Ladies and gentlemen, good day, and welcome to United Spirits Limited Q2 FY20 Results 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 Mr. Anand Kripalu — Managing Director and Chief Executive Officer, and Sanjeev Churiwala — Executive Director and Chief Financial Officer, United Spirits Limited. Thank you, and over to you, sir.
Thank you very much, and good day, everyone, and a warm welcome to the FY20 Q2 and H1 results call. As we normally do before we open the lines for Q&A, I'm just going to give you a brief summary of our results that we announced last evening. As you have seen, our revenue growth in this quarter was soft. The performance has been adversely impacted by both external as well as some one-off internal operating challenges. External challenges, of course, as you know, include the broad-based consumption slowdown. A nd that is also leading to some liquidity challenges with the trade in some specific states. In addition, we also faced some specific operational challenges in a couple of states, and this affected our overall business in those states to an extent, as well as the sales of Scotch whisky.
Consequently, as a result of these challenges, net sales for the Q2 grew 3%, including the sale of bulk Scotch inventory. Net of that, our underlying net sales growth for the quarter was pretty much flat. Within this overall net sales growth, the Prestige and Above segment was also flat, lacking a high comparative of 19% growth last year. In addition to the broader consumption slowdown, the segment was particularly impacted by a temporary supply chain disruption in our luxury Scotch portfolio, which has, of course, since been resolved. Also, liquidity challenges in certain key markets impacted the performance of premium Scotch, which is our Bottled-in-India Scotch whisky, where we consciously adhere to our policy of prioritizing credit risk over achieving sales, and therefore, we credit cautiously in extending credit to private parties in these states.
Additionally, while the P&A volume grew over 3% in the quarter, due to the adverse price mix, the value growth was flat. The Popular segment declined 1% in the Q2, and that too was lacking a high base of 10% growth in the same quarter of the previous year. Moving on to profitability, there has been significant inflation in our raw material costs, particularly ENA, which impacted the gross margin for the quarter. Despite the gross margin compression as a result of that, we have delivered a like-for-like underlying EBITDA margin of 17.5% for the quarter, net of the one-time benefit from the sale of bulk Scotch. More importantly, this EBITDA performance was a result of discipline and efficiencies in our operating costs, and it's not just about saving of our A&P. This actually compares favorably with last year's full-year underlying EBITDA margin of 14.9%.
So, both in Q1 and Q2, we are ahead of last year's full-year delivered EBITDA margin. We believe, as a management team, that with this, we have demonstrated our ability to mitigate gross margin pressures at the EBITDA margin level. And while we assert that a couple of quarters don't make a trend, this does, in some ways, underscore our progress towards our medium-term margin ambition. Investing behind our brands continues to be an area of strategic priority for us, and the reinvestment rate for the quarter was 7.8% after adjusting for the sale of bulk Scotch. Given that most of our A&P is directed towards our P&A portfolio, the effective reinvestment rate on that part of the portfolio is in double digits, which we believe is extremely competitive.
The PAT margin for the quarter came in at 9.8%, as the benefit from corporate tax cut was offset by some one-time write-off of deferred tax assets. The lower corporate tax rate will start to benefit the EPS from next quarter onwards. We have resolved the internal operational issues that we experienced in the last quarter and are investing behind all growth drivers with the onset of the festive season. Additionally, while the commodity space is volatile, with the upcoming harvest, we are hopeful of seeing some respite in ENA costs. At the macroeconomic level, we do hope that the good monsoon, coupled with the various measures recently announced by the government, as well as some improved liquidity, will help stimulate the economy and bring back consumption.
Overall, I would like to reiterate that we don't run this business on a quarter-to-quarter basis, and while the current context has presented some challenges, we are committed to making consistent progress towards our medium-term ambition of growing our top line by double digit and improving the EBITDA margin to mid to high teens. With that, I'm going to open up the line for questions.
Thank you. Ladies and gentlemen, we will now begin with the question-and-answer session. Anyone wishing to ask a question, may please press star and one on your 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 Abneesh Roy from Edelweiss. Please go ahead.
Sir, thanks for the opportunity. My first question is in terms of price hike. So, last one year, 15 states have given the price hike, but when I see gross margin, it is at a 10-quarter low and down 11 basis points. I understand ENA has moved up sharply in Q2. So question is, now with 15 states already having given price hike, is it now difficult, or because of the gross margin, there will be resistance from the government on that fact? And second is, in Q3, do you see further erosion? Because my sense is in Q3, some more inflation has happened in the key raw materials. So could you discuss that?
Abneesh, yeah, thank you for the question. So first and foremost, we've received price increases in 17 states, right? So it's fairly broad-based. Yes, there's one or two states which have been more difficult, and we haven't got the price increase, and our efforts continue to make that happen. The reason why you've seen the gross margin erosion in the quarter is because of two things. One is the glass price increase, which we absolutely knew, and that was not a surprise because we had agreed to certain glass price increases a couple of quarters ago, and we've spoken about that earlier, and unprecedented ENA prices this quarter. So while we got fairly broad-based price increases, this only covered a fraction of the cost increases, and therefore you've seen the erosion in gross margin.
