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Beat on EBITDA; retains double-digit growth guidance for FY25

* UNSP reported revenue growth of 8% YoY (in line) in 1QFY25. Prestige & Above (P&A) segment clocked revenue growth of 10% YoY and volume growth of 5% YoY. The popular segment posted a decline of 3%/5% YoY in value/volume.

* The premiumization trends in the liquor category continued to drive the P&A portfolio. Pricing strategies also played a role in achieving better value growth. The proposed excise policy reform in Karnataka, which includes a duty reduction, will enhance demand trends and foster premiumization in the market. The company remains committed to driving double-digit growth in FY25, backed by better growth in 2HFY25.

* Gross margin expanded 90bp YoY to 44.5% (est. 43.2%), led by mix and pricing. The company benefited from a 100bp reduction in overheads (trueup the provisions) and lower A&P spending due to seasonality, which resulted in EBITDA margin expansion of 590bp QoQ/170bp YoY to 19.5% (est. 17.5%), a 23-quarter high margin. The management has guided that 1QFY25 margin was a one-off event and it will normalize in the coming quarters. We estimate 17% EBITDA margin in FY25 (16% in FY24), factoring in expectations of stable raw material inflation, steady product mix, and effective cost control.

* We value UNSP at 55x Jun’26E standalone EPS and include INR150/share for its RCB+ non-core assets to arrive at a TP of INR1,400. With the limited upside, we maintain our Neutral rating on the stock.

In-line revenue; EBITDA beat estimate

* Volume growth in mid-single digit: Standalone net sales increased 8% YoY to INR23.5b (est. INR23.6b) in 1QFY25, with P&A revenue growth of 10% (90% revenue mix). Popular revenue declined 3% YoY as inflation continued to affect the price-sensitive segment. Volume growth stood at 3.5%, with P&A volume up 5.1% to 11.5mn cases (est. 11.4mn cases) and Popular volume down 5% to 2.2mn cases (est. 2.4mn cases).

* Operating leverage-led margin expansion: Gross margin was up 90bp YoY at 44.5% (est. 43.2%). Excluding a one-off benefit of INR130m due to a write-back in the 1QFY24, gross margin expanded 150bp YoY. As a percentage of sales, advertising costs rose 60bp YoY to 7%, staff costs remained flat at 6%, and other expenses were down 150bp YoY at 12%. EBITDA margin was up 170bp YoY at 19.5% (est. 17.5%). Excluding the oneoffs in 1QFY24, EBITDA margin expanded 230bp YoY.

* Double-digit EBITDA growth: Employee and A&P expenses were up by 7% and 19% YoY, respectively, while other expenses declined by 4% YoY. EBITDA grew 19% YoY to INR4.6b (est. INR4.1b). Higher other income resulted in 25% YoY growth in PBT and APAT to INR4.0b and INR3.0b, respectively (est. INR3.5b/INR2.6b).

Highlights from the management commentary

* 1HFY25 is expected to see single-digit revenue growth, while 2HFY25 should witness revenue growth in double digits. The management expects to meet its double-digit growth guidance for FY25.

* The company approved investments in V9 Beverages Rise Up, the maker of sober non-alcoholic beverages, and Indie Brews and Spirits, the maker of coffee liqueurs, as part of its strategy to add premium Indian provenance craft brands.

* The price mix was 4.8%, contributing to an overall portfolio NSV growth of 8.3% for the quarter. The company maintains that the price mix as a whole, the volume value delta, will stay in the range of about 6-8% on a full-year basis.

* ENA continues to experience inflation, while the rest of the commodity remains stable.

* The new policy in Karnataka suggests slab changes with a reduction in duty, which is a positive development. It will drive some premiumization, but the product will remain relatively expensive compared to other markets

Valuation and view

* With consistent improvements in gross and EBITDA margin, we increase our FY25/FY26 EPS estimates by 3%/4%. We model EBITDA margin of 17% for FY25E/FY26E (vs. 16% in FY24).

* 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 at 55x Jun’26E standalone EPS and include INR150 per share for its RCB + non-core assets to arrive at a TP of INR1,400. With the limited upside, we maintain our Neutral rating on the stock.

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