Ladies and gentlemen, good day and welcome to the United Spirits Limited third quarter FY 2023 earnings conference call. As a reminder, all participant lines will be in the listen-only mode, and there will be an opportunity for you to ask questions after the presentation concludes. Should you need assistance during the conference call, please signal an operator by pressing star then zero on your touch-tone phone. Please note that this conference is being recorded. I now hand the conference over to Ms. Shweta Arora, Head of Investor Relations, United Spirits Limited. Thank you, and over to you, ma'am.
Good afternoon, everyone, and welcome to United Spirits' third quarter and nine-month ended FY23 earnings call. Today on the call we have with us our Managing Director and CEO, Ms. Hina Nagarajan, and our CFO, Mr. Pradeep Jain. Hina will provide you an update on business performance, while Pradeep will run you through the financial performance during the period. Post which, we will open the floor for questions. With this, I hand over the call to Hina for her opening remarks. Over to you, Hina.
Thanks, Shweta. Good afternoon, ladies and gentlemen. Thank you for joining us on the Q3 FY23 earnings call of United Spirits Limited. It's always a delight to interact with all of you. I wish you and your loved ones a very happy and healthy new year. I will first give a brief update on macro and industry. I will then discuss progress on our portfolio reshape strategy, followed by some business context of the results that we have announced yesterday evening. The consumption and the growth story of India continued in the October to December 2022 period, with India safely being one of the bright spots, I would say, in an otherwise gloomy global economy. This was the first full festive season post-COVID where people celebrated both inside their homes and out of their homes with great fervor.
I mean, we saw that Dussehra, Puja, Diwali, you know, even Halloween, Christmas and New Year's. Premiumization and aspiration-driven choices continued to be the key drivers of demand, with greater growth coming from the middle and upper income segments in India. The lower income segments did feel a crunch in their wallets as inflation continues to be high. That reflects in the lower end of our portfolio. Having said that, we would like to stay hopeful of inflation coming down and a boost in income owing to strong winter harvest. I mean, speaking of alcohol in particular, we continue to witness good growth post-COVID, particularly at the mid upper segments of the P&A portfolio. That is reflective of the consumption revival in the broader economic context, with the festive season adding further momentum as mentioned earlier.
Our premium Indian whiskies and scotches continue to drive category expansion on the back of the same trend of premiumization. Inflation and the larger global macroeconomic headwinds may act as a bit of a drag, but we believe that consumer demand will continue to be robust. Global data also suggests that the Indian consumer continues to be amongst the most resilient and optimistic in the world. Net-net, I would say the larger growth story pegged on premiumization continues for our industry. In this context, we have delivered a good performance in the quarter, despite headwinds from route to market change and partial recovery of BIO into. This was also the first pristine quarter post the slump sale and franchising of the strategically reviewed popular portfolio.
Pradeep will re-emphasize a couple of points that we have consistently communicated with regards to the divestiture and the franchising in his section of opening comments. During the quarter, we have also completed the merger of Pioneer Distilleries Limited and signed definitive agreements to divest the non-operated Sovereign Distilleries Limited. That progresses us towards a simplified legal entity footprint. I'm also very happy to inform that the board of directors have approved our multi-year supply chain agility program, which aims to strengthen our end-to-end supply chain, making it future ready by improving its resilience and agility, driving efficiencies, delivering additional productivity savings, and making our supply chains and operations more sustainable. This is in addition to our focus on everyday efficiency savings. Just to take you through a bit more on the rationale and economics of the program with more details.
As we have clearly articulated on several occasions that being the, a combination of acquisitions and mergers over a period of time, USL still has a fair amount of legacy costs stuck in the P&L, and we want to accelerate towards our near end stage manufacturing footprint. This is exactly what we are trying to achieve through the multi-year supply agility program. The total program cost will hover around, INR 500 crores, consisting of both cash and non-cash components in roughly a 60/40 ratio. Once completed, the program will generate INR 130-INR 150 crores of annualized productivity benefits. Overall, the discounted payback will be about 4, four and a half years. There are also appropriate disclosures to this effect in our financials.
Compared to the impact of very route to market and policy change that is clearly visible during the quarter. There is unarguably a setback for companies like ours with this change. We are doubling up our efforts to make up for this lost growth opportunity by sharpening portfolio execution, particularly on premium segments and brands like Black & White, Black Dog, Royal Challenge. We are harnessing the strong momentum of these offerings and also accelerating the reach of our innovation, such as Royal Challenge American Pride and the renovation of Royal Challenge Whiskey and Signature across other states in the country.
Overall, we remain very pleased with the response received on our renovated innovative offerings and new launches over the last few quarters and continued the sequential momentum of growth of the same in the October-December quarter. We also launched Johnnie Walker Blonde, the smooth, bright and light Scotch variant from the house of Johnnie Walker. Blonde is price-positioned in between Red and Black and will play the strategic role of recruiting the next-gen non-Scotch consumer. We have also launched the renovated new Royal Challenge in many other markets. The renovation launch was done with a Choose Bold video from Virat Kohli, which reached about 12 million+ accounts. Complementing the same, we have created the Naya Sher anthem, which was created in collaboration with Divine and Jonita Gandhi, featuring Virat Kohli.
The renovated Royal Challenge has been rolled out in Assam, Rajasthan, UP, Haryana, Maharashtra, Goa, Daman, Diu, Chandigarh. We are targeting a full national rollout completed by June 2023. On the brands No.1, we continued focused investments. Pan India launch of the new Yaari song in December, which basically was a tribute to KK who was the original singer of that song. This is one of our strongest sort of brand assets, I would say. That new song garnered 26 million+ views. The song aims to build salience for the brand across the country and drive brand love amongst the youth with celebrity handles, digital as well as new age platform promotions. On the digital side, we are continuing acceleration on consumer engagement content and community building through our platform, in.thebar.com.
We are also driving precision marketing for effectiveness and efficiency of our marketing spend. We create this virtuous cycle therefore of, you know, everyday efficiency, smart investment leading to top-line growth. I'm pleased to share that our consumer activations have been significantly recognized by the industry for their innovative approaches and best-in-class. To quote a few, the drone activation around Johnnie Walker, which we did Goa, won a gold both at the Mobile Marketing Awards, SMARTIES, in the Media Innovation category and at the ET Brand Equity Brand Strategy Awards for Tech-enabled Media Plan category. Godawan, an artisanal single malt, won its first International Taste Award for both its expressions at the International Taste Institute Awards, Brussels. Our renovated Black Dog packaging has won WorldStar Packaging Award, which is awarded by the World Packaging Organisation as the highest award in the field of world packaging.
