Near-term headwinds could reverse United Spirits growth trajectory

Margin expansion, debt reduction and higher premium segment sales may offer some support to the stock

After four quarters of contraction, United Spirits returned to a positive sales growth trajectory with an uptick of 12 per cent y-o-y in the March quarter. Adjusted for bulk scotch sales, comparable sales growth came in higher at 16 per cent. This coupled with expanding margins and debt repayment were other key takeaways in the quarter.

As has been the case in recent quarters, the Prestige and Above (P&A) segment was the key growth driver rising 26 per cent led by higher demand for scotch and a lower base. While overall volumes were up 8 per cent led by higher off-trade sales, volume growth for the P&A segment was at 19 per cent. Volumes in the Popular segment were flat with higher taxes in states such as West Bengal impacting this business.

A strong show in the P&A segment aided the product mix which coupled with benign raw material costs and lower advertising spends led to a 490 basis points expansion in operating profit margin to 18.5 per cent. This was the best margin performance in 10 quarters. While raw material prices are expected to harden going ahead, a lower year ago base and productivity gains would offset the pressures.

Another positive has been the reduction in debt. Better working capital management led to a higher debt repayment to the tune of Rs 1,517 crore in FY21. Ashit Desai of Emkay Research believes that with current debt at Rs 556 crore, the company should turn into a net cash position in the current financial year.

While investors await the outcome of the ongoing strategic review of brands in the Popular segment, the premiumisation strategy of the company is working well. The share of P&A segment increased from 65 per cent in FY20 to 70 per cent in FY21 with scotch among the fastest growing sub-segments.

Due to the restrictions related to lockdowns in multiple states, most analysts have cut the company’s FY22 earnings estimates by over 15 per cent. They however expect growth to come back by FY23; investors can consider the stock on dips.