Ladies and gentlemen, good day and welcome to United Spirits Limited Q3 FY20 results conference call. As a reminder, all participant lines will be in a listen-only mode, and there will be an opportunity for you to ask questions after the opening remarks conclude. Should you need assistance during the conference call, please signal an operator by pressing star and zero on your touch-tone phone. Please note that this conference is being recorded. I now hand the conference over to Mr. Anand Kripalu, Managing Director and Chief Executive Officer, and Mr. Sanjeev Churiwala, Executive Director and Chief Financial Officer, United Spirits Limited. Thank you, and over to you.
Thank you very much, and hi everyone, and very warm welcome to the FY20 third quarter and nine-month results call. As we normally do before we open the lines for Q&A, I just wanted to share a brief summary and an overview of the results that we announced last evening. As you might have seen from our published results, despite the impact of the ongoing slowdown on the industry and the growth of the industry, we saw a sequential improvement in our top line. Net sales for the quarter grew just over 3%, up from a flat performance in the second quarter. More importantly, we're encouraged to witness some momentum in our Prestige and Above portfolio, which grew a little over 8%, on a high comparative of 16% growth in the same quarter last year.
This is in sharp contrast to the previous quarter when the segment didn't grow, partly also because of some internal operational challenges that we faced. We also saw a return of premiumization, with each subsegment in our portfolio growing faster than the one beneath it. Having said this, we as a management team remained restless about driving higher levels of growth. So you will see enhanced intervention to enable this in the period to come. And the first amongst this is the rollout of a significantly enhanced mix for our biggest brand, McDowell's No.1 , and this will start hitting select states very soon.
In fact, our Scotch brand had a strong quarter, thanks to the resolution of the temporary supply chain disruption in our luxury portfolio that we spoke about in the last quarter, and also in terms of some improvement that we've seen in the liquidity situation in some of the key markets for premium Scotch. This is certainly encouraging in the current context of the economy, and this has also resulted in a positive price mix of 5.6% for the Prestige and Above segment. Our Popular segment that we've seen declined 5% in the third quarter, led by a decline in our priority states. Part of this is due to the conscious deprioritization of some of our low-margin brands so as to avoid further runaway inflation in ENA costs.
On a year-to-date basis, Popular is around minus 1%, which is over the last three quarters, and that's not hugely divergent from the guidance that we've given typically, which is of flat to low single-digit growth for our Popular portfolio. In terms of profitability, continued inflation in our raw material costs, especially ENA, more than offsets the positive impact from the price mix, and hence this impacted the gross margin for the quarter, which came in at 44.4%. Despite considerable gross margin compression, we have delivered an EBITDA margin of 16.4% for the quarter and improvement of 207 basis points versus the last year. This brings the nine-month underlying or like-for-like EBITDA margin improvement to 118 basis points, net of the bulk Scotch sale and any one-off restructuring costs in the base.
More importantly, this EBITDA margin expansion has been delivered in what we believe is an unprecedented cost inflation environment, and as a result of our continued discipline on cost management and not just by pruning our A&P. Like we had shared with you earlier, we have been prudently prioritizing credit risk over sales in credit-intensive markets, and while in some periods in the past we took a hit on that, you can see that in this quarter, in the other expensive line on the P&L, we have not had to make any provision so far, and that in some ways underscores the prudence that we showed. The A&P investment rate for the quarter was 9.7% of net sales, which brings the year-to-date rate to 8.6%, roughly in line with our full-year guidance.
During this quarter, we rolled out McDowell's No. 1 Platinum in three new states and Hipster, the pocket Scotch offering in one new market. Both these innovations continue to perform well. Profit after tax for the quarter was INR 259 crores, up 35%, and PAT margin for the quarter came in at 10%, a multi-quarter high. PAT growth during the first nine months of the year was 28%. I'm also pleased to share that during the quarter, CRISIL has reaffirmed the existing credit ratings of AA plus and A1 plus on our long-term and short-term debt, respectively, and revised the outlook to positive from stable. This reflects CRISIL's acknowledgment that we will sustain the journey of improvement in margins, cash accruals, and deleveraging over the medium term. We have seen some green shoots in consumption in the current quarter.
We are hopeful that the recent government intervention and the upcoming budget would recreate positive momentum for our category. In summary, this year, as you know, has presented a fair share of challenges for our category, and while that has had an impact on our growth trajectory, we have—we'd like to believe demonstrated agility in managing the profitability of our business, taking us even closer to our medium-term EBITDA margin guidance. Hence, as the economy improves, I am confident we will continue making progress towards our medium-term ambition of growing our top line by double digits and improving the EBITDA margin to mix to high peaks. With that, I'm going to open up the line for questions.
Thank you very much. Ladies and gentlemen, we will now begin the question and answer session. Anyone who wishes to ask a question may press star and one on their touch-tone 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 Arnab Mitra from Credit Suisse. Please go ahead.
Yeah, hi. My first question was on the growth itself. You've seen a pretty good growth in P&A, but how much of this would you ascribe to pipeline refilling after the disruptions you had due to the licensing issue? And in a normalized rate, if you could think of-if that was not the case, what would have been the P&A growth? Or if you would want to call out the ex-Scotch growth as more of a normalized trend on the P&A side, so it would be helpful to get some sense on that.
