Improved outlook, product mix helps profit outlook for USL

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Shares of United Spirits Ltd (USL) have gained more than 48% so far in FY22 to hit a new 52-week high on Monday. An improving sales outlook from the easing of covid restrictions appears to be behind the optimism for the stock.

Based on channel checks, analysts said USL saw a significant increase in sales. Considering that the third quarter is seasonally strong for spirits manufacturers, the opening of most markets bodes well.

“The recovery has been strong in recent months, with the reopening of the market and non-trade demand remaining healthy,” analysts at Motilal Oswal Financial Services Ltd said in a note.

In addition, the recovery after the second wave of covid was faster. About 70% of the outlets were operational by mid-August.

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Pickup expected

The other factor that can increase revenue is the company’s focus on premiumization. Its scotch whiskey portfolio is considered to generate gross profits. Additionally, the cash conversion cycle is better at 75-90 days compared to 120-130 days for the company’s overall portfolio, analysts say.

United Spirits has expanded its scotch portfolio to more retail outlets. That said, weak global travel demand has had an impact on duty-free outlets. However, some recovery in duty-free sales was observed. Therefore, the increased availability of scotch brands in more retail outlets is likely to support sales momentum. Attempts to open door-to-door delivery in some markets may also lead to a resumption of sales, despite opposition from some state governments.

Overall, with the trend towards premiumization and new leadership at the helm, the company should profit.

“India is a spirits market with long-term premiumisation drivers. The new Managing Director (Hina Nagarajan) can accelerate this trend for United Spirits with her global experience, “HDFC Securities Ltd analysts wrote in a note.

Meanwhile, the popular segment’s revenue increased 60% year-over-year (year-over-year) in the June quarter, but was down 3% on a sequential basis. Volumes increased 62% year-on-year. Easing mobility restrictions would increase achievements here, analysts said. Moreover, outsourcing the production of its popular brands can also help maintain margins by improving achievements. United Spirits’ popular portfolio includes 30 brands, including Old Tavern, White Mischief and Bagpiper.

However, the company focuses on the prestige segment. The recovery in sales in this segment should have a positive effect on the price mix and margins. For the June quarter, the underlying price mix was unfavorable, mainly because the performance momentum of scotch was affected.

In addition, several states have experienced disruptions in the sale of alcohol, particularly in northern India. A revival is expected and this will help improve its performance.

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