Multiple growth triggers to drive gains for United Spirits stock

Growth on top: Premiumisation and strategic pricing raise the bar for its Prestige and Above portfolio

The stock of United Spirits (USL), the country’s largest alcoholic beverage maker, has surged by 20 per cent over the past three months. This growth is driven by a combination of factors: better-than-expected performance in the first quarter (Q1) of 2024-25 (FY25), a strong premiumisation trend, excise duty cuts in Karnataka, and projections of double-digit growth for the financial year.

One of the key catalysts is the reduction in excise duty slabs in Karnataka, the largest spirits market in India. These cuts are expected to lower the prices of premium liquor in the state. The state government’s move to rationalise the slabs aims to stay competitive with the pricing of premium liquor in neighbouring states. This is expected to result in lower prices, higher volumes, and increased excise revenue for the government.

 

Moreover, market optimism has grown around the potential resumption of business in Andhra Pradesh following the recent Assembly elections. In 2019, the previous government halted liquor purchases from major companies and brands, affecting sales. However, brokerages expect sales to resume in FY25, contributing to mid-single-digit volume and value growth for the company.

In Q1, USL reported overall growth of 8 per cent, while its Prestige and Above (P&A) segment outperformed with 10 per cent revenue growth and a 5 per cent volume increase. In contrast, the popular segment saw a 3 per cent decline in value and a 5 per cent drop in volume.

Analysts at Motilal Oswal, led by Naveen Trivedi, highlight that the ongoing premiumisation trend in the liquor sector has been the prime mover for the P&A portfolio. Strategic pricing has also bolstered value growth. The second half of the financial year is expected to further strengthen growth, potentially pushing the company towards its double-digit growth target.

Nirmal Bang Research analysts Krishnan Sambamoorthy and Sunny Bhadra noted that demand in the sector has remained healthy, with a strong outlook for top-line growth. Stability in excise duty, the urban-focused nature of consumption, and premiumisation are key factors contributing to this positive forecast.

Margin expansion is also a focal point for investors. USL reported improvements in both gross and operating profit margins in Q1. Gross margins increased by 90 basis points (bps) year-on-year (Y-o-Y) to 44.5 per cent. Excluding a one-off benefit in the year-ago quarter, the increase was 150 bps Y-o-Y. Brokerages forecast a 100-bp rise in operating margins for FY25, reaching 16 per cent, due to stable raw material costs, an improved product mix, and cost control measures.

A series of product launches and acquisitions is expected to further bolster sales. From parent company Diageo’s global portfolio, USL launched the Godawan artisanal single malt and Don Julio tequila, both of which are top-selling premium brands globally. The company also acquired stakes in Nao Spirits (premium gin), Inspired Hospitality (agave craft spirit), V9 Beverages (zero-proof alcohol), and Indie Brews & Spirits (specialty cold brew coffee liqueur).

Progress on the India-UK free trade agreement could also boost volumes.