All this is a reflection of the work of our extremely talented team, underpinned by deep consumer insight and above everything else, our agility to adapt to the ever-changing marketing landscape. We will continue to invest in our brands by driving focused interventions, and over the coming months we'll further build up mental availability for our PMA portfolio and equity of our Diageo brands. To sum up, we remain optimistic about the prospects of our business and confident in the resilience of our well-established processes and overall in our ability to navigate headwinds. In the last few years, our teams have demonstrated their ability to overcome several significant challenges. With renewed portfolio and razor-sharp focus on driving commercial excellence in-store and on-premise, revenue growth management and everyday efficiency, we are confident in our ability to deliver sustainable long-term growth and stakeholder value.
With this, I hand over the call to Pradeep to take you a bit deeper into the financial update. Pradeep, over to you.
Thank you, Hina, and a very warm welcome to all of you. I would like you to refer to the results press release posted on our website last evening. At the onset, would want to make two terminologies clear that are being used throughout the document. One is reinstated, wherein all numbers are adjusted for the Pioneer Distilleries merger as it is effective April 2021. For the previous periods, these numbers are reinstated, while current period reported numbers are already inclusive of PDL. That makes it comparable. The second term that we are using is rebased. This is eliminating the impact of the strategically reviewed Popular portfolio from the base years to make comparisons meaningful and absolutely like to like. Hope this will provide all of you a better understanding of the performance and the numbers.
Before I come to the retained portfolio core operating performance, let me cover the impact of the Popular brands sale and the franchising of the strategically reviewed Popular portfolio. Since we have announced the deal in May 2022, we have consistently communicated that you will see 2 impacts of the transaction on our go-forward financials. A, divested perimeter will not provide any material pickup in margins as it more or less makes portfolio margins. B, on fixed overheads will lead to an operating deleverage for 12-18 months, and we will have to recoup the same through a combination of growth stroke leverage over the next 4-6 quarters.
If you look at the numbers released for the quarter, these are exactly the two things that are playing out. We have consciously called out the impacts transparently exactly in the manner in which we have been conveying it to all of you over the last three quarters ever since we announced the deal. Let's come to the core operating performance of the retained business. Like for like, we have delivered a portfolio NSP growth of 9.7% during the quarter. Underlying growth stands at 11.5% after adjusting for the one-off bulk Scotch sale in the prior year same quarter. Prestige and Above growth stands at 11.7%, with double-digit growth in our Scotch portfolio.
The price mix during the quarter was 6.5%, reflecting the higher growth in more premium segments as we move up the consumer price ladder. The continued brunt of inflation, which remained at double digits, approximately 11% for the quarter, and partial BIO normalization adversely impacted growth margins. Our marketing reinvestment rate during the quarter was 10% of net sales. As mentioned by Hina, we continue to drive customer-centric activation, strengthen our brand equity, and optimize the portfolio. EBITDA was INR 368 crores, and EBITDA margin was 13.2%. Exceptional charge of INR 151 crores is on account of the supply agility program approved by the board. Reported PAT for the quarter is at INR 111 crores, impacted by the supply agility one-time restructuring charge.
As we look ahead, input commodity inflation is expected to remain high. Having said this, our sustained efforts on pricing and productivity are also yielding results and will reflect higher run rates in the subsequent quarters. On ANP, we have done targeted calibrations earlier in the April to September period. With full normalization of BIO supplies expected in January, March, we will invest in the brands to ramp up equity and regain the lost ground. As always, our focus is on the circle of control rather than the circle of concern, and we continue to work towards expanding the pipeline of value chain productivity and revenue growth management initiatives. Right. I would like to hand over back to Hina for a very, very special update which is hot off the press, and then we can open up for Q&A.
Yeah. Hi, everyone. I just wanted to share this. You know, it's right off the press as we speak. Very pleased to announce that our 100% subsidiary, Royal Challengers Bangalore, has acquired the Women's IPL team for Bangalore just now. As the BCCI bid, you know, process closed, you know, over the last 2 hours. We are very delighted with this because, I mean, this is really taking forward, you know, the narrative of inclusion and diversity that we have led, particularly for our industry and, you know, in a broader context in India and globally. You know, it gives us. It fits perfectly with our purpose of celebration.
Cricket is big in this country, so having this additional platform of Women's IPL, you know, fits hand in glove with our with our purpose and values. Delighted with that. With this, Pradeep and I would be happy to answer all your questions.
Thank you very much. We will now begin the question and answer session. Anyone who wishes to ask a question may press star and one on the touchtone telephone. If you wish to remove yourself from the question queue, you may press star and two. Participants are requested to use handsets while asking a question. Ladies and gentlemen, we will wait for a moment while the question queue assembles. The first question is from the line of Jaykumar Doshi from Kotak. Please go ahead.
Yeah. Hi. Thanks for the opportunity. A couple of bookkeeping questions. The first one, when I look at the bridge between INR 490 crore reported EBITDA last year and INR 420 crore rebased EBITDA, the impact is INR 70 crore. You know, our understanding at that point of time was that, you know, the EBITDA impact or EBITDA of the divested portfolio as some sale as well as franchising portfolio was INR 195 crore ballpark in FY22. Of course this transaction, you are expecting certain royalty income. Net impact of the business that was sold or franchised would have been somewhere in the range of INR 170 crore. Over and above that, what I understand is the operating leverage impact that you're calling out is another INR 100 crore.
Is it right to understand that, if I look at your FY22 EBITDA, the impact of the portfolio that has now been divested on your EBITDA is going to be at full year level, somewhere in the range of INR 250 crore-INR 270 crore? If you can tell me what the rebase number for FY22 full year was, standalone, the equivalent of INR 420 crore at a full year level.
