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P&A outperformance sustains

* United Spirits (UNSP) registered a 7.5% YoY revenue growth (est. 5.5%), with the Prestige & Above (P&A) segment recording a 10% growth. While overall volume contracted 2% YoY, P&A volumes registered an increase of 5% YoY (4% four-year CAGR). The popular segment, both in terms of value/volume witnessed a decline of 12%/23% YoY, respectively.

* The premiumization trends in the liquor category (post COVID) continued to drive the P&A portfolio. Scotch continued to outpace within the P&A portfolio. Pricing strategies have also played a significant role in achieving better value growth.

* The gross margin continued to see gradual recovery, up 300bp YoY, and flat QoQ at 43.4%. However, it is still distant from the 48-49% levels achieved in FY18-FY19. After seeing high RM inflation in the last three to four years, prices are expected to stabilize (steady glass prices, etc.). In our projections, we model a GM of 44% in FY25/FY26

* The EBITDA margin expanded +300bp YoY to +16% despite a significant increase in A&P spend (up 18% YoY). EBITDA was up 33% YoY. We model 17% EBITDA margin for FY25/FY26, factoring in expectations of stable raw material inflation, sustained favorable product mix, and effective cost control.

* We value UNSP’s standalone EPS on 50x Dec’25E and include INR 100/share for its RCB+ non-core assets to arrive at a TP of INR1,150. With the limited upside, we maintain our Neutral rating on the stock.

P&A outperformance continues; healthy operating margin

* Standalone net sales increased 7.5% YoY to INR29.9b (est. of INR29.3b) in 3QFY24, with P&A growth of 10% (90% revenue mix).

* Overall reported volume declined 1.8% YoY (est. 0.7% growth), while P&A volume grew ~4.6% YoY.

* Gross margin was up 290bp YoY/flat QoQ at 43.4%. (est. 42.4%).

* Employee costs declined 12% YoY, whereas A&P and other expenses grew 18% and 5% YoY, respectively.

* As a percentage of sales, advertising costs rose 100bp YoY to 11%, whereas staff costs declined 110bp to 4.7% and other expenses fell 30bp YoY to 11.3%.

* EBITDA margin expanded 300bp YoY (flat QoQ) to 16% (est. 15%).

* EBITDA increased 33.6% YoY to INR4.9b (est. INR4.3b).

* PBT grew 51.2% YoY to INR4.6b and adjusted PAT rose 61% to INR3.5b (est. INR3.5b/INR2.6b).

* In 9MFY24, net sales/EBITDA/Adj. PAT grew 2%/25%/29%.

Highlights from the management commentary

The demand environment is muted sequentially; however, premiumization trends continue. Despite the festive season, the Cricket World Cup, and the peak wedding season, demand has not increased, as consumers are reducing the number of occasions to manage their budgets.

Valuation and view

* With consistent improvement in gross and EBITDA margin, we increase our FY24/FY25 EPS estimates by 13%/7%. We model EBITDA margin of 17% for FY25/FY26E (9MFY24 EBITDA margin was at 16.8%).

* UNSP sold a large part of its popular portfolio to concentrate on its global strategy for the premium portfolio. The liquor industry is currently experiencing an upgrading trend, aligning well with UNSP’s renewed emphasis on P&A, which fits into the long-term liquor upgrading narrative in India.

* We value UNSP’s standalone EPS on 50x Dec’25E and include INR 100/share for its RCB+ non-core assets to arrive at a TP of INR1,150. With limited upside, we maintain our Neutral rating on the stock

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