Liquor stocks in India tend to trade at premium valuations on account of the limited basket of such stocks in the listed space and the perception of the business being recession-proof. United Spirits Ltd. (USL) is  a compelling structural play on India’s liquor industry on account of favourable demographics and low per capita consumption. Robust market share (23 per cent of spirits volume in FY21) and turnaround benefits ensuing from management control of Diageo are added positives.

However, we initiate coverage on the stock with a neutral view due to rich 38 times EV/EBITDA and 64 times Price to Earnings valuation (based on FY23 consolidated adjusted earnings per share), which bake in most of the positives. The estimated (Bloomberg consensus) 13-17 per cent adjusted profit growth for FY24 and FY25, backed by mid-teen EBITDA margins, are good but don’t make USL stock attractive, due to the rich valuations. The company’s plan to resume dividends to shareholders in FY24 is encouraging.


USL, India’s leading beverage alcohol company, manufactures, sells and distributes brands such as Johnnie Walker, Black Dog, Black & White, VAT 69, Antiquity, Signature, Royal Challenge, McDowell’s No1, Smirnoff, Tanqueray, and Captain Morgan. ‘Prestige and Above’ (P&A) segment comprises 81 per cent of its net sales. Within the portfolio, luxury segment in FY23 has contributed 52 per cent in overall rebased net sales growth, followed by 34 per cent contribution by mid and upper prestige segment.

Headquartered in Bengaluru, USL has over 3,000 employees and approximately 40 manufacturing facilities. In 2014, Diageo Plc gained control of USL from Vijay Mallya, and since then, the company has undergone major changes, including cutting debt (standalone gross debt of ₹1.1 crore in FY23 vs. ₹3,252 crore in FY18; consolidated numbers not available). The company has now sharpened its focus on P&A portfolio, exiting a major chunk of the declining ‘Popular’ segment market by way of a slump sale (32 brands) and franchise agreement (11 brands) in September 2022.

Diageo has introduced changes in distribution levels, brand promotions strategy, initiated brand renovations, enhanced efficiency in supply chain, and brought focus on a lean portfolio. The strategy of franchising of ‘Popular’ segment is also bearing fruit in terms of release of working capital and improving margins.

Growth and valuations

USL is undergoing a major transformation. At the same time, there are some headwinds ahead. The first half of FY24 is likely to be a challenge, courtesy a high base coupled with negative impact of Delhi excise policy change, impact of sale of ‘Popular’ business (with effect from Q3 of FY23), price cuts in Maharashtra. The impact of higher raw material costs is also important to monitor. Both its primary raw materials Extra Neutral Alcohol (ENA) and glass (30 per cent each of cost of goods sold) have surged in recent times. El Nino/MSP hike is to be watched for ENA prices. The second half of FY24 and FY25 is when the base could become more favourable, especially from raw materials perspective.

In FY23 USL reported 41.5 per cent gross profit margin, which is lower than 43.9 per cent in FY22. Commodity inflation impact in glass and ENA weighed but was partly offset by favourable mix and ramped up pricing and productivity. Similarly, reported EBITDA margin was 13.7 per cent in FY23 vs. 16 per cent in FY22. This was primarily due to gross margin contraction. Reported profit after tax stood at ₹1,052 crore in FY23 vs. ₹851 crore in FY22, indicating 10.1 per cent net profit margin (110 basis point yoy increase).

Bloomberg consensus estimates indicate 5-6 per cent yoy adjusted consolildated revenue growth for FY24, which is much slower than the FY22 (19 per cent) and FY23 (9.3 per cent) adjusted figures. USL is expected to return to 9-10 per cent adjusted revenue growth in FY25. Adjusted EBITDA margins are expected to be between 15-16 per cent in FY24 and FY25, on the back of a better product mix and cost structure. USL is focussing on premium portfolio to ensure that mix continues to improve. However, the prevalent inflationary trend in raw material costs combined with low pricing power in ‘Popular’ and ‘Lower Prestige’ segments can make it challenging for USL to clock higher growth in this pocket.

United Spirits stock trading at 38 times EV/EBITDA and 64 times Price to Earnings valuation, which is at a premium to domestic peers. Its valuation is also rich in comparison to global alcobev players such as Anheuser-Busch InBev, Heineken and Pernod Ricard. At current stock price levels of Rs 913.60, USL prices in most of the positives. Its long-term growth prospects, led by favourable demographics (100 million entering legal drinking age by 2025-26, low per-capita consumption (21 litres in CY21 for India vs. 52 litres global average) and benefits from premiumization, and a strong portfolio of brands are positives, but chances of an upside from current levels are capped. Hence, new investors can wait to enter. But given the positives, existing investors may continue holding the stock. 

Upside triggers for the stock could be a Free Trade Agreement (FTA) between India and the UK for liquor trade. This can boost imported scotch business for players such as USL. Faster than expected softening of raw material prices could also surprise. On the other hand, GST remains a key monitorable. Any inclusion of raw materials within GST ambit would be a potential negative. Sustained slower-than-industry growth and any impact on tax/pricing are also risks to our call. For instance, just last Friday Karnataka announced a hike in additional excise duty on IMFL and beer as part of the State Budget for 2023-24, a move that is likely to raise prices. In India, the state governments use their discretion to regulate alcobev firms within their territories. Nearly 50 per cent of sales volumes are generated from regions where state governments control prices.  

Rich valuations
Rising input costs
Strong business prospects