Ladies and gentlemen, good day and welcome to the United Spirits Limited First Quarter 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 contact the 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 Mr. Sanjeev Churiwala, ED and Chief Financial Officer from United Spirits Limited. Thank you and over to you, sir.
Thank you very much, and very good afternoon, everyone, and a very warm welcome to the FY21 results call. Before we open up the lines for Q&A, as we typically do, I just wanted to provide a context of our results that we announced last evening. As you may have seen in the published results, net sales grew 10% in the first quarter, partially benefiting from a one-time sale of our surplus Scotch stock in the U.K. Excluding that, underlying net sales grew 6%. The prestige and above segment grew 9% on a solid base of 19% net sales growth in the same quarter of the previous year. The popular segment grew 3%, adjusted for the operating model changes enabled by a softer March in Karnataka.
In addition to the broad slowdown that the entire FMCG sector is grappling with, for us, this quarter was also impacted by dry days and restricted store opening hours resulting from the general elections. Moving to the other lines of the P&L, COGS inflation, as well as adverse price mix, significantly impacted gross margins for the quarter, which came in at 47.3%. Despite that, I am pleased that we have delivered a like-for-like, or indeed underlying EBITDA margin of 16% for the quarter, which is an improvement of 407 basis points versus the previous year. That is, after adjusting for the bulk sale and one-off restructuring cost in the base. So the 407 basis points is just pure underlying like-for-like margin improvement. Most of this margin expansion was made possible through savings in our operating costs, as well as the phasing benefit of marketing investments for the quarter.
Adjusted for the one-off restructuring costs, staff costs for the quarter were lower by 19%, and other overheads were lower by 11% compared to the previous year. While we reiterate the fact that one quarter doesn't make a trend, these numbers give us confidence in our ability to mitigate gross margin pressures through operating efficiencies, as we have guided in past calls. While the reported reinvestment rate for the quarter was 7.7% of net sales, after adjusting for the one-time sale of bulk Scotch, which obviously doesn't warrant any A&P, the reinvestment rate was 8.1%. Additionally, we trimmed down our marketing investment in light of the ongoing general elections, and our marketing investment will kind of normalize over the course of the coming year.
During this quarter, we also launched McDowell's No.1 Platinum campaign, which featured Vicky Kaushal during the ICC Cricket World Cup, both on television as well as on OTT, which is specifically Hotstar. We continue to stay focused on finance cost efficiencies, and interest costs for the quarter were down 11%. As a consequence of this, our profit after tax for the quarter was INR 197 crores, up 143%, mainly as a result of improved operating performance and, to some extent, lower interest costs. Looking ahead, while we continue to monitor the broader economic slowdown and its potential impact on the overall consumption in the near term, we have to wait and see if there is any specific impact on our cash stream. Having said that, we remain committed to driving consistent and profitable growth of our business, and for us, really, top-line and consistent margin improvement are important.
And therefore, I'd like to retrace our medium-term ambition to grow the top line by double-digit and improve our EBITDA margins to mid- to high-teens on a consistent basis in the medium term. So with those opening comments, I'm going to open up the line for questions, and we will address the questions partly from me and partly by Mr. Sanjeev Churiwala who's seated next to me.
Hi. Good afternoon, ladies and gentlemen.
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 the adjustment telephone. If you wish to remove yourself from the question queue, you may press star and two. Participants are requested to limit the question to two per participant. If time permits, you may join the question queue for any follow-ups. Ladies and gentlemen, we will wait for a moment while the question queue assembles. The first question is from the line of Avi Mehta from IIFL. Please go ahead.
Hi, sir. Congratulations on a great performance. Just on the Prestige sales growth, you saw a very healthy 9% growth in Q1. I just wanted to understand, A, would you have an estimate of what the growth would be like if you had adjusted for general elections impact? And B, why are you sounding cautious despite such a healthy performance? I mean, is this linked to the regular performance that is likely to moderate, or is it something that you witnessed in June?
Yeah. Thank you, Avi. And separately, you'll also have to tell me why the stock price has reacted the way it has today. But specifically answering your question that you asked me, no, no, listen, we are pleased with our performance. There's no doubt about that. It's speculative for me to tell you or give you any view on how much is the impact of the general elections because it's really, really hard to read that. I think we're not being pessimistic, just to be clear. I think we are being realistic because, as you have seen with CPG results that are coming out, there is a general moderation of growth across categories in the CPG industry. And we've seen what's happening in automobiles and, in general, on consumer spending.
So I think it is sensible to just say that we are going to keep these things in our mind as we determine our outlook. It's nothing more than that, just to be clear. Nothing more than that, nothing more deep and insightful than that either.
Okay. No, because 9% is a fairly good, very good, honestly, in this kind of circumstance, as you rightly pointed out. And that's why I was surprised to see that comment. That's why. So the second question was on the price increase. Have you received any price increase in any state? And the second part, would it be fair to now argue that the gross margin has bottomed out because all those input cost pressures were kind of reflected in this quarter?
So as far as the input cost pressures are concerned, I would say that glass is more or less done for the foreseeable future. There is some recent hardening of ENA prices, both grain as well as molasses ENA, right? And we are seeing a bit of an impact on that. I can't tell you categorically if gross margin has bottomed out, but I'd be surprised if it erodes any materially from now on, okay? Now, as far as pricing is concerned, which is the compensation for the increase in COGS, the pricing environment remains, I would say, reasonably fertile. We've got almost 15 states in the last quarter, which you will agree in an industry like ours is not bad at all.