We also had a poor quarter on mix, specifically because of what I spoke about, and we believe that the mix part of it, we will be able to recover in the fullness of time, particularly to do with Scotch. So that's the reason why the gross margin has got eroded to the extent that it has. Now, coming on to Q3 , so in Q2 , ENA actually peaked. It was an unprecedented increase as a result of ethanol blending being pushed to the limit, right? And that was fueled by the fact that petroleum prices were reasonably high and the rupee devalued, and therefore there was a big push from the government to improve ethanol blending, and that kind of destabilized the whole supply-demand equation on ENA.
I suppose the silver lining is this: that since the peaks that we saw in Q2, at the end of Q2, it's come down a bit. Okay? So it's not going up any higher. So in some ways, we might believe, we could believe that the worst of ENA happened in the quarter, and we had to bear the brunt of the margin erosion, the gross margin erosion in the quarter. Okay? So that's the overall situation. But I just want to say this: that despite this, and like I said, if anything, this may get a tad better, right? I think what gives us confidence is the fact that we've been able to maneuver the other lines in the P&L without doing anything that will harm our growth opportunities when the tides turn and the markets improve, right?
We have continued to do everything that we have done in the past on productivity and overhead management and deploying A&P appropriately to still deliver an EBITDA margin that we believe is reasonable given the current context of the business.
Sir, just one small follow-up. So, the exit in Q2 in terms of the ENA, that's lower than the average ENA in Q2. Is that correct?
It is lower than the peak that it hit in Q2. I'm not in a position to tell you whether it is lower than the average right now, right? But it peaked, and I think the bulk of the inflation, the max inflation we experienced in Q2, one is we started seeing a little bit of it coming off, and second is now with the post-monsoon scenario and the harvest coming in, we believe there could be some improvement in the feedstock prices, which will also help ENA prices ultimately, right? And we have to just wait and watch for this to play out.
Sir, that's quite helpful. My second and last question is, again, related to this. So when I see ad spend that has come off significantly in Q1 and Q2 versus the number which you used to give earlier in terms of, say, 9% to 10% of the sales, so because the industry is also facing similar gross margin pressure, so has the entire industry also come down in terms of ad intensity?
So I can tell you this, that first of all, our ad spends are very competitive, more than competitive. Okay? That's the first thing I'll tell you. The second thing I'll tell you is that the bulk of our A&P goes behind our Prestige and Above portfolio, and therefore, in the Prestige and Above portfolio, we are spending double-digit A&P as a percentage of sales, which you will also accept is competitive in the larger consumer goods space. And the third thing is this, Abneesh, that there is a reality of the current context where the business environment is exceptional, right, in terms of circumstances, and it requires management prudence and management judgment on what is the right amount of spend. So, do I have confidence that we are still doing the right stuff for our brand? I absolutely do.
And one more thing we have done is we have mounted a fresh effort on driving efficiency and productivity from our A&P spend. So we actually have a comprehensive project in the business where we are really pruning down our A&P efficiencies to make sure that we retain the impact, but with a lower outlay of spend investment. Okay? So, I think at the end of the day, as the management team, and on behalf of the management team, I do believe we are doing what is right by our brands in this context so that our brands continue to strengthen. So, when the market improves, we should be in a strong position to grab our share of that opportunity.
Sir, why I ask this question was essentially the other player has called out India as one of the top three strategic markets. So you're saying still the ad spend is competitive in spite of that, right?
Very competitive.
Okay. Okay, sir. That's all from me.
Very competitive.
Thank you. The next question is on the line of Amit Sinha from Macquarie. Please go ahead.
Yeah, hi, sir. Thanks for the opportunity. My first question is on your overall sales growth. While you have highlighted, I mean, the main impact was mainly on account of the overall macro slowdown, I just wanted to basically understand from you in detail some of the extraneous factors which might be very, very specific for the quarter. For example, the competition called out a major impact from floods in some of the key states. And also wanted to understand what was the impact for you specifically in some of the southern states where there was some uncertainty on the route- to- market changes. So the entire effort from my side is to understand what could have been a normalized sales growth for the quarter?
So, there are too many moving pieces, s o it's hard for me to give you any specific view on what could have been the normal sales if all this didn't happen, right? I can conjecture, but it is conjecture at the end of the day. First and foremost, even in the previous quarter, I'll tell you many investors told us, "Why are we being cautious?" Right? When we gave an outlook, they said, "Listen, we are beginning to see this macroeconomic slowdown, and there could be an impact in our outlook." Many people felt that the previous quarter was decent, so why are we being pessimistic about it? I'm just glad that we were able to see some of these dark clouds ahead of us coming. Now, coming to our internal challenges, there have been many.
I mean, floods kind of could have impacted the movement of trucks and stuff like that, but we don't believe that floods were the big impact as far as we are concerned. Now, we did have issues of, for instance, ENA supply in certain states, right, where we could not produce the full volume of some of our Popular brands that we wanted to do, right? So we gave that up because of shortage in ENA. And all we would have done by is to push up the ENA prices even more, given how big a consumer we are. So, sometimes you just have to balance your portfolio and play the game out so that resulted in some lost sales. The second thing is that some of the competitors in the marketplace decided to increase credit in high-risk markets. We decided we won't do that, yeah?
