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United Spirits Limited (USL), a leading Indian alcoholic beverage company, faced subdued demand but reported an impressive 8% YoY net revenue growth in Q3, driven by the premiumization trend. The Prestige & Above segment played a key role, contributing 88.0% to net sales and achieving a significant 10% YoY growth in Q3 FY2024. Despite challenges like fluctuating raw material prices and demand pressure, USL maintained and expanded margins through effective implementation of price hikes. With the recent reduction in import duties under the UK-India Free Trade Agreement expected to lower the Maximum Retail Price (MRP) of BIO brands, USL's selling prices may see a positive impact. The company's forward-looking approach is evident in the launch of the global Tequila brand Don Julio in India. Considering these factors, we recommend holding USL as an investment.

Revenue expanded despite a modest increase in volume: In Q3FY24, United Spirits Limited (USL) reported a Net Sales Value (NSV) of INR 2,989 Crore, where Prestige & Above products accounted for a significant 88% on a standalone basis. The overall NSV experienced robust growth at 7.5%, while Prestige & Above NSV showed a commendable 10% growth on a rebased prior-year comparison. Despite this, Prestige & Above volume growth slowed to 4% YoY due to consumers reducing occasions to manage budgets, resulting in a 12.4% decline in net sales for the popular segment. Muted demand and duty increases in key states further impacted the segment adversely. The EBITDA for the quarter stood at INR 491 crore, with a margin of 16.4%. Notably, the hike in excise duty in Karnataka had an adverse impact on volume growth during this period.

Expanding Margins: The company's financial report showcases a strong performance, marked by a gross margin increase to 43.4%, attributed to a favorable product mix, premiumization efforts, and implemented price hikes. The advertising and promotional spending recorded a robust 18.4% YoY growth, driven by the festive quarter and the cricket world cup, with expectations of remaining elevated in 4QFY24 due to the IPL, promotion of the new launch 'Don Julio,' and increased investment in underperforming popular brands.

The EBITDA experienced a significant uptick of 20.9%, reaching INR 491 Cr., resulting in a corresponding increase in the EBITDA margin to 16.4%. While ENA prices saw inflation during the quarter, stability in other commodity prices, particularly glass costs, helped partially offset the impact. However, expectations are for continued elevation. The management has maintained the EBITDA guidance ahead of 15% for FY24, with a forward-looking target to achieve mid-to-highteen margins in the next two to three years.

Brand Expansions and New launches: Royal Challenger American Pride expanded into Himachal Pradesh, Arunachal Pradesh, and Uttarakhand. The new Antiquity Blue bundle is performing well, complementing the steady success of Signature and Royal Challenge American Pride. In Assam, the company introduced the premium MacDowell's No. 1 Premium Smooth variant. The global brand portfolio shows positive premiumization trends, and increased investment in Don Julio aims to position the brand as a market leader in its segment.

Outlook: Despite uncertainties surrounding government policies and interventions in the alcohol industry, as well as the prevailing inflationary and demand pressures in the near to medium term, our outlook on United Spirits Limited (USL) remains positive. The company's ongoing efforts to revamp its premium portfolio, introduce new brands, control costs, and negotiate price hikes from states are expected to yield favourable results. USL's debt-free status, double-digit return ratios, and strong cash generation further contribute to our positive stance. The strategic revamping and focus on premiumization are anticipated to drive higher margins in the upcoming quarters. Considering these factors, we recommend toHold rating on USL and set a target price of Rs. 1,150/-.

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