We still have a few stubborn states, and those are some of the bigger ones where we've not got price increase still, and partly it's because of the political scenario in those states, and you know exactly what I'm talking about. But having said that, we have also absorbed a bit of price increase because of certain price corrections that we have taken, specifically in the state of Maharashtra, in terms of absorbing the very significant tax increase that happened in January, okay? Now, I believe that that was a right decision for us as a business, and the numbers really are commensurate with what I'm saying. And therefore, we have lost a bit of that pricing benefit by way of excise absorption.
Looking ahead, I'm hoping that we don't have to absorb any more tax increases and that we will be able to retain more of the pricing that we are getting.
Okay, sir. And I look forward to you being proven wrong in the double-digit growth as we move forward in the next quarters in the sales side. Thank you very much.
Thank you, Avi.
Thank you. The next question is from the line of Vivek from CLSA. Please go ahead.
Hi, good afternoon, sir. This is Vivek. Two questions. At the time of analyst meet, you mentioned that the low-hanging fruits on cost savings are in the bag, and it's only the higher-hanging fruits that you will be able to capture. So this quarter, the other expenses, staff cost, all these are high-hanging fruits or low-hanging in your view? And how much of this is sustainable as we go ahead?
Sanjeev?
Yeah, I think you asked three questions rather than one question. So I think in our last call, absolutely, we said that, look, the low-hanging fruits cannot be already eaten, and we're now looking at the high-hanging fruits. And that was Anand's comment, largely to the productivity agenda that we have been driving over the years across all the line items. So kind of if you look at our costs, absolutely, a lot of productivity work has happened in the past. And given the inflation environment that we are, we'll still look for significant productivity happening in that line because this industry normally would have an inflation impact of 4%-4.5%. We cannot allow that entire inflation to come in P&L. So significant work would continue happening over there. Besides that, we also spoke about the other overhead line, A&P line, stock cost.
And we have seen over the last three to four years a significant work has happened. Our stock cost, in spite of inflation, trending about 10% every year, has been flattish or lower, right? A lot of work has happened around there. Going forward also, you will see a similar kind of trend where you'll see the other overhead, including stock cost, only growing in moderation. We should be able to absorb a large part of the inflation impact also going forward. So absolutely, whether it's the high-hanging fruit or low-hanging fruits, fruits are still there, and we'll continue to work on them.
So First-Quarter run rate on staff and others is something that we should be working with for the rest of the year or for nine months, right?
No. So look, we don't want to go and give you a guidance basis quarter on quarter. We have always told you to look at it on a yearly basis. Let's just look at the trend over the last couple of years and try to work out on an interpolation basis that rather than just looking at a quarter number.
Okay. And second bit on Ind AS 116 impact, can you just highlight which all line items or heads are impacting?
Yeah, so I think.
And the quantum.
Sure. In our case, it's not big. The overall impact on the EBITDA is just about 50 basis points or around so. And basically, it's impacting your other overhead line and the interest line, but it's very, very insignificant, a small amount. And of course, the depreciation line. The PBT is neutral because of that.
All right. Thank you, and I'll come back in the queue.
Yeah. And also, have a look at the notes to accounts. We have the complete detail on that.
Sure. Thanks.
Thank you.
Thank you. The next question is from the line of Abneesh Roy from Edelweiss. Please go ahead.
Yes, sir. My question is on the bulk Scotch. So you mentioned 57 crore PBT on 97 crore sales. So my question is, why this kind of an order happened and why it's just a one-off? And why such a high PBT margin? So it's good for the company, but wanted to understand the thought process. And what's the impact on the gross profit and any other cost? You said A&P for obviously, this will be zero, but how is the impact on the gross profit and any other cost item? Is there any impact?
Okay. It's a good question to ask. Let me give you some background and context so that we can come back to the numbers. United Spirits have been maintaining a U.K. branch for many, many years, I would say, going back to decades. Wherein because we have a significant IMFL production here, we need matured stock coming from a U.K. branch every year in order to deliver ambitions on a blend for our IMFL. So we recently took a stock of the current matured stocks lying in our U.K. branch, and this is that evaluation became with the working that there's a certain amount of Scotch, which are matured Scotch, matured bulk Scotch, which we don't need immediately in India because our blend profile has changed over the years. And hence, we decided to sell that Scotch.
We looked for various parties, and finally, we realized [it was] best to sell it to Diageo because Diageo needs them. We did go down to the market [and] took quotations around that. This is our evaluation and basically arm's length transactions. We sold INR 97 crores worth of bulk Scotch to Diageo. This was completely planned, and this is kind of also cleaning up on the Scotches that we don't need and will never need in [the] future. Now, because this is a matured stock lying for ages and years, right, it didn't cost much to us. We are very happy that that resulted in a 60% kind of gross profit, [with] no impact on any other line item. We are happy that we were able to release almost INR 100 crore of cash into the business, pay back our debt, [and] improve our working capital.
So it's a very good thing to happen, and we are very happy that we think, looking at the current Scotch profile that we have, we do have some more suppliers that we think we should be able to sell during the year. But that's more one-off, and hence, we very transparently wanted to call that out.
