IGI Logo

United Spirits delivered an in-line performance for 4QFY25, supported by a strong 13% YoY growth in the Prestige & Above (P&A) segment. The company saw EBITDA margin expansion of 356 bps YoY to 17.1%, aided by better gross margins and lower ad-spend. Gross margin improved by 114 bps YoY to 44.5%. Despite a tough demand environment, premiumization and favorable regulatory changes like the UK-India FTA and UP's new liquor policy offer structural growth triggers. FY25 P&A revenue grew 9.9%, with premium/luxury portfolio saliency rising to 33%. With a focus on innovation and scaling Diageo's global portfolio, UNITDSPR is poised for medium to long-term growth. We maintain our BUY rating, with a revised target price of 1,740 based on 60x FY27 PE(x).

P&A Segment Driving Growth with Strong Premiumization:

UNSP's P&A segment was the primary growth driver in 4QFY25, with revenue increasing 13% YoY and volume growing 9% YoY. This segment accounted for 88% of total sales in the quarter, reflecting the company's successful shift towards premium brands. Average realization per case rose from Rs. 1,740 in FY24 to 1,810 in FY25, highlighting the strength of the premiumization trend. Premium and luxury portfolio improved to 33% in FY25, from 31% in FY23, showing continued consumer preference for higher-end offerings. Meanwhile, the Popular segment remained subdued, growing just 1% YoY in revenue, with a 2% volume decline, reinforcing the company's strategic focus on premium brands.

Margin Expansion Supported by Superior Product Mix and Cost Control:

UNSP achieved an impressive EBITDA margin of 17.1% in 4QFY25, up 356 bps YoY, despite a challenging demand backdrop. This margin improvement was driven by a 114 bps expansion in gross margin to 44.5%, led by a richer product mix (more sales from premium brands) and ongoing productivity measures. Advertising & promotion (A&P) expenses declined by 3% YoY, now accounting for 11% of sales, down from 12% in the base quarter. Staff and other operating expenses remained under control, growing modestly at 2-5% YoY. Management expects margins to remain stable at high-teen levels going forward, supported by expected stability in key raw material prices and continued operational discipline.

Favourable Policy Tailwinds and Innovation to Accelerate Growth:

UNSP stands to gain significantly from policy-level tailwinds. The UK-India Free Trade Agreement (FTA) proposes to reduce import duties on Bottled-in-Origin (BIO) products from 150% to 75%, which could lead to a high single-digit reduction in consumer prices and a corresponding increase in volumes. This is particularly beneficial for United Spirits, given its access to Diageo's global portfolio. In India, the new liquor policy in Uttar Pradesh allows composite retail shops (beer + IMFL), which is expected to increase liquor outlet density and boost sales. Further, the company is doubling down on product innovation, aiming to double the contribution of new products to growth over the next 3-5 years, supported by increased A&P investments.

Outlook:

We expect Revenue/EBITDA/PAT CAGR of 11.7%/16.6%/17.4% respectively, over FY25-27, driven by premiumization, operating leverage, and a favourable policy environment. We maintain our BUY rating, with a revised target price of 1,740 based on 60x FY27 PE(x).

Please refer disclaimer at http://www.aretesecurities.com/

SEBI Regn. No.: INM000012740