This remains part of our philosophy to not keep having provisions of bad debts because you sell and then you just find it hard to collect, just to be prudent as far as that is concerned. The third is, we had a funny action, really, on one of our Scotch finishing centers in India where the customs license was withdrawn for a period of time inexplicably. That's obviously come back, and we have sorted that problem out now in terms of making sure that our BII Scotch supply is uninterrupted, but that also impacted the quarter. There were a few other issues as well. Honestly, the RTM change in Andhra Pradesh has not impacted the previous quarter materially at all. Ok`ay? We'll see what happens now because it got impacted from AP. There's no real impact of that in the previous quarter.
So I would say those are the nature of issues that we have had. Each of these have contributed to some amount of the loss of MSP and the loss of mix. Okay? And I don't want to be specific about what this totals up to, but suffice to say that, yes, the revenue numbers would have been better than what we reported if these were not to have happened.
Thanks a lot for the detailed answer. Just to follow up on here, while I completely understand Andhra may not be a big impact, not a very big market for you, but the uncertainty in Telangana, even that did not impact the primaries during the quarter?
No, because what happened is we announced so there was a period of uncertainty, obviously, in the quarter. Okay? But it's not as if that stocks in the corporation or the retail shells dried out completely or something of that kind, which affected a significant consumption loss. And because the issue got resolved with the announcement to say now the policy is extended for two years with no other change in RTM, that quickly sorted itself out, and the new licenses will now get operational from 1 November 2020. So, I would not say that there was any material loss in the quarter because of TG's uncertainty.
Sure. Sir. My second question is on working capital, and you have mentioned that it's a very short-term kind of an issue, but just wanted to understand some details around there, and has anything changed on the payment side for some of these corporation markets?
So, Sanjeev here, maybe I'll take this question. If you see the press release, the press release pretty clearly calls out that we had a negative working capital changes in the cash flow terms of roughly about INR 380-odd crore. But we're not really worried for a couple of reasons. As you all are aware, towards September end, we had banking holidays, and as a result of which, some of the corporate markets could not pay us towards September end, which was expected in the receivables now. That payment has come in through largely towards two states, West Bengal and Telangana. Roughly about INR 180 crore were stuck towards September end, but the money has come through. So, it's not concerned. Second is something good. As you're aware, there's this sale of Scotch of INR 75-odd crore, which is kind of called out as one of items.
That sale-out happened towards September end, and that money is going to come to us in October. So that's about INR 75-odd crore over there. These three items or two items put together is about INR 250-odd crore. Towards September end, we had to also build up some case goods inventories in bonded warehouses to cater to hopefully higher demand that we'll see in October, November coming in. And roughly about INR 100-odd crore were blocked over there. So that's what it is. I think what we are trying to really do is, as you're aware, that there's a lot of liquidity pressure in the market, and retailers, distributors, wholesalers are in big-time liquidity crunch. We want to really play it out dynamically and see if we can really manage our sales at the same time, manage the credit risk.
We want to be very prudent and judgmental throughout as we move forward into subsequent quarters, and of course, in pockets, we will keep on releasing more liquidity other than required because Anand has called out. We definitely want to ensure that in some of the pockets where we have some challenges, we want to prioritize credit risk over the sales growth, and that's the area trying to work out and manage between our top-line aspirations and the working capitals.
Yeah. Very clear, sir. Thanks a lot and all the best.
Thank you.
Thank you. The next question is from the line of Harit Kapoor from Investec. Please go ahead.
Yeah. Hi, good afternoon. Just two questions. Firstly, you've mentioned in your release that you are seeing a little bit of a pickup in the festive season on demand. So if you could just speak a little more about what you're seeing on ground probably towards end September, early October, any green shoots?
So let me put it this way. So first of all, in the festive season, the start of the festive season or the onset of the festive season starts with Dussehra normally. Okay? And I must say that Dussehra in Bengal was good, right? I won't say it was euphoric, but it was good. It didn't give you a sense of an economic slowdown. Okay?
Right.
Now, normally, historically, we've seen sometimes that's a precursor to the mood during the rest of the festive season with Diwali and Christmas and everything else thereafter. So, the start was good. The euphoria around Diwali is still not there. Okay? Now, normally, a lot of sales happened in the last weekend before Diwali, and we've got to see in the next four, five days whether there is an exceptional pickup that happens. Okay? And normally, it does happen. But having said this, I think there is an overall, I would say, less-than-euphoric or even modest mood, right, in the run-up to Diwali overall, right? There's no buzz. The malls are not packed. There's just the normal Diwali buzz, the parties, the bash, all the stuff that goes with it.
There just seems to be less this year, and I don't know if you guys are noticing it in your own circles as well, but we're noticing that. And that's normally an important route for consumption of our kinds of brands. Okay? So we really have to just wait and see over the next four, five days to a week how this kind of pans out.