I mean, Arnab, thanks for the question. I don't think that it's material. We monitor secondary sales very closely in our business, and there has been no significant pipeline filling or stock increase that explains our performance. So I'd like to believe broadly that a large part of the performance is underlying and even benefited from a good winter this year, and I would say a reasonably good festive and wedding season, right? More of the wedding season towards the end of the year. So I would say it's underlying. Now, the point is that we all know that one summer doesn't make, one swallow doesn't make a summer. It's hard to see how P&A will continue to perform, right? Previous quarter was flat. This quarter was good.
What the next quarter will be, we can't tell you for certainty, but we do believe that all of this is because of fundamental underlying interventions that we have made, right? Including activation on our brands and a lot of focus from our sales guys to deliver a good quarter. So I'd ask you to read it that way.
Sure. Second question was on the two key costs, which are staff costs and other expenses, which on the nine-month basis, I think staff cost is down 13%, adjusted for the VRS, and other expenses are down about 12%. So other expenses, you did allude to the bad debt situation, but the staff cost decrease is just too sharp from a normalized, your earlier guidance, which was more like a flattish territory. So what kind of explains this kind of a big dip in both these expenses? And more importantly, is it like a new normal of cost, or could these costs come up sharply at some stage because these are unduly depressed right now?
Thank you. Let me answer this one here. I think the first time that we're looking at nine months is just when I'm looking at the quarter. So as you said, when you look at the nine-month number, our staff cost as a percentage of NS is close to the 6%, right? And of course, when I just look at the same as compared to 18 and 19, 18 were about 7.8%. 19 we closed at about 7%, and now we're looking at about 6% for the first nine months. So absolutely, there is a good change in terms of optimizing the overall staff cost.
As we have mentioned in all our previous calls, we are looking at our entire organization efficiencies and productivity, and that is a piece of work that is embedded in our overall productivity program, and that benefit you see accruing every year, year on year, including the nine months. A large chunk of that benefit is sustainable and will continue going forward, but of course, there will be some variance between quarter and quarter, nine months and nine months. My sense is we would continue to ensure that the large chunk of the inflationary impact that we see on the staff cost, which is about 8%, we should be able to fully mitigate or almost fully mitigate and try and ensure that we get operating efficiencies that we add back to our EBITDA margin going forward.
That's the way I'd like you to decode it. Sure and anything on other expenses other than bad debt, which is because even looking at your full-year bad debt number, there seems to be other lines also which are lower, so anything other than the bad debt which is driving the other expenses lower?
So I think when the going gets tough, the tough get going. I think with the last three, four quarters, we have been saying that we see an overall category slowdown happening. We have said that we see the cost inflation environment not benign anymore. And as such, we have ensured that across all the line items and across various subheads that you see, we drive productivity. And that's something that we've been doing very diligently over the last three, four quarters, and we just need to continue that. Of course, with the other overhead lines and the other various items that we keep watching and carefully navigating, with complete control on any sort of discretionary spend. We have put complete measures around that, and we would just want to continue to support through this time until the market is normalizing for us.
Okay. Thanks. I'll come back in the queue for the questions.
Thank you.
Thank you. The next question is from the line of Abneesh Roy from Edelweiss. Please go ahead.
Yeah, thanks. My first question is on the regulatory side. So one is in UP, Noida, Ghaziabad, bar timings are getting extended, and on the other hand, duty-free shops' proposal is to reduce the number of bottles one can buy. So one is why there is no coherent thinking still, and are you and the other players speaking with the regulator? And any big impact of either of these?
First of all, Abneesh, this is a state-based regulated model, right? So we cannot always say that decisions taken are 100% logical or consistent with decisions that are on the national stage. As far as duty is concerned, we're decoding the policy honestly in terms of the pluses and minuses of policy, so I'm not going to comment on that. Equally, on the duty-free allowance of two bottles going down to one bottle, I mean, it's speculative. I know that enough people are doing their bit to convince the concerned ministries to not make any change, but the news items honestly are speculative, and there is very little that I can comment on this time based on speculation. Let's see what happens when the budget comes, which is literally three, four days away, and then people, I think, rally together and decide next steps.
So the second question is on the ad spend. So it's at a four-quarter high as a percentage of sales. So is this because of the festive, or is this because of the new launch of the McDowell's Platinum, or is it because the competition has also started spending more?
So two points. Typically, the October-December quarter is our peak spending quarter. It's the peak consumption quarter, right, for our brands, and therefore, at a time of peak consumption, your brands need to be more present than at other times of the year. And therefore, typically, you'll see there's a cyclical movement of A&P in that quarter pretty much every year, and therefore, you've seen it this year as well.
As far as competition is concerned, I can tell you that we monitor our spend, media spend, versus other key competitors and the total market in our category. And our objective is to be competitive at a category level and for the priority brands in the category to be competitive versus other brands in the category that compete on a head-to-head basis. And I can tell you that our spends remain competitive. In fact, I might go on to say more than competitive, right? So that's how you should decode it.
And so last question on demand side. So in Q2, you had mentioned some signs of revival in consumption because of the festive season. You also mentioned that now there are some green shoots which are visible. So could you elaborate? Is it more of FY 2021 back-ended, where I think good recovery will happen, or do you expect prior to that itself some demand recovery?