Okay, Jay. Let me take this. You know, that's why I did kind of want to cover this in my opening comments as well, right? We've always consistently said that there are going to be two impacts, right? One is the EBITDA of the divested business that it makes after a full loading of overheads, right? I mean, it's a very, very convenient living room view, right? That the marginal contribution can be taken as the, you know, as the EBITDA of the, you know, of the business. That's not right? I mean, to run a sustained portfolio and a business even of INR 1,500 crores, you require corporate functions, right? Therefore, those corporate functions on a fully loaded basis is the INR 42 crores that you are seeing, right?
The second thing we've always said is that those central corporate functions obviously don't go with it, right? Very rudely, I used to take the joke of my own salary. My own salary doesn't come down, right? Once I divest the portfolio, right? There is a deleverage on account of that which we have consistently maintained. We will take about anything from 4 to 6 quarters through a combination of growth and obviously our continued discipline on discretionary overheads. I think we've established a fairly good track record over the last 4 to 5 years of maintaining a fairly disciplined organization on, you know, on discretionary overheads, right? That's the way one will really have to look at it, right? Yeah. I don't know whether that answers or not, right?
Basically what I'm saying is what you see the INR 42 crores in the quarter, that's the core, fully loaded basis EBITDA that is losing. Rest is timing. We will recoup it over the next 4 to 5 quarters as we grow the business back to the original. Does that answer, Jay?
Understood. Got it. It's just that we didn't anticipate, at least I didn't anticipate INR 110 crore-INR 112 crore kind of annual, de-operating leverage, impact.
Yeah.
My understanding of the underlying EBITDA was higher than what the reported number is.
Yeah. No, absolutely right. Since you've raised this, I would want to clarify that we have been very, very clear in articulating that there will not be any mathematical pickup of the margin, right? If you look at the numbers, there is a mathematical pickup purely due to the dilutive part of the portfolio going away, right? If you combine the two impacts, the net impact on the EBITDA margin is roughly about 40-60 basis points, which is playing out whether you look at the quarter numbers or whether you look at the nine months numbers, right? I just wanted to kind of, you know, balance that picture also.
Understood. Second question is can you explain a little bit more about this program, supply chain sort of program that you've initiated? What will be that? Look, on INR 500 crore, 60% cash impact, it's like INR 300 crore of cash costs. What is the nature, you know, of this cost? Is it entirely going to be severance? Is it going to be INR 300 crore of severance that you will have to pay in the next, maybe 3 to 5 years?
Yeah. Jay, again, I mean, by and large, you know, we have a very, very detailed descriptor in our financials that will give you a good sense, right? We did want to, you know, share the highlights, right? Again, you know, we are being consistent with what we have communicated to you, right, over the last three, four quarters, that this is something that we are working on, and we will want to accelerate now, right, towards our in-state manufacturing footprint. It's becoming extremely difficult to kind of do them on a piece-by-piece basis, right? Therefore, we did want to, you know, announce this multiyear program. Yeah, I mean, you can make reasonable guesses on where the, where the costs would be, right?
The costs are largely on account of, you know, severances and on account of the write down of the asset values of the, you know, of the assets that we'll probably close towards our progress to the in-state footprint.
Understood. Lastly, could you comment on, you know, the inflationary trends in case of ENA and glass bottles, and what is your outlook on gross margin front? You know, where does it go from the current level over the next 1 or 2 quarters?
Yeah. Jay, look, I mean, I think Vinay also covered it in the press release itself. The RMPM still continue to remain inflationary, though just to balance I would want to say certain smaller mix elements have started coming down also, right? Paper has started coming down, PET has started coming down. These are not the big drivers of our COGS portfolio, right? ENA is kind of flattish, I would say. Right? Glass continues to be inflationary, largely driven by the natural gas inflation, et cetera, et cetera, right? The capacity is completely kind of choked, right? I mean, it's pretty much a seller's market right now, right? That...
Having said that, you know, as we have mentioned, all the work that we have done in ramping up our productivity run rates and all the efforts of the, you know, of the last two, three quarters, et cetera, the higher pricing run rates and the higher productivity run rates will also start reflecting in the, in the quarter. Therefore, net-net, to sum it up, we believe even if you look at the gross margins of the refit portfolio that we have mentioned, we are pretty similar to the last quarter, right, on a sequential basis. We would right now want to believe that it seems to be bottoming out. As our pricing and productivity kind of run rates ramp up, right, hopefully we can reverse the trend from next quarter onwards.
Understood. Thank you so much. That's it from my side.
Thanks. Thank you, Jay.
Thanks, Jay.
Thank you. Ladies and gentlemen, in order to ensure that the management is able to address questions from all participants, please limit your questions to two per participant. If you have a follow-up question, you may rejoin the queue. The next question is from the line of Abneesh Roy from Nuvama Institutional Equities. Please go ahead.
Yeah. Thanks, congrats on winning the Women's IPL team for Bangalore. That was my first question. What could be the medium long-term impact of this on your brands and revenue? It's a very interesting development. The fact is, that the rights have come obviously quite expensive. I see, it is, as BCCI has received more money than what they received for the men's team in the first year. Obviously a lot of time has gone. RCB is paying around INR 900 crores for this. What would be the revenue and brand impact long term? If near term, how do you see in terms of the impact on the profitability? Because this is something which is currently going to be in nascent stage.
Abneesh, thanks for this. Look, on profitability, right, I mean, it is a bit of a portfolio game. Yes, this is a long-term bet, right? I mean, if I go back to the Men's IPL also, since we have the history and we have seen it organically play out over the last 15 to 17 years now, it did not make money for the first 10 years, right? The good thing about this investment, as I know all of you are aware, it kind of timed perfectly with the new cycle of the Men's IPL and the new media auction cycles of the Men's IPL, right? We are fairly buoyant, right? That is going to provide a kicker into the, you know, into the Men's IPL profitability.
A part of that will be consumed by the Women's IPL. Right? Longer term, genuinely right from where the Women's IPL cricket penetration, viewership penetration stands today, it can only grow by leaps and bounds, right? Therefore, it's a long-term jewel that we are picking up, you know, in our portfolio. Obviously the three or four reasons that Hina mentioned at the outset, right? That kind of provide a kicker to our core alcohol business as well. Hina, do you want to add anything?
