United Spirits yields ‘strong’ full year results

Diageo-controlled Indian drinks group United Spirits Limited (USL) has reported net sales growth of 4% in 2016/17, despite a “subdued” economic environment due to demonitisation, India’s roadside alcohol ban, and the impact of prohibition in the Bihar state.

United Spirits Limited has reported net sales growth of 4% in 2016/17

In the 12 months to 31 March 2017, net sales of USL hit Rs. 8,548 crore, while profit after tax grew by 39% to Rs. 170 crore.

The performance of its ‘prestige and above’ segment “remained robust”, with net sales up by 10% in the fourth quarter, and by 13% on the previous year, attributed to the firm’s renovation and premiumisation strategy.

Within the segment, net sales for Signature whisky grew by 29% and volumes grew by 26%, supported by “successful renovation”, while Royal Challenge whisky rose by 16% and 15% respectively.

McDowell’s No. 1 Whisky variants, excluding Platinum, added 8% to the brand’s net sales and 7% to its volume.

The ‘prestige and above’ results were also boosted by the direct distribution and sales of Diageo brands. USL’s Scotch whisky portfolio in the premium and luxury segment grew net sales by 32% and volume by 29%, driven mainly by Johnnie Walker, Black Dog, Black & White and Vat 69.

Within USL’s ‘popular’ segment, net sales and volume declined by 16% in Q4. Net sales dropped by 9% and volume by 10% in the full year results, hit by the complete ban on the sale and consumption of alcohol in Bihar as well as operating model changes.

In its Q3 results, USL announced that it had entered into agreements to franchise the ‘popular’ segment in additional states, including Andhra Pradesh, Union Territory of Puducherry, Goa, and the Union Territory of Andaman and Nicobar. It also moved to a complete franchise agreement for all USL brands in Kerala.

Volume and net sales for these franchised brands in the Union Territory of Puducherry, Union Territory of Andaman and Nicobar, Chandigarh, Rajasthan, Madhya Pradesh, Himachai Pradesh, Jammu and Kashmir, Delhi, Sikkim and Uttar Pradesh accounted for 7 million cases and around Rs. 460 crore net sales in USL’s full year results.

In priority states, ‘popular’ net sales grew by 1%, driven by Hayward’s, Bagpiper and Director’s Special, but volumes were “flat”.

“Our efforts are driving improved performance which reinforces our belief that we have the right strategy in place,” said USL CEO Anand Kripalu.

“We will continue to focus on these priorities to capture the long term opportunity in this attractive market and achieve our medium term ambition to grow top line by double digit and improve margins to mid-high teens.”

The company continues to face “challenges in the regulatory environment in certain states”, he added, referencing tax and excise changes, and highlighted the supreme court judgement on the sale of liquor near highways, which “will continue to impact performance in the short term”.

Kripalu also offered an “initial assessment” on the Goods and Services Tax (GST), a comprehensive indirect tax on manufacture, sale and consumption of goods and services throughout India to replace taxes levied by the central and state governments, to be actioned on 1 July.

“Our initial assessment on GST suggests that, while alcohol for human consumption has been excluded from GST, the additional tax on input materials and services will result in stranded taxes, and impact margins,” he said.

“We shall, of course, continue to work with the central government to minimise this impact, and approach the state governments for appropriate price increases. We also recognise that the GST rates may undergo further changes, and we await formal notification of the rates and rules.”

United Spirits has experienced widely-reported turbulence in recent years. Diageo launched an investigation into USL’s books in September 2014 after acquiring its controlling stake in the business for £1.13bn.

The move signalled the beginning of a discordant relationship with former USL chairman Vijay Mallya, who resigned as chairman and non-executive director after the investigation found that company funds were diverted to other entities.

Upon his departure, Diageo agreed that Mallya would not have any “personal liability” and agreed to pay the tycoon US$75m.

In November last year, Mallya gifted the US$40 million he received from the severance deal to his children.