United Spirits' outlook revised to positive, ratings reaffirmed

Rating agency Crisil has revised its outlook on long-term bank facilities and non-convertible debentures of United Spirits Limited (USL) to positive from stable while reaffirming the rating at AA-plus.

The short-term rating and commercial paper have been reaffirmed at A1-plus. Crisil said the outlook revision reflects an expectation of improvement in USL's credit profile, commensurate with better cash accrual and leverage over the medium-term.

USL's standalone earnings before interest, taxes, depreciation and amortisation (EBITDA) margin improved to 18 per cent in the first half of fiscal 2020 (14.3 per cent in fiscal 2019) from 12.6 per cent in fiscal 2018. The improvement in operating margin is driven by the increasing share of the premium segment, optimisation of operating overheads and employee costs.

 

USL has been particularly successful in gradually shifting its product portfolio towards the luxury, premium and prestige segments. These segments inherently have better margin and are more price inelastic, enabling the company to increase the prices and thus realisations.

The share of prestige and above segments in net sales increased to 67 per cent in the first half of fiscal 2020 (63 per cent in fiscal 2019) from 58 per cent in fiscal 2018.

With healthy accrual and moderate capital expenditure (capex), USL's debt/EBITDA is likely to remain below 1.5 times over the medium term. Capex is estimated at a moderate Rs 250 crore to 300 crore per fiscal, likely to be funded through internal cash accrual.

USL reduced its debt significantly to Rs 2,630 crore as on September 30 from Rs 3,418 crore as on March 31, 2018.

"The ratings reflect USL's leadership position in the spirits industry in India, strong and diversified product portfolio, and operational and technical support it receives from its parent Diageo plc," said Crisil."These strengths are partially offset by highly-controlled regulatory regime in the industry and exposure to intense competition."

USL is the largest Indian spirits company involved in the manufacture, sale and distribution of beverage alcohol, producing and selling around 82 million cases of Scotch whisky, IMFL whisky, brandy, rum, vodka, gin and wine annually.

The company has a portfolio of premium brands like Johnnie Walker, Black Dog, Black & White, VAT 69, Smirnoff, Antiquity, Signature, Royal Challenge and McDowell's No.1 among others. It has 16 own manufacturing facilities across 10 states and one union territory in India.

For the six months ended September, the company reported consolidated profit after tax of Rs 339 crore on operating income of Rs 4,747 crore against PAT of Rs 365 crore on operating income of Rs 4,509 crore for the corresponding period of previous fiscal.