210mn in 1QFY23/2QFY22. UNSP booked Rs3.8bn of exceptional gain this quarter from the slump sale transaction.

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