In July 2023, we had initiated coverage on the world’s top spirits maker Diageo Plc-owned United Spirits Ltd (USL) with a ‘hold’ rating. Since then, while the stock has rallied to current levels of ₹1,452, earnings visibility, margin gains and structural drivers have improved significantly. So, there is a good case now for continued upside even from current levels. Hence, investors with a long-term perspective of three-five years can look to accumulate the stock gradually on dips.
Based on Bloomberg consensus estimates, the company’s adjusted consolidated EPS is expected to grow at around 15 per cent annually over FY26 and FY27. This brings the FY27 forward Price/Earnings (PE) down to 51x from a current trailing 68x. While not cheap, it is not out of bounds as well for a compelling play on India’s liquor industry, which has a long runway of growth. The five-year PE of the stock is 71 times.
The stock is now backed by clearer visibility on premium product momentum, a strong earnings growth runway, anticipated benefits from the India-UK Free Trade Agreement (FTA) on Scotch whisky duties, and improved capital return metrics. These, along with a leaner portfolio, clean balance sheet and dividend payouts, make USL an attractive investment opportunity, as more than 100 million individuals enter the legal drinking age over the next five years.
Also, there has been speculation about a potential stake-sale in the RCB IPL franchise, owned by USL, at a $2-billion valuation (₹17,000 crore). Some broker estimates peg RCB’s worth at ₹10,000 crore or ₹140 per share. While USL has clarified the reports are speculative and no talks are underway, any future monetisation of Royal Challengers Sports Pvt Ltd, a wholly-owned subsidiary, could unlock non-core value for USL.
About the company
USL manufactures and markets some of the most iconic alcohol brands, including Johnnie Walker, Black Dog, McDowell’s No.1, Smirnoff and Tanqueray in India. It is the clear leader in both Scotch and Indian Made Foreign Liquor (IMFL), with offerings spanning from ₹120 to ₹25,000 per bottle!
Three brands — McDowell’s, Royal Challenge and Johnnie Walker — now contribute over ₹1,000 crore in annual net sales value (NSV) each. Another three — Signature, Black Dog and Black & White — exceed ₹500 crore in NSV, while Smirnoff, VAT 69, Antiquity Blue, DSP fall in the ₹100 crore+ club.
Over the last few years, USL has undergone a transformation by cutting debt, exiting low-margin brands and sharpening focus on premiumisation. Additionally, operational controls, distribution reforms and brand renovation strategies introduced under Diageo’s stewardship have turned USL into a margin-accretive, cash-generating business (free cash flow of about ₹1,400 crore in FY25). The company’s strong premium portfolio also gives it pricing flexibility, allowing partial pass-through of costs.
USL operates 36 manufacturing facilities across India, supported by a strong distribution network and a state-of-the-art technical centre.
Investment thesis
There are five key reasons to be positive on USL with a long-term view.
First, the company is entering a multi-year earnings upcycle. Consensus estimates peg adjusted EPS growth at about 15 per cent annually over FY26 and FY27. This is backed by stable volume growth and visible margin tailwinds. Margins, which were under pressure in FY23 due to Extra Neutral Alcohol (ENA) and glass inflation, have now rebounded. Adjusted consolidated EBITDA margin, according to Bloomberg estimates, is expected to more than double from 9.5 per cent to 19 per cent by FY27, driven by favourable product mix and disciplined cost control. Going into FY26, commodity costs are largely stable.
Second, USL’s success in expanding its premium portfolio is central to its structural story. Luxury and upper-prestige brands have consistently contributed to net sales growth in recent years. Newer launches like Godawan (single malt) and innovations such as House of McDowell’s X-series package, RC hipster pack, Smirnoff Indian flavours, McDowell’s pocket pack, etc, have seen traction. In FY25, 33 per cent of the company’s NSV came from the Luxury and Premium segment, 56 per cent from the Upper, Mid and Lower Prestige segments, and the rest from Popular etc. Consistent investments in advertising and promotion (₹900–1,100 crore annually over the last three years) have supported its premiumisation push, helping raise realisations per case from ₹1,600 in FY23 to over ₹1,800 in FY25.
Third, an underappreciated optionality is theFTA between India and the UK, which is in the final stages. With its implementation, the accessibility of Scotch whisky in India is set to improve, paving the way for new premium offerings for Indian consumers. The reduction in import duties — from 150 per cent to 75 per cent — is expected to translate into high single-digit reductions in consumer prices and drive additional volumes in the high single-digit range. USL stands to benefit meaningfully, both from direct sales and consumer uptrading into premium categories. This adds a long-term structural growth layer.
Fourth, post the divestment of the Popular portfolio and completion of its supply chain overhaul, the company is showing better capital discipline. USL exited a major chunk of the declining ‘Popular’ segment market through a slump sale of 32 brands and franchise agreement for some brands in 2022. The company’s ongoing manufacturing footprint optimisation is almost three-fourths done, with the remaining to be over the next two-three years. Similarly, cost optimisation initiatives are 63 per cent done. Return on capital employed has improved from 16 per cent in FY21 to 26 per cent in FY25. Operating leverage is kicking in, and dividend payouts (although small at ₹12/share in FY25) have resumed, reflecting confidence in future cash flows. Future earnings growth, coupled with a clean balance sheet, sets up for consistent cash returns.
Last, some key States present opportunities for USL to capitalise on. It recommenced business in Andhra Pradesh in September 2024, after a five-year hiatus, enabled by policy changes. Some States have begun making policy changes to support the industry, starting with Uttar Pradesh in its 2025-26 excise policy. Shops that earlier sold only beer or only spirits can now sell both, turning into composite outlets, nearly doubling the number of retail touchpoints for spirits to 12,500 and improving consumer access. Karnataka and Madhya Pradesh’s excise slab rationalisation moves are also positive. Having said that, the State governments use their discretion to regulate alcobev firms within their territories and this remains an industry risk.
Valuation, risks
While the stock trades at a rich trailing multiple (about 68x), the FY27 forward P/E of 51x appears justifiable given 15 per cent growth in earnings, margin expansion and premiumisation-led durability. This premium is also rational in the context of USL being the only large-cap, scalable play in India’s spirits market, a segment with long-term demographic tailwinds and limited investable options.
Investors may note the company faces risks from regulatory actions (excise hikes such as those seen recently in Maharashtra, price control etc) and raw material volatility in ENA and glass. Ethanol policy changes may impact ENA availability and pricing.
Also, navigation of the broader consumer demand environment rests on the company’s execution capabilities. Restrictive market access, for instance, in Delhi, needs to be monitored, as does tax uncertainty in Uttarakhand. Scotch-related FTA benefits are still over a year away and contingent on final terms.