Very clear. So the second thing was you spoke about prioritizing credit over sales. I was just wondering why we have done this earlier also in markets like Punjab, Haryana, while we were expecting changes in distribution at that point. I was just wondering, when we do prioritize this and maybe some of the competition doesn't, and when things actually improve from a liquidity perspective, do you find it easy to gain back some of the lost share which has temporarily been lost, or is that a fairly hard thing to do?
This is a great question, honestly, right? And this is the ultimate dilemma as management of short-term versus long-term, right, and what choices do you make?
Right.
We have seen that in the past when we were not prudent, right, on credit, right. It's easy to get the sale in states like that, and particularly in the wholesale markets, right, where it's private wholesale. This issue doesn't happen in government corporation markets. It's really in private wholesale markets. But getting the money back is really tough. Now, the current environment is different from the uncertainty of route to market change, right? The route to market change was that these guys will have no jobs later and you won't be able to find them. That was the risk at that point in time. Now, it was probably that it didn't happen and turned around. This time, the reality is there is real liquidity issues in the marketplace with the trading community today. There really is. So if you supply, they take the stock, but it's at your peril.
Now, this is management judgment. Now, somebody else may have more pressure on top line and say, "Fellow, I'll take the risk here. Let me supply and deliver my quarter's numbers," right? And I'm saying, "No, I'm not going to do that because I don't want sales if I'm not going to deliver to our larger philosophy of profitable growth for this company," right? I want quality sales. And sometimes this is about judgment. Now, in the fullness of time, the question is you're going to have two kinds of situations, right? Somebody has been smarter than us. They've given the credit and collected the money. Then you have to strengthen their share position as a consequence of that. You could also have a situation where somebody does this, gets short-term share gain, but shoots themselves in the foot because then you're not getting your money back, right?
So it's not as if we are not supplying at all. It is that extra push that you can get a volume that you get typically towards the last week or the last month of every quarter, right, which we are not doing because that is required and further expansion of credit risk. So it's not as if we are stopping sales or something, right? It's the last push, right? And we are just being cautious about the last push. And time will tell whether this is smart or not smart. Historically, I must tell you, we've also burned our fingers the other way around, okay? To be honest, you can see some of the provisions of bad debts in our books as well. Okay? So I think this is just how we want to play this game.
Very clear, sir. Very clear. Wish you all the best. Thank you.
Thank you.
Thank you. The next question is on the line of Aditya Soman from Goldman Sachs. Please go ahead.
Hi. Good afternoon. My first question is on the channel inventories. You mentioned that there was a buildup in an inventory at a company level prior to sort of the festive season. Do you think there's been a buildup in the channel inventory as well?
No. Actually, there's some buildup there, right? But it is nothing that is exceptional compared to what we normally do at the end of particularly September quarter. And it only happened in September quarter because we know that you're running into both the winter season and the festive season. And consumption for our brands are high, and that's the most important quarter for our business. Sanjeev, is there anything else?
Absolutely. I think this is normal buildup that is happening. Of course, we just want to ensure that we don't lose out momentum as we step into the festive season. The overall economy is sluggish. The worst thing that we can do is to ensure that there's no stock available, and we need to really move ahead. And the festive season just stands a little ahead, right? So very clearly, the Durga Puja in West Bengal was almost like first week.
Of October.
Of October. So we had to build in inventories towards September end over there. So just more timing and kind of being a little more prudent.
It's also early Diwali this year. Actually, this is one of the rare years when both Dussehra and Diwali are in the same month of October, right? So, it's early and kind of bunched together a bit. Last year, I think Diwali was on 8 November 2019, right? So, there's a bit of phasing there. Yeah.
Some of the supply issues that you said you faced in the quarter, I mean, would you have anything of that sort going into Q3, especially in terms of both in terms of what you have already in inventory in the system as well as demand for later in the quarter?
So, first of all, in our industry, never say never, okay? You never know if something's going to happen or not. Having said that, what we do know is that the bulk of the operational issues we had in the previous quarter are now kind of done and dusted, right? And as we are sitting today, there are none of those kinds of operational issues that we are dealing with, right? Now, whether something will happen in November, December, you never, ever know, right? But we hope and pray that there isn't anything of that.
Fair enough. I think very clear. And lastly, this route to market change in Andhra Pradesh, you mentioned there's no impact in Q2, but anything to call out for Q3, or you don't expect it to be significant?
So, first of all, I'm not going to call out any risk as a result of the change, just to be clear. From what we have seen thus far, the first fortnight of October was the first fortnight of the government retail stores opening up and so on, and the government also articulating its philosophy and policy of how they'll buy, how they'll pay, et cetera, et cetera. Okay? And we actually were cautious about what we would get in the month of October from the state of AP because of this transition. Actually, the sales are a little better than that cautious estimate that we had, okay? And that's why I'm not seeing any material risk to AP of AP contributing to the national numbers from where we are sitting right now.
All right. That's very clear. Thanks a lot.
Thank you.
Thank you. The next question is from the line of Arnab Mitra from Credit Suisse. Please go ahead.