Sir, just one follow-up here. So this decision had nothing to do with any slower growth in the Scotch portfolio in India. It was just because of the mix change which you have done. Is that correct?
Yes, absolutely. It is just because our blend profile, the aging profile that we need is very, very different than the matured stock that we have in the U.K. branch. It has nothing to do with the slowdown. In fact, Scotch business is growing. You just somewhere at the starting of the call, Avi, said you guys have been fabulous, and we're very happy to see you beat your own estimates. Yeah.
So my second and last question is on the A&P. You have done a good job, 9% growth on a very high base. So is there any downtrading you are seeing within this? A&P is a very wide portfolio now, accounting for almost 70% of your mix. So is there any downtrading you are seeing, and is that also impacting the gross margins?
So downtrading in what sense? Could you just be more clear?
So from the higher end of the A&P to the lower, within A&P.
No, no, absolutely not. In fact, in our earlier calls also, we said our Scotch portfolio is really growing. Our Scotch premium portfolios are definitely growing. So absolutely, we continue to uptrade and continue to work on our premiumization journey. Our luxury is more than.
Hello? Ladies and gentlemen, it seems that we have lost a line for the management. Please stay connected. Thank you. Ladies and gentlemen, we apologize for the inconvenience. We have the line for the management connected. Over to you, sir. You may go ahead, please.
Yeah. I think just completing the last question that I think Abneesh should raise. I just want to reiterate the fact that the premiumization strategy is fully intact. And just to underscore what Sanjeev said, we have each segment growing faster than the segment beneath it. So luxury is growing faster than premium. Premium is growing faster than prestige, and prestige is growing faster than popular. So there is no gross margin impact because of premiumization not happening at all.
Sir, one last follow-up on the ad spend. So adjusted for bulk Scotch, your ad spend was 8.1% of the sales, which is still lower than the 9%-10% long-term which you have been guiding. So this was in spite of the World Cup impact being almost fully there in Q1, in Q2, very little impact. So in spite of that, the ad spend is on the lower side. So could this mean that because now you are also expecting slower growth and maybe Pernod also, that overall industry could come to lower ad spend in balance part of the year also?
So I don't think that's the case. Just to be clear, our ad spend is still very competitive at over 8%. The second thing is that there's a global initiative of Diageo, which we also shared in the Global Capital Markets Day presentation in May, called Catalyst, where we are deploying certain technologies and tools to improve the way our ad spends are planned and how the return on those ad spends is measured. And basically, that's a way of driving significant productivity in ad spend. So for the same spend, we expect to get more bang for the buck, or indeed, we could get the same bang for the buck at a lower spend. Now, we had given the guidance of 9%-10%, and that was just a judgment.
This quarter, I think we spent a little less because we felt there were general elections and other things, and we stepped it up to spend behind our new campaign on McDowell's Platinum for the World Cup. So where there was something to be spent on in terms of new news, we decided to invest behind that. Now, looking ahead, there will be productivity that we will look at on A&P, right? And we will also spend at what is appropriate, both competitively and what's optimal in terms of the P&L. So where exactly this will land, I think is speculative, but it will somewhere in that range, could be a little less, a little more. But just as I've always said, A&P spend, there's no precise science of what is the right A&P spend. It's management judgment, right?
And sometimes you open the purse string, spend a bit more, and then you feel you don't need to spend that much, and then you tweak back a little, or you spend less, and you say, "I'm spending too little. Let me open up the purse string and spend more." And we will manage this dynamically quarter to quarter, but remain healthy and competitive in terms of our advertising support because we believe that's fundamental to our competitiveness and fundamental to category growth.
Thank you. The next question is from the line of Nillai Shah from Morgan Stanley. Please go ahead.
Thank you. I just wanted to drive a little bit on the Maharashtra impact. I understand what you've done and the reasons behind that. You've articulated that quite well. But how are you thinking about this strategy in light of two or three things? One is the fact that there's gross margin compression on account of input cost moving up. Secondly, the mix impact has not been as strong in the last couple of quarters as was the case earlier. And obviously, the overall tax structure has gone up quite dramatically. So how do you think about this general strategy of withholding prices in a free state like Maharashtra going forward? And is the tap on pricing completely shut, or would you explore that in the future?
So I think it's a very good question, and it's something that we are thinking about all the time. Now, obviously, the intent in our industry is not to absorb tax, okay, just to put the intent out there. However, you need to be sensible, practical, and competitive depending on a situation that you have to face. Now, where in segments, and I've said this before, now, for instance, I'll tell you, on BIO Scotch, there's been almost no change in pricing in Maharashtra. On BII Scotch, so all our BII Scotch brands, there necessitated a 15% increase in consumer price. We took all of it, right? And I was in the trade last week, actually, in Mumbai,, and Scotch is holding, huh, despite us taking the full price increase.
Now, obviously, in prestige, we have partly absorbed, depending on the nature of the brand and the nature of the competitiveness in that segment. Now, we remain watchful for every opportunity to take price up. Maharashtra, by the way, is a free pricing market. So the day we feel that, "Listen, it is ripe for taking a further price increase," we can apply, and we can do that. Now, while there has been tax absorption, which is not ideal, and I must admit that, the tax increase came after five years, and because it was a steep increase, we felt the consumer shock would be too much, right? And also the competitive environment was such that you couldn't take the full price.
