The stock of the country’s largest alcoholic beverages maker, United Spirits, has gained 25 per cent over the last three months. In addition to better-than-expected performance in the June quarter (Q1FY25), the ongoing premiumisation trend, excise duty cuts in Karnataka, and expectations of double-digit growth in FY25 have kept the sentiment positive for the stock.
A key trigger has been the cut in excise duty slabs in Karnataka, which is the largest spirits market in the country. The cuts are expected to reduce the prices of premium liquor in the state. The move by the state government was aimed at rationalising the slabs to remain competitive and in line with the prices of premium liquor in neighbouring states. The step is expected to lower prices and increase volumes, thus boosting the excise revenues of the government.
The Street is also hopeful of a resumption of business in Andhra Pradesh post the recent assembly elections and change in government. The previous government had, in 2019, halted the purchase of liquor from top companies and brands, which had an impact on sales. Brokerages expect sales to resume in FY25, and this is expected to add mid-single-digit volume/value growth for the company.
While the company posted an overall growth of 8 per cent in Q1, the Prestige and Above (P&A) segment did better with a revenue growth of 10 per cent and volume growth of 5 per cent. In comparison, the popular segment posted a 3 per cent value decline and a drop of 5 per cent by volume.
Analysts led by Naveen Trivedi of Motilal Oswal Research point out that premiumisation trends in the liquor category continued to drive the P&A portfolio. Pricing strategies also played a role in achieving better value growth. Better growth in the second half of the financial year should help the company hit the double-digit growth target in the year.
The sector, according to Nirmal Bang Research, has been one of the categories where consumer demand has remained healthy, and the outlook remains robust. Krishnan Sambamoorthy and Sunny Bhadra of the brokerage believe that stability in excise duty in recent years, the relatively urban-focused nature of consumption for large players, and ongoing premiumisation are all driving a healthy outlook for the company’s topline growth.
In addition to growth, the margin trajectory would also be keenly tracked. The company reported an expansion of gross as well as operating profit margins in Q1. Gross margins were up 90 basis points Y-o-Y at 44.5 per cent, and excluding a one-off benefit in the year-ago quarter, the gains are higher at 150 basis points Y-o-Y. Brokerages expect a 100 basis point improvement in operating margins for FY25 at 16 per cent on the back of stable raw material costs, a better product mix, and cost control measures.
What could incrementally add to overall sales are new launches and acquisitions that add to the number of categories the company has its presence in. From the parent Diageo’s global portfolio, the company launched the Godawan artisanal single malt and Don Julio tequila, which is among its largest selling premium brands globally. The company has also acquired stakes in a clutch of companies such as Nao Spirits (premium gin), Inspired Hospitality (agave craft spirit), V9 Beverages (zero-proof alcohol beverages), and Indie Brews & Spirits (speciality cold brew coffee liqueur). Any progress on the India-UK free trade agreement is also expected to boost its volumes.
First Published: Sep 03 2024 | 9:39 PM IST