FY 21, if I could tell you I'd be a rich man, and you'd also become a rich man for that information of mine. But the reality is this. Honestly, the environment is difficult to read, if I'm really honest with you. The environment is tricky. Initially, I thought the festive season, which was Diwali, that went well, but Diwali did not go so well this year. But again, it seems to have picked up in November, December with the Christmas, New Year celebrations, and the wedding season setting in. So listen, it's a bit of plus and minus. It's difficult to read. I can't really say how much this market will open up, right? And as you know, it's also contingent on the larger economic situation in the country. I think the question is, what can we do as a management team?
We can't change the GDP growth numbers. What we can do is to focus on what we believe will drive growth in a discrete environment. How can we make sure our brands are noticed more and across consumers better? How can we bring new news to our brands? And I spoke about Platinum, about Hipster. I've spoken about the number one relaunch, which is an all-new mix going into the market, right, as we speak.
So we have to focus as a management team on what we can do to drive growth. And as I said in my opening comments, we are restless about getting more growth in this business, right? And we can't change the environment, but we can change what we do. And I think that's what we're trying to do as a management team. Now, how that will translate into numbers, I think you have to wait and see, and I will also wait and see.
Sure. So thanks a lot. That's all from me. Thank you.
Thank you.
Thank you. The next question is from the line of Avi Mehta from IIFL. Please go ahead.
Hi, sir. Hello.
Hi, Avi.
Yeah, hi. Sir, just wanted to kind of understand more on the other expenses, the cost control. You've shown a very good ability to kind of work these line items and a very commendable performance over there. Would you be able to share adjusted for the Ind AS 116 and the reduction provisions, what is the other expense growth or decline like over nine months? And if you could help us with that, and I'll kind of comment.
Yeah. So I think the only big adjustment that we've seen is around our focus on credit management over the last three quarters, precisely. If you recall, in FY19, we had to provide for refusals in North Market, primarily from the risk-to-gain market, upon difficulties of the cases. And then we have ensured that over the last nine months to a year, we have focused on tightening our credit in those markets, and that has been prioritized over there. And as a result, as you see, in the last nine months, we did not have to provide for any recoverables going back. And this number, because the Ind AS 116 is not completely reflected in the P&L as well, and those numbers are perfectly visible. So if I look at the nine-month number, last year, for the nine months, we had to provide about 147 or so.
Compared to that, we don't have any particular provisions reflecting there. So that's something that you can pick up from the data to do a like-for-like comparison. And I think what is most important is just not the like-for-like comparison, but the fact of how we have kind of behaved and managed our overhead this particular quarter as well as the last three quarters, nine months.
And that's something that we have to see as more normal than just looking at the base disruption that we had last year. On the Ind AS 116, there's an adjustment worth 46 or so that we can pick up from the data. In spite of taking it all out of the data, you will see our overall overhead kind of still in a negative zone, in spite of that being hit by almost a normal inflation of 56% every year. That kind of really points out that we're still driving our efficiency across all other items, including other overheads.
And therefore, as I think you summarize what Sanjeev said, the progress we've seen in overhead is actually a translation of our strategy on how we manage credit risk and how we are managing discretionary expenses, right? And it's therefore not just a surprise. It's part of, I would say, a plan and a program that got us to this point.
Yeah. And maybe if I can add, because this question I'm believing shall come up, at the end of F19 call, when Anand and me were talking to all of you, we had very clearly said, "Look, the market overall seems that the category is going down." We were very clearly seeing the cost inflation environment turning bad for us, including glass prices as well as the duty prices. This has become a reality now. We had very clearly said that over the last three years, we have given 700 to 800 basis points improvement in the gross profit margin. We don't see that coming in through. So we'll have to definitely work through the reshaping of the P&L and ensure that we work through the opportunities across all of the line items. And that's exactly what you see in the shape of the P&L now.
No, no, I agree with that. No, and especially even more commendable because I recollect in the analyst meet that you had highlighted that most of the low-hanging fruits are done, and despite that, I think your other expenses are more or less flattish, even if I just for these decide that you kind of cut them, but where I was coming from is, as we go forward, I mean, this is what I wanted to understand. You see more levers to kind of be able to maintain or at least drive this momentum. Is that what I wanted to kind of get some sense from you, if you could?
So I think our guiding factor is we don't want to deep dive into each of the lines of the P&L. I think what's most important is we keep on driving the EBITDA growth and EBITDA margin growth, right? And we have to work backward across all the other line items to ensure that we deliver that. Of course, year on year, the flavors will change. This year, around time, we're kind of putting much more emphasis on looking at all the overhead line items because we know for sure the cost inflation is there. So I think if you have to decode that way, I think going forward, absolutely, we'll still keep a very, very close watch on the overhead fees and see how the market moves on because I think there's no other option at the moment that we're sitting on.
The good part is, as you already see and Anand said, November, December, if we've seen some revival in growth coming in, we hope we can continue with the momentum so that we can open up a pressure on everything else. But I think it's good to remain slim and thin as we move forward.
Okay. And second, it was on the input cost. How exactly is that kind of behaving? Is there some let-up on that inflation, or does it continue to remain under cost pressure, and how should I see that?
