Can something as significant as a cash shortage separate a man from his drink? Apparently not; and in some cases, it may have brought the two closer. Did black money hoarders drown their sorrows at the bar? Consider this: United Spirits Ltd’s volume growth was widely expected to decline in the December quarter, with estimates from three brokers predicting a decline of 3% to another that said low- to mid-teens. Nothing of that sort happened.
United Spirits’ management said demonetization directly affected them, but the numbers don’t indicate anything drastic. Overall volume growth was flat in the quarter from a year ago. In fact, the popular segment—which the masses consume—saw sales decline by 7%, while the prestige segment—which the well-heeled consume—actually grew by 11%.
So the poor suffered and the rich didn’t? It’s not that simple. Bihar’s prohibition edict has also been hurting the popular segment’s sales growth. United Spirits said that in priority states, sales grew by 3% in volume terms and sales by 6%. The company said it benefited from a focus on selling more premium products, selective price hikes and productivity measures to offset input cost inflation.
Thus, while overall volumes were flat, net sales rose by 3.1% from a year ago, while material costs actually declined by 1.6%. This could be attributed to the decline in the popular segment’s volumes as also the productivity measures mentioned earlier. Now, United Spirits did push some of these cost savings into higher advertising expenses, up 6%, and other expenses rose by 19.7%. Still, its operating profit margin rose by about three-fourths of a percentage point over a year ago. That’s not bad at all, considering demonetization and the hit from prohibition in Bihar.
Operating profit growth was slender but respectable at 9.8%; but higher other income and lower interest costs helped profit before tax grow by 58.3%, while a lower tax incidence resulted in net profit growing by 86.1%. That’s much higher than the Street anticipated and is bound to see them raise a toast to its results on Monday.
Some caution is advised. Remember this is primary sales growth, from the company to the distributor/stockist. Trends at the secondary level, the actual consumer, could be different. Analysts would want to know if demonetization has had certain one-off effects at the primary level, such as dealers using old currency to buy stock while they could. Monday’s conference call should provide some details. Any spillover effects to the current quarter should be watched for.
United Spirits has also cautioned about the challenges posed by regulatory changes and tax hikes in some states, especially the Supreme Court’s order banning serving of liquor along highways. Still, if the company could defang the demonetization monster with such ease, those should be easily tackled, too.
One change will come into effect from the current quarter. The company is shifting some of its sales, mainly in the popular segment, in some states, to a franchise model, where it will earn royalty revenue. Year to date, these contribute to about 4% of net sales and 5.8% of volume. The sales from these brands will be replaced by royalty, which means reported sales growth will decline but the profit attributable to this part should be unaffected or may even improve.