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Strong operational performance amid tough scenario

United Spirits continued its strong momentum in Q4, reporting 8% YoY growth in volumes mainly led by resilience in off-trade channels and strong performance of prestige and above segment. Net revenues grew 12% YoY to | 2224 crore (I-direct estimate: | 1991 crore) in spite of softer on-trade channel. Prestige & above segment volumes grew 19% YoY to 10 million cases while popular segment reported largely flat volumes at 9.7 million cases. EBITDA margins expanded 490 bps YoY to 18.5% and came in above I-direct estimate of 16%, due to better product mix and improved productivity (gross margins were at 43.9% vs. 42.2% in Q4FY20). EBITDA grew 52% YoY to | 412 crore. Subsequently, reported PAT grew 6x to | 167 crore on a weak base (I-direct estimate of | 177 crore), as strong operational performance was negated by an exceptional expense of | 76 crore.

Product mix, lower ad spends aid EBITDA margin performance

Prestige and above segment revenues in Q4FY21 increased 26% YoY to | 1532 crore on the back of 19% volume growth. Strong performance of prestige and above segment enabled the company to report 490 bps YoY improvement in EBITDA margins. USL also curtailed its advertisement spends by ~15%, which further aided EBITDA margin expansion. The company continues to focus on its premiumisation strategy. Even in the current uncertain scenario the share of P&A segment in FY21 has increased 450 bps YoY to ~70%. The scotch segment continued to be fastest growing segment among the prestige and above category indicating overall premiumisation of the prestige and above portfolio.

Continued investment, renovation of core brands

USL continued to reinvest and renovate its biggest core brands i.e. McDowell’s No. 1 and Royal Challenge with an innovative packaging and new blends, even during the pandemic. The management indicated that McDowell’s No 1 renovation received a good response from customers. The management also focused its resources on capitalising newer trends such as consumption in home premises. Ad spends are expected to return to 8- 9% of revenues as the situation normalises and the company will continue to spend more on prestige and above segment to drive its premiumisation strategy over the longer term.

Valuation & Outlook

USL reported a continued reduction in its debt by selling non-core assets and improved WC management. While in the near term, uncertainty continues to remain over the evolving situation in on-trade channels, the longer term growth aspiration and continued premiumisation trends remain key positives for the liquor sector. USL continues to invest in increasing its brand strength and propel its premium brands to higher share of its revenues (currently at 70%). We value the stock at ~43x FY23 EPS with an unchanged target price of | 710 and maintain BUY rating.

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