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An ordinary quarter

Muted volume growth, realization per case outperforms

United Spirits (UNSP IN) reported ordinary growth in Q3 – Prestige & above (P&A) volumes grew just 6% YoY in 9MFY24. UNSP reported stronger growth in realisation per case in P&A segment, led by product mix change/pricing, as the P&A realisation grew 7.4% YoY in the same period (9MFY24), largely led by growth in the luxury portfolio. Competitive intensity remains high in the mid/upper prestige segment to gain market share versus local peers, as per our assessment. But at overall portfolio level in P&A, UNSP grew in line with peers, helped by luxury brands. Constant move to renovate brands in the mid and upper-prestige segments led to traction in select cities, which drove volume growth. Realization per case would continue to prop growth, as UNSP is the leader in Scotch, with a strong recall across brands like Black & White, Black Dog and Johnnie Walker.

EBITDA margin may remain in a narrow band of 16.2-16.5%

UNSP indicated stable-to-slightly negative impact on gross margin going forward, as negative impact from higher cost of extra neutral alcohol (ENA) may be offset by 1) stable glass prices, 2) operating efficiencies and 3) potential price hikes. Overhang from higher advertisement and promotion (A&P) spend remains – as A&P spends, as a percentage of revenue, may move up sharply QoQ in Q4FY24E (currently at 8.9% basis 9MFY24) due to 1) launch of Don Julio tequila and 2) spends in IPL. This in turn may limit EBITDA margin improvement to 16.2-16.5% in FY24E. Expect EBITDA margin of 16.3% in FY24E, up 260bps YoY, which is healthy in our view.

Valuation: Maintain Reduce with higher TP of INR 1,170

UNSP’s core alcobev segment may post healthy revenue CAGR of 12.4% in FY24E-26E, led by realisation per case growth and partially due to volume growth. However, UNSP’s core alcobev valuation is already trading at fair valuations of 49x basis FY26E PER, factoring in healthy growth prospects. We marginally up FY25E/26E revenue 0.7%/1.6%, factoring in 1) higher realisation per case growth & 2) slightly better profitability and thereby raise FY25E/26E earnings 1.6%/2.4%. We retain Reduce and roll over to March 2025E SoTP-TP of INR 1,170 from INR 1,100, valuing the alcobev business at 53x one-year forward P/E (unchanged). We value the IPL segment at INR 83bn and WPL segment at INR 2.5bn. Implementation of the UK FTA leading to higher volume growth in P&A (luxury) and better profitability remain key drivers for upgrade.

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SEBI Registration number is INH000000933