Yeah. So I think we have seen an inflation that we talk about is largely ENA for us. And when I look at the last two quarters, especially the last concluded quarter, we have seen some inflation data, some softening coming in. I think the peak is over behind us, right? We had the peak of inflation, which was quarter two, and I think September, October was the peak. We've seen some softening happening in the last one or two months. And our sense is the worst is behind us, and we should start seeing some stabilization coming in as we move forward.
Okay. The last, if I may squeeze in, is just on the employee cost. Is this decline because of some change in the way you are now approaching the employee remuneration? I mean, is this more have you kind of done that, or is it more to do with reduction in manpower itself, which you have kind of done?
It's part of a larger productivity agenda and is going to drive efficiency across everything else that we do in the business, including also efficiencies across how we manage various functions. And that's something that we have been doing over the last two years, and a large part of that is depicting the numbers now.
Yeah. At the end of the day, in fact, we do salaries, right? So we haven't reduced anyone's salary, I think. Otherwise, we would have had different problems on our end. So it's really about the efficiency of the organization structure, delivering these results more productively. And that's how you have to look at it.
Okay, sir. I'll come back in the queue for the other questions. Thank you.
Okay. Thank you.
Thank you. The next question is from the line of Latika Chopra from JP Morgan. Please go ahead.
Yeah. Hi, Anand and Sanjeev. The first question is around the recent tax hike in Telangana, and there was a news around license fee hike in Uttar Pradesh. Does any of these worry you at the margin from a demand perspective going into Q4?
So maybe we did not decode its excise policy, by the way, and there are some positives there. There may be some negatives there, and I don't want to comment on it, but we are happy to offline share more once we have decoded the policy fully. As far as Telangana is concerned, there was a sharp price increase that happened in the middle of December, and it's getting INR 20 a bottle, which is quite material at the lower segments of the market, and it becomes less material as you go to the higher segments in the market. Now, the typical reading, by the way, Latika, has been that in alcobev, this is not the first time that there's been a material price increase in terms of excise duty. It happened in Maharashtra last year. It's happened in Karnataka in the past. How does this behave?
How it behaves is, for two or three months, there's a slowdown. That slowdown is partly because consumers make those purchases at decision, but more because trade tends to downstock immediately when a price increase that comes in happens. And they try and get as much old stock as they can, etc., etc., and consumers go around looking for old price stock. But we have typically found that the category is quite resilient and elastic, right? Or inelastic, actually. And three months later, the category bounces back. There are multiple examples of our case of this happening. So there's a short-term impact. Do I believe that that INR 20 will have a long-term negative impact? I don't, because the absolute consumer price in Telangana actually is not very high compared to many of the surrounding states like Maharashtra and so on and so forth.
The absolute put-down price is still not something that's completely out of whack where it will go. It will go out of sync completely in terms of affordability. The other thing to think about is, because the price increase is flat irrespective of the segment, you should believe that an INR 20 hike at the bottom end of the market is hugely impactful for the consumer. But INR 20, as you become more premium, is a small increase in price.
And therefore, if anything, this may lend itself to a bit more premiumization and a bit more of people buying more premium brands, which then is in line with strategy as well. Short-term, yes. In fact, medium-term, it is unlikely that in our industry that people stop drinking, right? We haven't seen that. There's no data to believe that that will be the case from whatever we have seen so far.
Yeah. Thanks. This is very clear. The second bit, again, on gross margins, and I heard Sanjeev mentioning that you have seen softening in ENA prices over the last one or two months. Now, for this quarter, you had a very good mix, and we did see a sequential dip in gross margins. So how should one read it? Is it and the state mix, which also played its role? And is it right to say that this is probably the bottoming out of gross margins in Q3, and one should start expecting improvement even on a sequential basis going forward?
So I think your report is correct there, Latika. We also see that the gross margins seem to have bottomed out. The last three quarters, it was largely impacted initially because of the glass, but we have not given any glass price increases over the last three quarters. What we see recently is basically the E&A inflation, which has really hit us hard, very hard. We think that has bottomed out now. And my sense is that the gross margin profile that we see go forward should not see further degradation drop again.
And of course, there is this impact on the price mix and the blend mix that we see, but it's also offset with other things. So net, I think we are in a good position now. E&A prices seem to have stabilized. I think the worst is behind us. If we are kind of able to kind of hold on to a gross margin, gross margin profile going forward, and with all the other operating leverages that we have seen, that should help us grow our EBITDA margins beyond quarter three as well.
Sure. Thank you so much.
Thank you.
Thank you. The next question is from the line of Harit Kapoor from Investec. Please go ahead.
Yeah. Hi, good afternoon. Just had one question regarding the liquidity thing that you had called out in Q2, and you said now that things have eased a little bit. Would this mean that in some of the northern states that you were kind of restricting sales of the P&A portfolio, things are now back to normal?
So yes, we are back to normal in the sense that we're not restricting. That doesn't mean there are no market challenges that exist in some of those states. But clearly, we aren't restricting. But I'll tell you one thing. We're also not letting go. So with many of the customers, we have once bitten twice shy. So we know how much credit to play with. It's very tightly controlled from the center here on credit by big customers.
Customer-wise, it's controlled from here. And for many customers, we just talk as much as they pay back, huh? So we're not increasing the exposure at all. But I would say it is not a hindrance today to delivering what the demand is, right? Earlier, we were holding back, and I said, "Even if I lose market share, I don't mind letting somebody else take the credit risk." We were not willing to do that. Today, we are not in that position.
