United Spirits consumers not shifting to cheaper brands, but input cost pressure builds

While inflation has been a worry in recent times, the larger consumption story anchored in premiumisation continues strongly for United Spirits’ consumers, said MD and CEO Hina Nagarajan during Q2FY23 earnings concall.

“Affluent consumers continue repertoire drinking with non-whiskey categories like gin and white spirits gaining further traction. This is also indicative of consumers increasingly wanting to drink better, not more,” she said.

In Q2FY23, the company reported 105.93 percent year-on-year jump in net profit to Rs 563 crore. Net sales jumped 17.69 percent YoY to Rs 2,879 crore in the quarter.

Also Read: United Spirits Q2 net profit rises 91% to Rs 548 crore, sales at Rs 8,283 crore

Exceptional items comprised a one-time profit of Rs 381 crore from the slump sale of 32 brands (including Haywards, White-Mischief and Green Label) in the ‘Popular’ segment, to Inbrew Beverages.

In Q2, the company’s ‘Prestige & Above’ segment net sales grew 23.1 percent to Rs 2,257 crore on back of the innovation and renovation done in prior quarters. The segment accounted for 75 percent of the company’s net sales during the first half of the year.

“The larger FMCG space is witnessing downtrading. But, I would say our Prestige consumers are managing their wallet share by moving to smaller size SKUs (stock keeping units) but not downgrading to lower priced brands. This is reflective of the brand affinity in our category,” said Nagarajan.

USL’s Prestige & Above segment includes the likes of Johnnie Walker, Vat 69 and McDowell’s No 1.

“With events and marriages now back at pre-COVID levels, we are anticipating pretty good demand forecast. The price mix during the quarter was at 9.4 percent reflecting higher growth in more premium segments as we move up the consumer price levels,” she added.

The stock has gained 6 percent since its announcement of Q2FY23 results. It currently trading at Rs 873 on the National Stock Exchange.

‘Raw material inflation remains a worry’

The company’s EBITDA margins contracted 190 basis points YoY to 15.4 percent, largely on the back of raw material price inflation.

“We expect double-digit inflationary pressures to continue to impact the company in the near term, driven by the sequential surge in prices of inputs going into glass manufacturing. We are cautiously awaiting the ethanol blending policy, which will hopefully be announced in the coming quarter,” Nagarajan said.

According to Nuvama Wealth Management, short-term stress from high raw material prices can continue to pinch the company’s margin profile. Its analysts have cut FY23/FY24 earnings per share estimate by 3 percent/1.2 percent. They have a Hold call on the stock with a target price of Rs 870 apiece.

Meanwhile, global brokerage Credit Suisse has a Neutral call on the stock with a target price of Rs 925 per share. It expects the company to begin paying dividends in FY23 and has raised FY23-25 EPS estimates by 3-4 percent, on back of high double-digit growth rate in P&A segment.

Analysts at HDFC Securities, too, have increased EPS estimates by 3 percent for FY24 and FY25. Given the Q2 beat and a healthy trend sustaining in P&A, they have maintained their Add rating on the stock with a target of Rs 875.

Elara Securities has the most bullish target on the stock at Rs 1000. The firm believes volume growth and steady margin recovery from here on will support premium valuations. The stock has a trailing twelve month (TTM) price-to-earnings ratio of 50.92.

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