I would just add that actually we have taken a very conservative view over the next few years of what Women's IPL could do. Even there, the business case made absolute sense. We have gone through a proper, you know, due diligence process with the board globally, and we believe the business case is very robust for it. Like I said, Abneesh, I think, we in fact, I mean, this is right up, you know, where Diageo purpose and values stand, right? I think our focus on inclusion and diversity, we have stood for mixed gender, you know, cricket in the past, and this is taking that narrative forward.
I would say it's a very strong affirmation of what our business stands for, and we believe that this will only strengthen our overall equity as a business. You know, being a strong revenue case over the next few years.
Thanks. My second and last question is on the premiumization and the packaging. In premiumization, you have delivered good consistent growth over the past few quarters. Would you be a bit worried because of the startup job losses, IT net addition has been at a multi-month low? Would you be worried on that in terms of the outlook, not from a Q3 or Q4, I mean more on the FY 2024? On the packaging bit, in terms of the innovations and cost savings which you are driving, next few years could you talk about that, what exactly will you be doing and how much could be potential savings there?
Abneesh, to answer your question first, I mean, we have seen this in India and globally actually. The premiumization story has, you know, remained quite strong. If you look at, you know, mid to upper segments, as I said in my opening, you know, script, that, basically, we don't see a slowdown there, right? We are seeing robust growth, we expect that premiumization trends to continue. I mean, in a sense, because we are not a daily frequency purchase item, right? People only purchase a bottle every month or 2 or 3 months, right? We are not really comparable with the grocery items and the regular consumer FMCG. Our story doesn't get as impacted by inflation as, you know, the daily consumables do, right? We are not seeing a slowdown.
Actually, the only little bit of slowdown that we see is towards the lower end of Prestige. You know, it is difficult to say conclusively whether that is, you know, there to last. I think there might be some slowdown on upgrades from, you know, country liquor, so Popular business, which is the key source of growth for that segment. Difficult to say, so we'll continue to watch that segment over the next few quarters. Beyond that, I think we see the premiumization story and the growth quite robust. We see that in global trends as well. You know, even pessimistic markets like the U.K., which is currently the most pessimistic market on consumer sentiment, we are not experiencing a slowdown in alcohol sales, right, and the premiumization.
I think we are quite confident that, you know, the fundamental growth trends will continue.
Right. on the packaging bit, packaging costs.
On packaging, I mean, on packaging, look, I mean, you are probably referring to, you know, the removal of IPCs, which we have started doing, right? That was definitely both a sustainability and cost-saving initiative. Of course, there will be cost savings with it. We have started that. I mean, I will talk about our innovation as we go along. I can't really talk about it, you know, in advance, but there's a number of innovations that we are looking at which are both to, you know, keep our growth momentum in Prestige and Above. Also, you know, accelerate our sustainability journey, because that's also a very critical pillar of our strategy. Whether it's alternate formats or whether it is more, you know, innovative packaging, we are working on that.
Our technical team is working on that, and we will be announcing these at the appropriate time.
Thanks. That's very helpful. Thank you.
Thanks so much, Abneesh Roy.
Thank you, Abneesh Roy.
Thank you. Participants are requested to please submit your questions to do for participants. The next question is from the line of Manoj Menon from ICICI Securities. Please go ahead.
Hi, team. Just allow me 1 quick follow-up on that question on the profitability of the divested portfolio, because that is one of the questions which many investors have been asking us since yesterday. Look, if I look at the 9 months of profits, right, so it is 110 plus 80. Am I supposed to add these two, 190 divided by 983, which gives me a mathematical outcome of 19.2% EBITDA margin? Because cost is cost, right? Whether it is corporate costs or, you know, the other variable costs, et cetera. To begin with, is that the right way to look at it, that the divested portfolio actually had a 19% you know, EBITDA margin, cash, non-cash, everything included? Yeah.
Manoj, that's not the right way to look at it, right? That's why we have consciously kind of, you know, split the numbers, right? We have tied in with the consistent narrative that we have shared over the last seven, eight months ever since we have announced the deal, right?
The 110 is with the corporate overheads that portfolio was absorbing, right? Even after we have kind of sold that portfolio to Inbrew, et cetera, they have also had to set up that corporate organization, right? That's the broad point that I'm making, right? That to run a 1,500 crore business, right, anyone will need a reasonable sized corporate organization. We can dispute, you know, we can debate whether it should be 28 crore per quarter organization or it should be, you know, 20 crore or it should be 35 crore, right? The fact is that you need central support corporate organization functions, right, to run that machinery, right? That's the way it is.
The second thing is we've always said that, look, when this happens, there will be an operating deleverage, which we will recoup as our experience in other parts of the globe when we have divested the tail end of our portfolio, et cetera, where we do not have a longer term right to succeed. We believe that we will be able to accelerate on our P&A growth, et cetera, to be able to recoup this over the next four to six quarters, right? Manoj, that's pretty much the story. Consistent with what we have said from May onwards. Now that the first quarter has come in, I am equally transparently sharing the numbers as they are.
Understood, Jain. now the only follow-up which comes here, and I'll take it offline, is that this INR 80 crore calculation for nine months, is it volume, indexed or volume linked? I mean, that probably that's the reason, it's a higher number than what many of us thought.
No. Okay. I mean, the way we allocate corporate overheads is straight percentage NSP, right? All the direct overheads, et cetera, have anyway gone with the P, right? The people who are dedicatedly working for that portfolio, the plant, for example, that one own manufacturing facility, all those have gone with the P, right? These are the, we just allocate on percentage NSP basis, right? If our full corporate organization has fixed overheads of, let's say, 7% to 8% of NSP, we just load the 7% to 8% of NSP on all segments of the portfolio.
Very clear. Just quickly the second question, on one on, you know, the actual pricing which you would have got, let's say, you know, in nine months this fiscal, you know, with, with geography, some granularity if you can. One theoretical question I had is on, on NSP initiatives like mono carton removal, et cetera, which I presume, you know, is an industry-wide practice, at least definitely in the top companies for sure. Can it, you know, redefine the industry profit pool higher or because everybody's doing it on a like-for-like basis, it is likely to get expensive? Thank you.
Yeah. No, maybe I'll take the first question, right?
Okay.