Got it. Got it. And the second thing was on the balance sheet side, you've organically continued to reduce the debt. I was just wondering, in the near to medium term, any resumption of the asset monetizations that are likely possibly going forward, or that for the near-term or nearer medium term doesn't look likely?
No, I think that's two parts of your question. Absolutely, we are working towards ensuring the cash flow that we generate from the company along your kind of trade and cash, and to that extent, we are very tightly monitoring our capital program, and if you see the last two or four years' trade is very, very tightly managed in a bank. That will continue to drive the same efficiency. When we look at our working capital, I think we have been doing excellent work in terms of reducing our working capital and average working capital year on year. In spite of the liquidity crises and the issues that we have, we have still very tightly been able to manage our working capital.
So absolutely, while for this quarter, we have not decoded the balance sheet, but I'm very, very sure when we look at the full year results that are not coming, we will see a similar outcome in terms of debt reduction as well as working capital efficiency still driving into the business. Sorry, there was another part of your question.
Yeah. The other one was on the asset monetization, sir.
Yes. So asset monetization program we have been working for the last four years will still continue. And as I mentioned in the previous call, whatever assets that we're monetizing now will not give me operating profit or margin coming out of, but it definitely gives me cash. And just to kind of give you the numbers overall, we still roughly have 1,500 crores of portfolio of assets to be monetized, which will have a combination of the treasury shares, which is about my sense is about 1,000-odd crore of the current market value, plus a combination of residential and commercial properties that we have scattered across India.
A large part of that is kind of in litigation with IDBI right now, which we are still fighting it out. But that's the portfolio that we have. My sense is we will continue to drive this monetization, but don't expect any benefits coming above the top line or within the operating profit that we have cash. The cash will absolutely flow in.
Okay. That's it for me. Thanks.
Thank you.
Thank you. The next question is from the line of Amit Sinha from Macquarie. Please go ahead.
Yeah. Hi. Thanks for the opportunity and congratulations on good numbers. So my first question is I wanted some commentary on the competitive intensity which you are seeing at this point of time. One of the global players has launched their IMFL brand recently. So on a longer-term basis, I mean, let's say the kind of intensity which used to exist, and I know, I mean, it has always been a high-intensity competitive intensity market, but I mean, if I have to just compare between, let's say, four or five years back and now, how do you rate it? Some commentary there would help us. Thanks.
Yeah. So listen, it is an intense category comparatively. No debate about that. And more players will keep coming in as the impact of this category becomes more and more visible to everyone. You all look at the same data and the same opportunity in terms of consumers. I think in that regard that India is a growth market, and the short-term slowdown should not be construed as anything other than the fact that on a broad basis, it's a growth market. Category growth is everything in this market. And honestly, more competitors come in, and invest more, right? I've seen this in other categories from my experience in the past. Categories grow faster than the intensity of the category, and the competitors of the category increase. Categories grow faster, right?
Now, the only question then is to say, right, how do you stay competitive, whether it's in terms of your brands, the offer that you have, and your pricing? And that becomes then part of strategy. So honestly, I welcome competition because finally, the consumer gets a better deal, and honestly, we will all grow faster. The question is to hold our growth share in that increased competitive environment, and that's precisely why we are doing a lot of the stuff that we are doing as a business. Now, some of the shorter-term challenges in terms of competition have been some amount of price-based competition that some of the competitors have employed as a strategy. That is not our strategy, right?
I just want to be clear that in this category and in our industry, it's so easy to forgo margin and get volume, but you can never get your margin back easily, huh? So just like we prioritize credit risk over net sales sometimes, sometimes we prioritize margin over short-term volume and share because keeping the P&L protected is important because that gives you the right to invest and the right to grow later, right? So that's the philosophy we pursue.
Now, we're not stupid about it. If somebody is running away with the market, then we will respond, but we don't respond immediately the moment something happens. So I think there are two kinds of competition, really: short-term tactical price-based competition and longer-term strategic competition where people are launching new brands and investing into the category. I think you have to deal with each in terms of what is the process.
Sure. So thanks for the detailed answer. Secondly, in the starting remarks, you had mentioned that you were planning to, I mean, there is a renovation plan for McDowell's No. 1 brand. Just wanted a few highlights there if you can tell us in detail. I mean, what is the timeline, and is it a new liquid, or there is a new packaging which is involved here?
So I said it's all new. Okay? So I'm rolling out every week, and that's why I'm sharing with you because it's currently being produced. The labels have been registered, and it is hitting the market, right, any moment now. So it's all new. It's a new, more environmentally friendly carton. It's a new bottle that is slimmer and taller.
There's a whole new representation of the key brand effect, which is the embrace on the pack. And of course, there's a new liquid, right? A new improved liquid, and we have done extensive testing, right, of this liquid, both in terms of research as well as actually in some test markets to prove that it is going to make a big difference to this brand. As you know, it's the heart of this business in many ways, and we are very hopeful and confident, in fact, about the impact that this can have as we roll it out.
Okay. Thanks a lot. That's it. Thank you.
Okay. Thank you.
Thank you. The next question is from the line of Nillai Shah from Morgan Stanley. Please go ahead.
Thank you. I'm going to just talk a little bit about the market share trends that you witnessed over the first nine months of the financial year, especially in Maharashtra.
