United Spirits Ltd (USL) (NSE: MCDOWELL-N, BSE: 532432) is one of the largest alcoholic beverage (alcobev) companies and consumer goods companies in India. A subsidiary of Diageo (55.9% stake), the global leader of the alcohol beverages industry, United Spirits is headquartered in Bengaluru and has a pan India presence with over 50 manufacturing facilities and robust distribution network of more than 65,000 outlets. The company has a comprehensive brand portfolio of over 80 brands covering popular, prestige, premium, and luxury liquors including marquee brands like Mcdowell’s No.1, Royal Challenge, Signature, Black Dog, Bagpiper, Haywards, and Antiquity. United Spirits also imports, manufactures, distributes, and sells various iconic Diageo brands to the likes of Captain Morgan, Johnnie Walker, Baileys, VAT69, Smirnoff, Black & White, Ciroc, J&B, etc in India under different licensing agreements.
United Breweries Ltd (UBL) (NSE: UBL, BSE: 532478), UB Group’s brewing entity is the undisputed market leader in the Indian beer industry with a market share of over 53%. United Breweries manufactures, markets, and sells beer under various brands including Kingfisher Strong, Kingfisher Ultra, Kingfisher Premium, and Kingfisher Storm. Selling over 150 Million cases in FY19 alone, Kingfisher is the company’s flagship brand. Heineken, the number one brewer in Europe with a brand presence in 190 countries, has a 46% ownership in UBL, which makes UBL one of the manufacturers and sellers of Heineken beers and expand its portfolio with stellar products of global repute. The company has at least one of its brands selling in around the ~80,000 selling outlets across the country, making it one of the widest distribution networks among its peers. The Company has a pan-India presence with 21 owned manufacturing facilities and 8 contract brewing arrangements.
Operational and Financial Performance
While USL’s operating revenue has grown only at a CAGR of 0.02% in the past 5 years, operating profit and net profit have grown at a staggering 89.24% (FY15-19) and 68.45% (FY16-19) respectively. This is testament to the company wide clean up that Diageo has undertaken over the past couple of years. The management has also been successful in bringing down debt over the same time period. The company has been vocal on its decision to concentrate on the Prestige and Above (P&A) segment (INR 400 a bottle and above). The P&A segment contributes towards 66% of the total revenue in 9MFY20 as against 58% in FY17. Volume growth has also been positive for the P&A segment over the past 8 quarters.
Raw materials continue to be the largest expense for the company. However, the management is expecting raw material inflation to moderate in the coming quarters. The company has received price hikes from 17 states over the last 12 months and is actively working with more states for price hikes. Cost initiatives will continue in FY21.
|
United Spirits |
FY15 |
FY16 |
FY17 |
FY18 |
FY19 |
|
Operating Revenue (INR Cr.) |
9,334.99 |
8,494.90 |
8,817.50 |
8,590.60 |
9,340.80 |
|
Operating Profit (INR Cr.) |
114.07 |
1,008.20 |
1,094.50 |
1,426.10 |
1,462.80 |
|
Operating Margin (%) |
1.22 |
11.87 |
12.41 |
16.6 |
15.66 |
|
Net Margin (%) |
-17.92 |
1.68 |
1.04 |
7.40 |
7.28 |
|
ROCE (%) |
-11.16 |
14.3 |
9.11 |
20.21 |
21.17 |
|
ROE (%) |
-91.41 |
12.5 |
5.44 |
31.01 |
24.88 |
|
Cash Conversion Cycle |
27.11 |
12.74 |
7.19 |
-6.43 |
-14.15 |
|
Debt to Equity |
7.56 |
2.59 |
2.32 |
1.41 |
0.93 |
UBL has also showcased excellent growth in the past 5 years. Operating revenue has grown at a CAGR of 8.41% in FY15-19. Operating profit and net profit grew at 15.42% and 21.30% respectively in the same period. The company has not only been able to increase its market share but also maintain its several moats. Premiumization, better utilization of capacity, recycling of bottles enabled by embossment, localized sourcing of barley, and reduced competitive intensity in recent years have enabled margin and RoCE improvement for the company.
The company has taken price increases in key markets such as Karnataka, Maharashtra, Rajasthan and Goa. These price increases have helped offset part of the input cost increase impact, especially in new glass and barley.
|
United Breweries |
FY15 |
FY16 |
FY17 |
FY18 |
FY19 |
|
Operating Revenue (INR Cr.) |
4,688.11 |
4,833.14 |
4,729.19 |
5,619.02 |
6,475.43 |
|
Operating Profit (INR Cr.) |
659.37 |
779.35 |
693.83 |
915.12 |
1,170.37 |
|
Operating Margin (%) |
14.06 |
16.13 |
14.67 |
16.29 |
18.07 |
|
Net Margin (%) |
5.51 |
6.07 |
4.81 |
7.01 |
8.66 |
|
ROCE (%) |
16.06 |
19.00 |
13.83 |
22.10 |
28.46 |
|
ROE (%) |
14.94 |
14.94 |
10.26 |
15.71 |
19.18 |
|
Cash Conversion Cycle |
42.39 |
28.27 |
29.03 |
22.83 |
23.08 |
|
Debt to Equity |
0.45 |
0.38 |
0.25 |
0.12 |
0.07 |
Industry Overview
United Spirits – The alcohol beverage industry in India is segmented into IMFL (Indian Made Foreign Liquor), IMIL (Indian Made Indian Liquor) Wine, Beer, and imported alcohol. The IMFL contributes over 70% of the total sales in the Indian Alcobev Market. India’s liquor market was estimated to be USD 35 Billion in FY17 wherein the contribution of the organized sector was a mere 50%. India is the largest Whisky market in the world (volume terms), yet still ranks low in terms of per capita consumption of alcohol. India is the fastest growing alcohol market in terms of volume growth (7% CAGR over 2018-2023). Premium segment is expected to outpace popular segment.
