Near term demand triggers lacking for liquor major United Spirits

The stock of United Spirits, the country’s largest liquor company by market capitalisation (mcap), has gained 11 per cent over the past week on double-digit growth guidance, rising premiumisation trend, operationally in-line performance in the March (Q4FY24) quarter and a rally in consumer stocks.

The revenue growth of the company came in at 7 per cent year-on-year (Y-o-Y) mirroring the growth of the prestige and above (P&A) segment.

This segment comprising premium brands accounts for 88 per cent of the revenues.

The popular segment saw a revenue growth of 3.7 per cent on volumes of 4 per cent.

The ongoing premiumisation trend is aiding the growth of the P&A portfolio, and better pricing is helping drive value growth in the category.

The company, which ended FY24 with a growth of 10.5 per cent, expects to maintain the double-digit growth trajectory going ahead.

The FY24 growth in the P&A segment was 11.8 per cent and was a combination of 5.4 per cent volume growth and about 6.1 per uptick from realisations per case.

The growth in the current financial year might be backended with initial volumes expected to be low on account of a high base of last year and subdued demand environment.

The company has invested in new products/innovations across its portfolio.

Elara Securites’ Karan Taurani and Rounak Ray believe these innovations do not meaningfully contribute to revenue/profitability and they await potential market share gain and profitability.

Even as the top line performance was better than estimates, profitability was impacted on account of higher raw material costs.

The gross margin was lower by 200 basis points (bps) over the year-ago quarter while it was flat on a sequential basis at 43.3 per cent.

Higher prices of extra neutral alcohol (ENA) led to pressure on gross margins.

Analysts led by Naveen Trivedi of Motilal Oswal Research believe that gross margins are still far off from the 48-49 per cent levels achieved in FY18-19.

After witnessing high raw material inflation in the last four years, glass prices are likely to stabilise, but ENA inflation remains firm, rising 11 per cent Y-o-Y.

The brokerage estimates a gross margin print of 44 per cent each for FY25 and FY26.

It has a ‘neutral’ rating on the stock and doesn’t expect much upside from these levels.

Margins at the operating level at 7 per cent were flat as high input costs were negated by the decline in ad spends.

The company expects ENA prices to remain elevated in the medium term due to the government’s focus on ethanol blending.

IIFL Research has maintained its ‘add’ rating.

Say analysts led by Percy Panthaki of the brokerage: “While current demand conditions remain challenging and ENA price is inflationary, the management is confident of delivering modest margin expansion via cost efficiency plans and premiumisation.

"We believe that the long-term story for United Spirits is exciting, although it lacks near-term triggers.”

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