On the pricing, Manoj, I mean, here are the broad headlines, right? If you talk of the quarters, right, we've got good pricing, you know, price increases from to just call out 4 states definitely, right? West Bengal, Delhi, Odisha, Karnataka, right? Those are the 4 states. Obviously our long-pending application with CSD, we've also managed to get some price increases in CSD, which is very, very difficult to get, but we have managed that also, right? And a couple of other small states, right? I know that, you know, Daman and Diu, we've got some pricing, et cetera, right? Overall, at a slightly elevated level, I do want to say that if you look at the July-June performance period of Diageo, right?
I mean, that's the way I mean we in UNIDU live a schizophrenic life, right? April, March and July, June. If you look at July, June, right? We are trending towards probably one of our best year on pricing, right? Broadly, we right now have a line of sight to about 2% of our NSP, right? 2% pricing we've never got in the last 5-7 years, right? I would probably say it's the highest since the acquisition. Now, having said that, it is still only a fraction of our inflation, right? You know.
Hence the proper pricing.
You know, always focus on, you know, mix and, you know, and productivity, right? Hope that answers the pricing question.
Yes.
Second question, maybe I'll request, you know, Hina to build after what I have shared, which is, will it redefine the profit pool? The entire mono carton removal and packaging. Manoj, the conditions in which it is happening, right? Like I said, it was a sustainable initiative. In the current inflationary conditions where your COGS is inflating by 11% and you are getting probably pricing in terms of percentage terms only at 20%, even at 2%, right? Is only about 20% of it, et cetera. I think it's just kind of helping counter inflation to my mind, right? Once the inflation kind of, you know, normalizes a little bit and we, you know, we see some fatigue coming back, et cetera. Yes, absolutely.
That kind of comes into the profit pool, and then it, and then it's up to each individual player to make the choices that they want to do with that profit pool, right? I don't know, Hina, whether you want to add something.
I don't think there's anything to add. Absolutely. In this current environment, I think it is just going to, towards offsetting the costs. Of course it is helping on sustainability. At the moment, sustainability is the bigger driver, right? I think it's a wait and watch area. Very difficult to say whether this will, you know, change anything because the environment still looks quite tough.
Does that answer your question, Manoj?
Absolutely loud and clear. Thank you. Thank you, Hina. Thank you so much.
Bye.
Thanks so much, Manoj.
Thank you. The next question is from the line of Avi Mehta from Macquarie. Please go ahead.
Hi, Pradeep. Hi, Hina.
Hi.
Hi.
Just a small clarification on this EBITDA margin bit. Now, the way, I just wanted to, you know, get very clear. The way you are, we would be right in kind of looking at this, the 15% 9-month number, which I think from a full year basis should be, you know, probably similar, percentage on a full year basis. That is the level at which you would look to reach back in the next 4-6 quarters on the back of. Yeah.
Gain benefits. That's the way. It would be happy to kind of look at that, right?
Absolutely. Absolutely.
Absolutely, Avi. That's the you know, the middle block of the bridge is our retained portfolio now, right?
Yeah.
That's what we need to focus on. That's what you guys need to look at. That's what we are, you know, maniacally focused on. You're right. I mean yeah.
No, no, absolutely. That's the F.
You got it absolutely right.
That number, what would it be on a full year? We don't have that benefit. You know, it's just to get us, you know, clear on what is the target that you internally are looking at, and we are also aligned on that. Could you give us a sense of what that target is for FY 22, which went by, when you do this adjustment?
No. FY 22 or FY 23? I mean.
22. 22. I mean, what the actual was. 15 is the 9-month number. Is it the same for FY 2022 and hence... Because the quarterly things were very volatile. Yeah.
We haven't done that, Avi, right? You know, there was so much of work this time. We haven't yet done that, right? When we come to you in May, we will anyway have that number, right? We will Now, I mean, the way I'm seeing it is till we start lapping the Atlas, sorry, the divestiture of the Popular portfolio till September 30th, we will. Yeah. We will pretty much continue with these bridges, right? You'll get a sense. It will not dramatically differ, I would say.
Okay. Okay. Just clarifying on that, the inflation aspect that we are witnessing is just, you know, something that will probably be impacting the time it takes to achieve it, which might be. That is why the 4-5 month range that you are quarter range that you're looking at is that's the right metric that you are also kind of building it, right?
That's right. That's right. Absolutely right.
Okay. Perfect. Just 2 clarifications, bookkeeping if I may. One is the, you know, this Women's IPL. Congratulations on that. Any sense on the likely near-term impact that I should build in? Would it be more like 900 divided by 10 plus some number, so it should be around INR 60 crores or so? Any sense of that number or what your math is, A. B, is there any one-off in the subsidiaries this time? With the sales, when I do consult on the standalone, the sales comes out to be negative. Those are the 2 clarifications. Thank you.
Okay. From the first one, right, I mean, obviously, you know, the INR 900 crores will be amortized over a period of 10 years.
Mm-hmm.
Right? Now, we don't know how the rest of the IPL math will work, right? We've done some modeling based on our learnings of having handled this, having, you know, seen the Men's IPL progression. We have to wait, right? For... I mean, the good thing is the tournament will happen in March, right? Whatever local sponsorships, this, that, et cetera, we will want to wait for one cycle to complete before we can provide, right? As I mentioned at the outset to Abneesh's question, the good thing is that this bump of investment is happening in the year in which the Men's IPL media auction cycle is changing, right? It's growing.
Therefore, that should provide a profitability kicker, right, which will hopefully and the impact of this, let's say, the INR 90 crore amortization of the INR 900 crore, should be consumed by that kicker on the Men's IPL profitability. That's the very, very broad model in our mind right now. Obviously, we need to wait, for things to emerge over the next three to four months.
Perfect. The subsidiary bit, is there any one-off over there?
Subsidiary bit, I'll just kind of, you know, quickly jogging. No, there's nothing on the subsidiary bit, right? I mean, since there's a lot of action in this quarter, I'm assuming that you have read about our signing the definitive agreements on the Sovereign Distilleries, right?
Mm-hmm.
That was a 12-year idle non-operative asset that we finally managed to dispose, right? We are happy with that. That'll lighten the balance sheet. We haven't taken any charges on account of that. That was fully provided for over the last seven, eight years, right? That's one. The second thing is you would have seen our announcement on the follow-on funding of you know, of Nao Spirits & Beverages, right? Apart from that, nothing around the subsidiaries.
