United Spirits seem flat, near-term demand triggers lacking for stock

Q4 performance of the country's largest liquor was better than estimates

The stock of United Spirits, the country’s largest liquor company by market capitalisation, has gained 2 per cent after its fourth quarter (Q4 FY24) results last week gave double-digit growth guidance.

The company’s revenue grew 7 per cent year-on-year (Y-o-Y), helped by the expansion of the prestige and above (P&A) segment. The premium brands segment accounts for 88 per cent of overall revenues and had revenue growth of 3.7 per cent. It grew 4 per cent by volume.

Premiumisation is helping the P&A portfolio, and better pricing is helping drive value growth in the category. United Spirits expects to maintain double-digit growth going ahead. FY24 growth in the P&A segment was 11.8 per cent and it was a combination of 5.4 per cent volume growth and about 6.1 per uptick from realisations per case.

Growth in the first half of the FY25 will be shaped by low initial volumes due to a high base of last year and subdued demand. United Spirits has invested in new products across its portfolio. Karan Taurani and Rounak Ray, analysts with Elara Securities, believe that such innovations do not meaningfully contribute to revenue and they await potential market share gain and profitability.

United Spirits’ Q4 performance was better than estimates but profitability was under pressure due to higher raw material costs. Gross margin was lower by 200 basis points over the year-ago quarter while it was flat on a sequential basis at 43.3 per cent. Higher prices of extra neutral alcohol (ENA) led to pressure on gross margins. Analysts led by Naveen Trivedi of Motilal Oswal Research believe that gross margins are still far away from the 48-49 per cent levels achieved in FY18 and FY19. Glass prices are likely to stabilise after high raw material prices in the last four years, but ENA inflation remains firm and increased 11 per cent Y-o-Y in Q4. The brokerage estimates a gross margin print of 44 per cent in FY25 and FY26. It has a neutral rating on the stock and doesn’t expect much upside from these levels.

Operating level margin (7 per cent) was flat as high input costs were negated by a decline in advertisement spending. United Spirits expects ENA prices to remain high in the medium term due to the government’s focus on ethanol blending.

IIFL Research has maintained its ‘add’ rating for United Spirits. “While current demand conditions remain challenging and ENA price is inflationary, the management is confident of delivering modest margin expansion via cost efficiency plans and premiumisation. We believe that the long-term story for United Spirits is exciting, although it lacks near-term triggers,” said brokerage analysts led by Percy Panthaki.