- Premium segment volumes grew at 7 percent YoY
- Ad spends curtailed to protect margins
- Leverage ratio has improved, post debt repayment
- Valuations stretched from a near-term perspective
Liquor manufacturer United Spirits ended 2018-19 on a weak note. Both revenue and EBITDA (earnings before interest, tax, depreciation and amortisation) for the quarter to March were subdued amid challenges like moderation in demand and increasing cost pressure. Overall performance in FY19 was, however, impressive as revenue and operating profit increased by 10 percent and 25 percent, respectively.
Quarterly result highlights
- United Spirits’ recorded revenues of Rs 2,250 crore in Q4 FY19, registering a jump of around 4 percent year-on-year (YoY). Continued traction in the premium segment drove the overall growth in top line.
- Higher raw material costs -- both ENA and glass bottle -- had an adverse impact on gross margin. However, control in discretionary spends enabled the company to post stable operating margin. In January-March, gross margin was down by more than 300 bps, but operating margin was almost flat in comparison to the previous year.
- The overall volume growth for the quarter stood at just 1 percent on the back of higher sales from its premium segment (Prestige and above), the volumes for which grew 7 percent YoY on a high base last year. However, the volume offtake for this segment was softer than that of previous quarters. Popular segment volume stood in stark contrast to the Premium one and was down 4 percent YoY.
- Excise policy revisions in Maharashtra -- effective January 2019 -- had an adverse impact on offtake. Besides, no excise duty hike in Karnataka hurt the year-end stocking in the retail channel, unlike the previous years. Overall demand was also impacted by the constrained credit environment as well as production and sales restrictions on liquor due to the general elections.
- Multiple changes on the operational front helped the company manage costs despite a challenging cost environment. During the quarter, the company curtailed advertising and promotion spend to 8 percent of revenues. The same during Q4 FY18 stood at more than 10 percent of revenues. Besides, employee expenses were down 9 percent YoY.
- Interest expenses for the quarter were flat YoY, but working capital efficiency and divestment of non-core assets helped the company repay Rs 680 crore of debt over the course of the year. Balance sheet strengthened as the leverage ratio (net debt/EBITDA) has improved to 2.0x in the quarter under review, from 3.1x in Q4 FY18.
- Raw material prices continue to remain at elevated levels and the management has indicated that the focus on premium category, along with price hikes in select states, should help mitigate some of the cost pressure. Premium segment now contributes more than 66 percent to its topline and continue to be the key revenue and margin driver for United Spirits.
Outlook and recommendation
- Demand prospects seem very exciting from a medium to long term perspective, but near-term challenges such as slowdown in consumption, excise duty revisions, liquor ban in Andhra Pradesh loom as the sector continues to be under the regulatory ambit of the government.
- Given the strong product profile (McDowell’s No1, Royal Challenge, Black Label, Signature, Smirnoff and the like), an extensive distribution reach, Diageo-led United Spirits offers an interesting proposition for investment within the consumption space. However, the current valuations (53 times FY20 projected earnings) appear fairly expensive, considering that the business is facing a challenging operating environment, both on the demand and cost front.
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