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

Based on channel checks, analysts said USL recorded a significant pick-up in sales. Considering that the third quarter is seasonally strong for spirit makers, the opening up of most markets bodes well.

“Recovery has been strong in recent months, with on-trade reopening and off-trade demand remaining healthy," said analysts at Motilal Oswal Financial Services Ltd in a note.

What’s more is that the revival after the second covid wave has been faster. Around 70% of outlets were operational by mid-August.

Pick-up awaited
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Pick-up awaited

The other factor that is likely to boost revenue is the company’s focus on premiumization. Its scotch whisky portfolio is considered to be gross profit accretive. Also, the cash conversion cycle is better at 75-90 days compared to 120-130 days for the company’s overall portfolio, analysts said.

United Spirits has been expanding its scotch portfolio to more retail counters. That said, muted global travel demand has impacted duty-free outlets. However, some revival in duty paid sales has been observed. Hence, the increased availability of scotch brands at more retail counters is likely to support the sales momentum. The attempts to open up home delivery in some markets may also lead to a pick-up in sales, despite opposition by some state governments.

Overall, with the premiumization trend and a new leadership at the helm should benefit the company.

“India is a spirit market with long-term premiumization drivers. The new chief executive officer (Hina Nagarajan) can accelerate this trend for United Spirits with her global experience," analysts at HDFC Securities Ltd wrote in a note.

Meanwhile, revenue from the popular segment had grown 60% year-on-year (y-o-y) during the June quarter, but was down 3% on a sequential basis. Volumes saw 62% y-o-y increase. The easing of mobility restrictions would increase realizations here, analysts said. Moreover, production outsourcing of its popular brands may also help sustain margins by improving realizations. United Spirits’ popular portfolio consists of 30 brands, including Old Tavern, White Mischief and Bagpiper.

However, the company’s focus is on the prestige segment. The pick-up in this segment’s sales should have a positive rub-off on price mix and margins. For the June quarter, the underlying price mix was adverse, primarily because the momentum in performance of scotch was impacted.

Furthermore, several states had seen disruption in the sale of liquor, especially in north India. A revival is expected and this will help improve its performance.

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