Focus on premiumisation keeps United Spirits on a high

Five years after multinational liquor giant Diageo acquired Vijay Mallya’s United Spirits, the company has managed to pay off a debt of around ₹6,000 crore by driving a strong premiumisation strategy and through savings across different lines of the P&L.

On the balance sheet side, USL has continued to deleverage and reduced total debt by 20 per cent during the first half of FY19, following a 20 per cent reduction in total debt during the previous year. The company reported debt reduction, from around ₹8,000 crore five years ago to ₹2,628 crore as of September-end, 2018.

Focus on Prestige

“Our performance has been driven by our focus on the Prestige and Above segment, aimed at driving premiumisation of our product mix, in line with the evolving preference of consumers,” Anand Kripalu, CEO and MD of United Spirits, told BusinessLine .

Kripalu said the Prestige and Above segment accounted for 66 per cent of net sales by value during the first nine months of the financial year, an increase of three points compared to the same period last year. The company has been driving savings across different lines of the P&L, translating to consistent improvement in EBITDA margin over the last few years.

“Furthermore, we have managed to achieve this EBITDA margin improvement despite increasing marketing reinvestment rate consistently, from 7 per cent of net sales a few years ago to 10.1 per cent of net sales during the first nine months of financial year 2019,” he said.

NCD issue

To refinance higher cost debt, United Spirits made its maiden issue of non-convertible debentures in FY18, which combined with debt reduction and better debt-mix, resulted in saving of interest cost of ₹108 crore during FY18. The liquor major has also rationalised its supply footprints from 93 to 49. Kripalu said the company has also been restructured to make it leaner and flatter, roles and spans are bigger, decision-making is faster and accountability is sharper.

“We have broken down hierarchies and silos and encourage the employees to question and challenge each other in an environment of trust and transparency.”

“We continue to deliver financing cost efficiencies and repay our debt mainly as a result of improved operating performance combined with monetisation of our non-core assets,” said Kripalu.

The financial performance of the company has been steadily improving as the operating environment stabilised over the past few quarters after a series of unprecedented external shocks starting with the highway ban in FY18. In an investor call, the company had specifically mentioned the progress being made towards premiumisation and productivity so as to deliver consistent and sustainable profitable growth.

HDFC Securities in its note to investors said a potential price increase in Karnataka could be a positive and sale of non-core assets over the next 2-3 years is an additional trigger. It also pointed out that a persistent increase in State excise levies leading to a shift in consumer wallet share a key risk.

Nirmal Bang in its note to investors said that United Spirits’ focus on premiumisation has paid off.

“The popular segment tends to witness more volatility as it tends to be slightly more price-elastic and is influenced by trends witnessed in the country liquor market. In the case of prestige/deluxe and above segments, demand conditions are fairly robust and we expect the strength to continue considering the innovation agenda and marketing support for the same.

Premiumisation strength is also evidenced by the fact that growth in luxury (single malt and scotch blends) is well above the growth witnessed in premium Indian Made Foreign Liquor segment.

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