Now, so the way we are going to play this out is, and you're right, and the COGS are also hardening, and therefore, obviously, this is going to lead to some kind of gross margin pressure. Now, having said that, I just want to say that Maharashtra is still margin accretive to our national average margin. So after the absorption, right? So as long as Maharashtra grows, grows faster than the rest of the nation, it's still margin accretive. So that's the situation, and I think we just have to continue to watch this space closely and look for every opportunity to push price further. So, for instance, on Royal Challenge, we took up price even though the market never moved, right? And again, I was in the market.
I was looking at our performance, and honestly, the decision was right, right? Because the momentum on Royal Challenge stays intact compared to what it was before the price increase, even though it got more competitively disadvantaged. So, Nillai, we are going to watch this space, and we are as hungry for every opportunity to take price as anyone else is, and we will not miss an opportunity if we see one.
Got it. Very clear, sir. Two small questions. Is there an opportunity to import alcohol given how benign the global prices are at this point in time and the fact that the Indian prices are moving up only because of the blending policy? And secondly, could you just clarify on the IDBI Bank issue and the latest update on that? I know there's a detailed explanation of that in the release, but what has happened with the latest course of events, and when do you expect the court judgments to possibly come through either way?
I'll deal with the first part, and then I'll hand over to Sanjeev to deal with the IDBI issue. Listen, we are looking at it. We've asked our team to look at the possibility of importing of Scotch. I don't think there is still any arbitrage post-payment of all duties landed in India versus domestic ENA prices, but we are watchful of this. The moment there is an arbitrage opportunity, we will see if that's possible, right? We are just checking the feasibility right now. It has not been done historically, by the way, okay? We're just checking the feasibility of doing this and see whether we A, we can do it, and B, whether there is any arbitrage.
Because chemical guys are already doing it.
Sorry?
Just one point. Are the chemical manufacturers already importing alcohol given the steep increase in prices that you've seen domestically?
So I'll take that away, and I do not know if alcohol for industrial purposes is treated in the same way as alcohol for potable purposes. So domestically, the alcohol is the same, but if it goes to the chemical industry versus going to the potable alcohol industry, it's treated completely differently, yeah? So we'll check this out. We'll check this out, yeah? All right?
I'll try and answer your question on IDBI and for everyone's consumption. I'll still draw everyone's attention to the note in our notes to account and the specific note number F that you can see, which is a very detailed description on the IDBI matter. As you're all aware, that historically, we have been giving a very detailed note in our quarterly statement as well as an annual report, and the background is, as you're all aware, that we had repaid the IDBI loan some time back, and also on request of IDBI, we had also subsequently paid about 46 odd crore, which is held in the books of deposit. We've always maintained that this is a very, very strong case that we have because there's nothing that IDBI can hold against.
We have been able to repay the entire interest, principal as well as penalty, whatever has been asked for. In June 19, in the recent single judge bench hearing, the order of restitution was dismissed purely on the grounds of merit, and the matter has been remanded back to the civil court. Now, this order has been disputed by us, and the company has since filed an appeal already with the divisional bench of Karnataka High Court. And notwithstanding this order, the basis of management estimates supported by external legal opinions from senior counsels, we do believe that it's a very, very strong case on merit, and we'll continue to fight that. While we speak, possibly a matter has been heard in the court today, and hopefully in the evening, we should have some news on that.
By today evening, you said?
Yeah, the matter has been heard in the court today as we speak.
Okay, Sanjeev. Thank you very much for this.
Yeah. Thank you.
Thank you. The next question is from the line of Jaimin Shah from RWC Partners. Please go ahead.
Hi. Thanks. Thanks for the opportunity and great set of numbers. Congrats on that. Two questions. One is on the COGS and raw material. Given our mix shifting into BIO and BII, how much impact does the raw material have now at the overall scheme of things? And again, on the prestige versus kind of the mass side, we've kind of moved too much as an idea on the prestige side. So again, the pricing power there is fairly high. So I just wanted to understand that because while gross margin is down year on year, on a quarter-on-quarter basis, it looks like a small blip to me. So that's one. And the other question I wanted to understand on the other expenses, right? This has been fairly volatile line item in the last few quarters.
But again, I kind of, when I look at on the year-on-year, as in trailing 12-month versus trailing 12-month basis, it's steadily kind of coming down. How should we think about on an annual basis as well? Is it kind of flat? Is it down? Because trailing 12-month today is down, but is the guidance kind of flat for the full year? Yeah, that's about it.
Can you take the second question, then we can come back to the third question?
Yeah, maybe I'll try and attempt the question on other overheads. I think you are right, Mr. Shah. If you look at the trend over the last few years, our growth on the overhead has been fairly subdued. We've largely been able to beat the inflation, so you only expect the other overhead to kind of grow in moderation. More importantly, we should be able to keep on getting the operating leverage year on year. That's the way we should be computing it. We will still go and guide you not to look at just the quarterly trend. It is volatile. You're very right. The industry is per se volatile, right? Many things happen on quarterly basis, which is very difficult for us to determine and kind of put a number to that.
