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Our Take:

United Spirits (UNSP) is the leader in the Indian spirits market, with ~33% volume share. It has an established portfolio of ~120 brands across the price spectrum, with 13 millionaire (million cases sold per annum) brands including 4 brands with over 10mn cases per annum in sales. McDowell’s No.1, Royal Challenge, Signature, Antiquity, Black Dog, Director’s Special Black, McDowell’s Rum, McDowell’s Brandy, Bagpiper, Old Tavern, Haywards are some of the marquee brands owned by the company. In addition, UNSP also imports, manufactures, distributes and sells various iconic Diageo brands such as Haig Gold Label, Captain Morgan, Johnnie Walker, J&B, Baileys, Lagavulin, Talisker, VAT 69, Black & White, Smirnoff and Ciroc in India under different licensing agreements. With over 50 manufacturing facilities spread across approximately 23 states and over 3 union territories in India, it has a pan-India manufacturing and distribution footprint, and a sticky franchise. This category is both stringently regulated and ‘media dark’ and that offers strong competitive advantage to the existing players. UNSP is majority owned by Diageo, the largest spirits player globally. After a bumpy post-takeover phase, Diageo over the last decade has improved UNSP’s governance, strategy and business model – that led to boost in margins in tandem with market share. With UNSP dominating volume market share of the whisky segment in India, we believe they are well placed to ride on the rise in consumption of alcoholic beverages in India, driven by the underlying demographic advantage and the change in perception towards alcohol.

View & Recommendation :

Diageo is a global leader with 17% share in spirits and 40% in scotch globally. India being the largest whiskey market, is very important for Diageo. Over the past few years, UNSP management has tightened their seat belts and made a number of positive changes in the company. Their focus on premiumisation, de-focussing of popular category brands, debt reduction, digital push, cost optimization, better product mix and supply chain management are well reflected in the higher margins and superior growth rate of the company. The alcohol beverage industry which was already facing the heat due to strict regulatory measures and weak consumer sentiment was further beaten down by Covid-19 and resulting lockdown, however with economy opening up, the overall consumption is improving sequentially. The long-term growth drivers (low per capita consumption, favourable demographics, changing perception towards alcohol and up-trading from country liquor) still remain intact which would lead to steep volume recovery and thereby better operating efficiencies over next few quarters. Benign raw material prices, increased premiumisation and strict cost control, coupled with deleveraging will lead to higher profitability. While challenges still persist, the worst seems to be behind the company and so we recommend a buy on the stock at CMP with add on dips to Rs.499-505 band for a base case target of Rs. 603 (41XFY23E EPS) and a bull case target of Rs.647 (44XFY23E EPS).

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