Maharashtra is definitely a strong market share, but I really don't want to get into a share discussion at a micro level, okay?
This is just overall pan-India, just how.
Yeah. So I'll just give you a sense first. So we don't really discuss shares, but I don't have any data that we can share publicly. But I'll just give you our sense of this. So first of all, India is not a winner-take-all market. It's a growth market. And as I said in the earlier question, category growth is everything in this market, okay? So it's not taking a share of a pie that you see. It's about growing the pie, and that's the heart of the strategy that certainly we are pursuing in this market. Now, typically, we operate five segments in the prestige and above category, okay? So there's Bottled in Origin, Scotches last year, Bottled in Origin products, Bottled in India, Upper Prestige, Mid Prestige, and Lower Prestige, right?
Now, I'm not going to get too specific, but what I will tell you in all transparency is we are winning in several of these, and we are losing a bit in a couple of these. And you will see interventions, right, in the foreseeable future that will be addressing any of the places where we have felt a bit challenged, okay? So that's how broadly it kind of pans out. I'm not going to give you numbers and so on and so forth because we honestly don't have what we can share. But that's the broad situation.
Got it. And any price increases that have come by in the last three to four months?
So last three to four months, I don't think there's any price increase. As we know that in the previous six or eight months, we got 17 states, and we've shared that before. But typically, price increases don't come in the run-up to the excise cycle. And as you know, March, April is the excise cycle across most states in the country. So this is the time, Jan and Fred, when our efforts need to be seriously intensive, both in terms of our own PR effort with the states as well as the industry association. And given the comms environment, I can tell you that we're leaving no stone unturned to make the case for price increases this excise cycle. How much we will get? Time will tell.
Got it. And Sanjeev, just one question for you. The tax rate for fiscal 2020 in both the standalone and the consolidated business, please, if you have it.
Yes. I suppose we have this quarter benefited from the tax rate. The fiscal 2020 tax rate is about 25% as compared to the earlier tax rate of 35%. So we've very clearly adapted to the lower tax rate, which is we're getting benefits. Yes, in the first quarter, we had to reverse deferred tax because of that, about 60 crores, but that was non-cash. So on an overall basis, on the ETR, we're getting a 9% cash benefit.
And the consensus?
Consult is the same.
Asking you that because there's some one-off that's happened on account of PDL in the first and the second quarter, and the tax rate generally in the consol has been much higher than the standalone. So just to get a sense of for this year, what's going to be the tax rate in the consol business?
Only in terms of full year basis, the tax rate will be closer to about 25%-26%. The first quarter variations are around taking off, writing off some of the before-tax assets that we have because of the reduction in tax, which is about 60% off of the subsidy, but that's only for the first quarter. So if you look at the nine months versus the three months, the current quarter, you'll see a reflection of about 25% off, whereas for the nine months because of the 60% off, it's closer to about 30% off, yeah?
Okay. So the last three quarters of the financial year, 25%, and the first quarter, whatever was the impact because of the PDL, right?
Yes, so you should look at the nine months, which is kind of easier to get an understanding and even better, if you look at the current quarter, the effective tax rate is closer to 25%.
Okay. Got it. Thank you very much.
Thank you. Thank you.
Thank you. The next question is from the line of Vishal Biraia from Aviva Life Insurance. Please go ahead.
Sir, could you ask us something on the change in mix among the states? Is there some states where we sold more, where we make higher profits or anything of the sort?
So we don't really share statewide performance. Honestly, I think that's very interesting. We don't go into a little detail too much of an extent. So I would say that we have talked about price mix being very positive in the prestige portfolio. That has sort of got eroded if the state mix has been adverse, honestly. So you've got to believe that the state mix is certainly not adverse. The price mix is less pricing and more mix, honestly, in the quarter, and that's because our portfolio has done well with the more premium parts going faster. And that hasn't been kind of neutralized because of a bad state mix. So I would say nothing to worry about, at least, from a state mix standpoint.
Okay, and so within the P&A segment, was there a mix improvement within that segment?
Yes. Because that's why there's a 5.6% price mix. And as I said in my opening comment, each segment in P&A grew faster than the segment below it, right? So Bottled in Origin scotches grew faster than Bottled in India scotches, that grew faster than Upper Prestige, that grew faster than Mid. That grew faster than Lower Prestige. So every segment has grown faster than the segment below it, and that has obviously given rise to premiumization and price mix.
Okay. So the last question is, how has Andhra Pradesh done for us? Have the sales bounced back?
As far as Andhra Pradesh is concerned, the previous quarter was stronger, okay? What happened in the previous quarter was the government took control of retail. Retail on 1st of October changed to government retail. Through October and December, I would say that we are very pleased with our performance in Andhra Pradesh. Now, with the start of this new year or new decade, actually, there have been some shorter-term challenges in terms of the orders that we have been getting and the selections that we are getting. Our teams, the PR teams, our teams on the ground, are working intensively with the Andhra Pradesh government to just co-create a better solution for the future. No alarm bells yet in terms of performance, and we're trying to make sure that it stays that way.
But you have to watch this space because there is an emerging situation because of these short-term ordering issues that we have been facing and short-term selections because you know that the Andhra Pradesh government has a huge deficit and a huge gap and is not paying not just alco-bev companies but is not paying a lot of others. So we're trying to work with them to make sure that we get to the best buy and rebate that we can.