Yeah. Hi. Thanks for the opportunity. My first question was on the competitive intensity in this kind of a slowdown coupled with input cost inflation. So I specifically wanted to understand, are you seeing competition getting more aggressive on pricing, especially in free pricing markets like Maharashtra, where there could have been an opportunity to take up pricing more to make up for some of the gross margin pressures? Or is it proving to be difficult to do that even in the free pricing markets given the competitive intensity?
And also related to that, you did mention a lot of the price hikes you've got, but it doesn't seem to reflect in the Popular. P&A, I understand the negative is probably due to Scotch. But on the Popular side, also, the pricing and volume seems to be almost same, the value and volume growth. So is there something negative in the mix there also which is impacting the pricing growth?
So first and foremost, competitive intensity, of course. There's competitive intensity, and different competitors have different ways of competing, and different competitors have different pressures, right, on NSV or volume or whatever, right? So first of all, our philosophy is to go for quality growth. We don't believe that pricing as a tool to drive volume and revenue is our philosophy. We believe that there's a category growth opportunity in India, and yes, there are short-term obstacles to that, but the long-term consumer fundamentals hopefully will bear out the fact that the opportunity is there. And therefore, it's not a winner-takes-all market. It's a category growth market, okay? So our philosophy in line with driving profitable growth and quality growth is to continue to invest behind our brands, actually improve our products, improve our packaging, justify our premium, right? If anything, pick up our premium, right?
That's how you deliver quality growth. Now, if that's our long-term philosophy and how we want to drive our business, it's possible that there are certain short-term moves in the marketplace that we may need to react to tactically, right? We will do that. We won't just sit tight and do nothing at all. We will do that. Now, how we respond to that is really the million-dollar question. We're just watching and seeing how this space evolves. I think our own strategy will become clear in the next few weeks against this. I just want to say that this has happened earlier also in the state of Maharashtra, right? I can tell you today we are sitting in a solid position in Maharashtra despite the moves that happened over the last 12 to 18 months in Maharashtra.
I absolutely believe we did the right thing that we did at that point in time, and therefore we are sitting in a solid position in Maharashtra, and therefore, how we respond to this is not to let me just do what other people have done, but to evolve our own model of what is in line with our philosophy and our business objective, and that's what we are really aiming to do. On your second question on Popular, so there are two parts to it. Obviously, one is pricing and so on and so forth, but the other is state mix, yeah?
And what's happened is there's a difference between states that kind of make less margin, which has performed better, and states that deliver better margin that have performed not so well this quarter, okay? Therefore, it's really the state mix that's making that difference and nothing more than that.
Okay. Thanks for that. And just one question for Sanjeev, if I may. The other expenses seems to be at a 16-quarter low at below INR 300 crore, and it's a substantial difference from the INR 350 to 400 crore which we've had in the last seven, eight quarters. So, is there something specific in this quarter? Are these levels of other expenses sustainable? And even if I look H1 versus H1 , if I were to even out some one-off effect here and there, it's almost a 12% decline year- on- year. So, again, just wanted to understand, is there something specifically on other expenses which is a big tailwind for this year, and is that sustainable?
Yeah. So, I think the other overheads on a very like-for-like basis is lower by INR 2 crore. Now, I'm talking H1 because it doesn't make sense in looking at just the quarterly movements of other overhead items. There's an impact of the Ind AS lease rental adjustment, right? About INR 31 crore is coming out of the other overhead and moving largely into the depreciation and interest items. So, that adjustment definitely we should make in terms of your going forward outlook. The other part is largely related to the internal efficiencies. One of the big things that Anand and me have been speaking about in the last 30 minutes of our call is managing credit risk over volume growth, as a result of which our provisions for our doubtful debts have significantly come down.
And because of Ind AS requirements, we are very specifically in the balance sheet giving a breakup for these provisions. You will observe that in H1 of F19, that is last year H1, we had INR 44 crore of provisions. We don't have any provisions so far. But that doesn't mean there'll be no provisions going forward as well. We're dynamically managing the situation. There's a far far improvement that we've obviously seen since last year. So that definitely should give some benefit as we move forward to the full year. Second is all across the various overhead lines we've been driving efficiency. Internally, we call it war on debt. So we have a complete credit team spread across various functions. We're just trying to drive very clean efficiencies across various line items.
But of course, because our volumes are down to the extent, somewhere impact will have to happen on the other overhead, just to see kind of other overhead as a percentage of the NSV and the direction things are moving. As it trended over the last couple of years, definitely it's moving in the overall right direction. FY19, we closed at about 17.5% in terms of that. Where we are standing right now in H1 is 14.2%, which means if we can continue driving these efficiencies going forward, we will definitely see some operating leverage coming forward. I would kind of just step back and look at more on the macro level. And this is guiding towards how we look at H1 rather than just looking at one particular quarter.
