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United Spirits Limited (USL), a prominent Indian alcoholic beverage company, has recently reported a robust 12.2% rebased revenue growth on a YoY basis in its Q2 results, despite a dip in volume growth. This revenue surge is attributed to a strategic emphasis on premiumization, with the Prestige & Above segment contributing significantly-accounting for 88.0% of net sales and experiencing a noteworthy 12.8% YoY growth in the second quarter of fiscal 2024.During this period, the company also noted a gain of INR 307 million from the final tranche of income related to the slump sale. Despite grappling with challenges such as fluctuations in raw material prices and demand pressure, USL effectively upheld and expanded its margins by fully realizing the advantages of implemented price hikes. Furthermore, the recent decision within the UK-India Free Trade Agreement to reduce import duties is expected to lead to a reduction in the Maximum Retail Price (MRP) of BIO brands, potentially exerting a positive impact on selling prices. Apart from this, the company is maintaining its futuristic approach and launched global Tequila trademark Don Julio in India. Taking into account these factors, we recommend holding USL as an investment.

Revenue expanded despite a modest increase in volume:

In Q2FY24, United Spirits Limited (USL) reported a Net Sales Value (NSV) of INR 2,865 crore, with Prestige & Above products contributing significantly at 88%. The overall NSV witnessed a robust growth of 12.2%, while Prestige &Above NSV exhibited a higher growth rate of 12.8% on a rebased prior-year comparison. However, the Prestige & Above volume growth slowed to 4% YoY, and the popular segment experienced a volume decline of 11% YoY despite a 1% YoY revenue growth, attributed to consumer impact from inflation and duty increases. The EBITDA for the quarter was INR 470 crore, with a margin of 16.4%, and the company declared a dividend of Rs. 4 per share.

Expanding Margins:

The company's financial report highlights a robust performance with a gross margin increase to 43.4%, up by 278 basis points from the previous year, driven by a favorable product mix, premiumization efforts, and implemented price hikes. The advertising and promotional reinvestment rate at 8.4% of sales reflects strategic investments ahead of the festive quarter and cricket world cup. EBITDA saw a significant uptick of 20.9% to INR 470 Cr., with a corresponding increase in the EBITDA margin by 118 basis points to 16.4%. Despite a 24.8% rise in interest costs to INR 26 Cr., attributed to custom duty, the company reported an exceptional gain of INR 31 Cr. from the final tranche of income related to a slump sale, contributing to a Profit After Tax of INR 341 Cr. and a net profit margin of 11.9%.

Outlook:

Despite uncertainties surrounding government policies and interventions in the alcohol industry, as well as the prevailing inflationary and demand pressures in the near to medium term, our outlook on United Spirits Limited (USL) remains positive. The company's ongoing efforts to revamp its premium portfolio, introduce new brands, control costs, and negotiate price hikes from states are expected to yield favourable results. USL's debt-free status, double-digit return ratios, and strong cash generation further contribute to our positive stance. The strategic revamping and focus on premiumization are anticipated to drive higher margins in the upcoming quarters. Considering these factors, we recommend toHold rating on USL and set a target price of Rs. 1,100/-.

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