But I think we are very, very consistent in terms of our yearly delivery. And if you ask the trend over the last few years, we have been very, very consistent across our delivery, just not on the overhead other lines, but as well as on the stock cost line. So our approach is to look at the trend over the last couple of years and maybe extrapolate that. That's the better thing to do.
Okay. And on your first question, yeah, GM has more or less held when you look at it on a quarter-to-quarter basis, even though there's a drop versus the same quarter of the previous year. And that's because most of the COGS inflation has kind of got factored in, right? Barring a little bit of ENA movement that we have seen towards the end of the quarter, and it's continuing into the current quarter as well. Okay. Now, as far as the mix is concerned, yes, the mix is moving towards Scotch, without a doubt. But Scotch is still a relatively modest part of our total business. And therefore, the absolute impact of ENA hardening still remains material. Now, when Scotch becomes more and more and more, that will shift. That impact will shift. But for the moment, it's still very, very much there.
If I can add, Anand, on the discussion point on the GP margin and the COGS, I think it's important for us to, for a moment, to just draw back and see holistically as to how the development is happening. If you remember in our early calls, we had very clearly said that we have seen a very good progression on the GM margins, right? We had grown our GM margins almost by 750 basis points in the last three years, and it's now very, very competitive compared to the industries and in terms of our benchmarking. But however, yes, we have been hit this year, especially by the COGS inflation, and largely around ENA and glass. So our guidance to the market even last time is that we should not be looking at a similar kind of growth in the GM margin profile going forward.
It will definitely grow, but very, very moderate, right? And we'll continue to work on growing our EBITDA margins year on year. And to that extent, try and put sufficient operating leverages across all other line items. And that's the way we will request you to continue to look at the COGS and the GM margin as well as the overall EBITDA margin aspiration.
Okay. Fair enough. If I can just ask a simple bookkeeping question, the INR 97 crores on the 31st March 2019 was sitting in part of inventory for you?
Yes, it was sitting in inventory. And as I explained in the last question, we have now released this inventory. We have received the cash, and this cash has entirely gone in terms of releasing our debt.
Great. So on a full-year basis, I should be using the kind of adjusted number as of March 2019?
Absolutely, yeah.
Perfect. Yeah. Thank you.
Thank you.
Thank you. The next question is from the line of Prashant Poddar from ADIA. Please go ahead.
Hi. Thank you very much for the question. One quick one on the response that you gave, Sanjeev, on the previous question. When you say that incremental gains will be more on operating efficiencies and not from gross margin, the gross margin decline that we have seen in this quarter because of certain events and which you are likely to gain back over a period of time, are you saying that the base quarter of last year, from there, the gains would be modest, or is it you are referring this quarter as the base quarter?
Yeah. So just again, trying to reflect, some of you did mention that this quarter's GM margin is perhaps the lowest. Yes, if you kind of open up the last eight quarters and see the GM margin profile and the trend, it has been declining over the last three quarters almost. Even last quarter, to your point, we delivered 46.5% GP margin, and this quarter is again 46.5%. So kind of, yes, GP margin to that extent is holding this quarter in spite of the inflationary impact, which is a good sign. When we say we will see a GM margin kind of just growing moderately, normally we give a yearly trend. We don't kind of go back and just say this quarter or the previous quarter.
So our thinking philosophy is if we have delivered a certain GM margin profile last year, we would kind of want to see a certain moderate improvement in that profile rather than just saying the quarterly GM margin.
For the full year.
For the full year, yes.
So despite the first half base probably being relatively better, for the full year, you would attempt to improve margins from last year, gross margins?
We would attempt to, yeah. But as Anand said, we would not exactly be able to pin down how the inflation will go, how the ENA and the bottling prices would move.
Which is fair. I'll not waste your time more on that, Sanjeev. Yeah.
Yeah. So kind of let me just complete this thought. I think our focus this year definitely is kind of growing our EBITDA margin as we have reiterated in the past, rather than getting into each line item of the discussion saying, "Will we kind of still deliver a GM margin enhancement or not?" The absolute idea is to kind of deliver EBITDA growth as well as EBITDA margin growth. And to that extent, we'll play across all the line items.
Thank you, sir. Sir, the other one is on market shares vis-à-vis Pernod Ricard. How would we be doing nationally, and are there markets where you're winning or losing? I'm sure there would be markets where you are winning, other markets where Pernod Ricard is winning. But overall, how is it looking in terms of market share?
Yeah, so I don't have the specific information on how we are performing versus the category or specifically versus another competitor. Obviously, any performance will be a mixed bag of pluses and minuses, but the bigger opportunity for us is to deliver category growth leading to profitable growth. So for us, managing the top line and increasing our bottom line, as you've seen us do this quarter, remains paramount because at the end of the day, that's what's going to deliver shareholder value, and that's the way we are looking at this. And the big opportunity in this market is the category growth, right? It doesn't matter. It's not a winner-takes-all market at all, and that's our philosophy in terms of how we are approaching our business.
The question is because we saw Pernod Ricard being very aggressive in price, kind of surprise behavior in the past to defend its stuff because they saw a course correction since Diageo took over. Are you still seeing high competitive action in terms of pricing?