Because of our gross profit margin erosions, because of the reasons that we explained, mix issues, and of course, ENA and glass inflation coming in, our GP margin was lower on a like-for-like basis on underlying about 428 bps. But when we look at all of the line items below that, which is the combination of staff costs, advertisement sales, promotion expenses, other overheads, we've been able to recover 540 bps through various measures and efficiency coming in. As a result, on a like-for-like basis, EBITDA margins kind of still significantly improved by 65 bps, right? And our H1 EBITDA margin on a like-for-like basis is still 16.8%, which is still significantly better than the underlying EBITDA margin that we had for the full year of FY19, which is 14.9%.
So, my request is to kind of look at the overall theme, rather than just specifically looking at one particular line item. The fact is, this is exactly what we called out when we had this long call at the end of FY19, that we do see benign inflation environment behind us, which means the GP margins, in fact, didn't really be called out, and that's what we see right now. But I think everything that we do is in service to delivering a better OP and delivering a better EBITDA margin, and that's what's exactly playing out. So, we will continue to drive this cost savings across all the line items as well as we move forward to H2 and for the full year.
Okay. Thanks. That's it from my side. All the best.
Thank you.
Thank you. The next question is on the line of Nillai Shah from Morgan Stanley. Please go ahead.
Thank you. So my question is essentially on the pricing that you've got in the 17 states. Arnab also alluded to it. So essentially, when you look at the numbers, we don't see it. There are different reasons for it. There's state mix. There's also the price cut which we had taken in Maharashtra in Q3 of last year, and then the tax increase in Maharashtra again in Q4 of last year. So all of these are being offset by it. But just how do I think about pricing going forward in the second half of the current fiscal, given that some of these things will be lapped up in the base now?
Yeah. So you're right. So, Maharashtra, almost all the pricing that we got in these 17 states, right, was a big state, and it was a big decision to take. A large part of it is now we've lapped, okay, because it happened in September last year. And a bit more of it, we will lap in January. So. it's all around the corner now. So. at least the Maharashtra stuff will disappear. So the pricing that we've got should start flowing through because we also believe that the mix will also sort itself out because the mix was predominantly because of short-term issues right now, okay? So that should happen. So we should absolutely start seeing net pricing from quarter four. This quarter three, there'll still be a bit of the Maharashtra stuff in that.
But I think I want you to look at pricing on this that, listen, with this kind of commodity environment, right, and there's no way that we are buying worse than anyone else in this market. Everybody is reeling from a tough commodity environment, unlike FMCG, which is having a relatively benign commodity environment. The industry today has come together, and I can tell you there is a lot more intensity to push price. Now, within that, some competitors may choose to still play price at a time when COGS are going up, and that's, I suppose, a business call that people may take. But the broader industry is pushing much harder and also lobbying now with states to say that you've given us a price increase.
The normal model is you'll give it once in a few years, but these are exceptional COGS situations, and they're both bringing it back on the table for a more urgent one more round of price conversation and hopefully pricing decision, okay? So that's how we are approaching it, and I think that's how you've got to look at pricing as well.
If I think from a slightly longer-term perspective, how does the ownership of, let's say, a Pioneer Distilleries, for instance, help mitigate, if at all, ENA costs going forward?
Absolutely. Something like Pioneer should help. Pioneer has had some challenges, and that's been reported in the results of Pioneer as well since it's a listed company, right? We will solve those. It will give us some advantage at a time when ENA prices are as high as it is because it is a bit of captive ENA capacity, okay? Now, long-term, the decision is different because it's a commodity, and it goes up and down. You might have a period when it's really good to have captive capacity.
There may be a time when it's not so good to have your own captive capacity, right? We have seen both these scenarios play out in the past. I think even where we are today, it seems topical to think about it as an advantage, and it is, right, during this period of time. Pioneer will deliver a bit more as we improve the operating efficiency of our plant in Pioneer.
Yeah. And if I could just add to what Anand said, while we are looking at Pioneer as a separate P&L entity, it's largely a captive unit. And given the overall consumption that we have on our own ENA, the supply from PDL or the Pioneer Distilleries is really immaterial to the overall scheme of things. So it might bring a little more efficiencies, but again, on the larger scale, it's still insignificant. It's not very material.
Listen, I want to understand. I know that. Is there an optionality in the future to think about greater capacities coming in from captive, given the fact that ethanol blending is not going to go away as a strategy for the government?
So absolutely, you're absolutely right. Going forward in the long term, I think the larger thinking is now towards having an integrated unit there and having standalone bottling and separate distilleries.
Yeah. So the long-term footprint will move more towards co-location of distillation and bottling, right? So captive distillation and bottling, right, into the same plant. That's the direction which we will move strategically.
Final question is on grain versus molasses-based ENA. What is the split right now of our consumption?
About 70/30?
Yeah, about 70.
All right. Thank you very much, sir. All the best.
Thank you.
Thank you. The next question is on the line of Binoy Jariwala from Sunidhi Securities. Please go ahead.
Hi. Thank you for the opportunity. Just a quick one on the advertising and sales promotion expense. That's about 7.6% versus 9%. And likewise, it's been lower for this H1 as well. So just wanted to understand how much of this is alluded to the Diageo's Catalyst tool and how much is the actual reduction for managing profitability?