Okay. I wasn't able to understand why the you know, consult sales were lower than the standalone sales. That's why I was asking. That's okay, I can take it offline. Thank you.
Maybe, yeah, Shweta will probably get back to you, right? I will also understand the query a little more. Yeah.
Okay. Thank you.
Thank you.
Thank you.
Thanks, Avi.
Thank you. Ladies and gentlemen, please limit your questions to 2 per participant. The next question is from the line of Pesi Tantra from IIFL. Please go ahead.
Hi, good evening, Pradeep. My question is on the P&A sales. Last quarter, we had done a 22%-23% P&A sales, the 3-year CAGR since YOY growth can be disrupted by COVID. We are looking at 3-year CAGR, that was around 14%. In the con call last time around, you had mentioned there are pluses and minuses affecting this number, but overall, they cancel out each other and there is no one-off at an overall level in this 20%-23% kind of a top line growth. This quarter we have fallen to a 13%, sorry, 12% kind of top line growth on P&A, and the 3-year CAGR has decelerated from 14% to a 10% kind of a level.
Just wanted to understand what really has changed for the demand outlook, to suddenly change so materially in one quarter. If 10% is a three-year CAGR now, and now this quarter has been absolutely normal in terms of sort of demand, is this an indicator of what the P&A portfolio can grow at in future?
Okay. Super, Pesi. Great question. We were mentally prepared for this, so I, you know, I'll just say that I don't think we ever said that the pluses and the minuses are canceling each other, right? I think... No, I thought what we said was that this 23% is clearly not sustainable, right? I'll tell you what is happening. On a sequential basis if you look at it, Delhi is the big joker in the pack. Right. I mean, for the last four quarters up till July, September quarter, from October, December of last year, Delhi was adding about four to five points of growth, right, to our, to our national portfolio, right? With Delhi kind of reversing completely, that positive kicker has become a negative kicker, right?
Delhi was adding, I would say, probably 3-4 points of growth. It'll, you know, still stabilize further in terms of the negative direction over the next 2 quarters. Essentially, the swing is Delhi. Delhi, the +3-4 has become a -1-2 from October-December onwards. That's broadly the 5-6 points of swing. That's one. Second thing is, around the same time when the Delhi bump-up was coming, West Bengal had also favorably changed its RTM after the industry's kind of continued one-year advocacy with them. If you remember post-COVID, they had taken some 45%, 50% consumer price increases, et cetera, et cetera. That benefit now we have started lapping. It had opened sometime in October 2021, so huge growth for 4 quarters.
Therefore now we have started lapping. That's another 2 to 3 percentage points, right? That broadly explains the 23 coming down to the 12, 13, right? I mean, that's broadly the maths, right? Third thing, I mean, it's just that last year, right, with Delhi, Diageo being so salient there, et cetera, we had a absolute cracker of a quarter last year, you know, on Diageo sales. This time, Diageo, as we have said, you know, Hina mentioned in her opening comments, it's not fully normalized, right? Hopefully it will fully normalize in January.
A large part of it has now come in towards the end.
Towards the end, right. The whole quarter did not see a full normalization, so therefore lapping a very high base on Diageo, and obviously we couldn't kind of repeat that, you know, in October, December, right? Those are broadly the three reasons.
Pesi, I would like to, though, say one thing, right? I think for our industry, where, you know, we have route to market changes quite often, as you are aware, you follow the industry. I think it is probably not right to look at one quarter in isolation, right? We've got to look at, you know, a rolling four-quarter performance to understand the performance of the business. There are these ups and downs that happen in every state, and we know how to navigate them. In a particular quarter, they can, you know, disrupt the picture, right? I would say that if you look at the rolling four quarters, you're right. The, you know, growth has been that 14%-15%, and I think that is our aspiration.
This is exactly what we told you, that we want to continue the momentum to that. I think that's what the team works on. I would really request you to look at a, you know, a rolling four-quarter performance rather than an individual quarter and, you know, try and take a trend out of that, because that doesn't really work for our industry.
Absolutely, Hina. Also given that, bases are a little skewed on account of COVID, I would look at a 4-quarter, rolling, number, but on a 3-year CAGR basis.
Sure. What I mean is that, I mean, going forward now that COVID is out of the way and we'll start, you know, we've normalized the bases, right? Going forward, we will, it would be appropriate to look at the 4-quarter rolling sort of thing. Of course, you do your, you know, CAGR analysis, et cetera. The other thing I wanted to add is that, you know, growth, obviously the team is working on, you know, looking at how to recoup whatever part of that growth from other states and, you know, driving the momentum with the fantastic launches that we've had and where we are seeing so much momentum on our innovation and renovation. We will continue to aspire to deliver the kinds of growth that we have spoken about in our strategy, right, and we have delivered.
Maybe give one build. I'm kind of responding to your remark, Pesi. The 3-year CAGR, you get into 2019, 2020. Just be conscious. Andhra Pradesh is also the big animal there. You must... and if you want those numbers separately, these are hard actuals, et cetera. Shweta will probably end up sharing with you. There's a lot of noise in that 3-year CAGR because Andhra is in the base in 2019, 2020.
Understood. Understood. Secondly, quickly on the margins. This quarter you have done 13.2%. Even if I adjust for the operating deleverage, it's around 14.2%. Let's take 14.2% as a starting point because that 100 basis points you want to anyways recoup in the next 4-6 quarters. Let's look at the longer term. 14.2% as a starting point. Over the next 3-4 quarters from that 14.2% starting point, what are the margin tailwinds that you see and what quantum of those tailwinds do you expect let's say over the next four quarters?
Pesi, I mean, very difficult to call out here. This is, like I said, we continue to influence the levers, right? We are happy with what we are seeing on pricing, right? Even October-December, right, there was a fair amount of pricing versus prior year same quarter that has flown in, right? We also expect the run rates to ramp up, right? Because we, the price increases that we have got, they will ramp up. Productivity, I mean, the big one that you guys are aware, right, is the mono carton removal, et cetera. All that will start flowing into the P&L. Inflation, honestly, very difficult to call right now, right?
