Diageo bullish on long-term growth on the back of consumption revival

K Giriprakash Bengaluru | Updated on March 25, 2020

Liquor companies are facing the brunt of the economic slowdown just as other sectors are, but they have been hit harder by the steep increase in prices of ENA (extra neutral alcohol), the primary raw material for the alcohol industry. In an interaction with BusinessLine, Anand Kripalu, Managing Director and CEO, Diageo India, the country’s largest liquor maker, shares his perspective about the industry and the company’s roadmap.

United Spirits has seen a rather steep dip in volumes during the previous quarter, but since then has seen an improvement in its performance. Looking ahead, are there any major blocks that could impede growth? Will the economic slowdown and coronavirus outbreak affect future sales?

Q3 FY20 saw a sequential improvement in our top line. Net sales for the quarter grew over 3 per cent, up from a flat performance in Q2FY20. We are encouraged by the momentum in our Prestige & Above portfolio, which grew a little over 8 per cent (year on year) in Q3 compared to flat (year on year) volumes in Q2. We also saw the growth of our premium segment with each sub-segment in our portfolio growing faster than the one below. All sectors in India are currently impacted by the economic slowdown and we are no different. We will continue to work on growth drivers within our control and are optimistic about long-term growth prospects on the back of consumption revival. We are closely monitoring the developments around coronavirus and its potential impact on the business.

How many States have given out price hikes so far? Do you think it will impact gross margins, going forward? How do you read the situation in Telangana and Uttar Pradesh?

We have seen price hikes in two States, namely Rajasthan and Andhra Pradesh. Like any price hike, in this case, Telangana, it will take a few months for the system to stabilise due to old inventory and label re-registration. But within a couple of months, the category has bounced back due to strong brand resilience and inelastic demand. Similarly, the new excise policy in UP shows the progressive stance of the government. For the first time, there is a separate section on Ease of Doing Business which will help the industry by ensuring smoother operations.

The Q3 results showed that recovery, compared with Q2, was large because of better cost management. Does better cost management mean reduction in the workforce, closure of some verticals and reorganisation?

Since 2015, we have embarked on a holistic journey to drive efficiency and productivity across the organisation and this has resulted in improved margins and cash flows and, reduced debt and a stronger balance sheet. We are prudent about managing all the line items in the P&L. Our continued focus on cost discipline has helped us improve margins despite an unprecedented inflationary environment for our key raw materials in the current financial year. We have delivered an EBITDA margin of 16.4 per cent in Q3, an improvement of 207 basis points compared to last year. All this has been achieved by embedding productivity in all ways of doing business — be it through optimising our manufacturing footprint, or management of working capital or by leveraging systems and processes to reap cost efficiencies in various parts of the organisation.

Are you cutting down on capex during the new financial year compared with the previous ones because of the slowdown? What is the debt position of the company? What steps has it taken to reduce debt and increase cash flow?

We are working towards ensuring that the cash flow that we generate from the business year-on-year stays healthy. We have a moderate capex plan and expect to manage it with healthy accruals. We are reducing our working capital and average working capital year-on-year. Since 2015, we have been gradually bringing down our debt. This year also, we have reduced our debt further. Similarly, our credit profile continues to be strong. We continue to enjoy AA+ and A1+ by CRISIL on our long-term and short-term debt respectively. We are committed to sustaining the journey of improvement in margins, cash accruals and deleveraging of the balance sheet.

What has been the story with input costs? Will it remain a cost pressure for the company?

Our industry has faced significant COGS inflation this year. ENA, a key raw material, has experienced unprecedented inflation of over 25 per cent year-on-year. However, we would like to believe that the worst is behind us as we have seen some stabilisation in ENA prices in the last couple of months. Despite these inflationary headwinds, and a consequent gross margin compression of over 400bps this year, we have managed to deliver an EBITDA margin expansion of 248 bps, through sharp management of our operating costs.

What is the status as far as shares with IDBI are concerned?

Since the matter is sub judice, it would not be right to comment on this subject.

Will you continue to back the T20 team, RCB? Has it turned around now even though it is yet to win the coveted title?

RCB continues to be a good long-term asset and is integral to the brand. RCB has turned around and is profitable for some years now.

Published on March 25, 2020

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