Rising demand is fuelled by urbanization of Tier II & Tier III cities, the country’s large young population base, and the rise in disposable incomes. USL is riding on the premiumization theme in alcobev with disproportionate A&P spends on P&A and defocus on popular (franchised in 13 states). According to the World Health Organization, around 30% of Indians consume alcohol out of which 4% to 13% are daily consumers.
United Breweries – Beer accounts for merely 10% of the total alcohol consumed in India. In terms of volume, the current size of the Indian beer market is about 390 Million cases (1 case equals 24 bottles). Between FY14 and FY19 the segment grew at a CAGR of 8%. The beer industry in India is highly underpenetrated as compared to other Asian markets. Factors such as rapid urbanization of Tier II & Tier III cities, rising disposable income and growing prevalence of western culture are expected to aid the growth of the alcohol beverage industry over the coming years and decades. The craft beer segment along with the demand for premium beers is estimated to grow at a strong double-digit growth rate. Due to a growing number of cities and the presence of favourable demographics, North and West India are expected to be the fastest-growing markets in the country. In over 60% of markets, state governments dictate the price at which beer can be sold.
Strategies in play for United Spirits
Expanding Margins through premiumization – The prestige and above segment inherently have better margins and to capitalize this, the company has been gradually shifting its product portfolio towards luxury, premium, prestige segments, etc. and increasing its marketing expenditure. The company increased its investments in power brands through purpose-led campaigns.
Implementing Franchise Model – Having successfully implemented the franchise model for its brands, across 13 States of India, United Spirits plans to expand the same to other states, especially for its popular segment brands. This move is expected to reduce working capital requirements and allow the company to focus on higher-margin products.
Strengthening Brand engagement – To find a way through a prohibition on liquor advertisements, the company is leveraging retail outlets by using preferential placements in the outlets for better visual appeal and customer recall. The company has also collaborated with start-ups, invested in party and nightlife content to strengthen its impact. To expand consumer reach, the company is also using digital media. Johnnie Walker launched White Walker (a limited-edition scotch) inspired by one of the globally popular TV Series – Game of Thrones.
Bottled-In-Origin (BIO) scotch – Currently relatively small, huge potential for growth. Some states (Maharashtra, Karnataka and Delhi) when reduced price in BIO scotch led to explosion in growth. Diageo has the most formidable portfolio globally, if the category explodes, Diageo India will be the biggest beneficiary.
Strategies in play for United Breweries
Foraying into Craft Beer segment – To foray into a fast-growing craft beer segment where small players like Bira 91, White Owl, Simba had created a niche for themselves, United Breweries launched Kingfisher Ultra Witbier in Q3FY20.With the current demand of 1.5 million cases, the segment is at the nascent stage but is estimated to be brewing a strong double-digit growth.
Riding the lucrative wave of Premiumisation – Premium products inherently come with better margins so to expand margins and capitalize on the growing demand for premium beer the company launched Kingfisher Storm in 2018 which in its first year in the market sold over 3 Million Cases. Launch of Amstel will also facilitate the expansion of the premium brand portfolio. The Premium beer segment has grown much faster than the overall beer industry, the segment has grown at a CAGR of close to 30% over the last three years.
Capitalizing growing demand for aspirational products – In 2018, the company launched Heineken’s premium strong beer ‘Amstel’ to cater to the growing demand for international brands. The Company witnessed a strong demand as the sales for Amstel grew fivefold in 9 months ended FY20.
Outlook
Diageo gaining control has led to a dramatic turnaround for USL since FY15. India is a critical market for Diageo, given the scale (largest Whisky market), leadership position and opportunity to preimmunize.
USL is currently available at a CMP of INR 609.95 (as on April 21, 2020) at a PE of 61.22, which is just below its 5-year median PE of 62.19. While the company witnessed weak sales growth, portfolio realignment and continuous efforts on cost reductions and improving efficiencies have enabled the company to have improved profitability.
On the other hand, in the face of competitive challenges, increased taxation and somewhat sluggish industry growth, UBL has maintained its dominant position. UBL is currently available at a CMP of INR 927.05 (as on April 21, 2020) at a PE of 53.87, which is well below its 5-year median PE of 81.30. However, the possibility of worsening situation in Andhra Pradesh on prohibition of beers and the fact that we may be very close to final judgment on the Competition Commission of India (CCI) issue on price collusion creates a negative overhang on the profitability of the company.
While high taxes and regulations with controls on advertising and distribution are headwinds for these companies, the same create high entry barriers for new players. Both USL and UBL have strong moats in place in the form of brands and pan-India distribution networks. Governments of various states may be compelled to adopt liberal policies looking at the growing prevalence of western culture of social drinking, highly lucrative alcohol industry, and urbanization of Tier II & Tier III cities. By 2030, the working-age population is expected to cross 1 billion marks with a median age of 31.
Because of the particular nature of the liquors, these companies are not affected to the same level of damage of other FMCG companies.
While the sales and profitability of both the companies are still expected to take a hit due to COVID-19 outbreak and subsequent lockdown, USL is better placed to come out stronger once things get normal.
Team 3C Capitals
Sources
