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United Spirits (UNSP) reported strong 1QFY25 performance, with sales and earnings growth of 8% and 17% respectively. This was driven by the Prestige & Above (P&A) brands' value and volume growth of 10% and 5%, along with a 5% increase in realization. Although some moderation is expected in 2Q, management anticipates double-digit growth for P&A brands in FY25, with acceleration in 2HFY25. Conversely, the Popular segment saw volume and value declines of 5% and 3%, with a 2% increase in realization. Profitability improved due to tactical reduction in trade margins, a favorable product mix, and better overhead control. Despite inflation in ENA and higher A&P spending, UNSP is expected to enhance margins through premiumization and cost-saving efficiencies. We remain positive on UNSP's long-term outlook, driven by premiumization and brand makeovers. Following the 1QFY25 performance, we recommend holding UNSP as an investment.

P&A Segment Growth and Popular Segment Decline:

During the quarter, P&A brand revenue grew by 10%, driven by a 5% increase in volume (11.5 million cases) and a 4.8% rise in realization (INR 1,790 per case), bolstered by strong performance from innovative offerings and resilient consumer demand. Conversely, the Popular segment saw a revenue decline of 2.7%, with volume falling by 4.6% (2 million cases) and a 2% increase in realization (INR 1,019 per case), attributed to weak demand from price-sensitive consumers due to inflation. Long-term performance is expected to be strong, driven by the premiumization of the portfolio through brand makeovers and the introduction of Diageo's global brands. While growth may moderate in 2Q, the company maintains a double-digit growth forecast for the P&A segment in FY25, supported by 4%-5% volume growth and 6%-8% realization growth, with momentum expected to pick up in 2HFY25.

Gross Margin Expansion:

Gross margin (reported) expanded by 115 bps QoQ to 44.5%, driven by a tactical reduction in trade margins and a favorable product mix. Excluding a one-off benefit of INR 130 million, the underlying gross margin expanded by 145 bps YoY. Reported EBITDA margin expanded by 174 bps YoY to 19.5%, aided by a one-off benefit of 100 bps. EBITDA grew by 19% due to gross margin expansion, partially offset by a 19% YoY increase in A&P spending, which rose to 7.4% of sales from 6.8% last year. Employee costs grew by 6.5% YoY, while other expenditures declined by 3.6% YoY. Management expects inflation in ENA to persist, while glass prices remain stable. The company anticipates moderate margin improvement in FY25 through premiumization and cost-saving efficiencies.

EBITDA Beat and Growth Guidance for FY25:

UNSP reported an 8% YoY revenue growth in 1QFY25, with the P&A segment showing a 10% revenue and 5% volume growth. The Popular segment declined by 3% in value and 5% in volume YoY. Premiumization trends and pricing strategies drove value growth in the P&A portfolio. The proposed excise policy reform in Karnataka is expected to enhance demand and premiumization. Gross margin expanded by 85 bps YoY to 44.5%, aided by a 70 bps reduction in overheads and lower seasonal A&P spending, resulting in a 174 bps YoY EBITDA margin expansion to 19.5%. The management anticipates normalization of margins in subsequent quarters, estimating a 17% EBITDA margin for FY25.

Outlook:

Key brands like Don Julio, Johnny Walker, RC American Pride, Godawan, and McDowell X Series performed exceptionally well. Gross and EBITDA margins expanded thanks to internal revenue management, COGS productivity initiatives, and cost control measures. UNSP's recent acquisitions include a 15% stake in V9 Beverages, which operates the zero-alcohol brand Sober, and a 25% stake in Indie Brews and Spirits, which markets the premium craft cold-brew coffee liqueur Quaffine. Anticipated tax cuts by the new government in Andhra and the India-UK FTA, along with strategic M&As and accelerated innovation, are expected to further benefit UNSP. We maintain BUY with a TP of INR 1,476 based on 60x EPS of FY26.

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