Till when will the, you know, you know, the Ukraine crisis continue and therefore the natural gas prices will remain, you know, high, et cetera, et cetera. Very difficult to call out, right? But our first target is clearly, as I think one of your predecessors mentioned on the call, from this 13.2, get to the 15, right, first, and then we will probably take it from there, right? The supply agility program, right, I mean, that may not deliver too much in the first 12-18 months, right? Because first we have to execute the actions and only then the benefits of those, you know, lower conversion costs, et cetera, will start coming into the P&L.
That's the way I would want to leave it. Our first aspiration is to get back to about 15, and then we see how we take it from there.
How long do you think it will take for you to get back to that, 1st milestone?
Yeah. Wouldn't want to call that out, Pesi, right now.
Okay.
Wouldn't want to call that.
That's all from me. Thanks .
Had it been a free pricing category, you know, we would have been in a better position, right? There are, you know, those constraints in this category. We are giving it our best shot, and we would want to get there as soon as possible.
Sure. Understand. Thanks. All the best.
Thanks, Pesi.
Thank you. The next question is from the line of Harit Kapoor from Investec. Please go ahead.
Good evening. My question is really on pricing again. You've seen a state of pricing over the last 12 months. You said this is probably the best trade that you've had. I'm just wondering on as you go into the next policy season over the next few months, just wanted to get your sense on your confidence level on probably going back to some of these trades and saying, "Look, you know, we're back. We may need some more going forward as well." How do you see that dynamic playing out? Do you believe your success rates will be similar to what you've seen in the last 12 months?
I can answer what we will do. I can't answer the question of whether the success rate is the same or not, but we would obviously strive to have the same. You know, pricing is a continuous advocacy for us, right? Just because we've got this pricing, clearly inflation is still roaring ahead of the pricing, right? We are, definitely back with all the pace on, pricing advocacy, and we will continue to drive that quite hard. Both as an industry and as a company, we continue to do that. You know, we are getting into the excise cycles now. This is the time when the advocacy, is at its highest. The, the team is on it. We continue to advocate for it.
I mean, you may still see some media releases even by ISWAI on price increases and inflation, right? You know, we advocate both for immediate price increases, and we are advocating with the government for a more fundamental restructuring of the way pricing is handled for this industry. Will we be successful? We don't know. We know these are, you know, these things take time, right? We continue to work closely with the governments to try and reach some, you know, conclusion. The answer is absolutely. We are going back to the governments and asking for more pricing.
Yeah. Got it. My second question is on the competitive environment. You know, given that you're such a large entity, there is a very high, you know, ability to kind of manage the cost structure. But, you know, for certain smaller competitors, that might be even harder. So are you seeing in the market that given this inflation, the competitive intensity on media or otherwise has kind of, you know, come off? Is that something you're seeing or you still, it's still at a fairly, you know, high clip?
I mean, I don't think the competitive intensity is coming off, right? We've had a lot of new people come into the market and, you know, launch new offerings. We have always said that actually, competition is good for this category because of the low penetration levels in the country. Especially if you look at the Prestige and Above category, and especially as you go higher up the, you know, pricing ladder, I mean, scotches are hardly three, four percentage points penetration. Prestige also, you know, at the upper levels is 25%, 30% penetration. Competition is good. It continues. There are many new players, many new types of offers in the market. The consumer is demanding that, right? Consumer is experimenting.
You know, even the white spirits area is growing quite fast. If you look at our performance on gin, on Smirnoff, we are seeing, you know, good growth, robust growth there. I don't see intensity relenting. I just see different players, you know, coming in with new offers and more innovation happening actually. We have intensified our innovations and renovations, as you can see from our last few months. We are continuing to keep the tension on our innovation process, right, so that we can cater to the evolving needs of the consumer.
Got it. That's it from me. Thanks and all the best.
Thank you.
Thank you. The next question is from the line of Anil Shah from Aditya Birla Capital. Please go ahead.
Yeah, good evening.
Hi, Anil.
Yeah, hi. I just wanted to go back, you know, to why really did we do the Popular brands sales? Because if, you know, mathematically, when I look at it, you know, not only was the, you know, the Popular brands sale products giving me margins, EBITDA margins positive of 42% for the quarter, plus they were actually taking care of the fixed overheads of the other side. If I look at It literally tells me that margins for the Popular brands sale were higher than company average. A, please explain. You know, just let's go back to the drawing board. All the time we've been talking about margins will improve because we will only do P&A. It seems like margins were much better here, number one.
If you want to recoup this, you know, INR 90 crore for 9 months, I'm assuming INR 105-110 crore, let's say, for a year. We've talked about recouping this in the next 4 to 6 quarters. If we are currently around 13.2% margins, I'm assuming this will, you know, if I add back this in the next 4 to 6 quarters, we'll be back at 14.5% plus 15%. On top of that, can I assume that the productivity gains that we talked about, in which we are, you know, working out and the board has approved, will add another INR 130-150 crore productivity over the period of 2 to 3 years, and not necessarily in the next 18 months.
The next 18 months, this will kick in, the re-basing part will kick in. Is that understanding right, or is there certain things which are double counting here?
Yeah. Anil, let me just go back to your first question, right? I think that's absolutely the bull's-eye question. Even though we have answered it earlier, right? I don't think when we took the call to divest the portfolio, it was a mathematical equation for us, right? It wasn't.
It was not better margin.
Yeah. It was not better margin, right. We leave that, right? That's why we have been very, very transparent in sharing, right? The numbers are still diluted through the portfolio, right? Yeah, I mean, I don't think that's the big drivers. The big driver has always been, do we have a long-term right to succeed in that segment?
Yes.
Right? Very, very clearly, right, we had consciously, after a lot of work and diligence, genuinely landed at the conclusion that, no, we do not have a long-term right to succeed. In fact, you know, you'd say that we probably delayed the divesture for about two to three years, right? We only were eroding value on the portfolio, right? Maybe, let me just.
Yeah, I think, the other one, Anil, I would say is that there were two assessments, right? Which way is the market going? If you look at the market, segment development, well, before even I came in, it was very clear that the Popular segment is declining and what is taking off is Prestige and Above, and that is going to be the longer term future trend for this market, right? One was where are the future profit pools going to lie? The second was, where do we have the long-term rights to win? When you marry the two, I mean, this was active portfolio management, and it is absolutely proven that companies that do active portfolio management to play to their strengths and core capabilities win in the, you know, win in the long term, right?
