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Aging profitably

We initiate coverage on United Spirits Ltd/Diageo India (UNSP) with Rs1,320 target price and an ADD rating. Our view is underpinned by the following argument: (1) AlcoBev consumption opportunity is healthy despite the stringent regulations that govern the sector (2) Premiumization and category additions to aid double digit growth (3) Profitability per case improvement shows an upward trend (4) EBITDA/Earnings to grow at ~15%/13% CAGR over FY24-26E on improved ratios.

Consumption buoyant despite stringent sector regulation

Low per capita consumption coupled with positive demographics and >13mn people added each year to the population eligible for drinking, make India an attractive market for alcoholic beverages. IMFL sales volume is projected to reach 560 cases by FY28 from 385mn cases in FY23, growing at a CAGR of ~8%. Sales by value is estimated at Rs2,206.62bn in FY23 and is projected to reach Rs3,402.18bn by FY28, thus growing at a CAGR of ~9%. Having said that, given the ad-hoc change in route-to-market (RTM) and controlled pricing, actual growth won’t be consistently linear.

Management confident of double-digit growth for the portfolio

Post completion of the sale and franchising of select popular brands to Inbrew Beverages Private Limited, UNSP’s mix of Prestige & Above (P&A) now stands at ~87% of net sales as on FY24. On a normalized steady-state base, company continues to aspire for double-digit topline growth on the back of 7-8% price mix, driven by consistent premiumisation. Volume growth will be 3-4% on the aggregate portfolio, given the better growth in the P&A portfolio led by focus, renovations/innovations and category additions.

Profitability improving year on year, courtesy of sustained premiumization

In the absence of price flexibility, any major volatility in key commodities like extraneutral alcohol (ENA) and glass have a bearing on the margins. Premiumization will continue to be a key driver of margin improvement over the medium-to-long term. UNSP is driving premiumization through multiple levers: 1) Within segments; 2) Within P&A; 3) Within trademarks; 4) Within categories. We see mix of Mid & Upper-Prestige to improve further from (together accounted for ~22% in FY24) driven by innovation/renovation work done across brands. We expect NSV/EBITDA per case to improve to Rs1,900/Rs327 by FY26E from Rs1,740/Rs278 in FY24, respectively.

EBITDA/Earnings expected to grow at ~15%/12.9% CAGR over FY24-26E

Over the medium-term, favorable demographics, and improved focus on P&A segment (>85% P&A NSV salience now) are likely to ensure decent growth for this market leader. Diageo’s global brands has been doing well post-Covid and since the premium customers are loyal, it is expected to do well going forward as well. UNSP has also embarked on certain transformational projects like multi-year supply agility programme (in addition to efficiency savings), simplifying legal entity footprint, phased removal of mono-cartons starting with premium scotch brands, etc. which will keep key overheads in check (already visible in FY24). While margins continue to face pressure from inflationary headwinds in key commodities, company’s premiumization focus, pushing efficiencies through some transformational projects and leverage should support margin expansion in the near to medium term. Over FY24-FY26E, can expect UNSP to deliver EBITDA CAGR of ~15% led by 10.8% revenue CAGR and an EBITDA margin expansion of 120bps (driven by 120bps gross margin expansion).

Initiate coverage on UNSP with an ADD rating and a target price of Rs1,320

UNSP has recently resumed dividend, after almost a decade, as it wiped out all its accumulated losses in 1QFY24. Cash flow and return ratios have seen a improvement in FY24. The stock is currently trading at ~60x/52x FY25E/FY26E EPS. We initiate coverage on UNSP with a ADD rating and target price of Rs1,320 (targetig ~50x on March’2026E EPS of standalone business + RCSPL).

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