So there is competitive intensity, without a doubt. And they're all worthy competitors, right? At the end of the day, and you have to take them seriously. Now, I can tell you this. Where we have seen aggressive price competition, there are some cases where we have said we will not follow. And we will protect margin, and the jury will be out in the long term on what's the right decision to be taken. So sometimes you might take a call to say, "I will forsake the short term to get the long term." And we have taken a few decisions like this. And I think this is a question of management philosophy at the end of the day. And what's your long-term growth in terms of is it volume at any cost?
And that's how the old USL used to be versus profitable growth and driving premiumization and holding margin. And clearly, our strategy is the latter.
Thank you. Mr. Poddar, may we question you on back to the question before any follow-ups as you saw the participants waiting for their turn? Thank you. The next question is from the line of Harit Kapoor from Investec. Please go ahead.
Yeah. Hi, good afternoon. I just had two questions. Firstly, on the Andhra Pradesh side, just could you give us any update on how the situation is there? We understand that the government is going to take over the retail vendors as well. So any update would be helpful.
Yeah, so that's right. There is a notification to that effect. So the good news is that prohibition is not immediately on the horizon, okay? If there is prohibition at all, then it's some distance away. Yes, and the fact is they have issued a notification to take over retail. So government will take over retail. Now, how is this? So like I said, our business, I said this earlier, somewhere between 3%-4% contribution from the state of Andhra Pradesh. So it's worth putting that into context. Now, within that, so I'll tell you, we have had mixed experiences at dealing with government retail. There are some states where we have actually done very well dealing with government retail and dealing with them compliantly, but yet building share and building our business, and there are some states where we have got seriously compromised.
Now, we are hoping that we will use all the lessons of how we have done it right and won in Andhra Pradesh as Andhra Pradesh rolls out. Now, the state government, what they've also done is that they have also announced the closure of belt shops, which are typically unauthorized shops. But they've also announced that they want to increase revenue from excise duty. So if you look at this whole picture together, I would say that the opportunities in Andhra Pradesh, if we have the right strategy in place to deal with government retail, should remain intact.
Perfect. So perfect. The second question was to Sanjeev, and this was largely about the IDBI issue. Just a hypothetical that it doesn't work in our favor, does that mean that we get the INR 600-odd crore money back that we had given earlier to kind of release these shares? I just wanted to understand the technicality.
Yeah. We've got INR 600 crore. What we have given is 50-odd crore, a little less than 50-odd crore, which is lying in deposit. But again, this is hypothetical because we are trying not just not to get the 50-odd crore, we're trying to get back all our assets that have been pledged. So we have a larger cause, and we think we have a strong ticket.
Okay. Because it said that your note said that it had deposited a sum of INR 628 crore initially with the bank.
Yeah. So the note says 459 million. So maybe a confusing million with crore. It's INR 45.9 crore. So INR 46 crores.
Okay. I'll take that offline. That's it from me. Thanks. Thanks.
Thank you. Thank you.
Thank you. The next question is from the line of Pulkit Singhal from Motilal Oswal AMC. Please go ahead.
Yeah. Hi. Thanks for taking my question. So when I—I mean, I can understand a lot of cost items you have some discretion in kind of when it comes to A&P and maybe even other expenses. But when it comes to employee expense, and I look at the last five quarters, I've seen it move from 170, 140, 160, 170, and now again 140. I'm just trying to understand what is it there in your business model that allows for such variability of employee costs on a quarter-on-quarter basis, which we actually don't see in any other company?
Yeah. So no other company would also reduce 80 factories to 50. No other companies would have such large severance cost plans throughout the year. So what happens is while we have a planned agenda around our OE effectiveness, the organization effectiveness, the timing of the payment and the provisioning is only determined as to how we progress during the year. So as a result, you will always see this quarter-on-quarter movement. Sorry for that hard remark. But that's what it is. But what is most important for us, and what is most satisfying for us, is that also among the very, very few companies, to your point, that over the last three to four years, we have been able to manage our staff costs very, very significantly then.
So if you see the staff cost efficiency that we have driven over the last three years, you can calculate for yourself. We've been able to really achieve significant efficiency around that.
Absolutely. Staff costs have been flat for almost the last three years, which is incredible. But this year, run rate seems to suggest a major decline because even based on this quarter, even if I were to see the residual quarterly run rate, it would be way higher at INR 180 crores, which doesn't seem to be the case. So should we be building a staff cost decline over the next one or two years, and is it more? And what would that be driven by? You talked about factories being reduced. I mean.
Maybe I'll give you a simple answer to solve your issues. Just look at the last couple of years' run rate and just try and build that. Our whole idea has been to kind of ensure that we significantly mitigate the inflation around staff and other overhead costs. We will continue to kind of do that. So our growth in staff costs and other overheads in the subsequent years, and this year also as a full year, will only be in moderation. And you should not be looking at the quarterly run rate because what happens is in the previous quarter, there will be some additional expenses, one-off severance cost setting. This quarter, it's not the setting. So as a result, quarter-on-quarter is very, very difficult to kind of draw a trend line.
My request is, look at it on a full-year basis and draw your projections based on a full-year number rather than a quarterly number.
Do you have enough runway for this for the next three years, or is it because it's already been three years? How much runway do we have here?
I will not get into specifically telling you how many years in future. But of course, if you're looking at the near term, we will definitely try and ensure that we significantly have productivity across all the line items in order to kind of keep it flattish or just grow it in moderation. So we should still be able to beat inflation largely.