Thank you very much, sir.
Thank you.
Thank you. The next question is from the line of Jaimin Shah from RWC Partners. Please go ahead.
Hi. Thanks for the opportunity. Great set of numbers. Two questions. The first one is, could you talk a bit on how should we think about gross margin and EBITDA margin? Because the last time we saw this EBITDA margin, the gross margin was fairly high. And what Sanjeev was mentioning on ENA cost, if gross margin we kind of come back up, even if it's 100-200 basis points, how much of that will be reinvested in business? That's question one. And the question one is, could you talk a bit on the Bottled in Origin segment, broad numbers on how big is this one in terms of overall salience, in terms of sales now?
So let me start with the second question first. The Bottled in Origin segment, how big is it, etc., is still relatively small, but I think there's huge potential for growth, okay? And what can unlock growth is, obviously, the aspirations and the wallets of Indian consumers who aspire to drink global brands and nothing less, some moderation of customs duty in the fullness of time, and indeed, some moderation of the excise levies by some of the states. Now, in recent periods, what has happened is, actually, some states have actually reduced the price of BIO, okay? We've seen a bit of that in Maharashtra. We've seen that in Karnataka. Before that, we've seen that in Delhi most recently. And every time, I can tell you, there is a reduction in price with an explosion of growth. We had an explosion of growth in Karnataka after a big reduction.
That was a time when Johnnie Walker Blue Label in Karnataka was the most expensive in the world. It was INR 42,000. It came down to INR 17,000 in one swoop, okay? Now, obviously, everyone's not drinking Johnnie Walker Blue Label, but the price correction translated to Johnnie Walker Black and Red as well, right? And we saw an explosion of growth there. We're seeing an explosion of growth in Delhi today, okay? So I think the elasticity for BIO, the aspiration is intact. The affordability is the gap. The affordability can be bridged by higher income for people, lowering of customs duty, or lowering of excise duty by the state. And anything that improves the value for money, right, or the affordability of BIO, I think it really can lead to absolutely explosive growth. So we're excited.
Diageo probably has the most formidable portfolio in the world in BIO and particularly in Scotch whisky. So as this segment explodes, I'd like to believe that we are the biggest beneficiaries of that happening, all right? So it all accrues to us as it happens. On your second question or the first question about GM and EBITDA, we don't give GM guidance, right? We are consistently giving you EBITDA guidance, two things that we've said: Mid to high teens in the medium term, and that we will consistently improve EBITDA margins year on year, right? That is what we've been aiming to do.
We've already thrown a bit of light on what's happened to GM and the impact on COGS and so on, but I think what you have to decode from our results is the fact that we're not only managing GM, we're managing all lines of the P&L to deliver the guidance that we've given you on EBITDA, right? And that's really the only guidance that you should take away.
Okay, so should I think about, let's say, if gross margin does come back to the levels we have seen, let's say, two years back, the EBITDA margin should improve from here on? And we don't, I mean, we will require some investment in the business, but largely, that will be kind of passed through.
So that's speculative, and I can't ask you to think that way because it may be incorrect. I think what Sanjeev said earlier is that COGS, at least ENA, seems to have bottomed out for now, right? Who's to know how this will evolve in the medium term. At some point in the future, there'll be another glass price increase. Something can happen, okay? But for the moment, I think we've said that it's bottomed out, right? And we've delivered the guidance broadly despite having peak COGS, right? So let's see. We're beginning to see some early signs of softening of ENA. If that really happens and becomes a reality, we will see how to use that extra margin that we get in service of this business.
Okay. That's it for me. Thank you so much.
Thank you.
Thank you. Next question is from the line of Aditya Soman from Goldman Sachs. Please go ahead.
Hi. Good afternoon, and congrats on a good set of numbers. So just one question from my end. In terms of, you clearly indicated that your growth in the upper end of P&A has been much stronger, but is there a risk that you're actually losing a lot of market share at the bottom? Because if I look at sort of the absolute cases added year on year, that's about 300,000 cases added. Some of your smaller competitors, which are sort of one-system scales, have also added a similar number of absolute cases. If I look YOY, and the growth has been much stronger. So is it that you're losing, as you indicated, some market share at the lower end and gaining at the upper end?
So I'm not going to get into a segment-by-segment analysis of share. I think I've been transparent enough to say there are some segments we are winning, and I'd like to believe there are more segments that we are winning than we are losing, okay? So it's not as if there's some big losses happening. In segments where we are challenged, right, you will see interventions happening. At the end of the day, we've got to deliver a certain overall set of results for this business, yeah? And that is driven by category growth and market share and not just one or the other, right? And therefore, we have to look at this holistically, and that is what we are trying to do.
Fair enough. Thank you.
Thank you.
Thank you. The next question is from the line of Nitin Gosar from Invesco Mutual Funds. Please go ahead.
Hi, sir. A couple of questions. As a management, how do we see over a period of five years from now P&A and regular mix turning out to be?
I mean, in the five years in the future?
Yeah. We have already hit 70% on P&A.
