The stock of United Spirits, the country’s largest alcoholic beverages maker, has surged by 25% in the past three months. This impressive gain is attributed to a mix of strong performance in the June quarter (Q1FY25), the premiumisation trend, excise duty reductions in Karnataka, and optimistic double-digit growth expectations for FY25.
Excise Duty Cuts in Karnataka: A Key Trigger
An important factor driving this positive sentiment is the recent reduction in excise duty slabs in Karnataka, the largest market for spirits in India. This decision by the state government aims to make premium liquor more affordable by aligning its prices with those in neighboring states. By doing this, they hope to boost both the sales volumes and the state’s excise revenues.
Positive Outlook in Andhra Pradesh
Market watchers are also optimistic about Andhra Pradesh, which has seen a change in government following recent assembly elections. The previous administration had stopped purchasing liquor from top brands in 2019, impacting sales. Analysts believe that sales will resume in FY25, potentially providing a mid-single-digit growth boost for United Spirits.
Performance Highlights
In Q1, United Spirits achieved an overall growth of 8%. The Prestige and Above (P&A) segment particularly stood out with a 10% revenue growth and a 5% volume increase. However, the popular segment saw a 3% decline in value and a 5% volume drop.
Impact of Premiumisation
Naveen Trivedi from Motilal Oswal Research notes that the ongoing premiumisation trend in the liquor category has significantly bolstered the P&A portfolio. Pricing strategies also aided in achieving robust value growth. Better performance in the latter half of the financial year is expected to help United Spirits achieve its double-digit growth target for the year.
Market Stability and Healthy Demand
According to Nirmal Bang Research, the liquor sector has maintained healthy consumer demand, and the outlook remains strong. Analysts Krishnan Sambamoorthy and Sunny Bhadra attribute this to stable excise duty in recent years, urban-focused consumption, and ongoing premiumisation. These factors are crucial for the company’s topline growth.
Tracking Margins
Additionally, the company’s margin trajectory will be closely watched. United Spirits reported an increase in both gross and operating profit margins in Q1. Gross margins rose by 90 basis points year-on-year (Y-o-Y) to 44.5%. Excluding a one-off benefit from the same quarter last year, the gains are actually about 150 basis points Y-o-Y. Analysts expect a 100 basis point improvement in operating margins for FY25, reaching 16%, due to stable raw material costs, a better product mix, and effective cost control measures.
Future Growth Drivers: New Launches and Acquisitions
New product launches and acquisitions could further drive overall sales. From Diageo’s global portfolio, United Spirits has introduced brands like Godawan artisanal single malt and Don Julio tequila, which is one of its best-selling premium brands globally. The company has also acquired stakes in several ventures like Nao Spirits (premium gin), Inspired Hospitality (agave craft spirits), V9 Beverages (zero-proof alcohol beverages), and Indie Brews & Spirits (speciality cold brew coffee liqueur). Progress on the India-UK free trade agreement could also boost volumes.