Okay. So lastly, on the Popular, it's happening to see some growth on the Popular side as well, although on the lower digit side, 3% odd. I just wanted to understand the strategy here. Are we going to finally, I mean, have we reached the level of Popular sales that we are comfortable with, and we want to grow the business, or should we expect that to, I mean, be flattish again for the next two, three years as it has been in the past? How should we look at Popular going ahead?
I mean, our best understanding of the growth of Popular is that it is flattish as a segment, okay? And this quarter, the numbers look better because the previous quarter, there was some softness. And this is particularly due to the state of Karnataka. Every year in Karnataka, they normally have an excise increase on the 1st of April. So trade buys up a lot in March. This year didn't happen. So therefore, April has come back to normal sales, all right? So it is not as if there's some underlying momentum change, okay, to be absolutely transparent about it. So our guidance on Popular remains what it was in the past. No major shift.
Okay. So lastly, on asset sales and your ability to improve working capital, will the pace be faster or slower than what has been in the past on both these aspects?
Well, first answer on the asset sale, absolutely. We'll only sell what we have. And we have been selling significant assets in the past three years, as you've seen in our books already. Going forward, we do have some assets that we want to sell, but most of the assets will largely give us cash rather than the profits.
On the.
On the working capital, as in the previous call, I mentioned that over the last three years, we have been able to significantly reduce our average working capital. And of course, that means working capital as well, and almost like 12,000 basis points reduction over the last three years. I think we are now standing where we are, very, very competitive because we are a very capital-intensive industry when it comes to working capital. Because for our INR 100 of sale that we need to do, almost INR 300 of spend has to happen in managing working capital because for INR 1 of item, there's INR 3 of excise payment. So as a result, since we want to continue to grow our top line, our average working capital will only now reduce in a moderation.
We'll still look at efficiency and effectiveness as we move forward, but you will not see the kind of steep reduction that we have seen in the last three years.
Great, so thank you, and all the best.
Thank you.
Thank you. The next question is from the line of Amit Sinha from Macquarie. Please go ahead.
Yeah. Thank you, sir. So firstly, I would like to get some commentary from you on the overall competitive intensity. And not only from the Pernod, but also what we have seen in the last two years is some of the new brands ramping up in the space. But I mean, is it a fair assumption that in the last few months, incrementally, the competitive intensity has come off? We understand that the last quarter was, I mean, because of the restrictions on the A&P spend, you would not have been able to spend. But I mean, how should we look at this kind of A&P spend coming off in kind of cognizance with the fact that the competitive intensity in the market would have come off at the same time?
Honestly, the A&P spend has not come off because of the competitive intensity coming off. This was just our plan and our ability to spend at a time when we believed there was a bit of uncertainty in demand. And therefore, let's spend the right amount. I just want to make it clear that we are committed to spending competitively, in fact, more than competitively. As far as A&P is concerned, we will keep looking at opportunities to spend that money as efficiently and as effectively as possible. Now, to your earlier point, yes, there has been an emergence of some local brands in the market, right? And some of them have done well, right? In some cases, they've done well because the product offer was good. In some cases, people have invested discontinuous amounts behind those mixes to drive it.
Now, in any category, in any business, if a new person comes and is willing to really bet the bank on a brand, you will get traction, right? So we are seeing some traction there. I think the big question is how many of these will sustain long-term and continue to build share when that kind of discontinuous spend starts tapering off, right? And that, I think, time will tell. But the good news about the industry is that the opportunity for growth is still limitless almost. And the more people invest, the more new products that come in, the faster this category is going to grow. And as long as we are able to get a reasonable share of that category growth and do that profitably, I think it augurs very, very well for our business. And that's the way we see it, right?
In fact, there are very few industries where you have as dominant a presence of major players as you see in Alco-Bev. If you look at most other categories in CPG, you have many more players vying for a share of that category, right? And I think there are a few more competitors arriving on the scene here as well. And I'm not sure that is always bad news. That's all I'm saying.
Have you already started seeing these disproportionate investments in terms of media spends and promotions coming off incrementally?
Coming off? I actually have not read it that closely, to be honest with you. I don't think there's been a major change. There might have been some softening or coming off, as you call it, of competitive media spends on some of the launches that have happened. But I haven't got the hard data on media spend from the tracking the company yet, to really tell you with certainty.
Sure. Secondly, again, you mentioned efficiency in the ANP line. So should we expect a lower overall ANP spend for the full-year FY20? I mean, I understand that you haven't revised your guidance for ANP, but this efficiency ideally should lead to lower spend on an absolute number.
So it may or may not, honestly. So I can't give you enough clarity as far as that is concerned. I think the important thing is we are always watchful of how much we need to spend to stay competitive segment by segment, brand by brand. And we're going to do that, be competitive, and then do that most efficiently. Now, Diageo has unlocked through its global tool called Catalyst significant ANP productivity around the world. And we are hoping to harness a good part of that here too. And we have now put that tool into action in the business. So all our plans for the prospective year are going to go through the rigor of Catalyst. Now, what exactly it throws up in terms of productivity and so on, I think we just have to watch this space.
But I don't think you should be alarmed in any major way that we're going to start cutting, right? Or be surprised that we're going to spend too much more. We're going to be in this zone, give or take a bit.
Thanks a lot, sir. Thank you.
Okay.
