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Lackluster performance; P&A recovery hinges on 2HFY27

* United Spirits (UNSP) registered 3% YoY revenue growth to INR32.6b in 2QFY27 (est. INR33.7b). Volumes contracted by 5% YoY (est. flat; 2QFY26 at +8%, 1QFY27 at -3%). Prestige & Above (P&A) revenue growth stood at 6.3% YoY on a high base of 14%, while volume was down 1% (est. +3.5%). Premiumization, led by luxury and white spirits, including the J&B Scotch relaunch and Smirnoff innovations, supported value growth. The popular segment’s revenue contracted sharply by 23% YoY, with volumes contracting ~30% to 1.6m cases. Maharashtra and Karnataka’s excise policy changes continue to affect the popular portfolio.

* Gross margin expanded 90bp YoY to 48% (est. 46.4%), supported by favourable mix, productivity gains and the India-UK FTA benefits, partly offset by RM cost pressures. Management quantified the RM cost impact at ~INR500m in 2Q. The UK FTA benefits are likely to support GM, but ENA inflation could offset part of the gains. A&P spending rose 57% YoY ahead of the festive season, absorbing the GM gains. Consequently, EBITDA declined 4% YoY to INR6.4b (in line), with margin contracting 130bp to 19.7%. Management expects gross margin to hold in the near term. We model an EBITDA margin of 19-20% for FY27-FY28.

* Management reiterated its double-digit P&A growth aspiration for FY27. MML anniversarization from 3Q is expected to add 2-3% to P&A growth, taking it to ~9.5%; McDowell's and innovation are expected to bridge the gap. Smirnoff is on track to exceed INR10b in FY27 NSV, while J&B and Smirnoff Ice RTD provide further growth avenues going forward. The RCB transaction is expected to close by mid-December. We model a revenue and EBITDA CAGR of 9% and 12% over FY26-29E, respectively. We reiterate our Neutral rating with a TP of INR1,375.

Highlights from the management commentary

* Consumer sentiment remained soft due to the prolonged West Asia crisis, a weaker monsoon, and inflation. The pressure is concentrated at the bottom end (India 1, the lower half of IMFL), while the rest of the segments are holding up. Rural markets have not yet felt the monsoon impact, and management remains optimistic about the India consumption story.

* Ex-Maharashtra, 1HFY27 growth was ~10.5%, while Karnataka P&A volumes and value grew ~30% in 2Q.

* The McDowell’s No.1 renovation (liquid, glass and PET packaging, communication) has reached 80-85% of salient markets, with a mixed national response.

* The West Asia impact was ~INR500m across glass, energy, packaging and logistics, and is now treated as business as usual.

* ENA was deflationary in 1Q but is turning inflationary amid El Niño concerns, and management expects the full FTA benefit to offset the rise; hence, gross margin should hold sequentially in the next quarter.

Valuation and view

* We broadly maintain our EPS estimates for FY27-FY28.

* Management reiterated its double-digit P&A growth aspiration for FY27. MML anniversarization from 3Q is expected to add 2-3% to P&A growth, taking it to ~9.5%; McDowell's and innovation are expected to bridge the gap to the ~12% run-rate targeted for 2HFY27. Smirnoff is on track to exceed INR10b in FY27 NSV, while J&B and Smirnoff Ice RTD provide further growth avenues going forward.

* Key monitorables include McDowell's renovation acceptance, normalization of the Maharashtra base, benefits from Karnataka policy changes (6–7% of revenue), gradual gains from the India-UK FTA, and continued momentum in the P&A portfolio. The RCB transaction is expected to close by mid-December.

* We model a revenue and EBITDA CAGR of 9% and 12% over FY26-29E, respectively. We reiterate our Neutral rating with a TP of INR1,375.

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