RCB deal and growth outlook are positive triggers for United Spirits

Sale of RCB stake to boost cash flows and support deleveraging, while premiumisation and policy shifts underpin steady growth outlook for United Spirits

The sale of Royal Challengers Bangalore (RCB) and Rajasthan Royals (RR) to two different consortiums have led to a market focus on listed companies that hold stakes in IPL teams. United Spirits (UNSP) is in focus, as is Sun TV and RPSG Ventures. For UNSP, the sale will lead to a post-tax accrual of ₹195-200 per share and it fits with Diageo’s stated intention of deleveraging through asset monetisation.

 

The UNSP Share Purchase Agreement (SPA) for the sale of RCB is at a premium to Rajasthan Royals franchise sale. It may be a good exit valuation and analysts looking at recently released state excise policies believe pricing flexibility and shift to alcohol in beverage tax in Karnataka will offset negative changes in Maharashtra. As the India-UK Free Trade Agreement (FTA) kicks in, it may also improve premiumisation, sales growth and margins.

 

Among other states, Andhra Pradesh has moved from state control to private retail, Uttar Pradesh has merged beer and Indian-made foreign liquor (IMFL) outlets into composite liquor shops, and even Maharashtra which hiked taxes has allowed new liquor shop licences. There is speculation that Bihar may lift its prohibition.

 

The premium in the RCB deal may be justified on brand and engagement metrics, where it is clearly superior when compared to RR. RCB scores better in terms of sponsorship revenue, digital engagement, and merchandise pull, apart from being reigning champions. RCB is estimated to have 2-3 times as many fans with 35-40 million followers across social media platforms, compared to 10-15 million for RR.

 

Analysts see UNSP as capable of generating earnings growth in double-digits (low teens at best) and add back the cash generated in the RCB deal. Prior to the deal, UNSP was trading at a small discount to its historic valuation of 55 times price to earnings.

 

In Q3, UNSP reported in-line sales and a beat on operating profit, despite a steep increase in ad-spend, which accounted for 14 per cent  of sales during the quarter. Ex-Maharashtra, and ex-channel filling in Andhra Pradesh in Q3FY25, volume growth was 6 per cent and sales growth was 14 per cent. The material cost outlook is low and there’s some growth recovery in the premium end due to higher disposable incomes.

 

The  Q3FY26 standalone net sales grew 7.3 per cent year-on-year (Y-o-Y) at ₹3,680 crore. Volumes for the quarter declined 3.2 per cent Y-o-Y to 17.6 million cases. Operating profit rose 5.1 per cent Y-o-Y to ₹620 crore. Adjusted net profit increased 2.6 per cent Y-o-Y to ₹540 crore. Overall gross margin was up by 220 basis points at 46.9 per cent. The higher advertising spends (up 300 basis points Y-o-Y), led to operating margin contraction of 40 basis points Y-o-Y to 16.8 per cent (down by 440 basis points Q-o-Q).

 

In the Prestige & Above (P&A) category, volumes declined 2 per cent Y-o-Y to 14.6 million cases with value growth of 8.3 per cent Y-o-Y. Popular volumes declined 9 per cent Y-o-Y to 2.9 million with 4.8 per cent Y-o-Y decline in value. Excise duty was down by 210 basis points Y-o-Y to 53.5 per cent as a percent of gross sales in Q3FY26.

 

Management says there is a strong momentum and growth at the top-end of the portfolio, especially in luxury and premium. The guidance is for 6-8 per cent realisation growth as the top end is doing very well with disposable income up, after cuts in goods and services tax. The P&A volume was up 6 per cent, excluding a one-off due to the Andhra Pradesh pipeline filling up in Q3FY26. For 9MFY26, ex-Maharashtra and Andhra Pradesh, P&A volumes were up 7 per cent and sales rose 12 per cent. Raw material costs are stable and likely to remain so for two quarters.

 

Bulk scotch is seeing inflation, but costs within the segment will come down once India-UK FTA is implemented in the July-September quarter. Management sees ₹110 crore to ₹120 crore annual benefits. The consensus post RCB deal may be positive for the stock.