Thank you. The next question is from the line of Arnab Mitra from Credit Suisse. Please go ahead.
Yeah. Hi. I had just one question on the bulk Scotch. So I think Sanjeev mentioned that you still have some incremental excess bulk Scotch. If you could help us give some sense of what could be the value there and what is the time frame in which you would want to kind of sell this off if you've taken a decision on that?
Yes, so we want to sell them off in the next six months to a year time, but because it's one-off, we would not like to land up in giving any projections on that. My request to all of you would be not to consider in your future workings and kind of allow it to happen when it happens because your projections should be more business as usual rather than considering one-offs.
Sure. And the last question was on non-core asset sales. So you've had some non-core asset sales last year, but the big-ticket residential properties and land and things like that, I think, have not been. Those have not gone out. So do you see FY20 being a year when possibly some of this happens, or are market conditions still very bad and this could get pushed out into the further years?
Market conditions are definitely bad, and most of you are aware of that. The real estate has tanked. For us, it's important to get a good realization across all these asset classes and largely industrial or some of the residential property that we have. We don't think any of this asset will give us profit now, and we're kind of only eyeing at cash, and we will just sell it at the right time when we are able to get a good price for them.
Okay. Okay. Thanks. That's it from my side.
Thank you.
Thank you. Ladies and gentlemen, it is a positive time. We'll take the last question. That is from the line of Chetan Vora from ValueQuest Investments. Please go ahead.
Yeah. Thank you for the opportunity. You mentioned 15 states gave a price increase in last quarter. So what would be the portfolio level increase in pricing?
I'm not sure we are getting into that kind of granularity, honestly. But and like I had said in the previous call in the previous quarter, that these increases range from very small to kind of medium numbers. But it's tough to say what is the impact on the portfolio total. But I want you to also keep in mind the fact that while we've got this pricing, we've also had a bit of pricing reinvestment going back into excise absorption, particularly in Maharashtra, which you've spoken about, and COGS and the pressure on COGS that is there and continues to some extent. So but it's hard for me to give you a number of what is the percentage that we have achieved yet. We'll take a look at it specifically and see what it's going to be on an annual basis.
If we can share it, then we will. I don't think we've shared that kind of number in the past.
Right. Right. And any big state you are looking where I mean, expecting any price increase in near term?
We're expecting in all the balance states, but whether we'll get it, time will tell. We certainly are trying our best to see what we can do in Karnataka now. Karnataka, everybody knows what the political situation is right now and really the government functioning and will they take any big decision or not. But that's the real big one, really, that we need to try and find a way to unlock, honestly.
Right. And sir, so you mentioned in Prestige & Above also, higher category is growing much faster. So we are seeing premium as a trend strengthening further. But when I look at realization per case, it's been last two quarters, realization per case number is not moving up. What exactly is happening on that front? The price increase is there.
On a like-for-like comparison, absolutely the per case is moving up. But yes, we do have this moment, especially the Maharashtra excise policy increase that we had in January. And we've not been able to pass on the full price increase. To that extent, when you compare, yes, it does undermine some of this effort. But yes, absolutely, the luxury per case will be definitely higher than premium and will be higher than Prestige.
Quantum, which was like three.
What I can tell you is that when you're taking into account Maharashtra as well, and despite whatever price increase we've got, when you net all this off, there is still negative pricing pressure on the business at this point in time.
Okay. Okay. Good.
Yeah?
Got it. And sir, lastly on this gross margin, so you mentioned you are focusing on improving overall EBITDA margin. I understand that part. FY19, your gross margins were around 48.8%. Q1 was 46.5% adjusted. And you are still talking of maintaining this kind of operating margin or improving slightly. That means H2, you're hoping to have a much better gross margin. Is the understanding correct?
But we don't get into the specific numbers. Our attempt absolutely would be to keep on improving slightly, right? To that extent, on a like-for-like basis, even the GM margins are slightly better than the previous quarter, not the corresponding quarter last year. But yes, I think there is this pricing issue and the inflationary commodity inflation issue that we are facing right now. And we'll have to see how we play that around. Now, for some reasons, we think that we will be under intense pressure on the GM margins. We'll have to play across the other line items and still deliver our EBITDA and EBITDA margin aspirations. Because finally, what matters is the top line and the bottom line delivery. The rest is all the line items that we need to play around.
Fair. Fair. And bookkeeping question, depreciation for the quarter was INR 50 crore. Should we take this as a run rate going up?
Should be around that because depreciation is kind of almost flattish and going very, very marginally. So I think look at the, again, the yearly trade.
Historically, we were in the range of INR 35-INR 40 crore. And this quarter is INR 50 crore. So just trying to understand.
Yes. So I think it's also impacted slightly by the Ind AS 116. And if you go to the notes, the exact breakup is there.
Okay. Got it. Thank you and all the best.
Thank you. Thank you. I think it's 1 o'clock now, so I think we'll have to bring the call to a close.
Sure, sir. Would you like to add any closing remarks before we close the call, sir?
No, I just want to thank everybody for the continued confidence in the company and their sharp questions as always. And I look forward to staying connected. Pleasure talking to all of you folks. Thank you very much.
Thank you very much. Ladies and gentlemen, on behalf of United Spirits Limited, that concludes this conference. Thank you all for joining us. Any minute, I'll disconnect your lines.