I mean, we are two-thirds, 65% is P&A today, value. I mean, I can't give you a number, but you can do an arithmetical progression of the guidance we've given. So if P&A continues to grow, I don't know, double digits in the fullness of time because we are committed to making it grow at that level, and COGS is low single digits, then you can mathematically, I think, evolve how those ratios will move. So I'm not going to give a guidance on that, but you can easily do that, I think.
That should be helpful. And to support that kind of P&A growth, the existing investment that we're doing on A&P, would that be good enough, or we need to elevate it once the gross margin starts giving us much more headroom?
I've always talked about A&P, and I've said that there's no precise science, by the way, at least based on my three decades of management experience on what's the right level of A&P. It's something that you suck and see and evolve and play with, right? So as you all know, two years ago, in good faith, we increased A&P very significantly, and we've trimmed it a bit in the last year, okay? I think the important thing is this: are we funding all the new news? So are we putting our money behind good creative work? Are we putting our money behind great innovation, right? And are we competitive in the amount of media spend that we are incurring, right? And I would say it sticks to all of these three points, okay? And that's how we think about it.
So we will not underfund any of our brands competitively or underfund innovation, right? And new launches because that's the most important thing that's going to drive category growth at the end of the day. And at an overall media level, I would say our spends are competitive in the category.
Right.
That's really how we should read it. Now, whether it's +0.5%, -0.5%, I mean, honestly, there's no precise science. This is based on management judgment, and prudent management of the P&L, as you need to do when other lines of the P&L are moving in opposite directions sometimes.
Right. One last question. You mentioned about enhanced intervention, and McDowell's will seek that kind of intervention. This is more to do with change in product proposition or the imagery the product is carrying. Has it lost something and need to reposition it to some different level? What are we trying to do over here?
So first of all, I think you have to wait and watch the sales to see the full mix of McDowell's No. 1 as it rolls out into the marketplace. I would say this. So first of all, brands are not relaunched only when they're in trouble. Brands are relaunched because consumers change, consumers evolve, and technology changes, packaging changes, product knowledge changes, and you improve things to make it stronger, okay?
So I'd like you to just recognize that it's not that there's a problem, you're trying to fix it, right? It's an enormous brand with an enormous franchise, right, at the end of the day, and we are trying to make it stronger, right? I said earlier in the call, it is all new, so you have to believe there will be a new proposition, there'll be a new pack, there'll be new bottles, there'll be new liquid. It is all new, right? But more than that, I think you'll have to wait to see it and hopefully taste it as well.
I got the messaging, sir.
Thank you.
Thank you.
Thank you.
Okay. Can we make this the last call, please? Last question?
Sure, sir.
Thank you.
Thank you. The next question is from the line of Mayur Gathani from OHM Portfolio Equities. Please go ahead.
Hi. Thank you. So I just want to know, what is the update on the shares with IDBI? I mean, there was a hearing that was due.
Yeah, so of course, the discussions are ongoing, and it will take a period of time. Our submissions have been accepted, and we are waiting for the hearing to come through, so as such, there is no major update for this quarter, and thereafter when we get some updates, we'll let you know, so there will be a legitimate material. Yeah. That's it.
Okay. On the other expenses, so you mentioned there was some one-off in the last nine-month FY19, but there's nothing much in this quarter. So what was that amount? I must have. You did mention it in the call somewhere.
Yeah. I did mention. I do remember the amount was INR 137 crores.
137 crores. That was one-off in the other expenses?
Yeah.
Sorry. I missed that amount again.
You're talking about stock costs or talking about other overheads?
Other expenses.
Yeah. Other overheads.
Yeah.
Yeah. So other overheads, as I mentioned, in the last year, let's say precisely the nine-month corresponding period, we had a INR 130 crore stock of provisions for refusals for some of the risky market changes that we had, specifically in the North market. That was one, which you don't see repeating in just the first nine months. So this is kind of a good provision management. And secondly, it's because of the impact of the lease accounting. So the Ind AS 116, that's about INR 46 crores. So I suppose you have to, for your like-for-like comparison and looking at your P&L analysis, take off this INR 137 crore from the base year and adjust INR 46 crores in the current nine months, right? And after all these adjustments that you'll do, you'll kind of still feel our efficiency coming into the other overheads.
Okay. And how much of debt did you repay back this quarter, sir?
So we definitely have repaid debt, but unfortunately, this is not something reported to the stock exchange because we're not supposed to report the balance sheet for this quarter. But the pain in terms of production is still continuing. And when you see the full year numbers, possibly you can kind of almost extrapolate the production that we've seen in the previous years.
Would you be able to give any timeline saying that debt was INR 2,400 crores in September quarter? I mean, in a matter of two years' time, we should be close to a zero debt level?
It's true. For any finance professional, I would never say to look at a zero-cost debt level. Rather, look at your optimal capital structure for granted that you want to use for the company, considering the growth requirement and the capital requirement. But of course, we do have a healthy cash flow, and over time, we'll determine as to how we want to make best use of it.
Okay. Well, sir, thank you and all the very best.
Thank you.
Thank you very much.
Thank you. On behalf of the management team here, I just wanted to say thank you to all of you who've logged in today for the call, and thank you for your continued interest and faith in our company.
Thank you very much, sir. Ladies and gentlemen, on behalf of United Spirits Limited, that concludes today's conference. Thank you all for joining us, and you may now disconnect your lines.
Thank you, operator. Thank you very much.
Thank you.