I think it's a brilliant question. We have been talking globally as well as locally on a lot of productivity work that we're doing. Anand just mentioned about the governance efficiency and the effectiveness that we're driving across our entire A&P spend. And as you can see, the fixed spend that we have over the years. First, coming to your question on the A&P spend or reinvestment rates, while on the books, reported business we see 7.6%. The fact is, it's about 7.9% and about 8%. If you look at the last three, four quarters, very consistently, we have been spending around 18%. We will step into a festive season, which would mean our reinvestment rate will slightly go up. Possibly on a full-year basis, we'll still see our spend closer to the 90%, and that's the guidance that we have been giving.
On top of that, definitely, we want to build in a lot of efficiency and effectiveness this year, given that we have invested a lot behind the Catalyst tool, the NRM technology piece that is globally driven, and hopefully, that efficiency will also be built in as we move forward for the year. We were not getting into a split saying how much of that is because of the productivity that we're gaining, but yes, we are moving headfirst into the direction, and we already see a lot of this effectiveness and efficiency already seen as we've seen in the last few quarters.
Sure. I understand that. So, a follow-up on this is, with this efficiency coming in from Catalyst, do you still maintain that in the medium term, you would like to hit about 9% to 10% of sales as advertising and sales promotion expense?
So I think there are two parts to it. If you really see on a comparative basis, we are definitely spending ahead of our competition. That's what we believe. So our effectiveness is already in place. As of now, we are already double-digit for P&A, right? And I think very, very competitive in the market space. We had earlier kind of spoke about guidance to 9% to 10%. This is still very good dynamic. We will continue to drive efficiency. And just be around that range, maybe more about the 9-ish range than the 10-ish range. But I think this is about the management judgment. This is about how we see the environment, and this is about the overall portfolio play. But I think the guidance that we've already mentioned in the past, kind of we are still closer to that. Yeah.
And if I can just add that I think the point Deep made about management judgment. I mean, when you're in an environment where you are seeing double-digit volume growth, then you also fund it in a particular way. And it's a chicken-and-egg situation. You never know which comes first. But at least the economic environment needs to be positive for you to be able to do that. And in an environment, and you'll see this with all companies, at a time when consumption and demand is a little slower, you just have to be prudent. The question is, are we spending share of spend more than our share of market, right? And that we absolutely are. And that's the point about us being competitive. And that's how we maintain it.
And we will just use management judgment and be dynamic about maneuvering our way through an environment that we did not expect six, nine months ago, honestly. So we have to take different actions depending on the environment that we're in, and that's what we're trying to do.
Understood. That's helpful. Thank you so much, and the last question is, what would be the normalized maintenance CAPEX?
Throughout the year, over the last couple of years, we've done spending about INR 200-odd crore. And as I see by H1 trend , close to almost half of that. So, my answer is, yes , we can still stick to our overall guidance that we have been telling you previously, that we're looking at overall about INR 200-odd crore CAPEX.
All of this would be maintenance CAPEX, is it?
That's largely maintenance, productivity-based compliance CAPEX, and environmental, safety, other factors. We're not putting up windmill projects, per se. So it's largely around only classifications of maintenance CAPEX.
Understood. And the, sorry, I couldn't get, you mentioned the split between grain ENA and molasses ENA was 70/30. Is that right?
Yes.
Okay. Thank you so much.
Especially for grain. Yeah.
Yeah. Thank you so much.
Thank you.
Thank you. The next question is on the line of Nandlal Padhi, an individual investor. Please go ahead.
Thank you for the opportunity. What percentage of revenue comes from export, and how fast it is growing?
Hello. I think we don't actually disclose this information specifically. It's a small part of our business. It is marginally accretive, so it's a good business to be in, and it is growing faster than the domestic business, right, so all the levers are positive, but the materiality is still somewhat small for the business.
Okay. Okay. Thank you, sir.
Thank you. Thank you.
Thank you. The next question is on the line of Avi Mehta from IIFL. Please go ahead.
Hi, sir. Congratulations on the great performance, especially on the cost front. My question is on the sales side. I might be repeating on there because I missed the earlier part. But in the Prestige portfolio, while you've called out some factors that you've chosen to either do or the environment has forced it, just wanted to understand if you, given that some of these factors have turned about, especially the one-off issues in BIO, how should I look at the recovery in sales trajectory? Are you expecting the double-digit more as a V-shape, or is this going to take some time in your view? I know part of it is linked to macro, but if I, based on whatever you've seen, if you can just give a help us understand how to look at this. That was the first question. The second was, sorry. Sorry.
No, finish your second question out there, and then we'll respond. Go ahead.
Second is that you highlighted that some of these working capital increases are more seasonal/one-off in nature. Is this corporatization or there is no linkage between working capital increase and the movement towards corporatization model? Would that be inaccurate to kind of link it, and how should I look at that? That is the only question that I have. Thank you.