As a prudent active portfolio management exercise, it was absolutely the right thing to do for this business. You know, Pradeep has commented on the financials of the business. It was not accretive to the business, right? It would have been under huge pressure with this macroeconomic environment. Please do not play to this portfolio. Play to our rules in this portfolio, right? Therefore, the longer term right to succeed was very low.
The last bit, right. There is enough in the bridges that we have given you. You will also get a sense of what that portfolio delivers right in the current environment, right. If you look at the INR 53 crores on the INR 700 crores in the first six months, you see the pace at which, right, in the current inflationary environment, that part of the portfolio dissipates.
Yeah.
Right? yeah, I think.
Are you double counting in the gains that we should expect going forward?
No. Gains, look, again, you know, like I said earlier, Anil, we have been very, very disciplined as a discretionary in terms of discretionary overheads management, right? I mean, Ind AS is a little complicated because it clumps the fixed variable, fixed overheads along with the variable overheads. In IFRS, you know, it gives a better sense. I can tell you that our fixed discretionary overheads or the corporate overheads are 20% below what they were 5 years ago, right? This is after providing industry competitive annual increment cycles to our employees, right? That's the level of kind of, you know, rigor that we have maintained in our discretionary overheads management. You're absolutely right that that will be a law of diminishing returns, right?
Now we can't cut further because if we cut further, we'll start cutting into the muscle, right? Therefore, we have to grow out of it now. We have to absolutely grow out of it, right? That we believe we will recoup whatever we've lost. We've lost about INR 1,300 crores of NFP. We are very confident that we will be able to recoup this over the next 4-6 quarters.
I'm sorry. I'm going to re, you know, ask the question again. I won't mind if I can get some numerical answers to this, please. I'm again saying you said that we will recoup in the next 4-6 quarters or 12-18 months, whatever we've lost out as far as the deal is concerned, the slum sale is concerned.
Mm-hmm.
That's about INR 110... It's INR 90 crores for the first 9 months, as per your chart or as per the, you know, the table that you put in. I'm assuming it'll be INR 105, INR 110 or INR 120 crores max for the year. Hypothetically, we will recoup this. On top of that, we've talked about a new plan which the board has approved, where we've talked about, you know, INR 130-INR 150 crores productivity gains of kicking in after 18 months.
No, Anil, that's not right. Right? Let me clarify again. The first part, you're absolutely right. Right? The operating deleverage, we should be able to recoup. Basically, if I just put it another way, whatever NFP we have surrendered through the divestitures, right, we should recoup that NFP over the next four to six quarters by keeping our overheads, fixed overheads flat. Right? That's the way I would want to kind of dimensionalize it, right? The moment that happens, we would have recouped it.
Yeah.
Correct? That's one. Right? Hope that's clear. The second one is supply agility is a three-year program, right? Initiatives will keep kicking in incrementally. The first set of initiatives will kick in after 12-18 months when the first set of actions are completed. Right? It's a three-year program.
It will deliver after the next 12-18 months.
It will start delivering in the next 12 to 18 months. It's a three-year program. All our action items will be completed. All our actions will be completed by, let's say, we are in 2023 January. All our actions will hopefully be completed by 2026 January, right? Whatever actions we complete by 2026 January will only deliver in 2026, 2027, right? Once all is completed, we will see an annualized flow through of anything between INR 130 crore to INR 150 crore, right? Not to say that the first set of savings will kick in from 2026, right? As we take the first set of actions, those savings-
Phased saving.
Actual savings.
Phased saving program. Same phase, similar. Yeah.
It's a phased saving program.
Yes, it comes after 12-18 months.
Yeah.
Which is exactly what I'm saying. There's, you know, there are two separate tracks as far as getting back the mon- First one is the next 12 to 18 months, getting back in terms of the rebase, and then the kicking in terms of the.
Yes, absolutely Anil.
That's exactly the point. On top of that, whatever we do as far as the mix is concerned, the product pricing from the various governments is concerned.
Yes. Yes.
It's a separate-
Absolutely, Anil. That's the right way to take it, right? I mean, that's a game of inflation, you know, productivity, pricing, mix, et cetera, right?
Yeah, I understood this part. I would, you know, generally like to have a call offline to really go back into understanding in terms of, you know. While I understand the long-term, you know, in terms of active portfolio, when a product is contributing, even in terms of fixed costs, corporate overheads, you know, to sell that off, still not able to sink that in. Sorry.
Happy to have that call, Anil, right? I mean, Latika can reach out to Shweta. We'll be happy to connect.
We. Yeah.
Yeah.
Thanks, Anil.
Thank you.
Thank you. The next question is from the line of Alok Shah from Ambit Capital. Please go ahead.
Hi. My question is?
Your voice is breaking.
Mr. Alok Shah, we are unable to hear you.
Can you hear now?
Can you please...
Yeah. Can you hear now?
Yes.
Yes, it's better.
Yeah. Thank you for the opportunity. My question was, you know, just an extension of what Anil asked. Can you elaborate more on the supply agility program? Firstly, what are you exactly planning to do over here, with respect to timelines? Of course, the benefit is something that you already explained earlier. With respect to the actions, if you can sort of, help us understand a little bit.
We've already shared everything that we had to share. Alok, is it something? I didn't get your question. We've already shared everything in the response to Anil's questions.
One is with respect to, you know, with respect to the factory closure or the save the rents is one thing. Apart from that, any other program that we are driving which will help us with respect to the cost saving?
Yeah. There will be a combination of, you know, there will be a few other programs. We don't want to get into that level of details, right, in this call. We'll be happy to kind of, you know, have that offline call and talk about some of those things.
Okay, sure. That is all my side.
Thank you.
Okay. I think, Shweta?
Ladies and gentlemen, this was the last question for today. I now hand the conference over to Ms. Shweta Arora for closing comments.
Thank you. With this I close today's call. For any follow-up questions or clarifications, please feel free to reach out to me. Thank you for joining.
Thank you very much. Really appreciate the interactions as always. Bye-bye.
Thank you.
Thank you.
On behalf of United Spirits, that concludes this conference. Thank you for joining us, and you may now disconnect your lines.