Yeah. So I'll take the first question, Anand, and then Sanjeev will comment on the second one. So how do you look? What should the NSV be? Will it be double-digit? Will it get there in the short term or the kind of medium term? I mean, it is a bit of the million-dollar question. Obviously, it's our ambition, and everything that we are doing is in furtherance of that ambition. I think a significant part will be dependent on some improvement in the macro environment. And there'll be smaller parts of it that are to do with some of the operational challenges and so on that are now behind us, right? And the efforts that we're going to be putting into just deploy the growth drivers that we have, invest behind those, and continue to push our strategy forward.
Now, what that number is going to be, unfortunately, I shouldn't say, and I cannot say what that number is likely to be or when it is likely to get there, right? Because given the current situation, it's really hard to comment beyond the point. I think what one does during times like this is, sorry?
Sorry. Just one thing I wanted to kind of highlight. I was not looking at reaching the double digit. What I wanted to do is try to wean out or try to associate a number for the one-off, which is kind of reversing, which is what you highlighted. Is there a way to kind of have any number to it? So if, for example, the BIO issue was not there and the BIO issue was not there, both of which have been resolved, the growth rate would probably have been 200 bps higher. Is there any way to kind of get that is what I was trying to kind of understand.
So look, the operational issues of the last quarter, right, which are now controlled, which we could have solved or should have solved or whatever, or these one-off things, it would have contributed to a few percentage points of growth.
Okay.
Okay? Now, I'm not going to say whether it's one or five or 10, right? But a few percentage points of growth, absolutely. I think we just lost because of some of those challenges, which are not there now, right, as we go into the next quarter. But this is a dynamic market. This is a quarter where you have the festive season in your base as well. How the festive season plays out in this quarter, right, is going to be a real important determinant of consumption. There are many moving pieces, not just that one. But that one is worth about that much is what I just told you. That's all.
But you can't quantify it, say, it's a 2%, 3%. That kind of number, you would not be able to kind of.
So I wouldn't like to. I wouldn't like to. We obviously have some internal workings on that, Avi, but I wouldn't like to, honestly.
Fair enough, Sanjeev. Fair enough. Thank you, and the second bit of the working capital is deeper.
Yeah. So Avi, I think there are two parts to your questions. Part of the working capital is towards the seasonal deployment, and of course, that's absolutely fine. And the other part we did mention about is the timing. But I think it's fair to say when I look at the timing, there's two parts to it. 70% of the sales are actually in the corporate market, right? And I did mention about some of the challenges that we had in terms of collections, which is in a way behind us. But yes, these are frequent. In the corporate market also, we do see from time to time these challenges across collections. But that's true for the industry and the way sales happen in the corporate market. Here the payments are all secured. At least the challenges are lesser than the challenges that we face in the open market.
Coming to the open market, as we had mentioned, we have definitely prioritized subscribers with the sales growth. As a result, we have kept some of these issues under control. But yeah, I think we do have our challenges in some of the North markets precisely. And as you're aware, again, there's the overall liquidity crunch that is there in the market. To that extent, we will continue to face some challenges as we move forward also in the subsequent quarters. But we'll have to really manage it very, very dynamically, right? And then we have to really see how things play out.
Okay. That's fine. That answers the question. Thanks a lot. Thanks a lot.
Thank you. And operators, we take the last question now.
Sure. The next question is on the line of Tanya Bajaj from Emkay Global. Please go ahead.
Yeah. Hi. This is Ashit from Emkay. Thanks for taking my question. I have two questions. One on other expenses. You've done a great job cutting down expenses over here. So, if you look at last two, three years, other expenses in the second half have been largely higher than the first half run rate. Is that a trend that will continue, or we should look at the first half expenses for that item? And secondly, one of your key competitors has cut one of the premium brand prices in Maharashtra. Do you see a material impact from that, and how do you plan to address that?
So I'll take the second question and then hand over to Sanjeev for the first question. I've already answered our philosophy and our strategy, right? And what the impact of that will be, I mean, we're still assessing. And most importantly, the impact will be based on how we respond if we respond, right, given our longer-term philosophy and strategy. So I think we'll have to just see how this plays out. I feel we have managed these situations effectively the last time around, right?
And actually, Maharashtra, our performance is really good, and those brands are growing really well. So it gives us confidence that we will be able to maneuver through the situation, whether there will be a short-term impact or not. I think we will just have to watch this space, honestly, because we're trying to construct our response and our plan at this point in time.
Okay.
I'll now get into your first question, which was how do we decode other expenses, H1 and H2? The fact is many of the costs are associated with the way the industry operates. Many of the costs, for example, licensing, renewals, brand registrations happens along with the changing of cycles, which has followed the fiscal year, which is May to March. So, some of the costs you will definitely see coming next year. But frankly speaking, do we see a trend? It's very, very difficult for me to answer that and decode it. Best is to see the overall other expenses on an annualized basis and see the trend around that. That's the best way you can do your modeling.
Okay. Got it. Got it. Thanks and all the best.
Thank you. Thank you. Thank you very much. I'd like to thank everyone for joining into this call and look forward to your support in the times to come.
Thanks, Anand. Wish you all a very happy Diwali.
Thank you. Ladies and gentlemen, on behalf of United Spirits, that concludes this conference call. Thank you for joining us, and you may now disconnect your lines. Thank you.
Thank you.