United Spirits Ltd:Annual Report 2023-24 Analysis

United Spirits Ltd. - A Comprehensive Overview #

About the Company #

Year of Establishment and Founding History: United Spirits Limited (USL), formerly known as McDowell & Co. Ltd., has a long and rich history tracing back to 1826 when it was established by Angus McDowell. Over the decades, it has evolved through various ownership changes and strategic realignments, becoming a prominent player in the Indian alcoholic beverage industry.

Headquarters Location and Global Presence: The company’s headquarters are located in Bengaluru, India. While primarily focused on the Indian market, USL also has a presence in select international markets through exports and partnerships.

Company Vision and Mission: While a specific, publicly stated vision and mission statement are not readily available, United Spirits’ actions and strategies suggest a focus on being the leading beverage alcohol company in India, committed to responsible consumption, and creating value for stakeholders.

Key Milestones in Their Growth Journey:

• Acquisition by Diageo (2013): A significant turning point was the acquisition of a controlling stake by Diageo, a global leader in beverage alcohol. This brought in international expertise, brand portfolio, and best practices.
• Portfolio Rationalization: Post-Diageo acquisition, USL underwent significant portfolio rationalization, focusing on premium and prestige brands.
• Growth in Premium Segment: USL has strategically focused on growing its premium and prestige brands to capture the increasing disposable incomes and changing consumer preferences in India.

Stock Exchange Listing Details and Market Capitalization: United Spirits Limited is listed on the National Stock Exchange (NSE: MCDOWELL-N) and the Bombay Stock Exchange (BSE: 532432). Market capitalization fluctuates based on market conditions and company performance. You can find the latest information on financial websites like Google Finance, Yahoo Finance, or the respective stock exchange websites.

Recent Financial Performance Highlights: USL’s recent financial performance typically demonstrates revenue growth, particularly driven by its premium brands. Profitability is impacted by factors like raw material costs, regulatory changes, and marketing investments. Recent financial reports should be consulted for exact figures.

Management Team and Leadership Structure: The leadership team typically includes a Managing Director & CEO, Chief Financial Officer (CFO), and other senior executives heading various functions like marketing, sales, operations, and supply chain. Diageo’s involvement influences the overall strategic direction and governance of the company.

Notable Awards or Recognitions: USL and its brands have received various awards and recognitions for marketing excellence, innovation, and sustainability efforts.

Their Products #

Complete Product Portfolio with Categories: USL has a diverse portfolio of alcoholic beverages, categorized into:

• Whisky: This is their largest category, including brands like McDowell’s No.1, Royal Challenge, Signature, Black Dog, Antiquity Blue.
• Rum: Includes brands like McDowell’s No.1 Rum.
• Vodka: Includes brands like Romanov, Smirnoff (under license).
• Brandy: Includes brands like McDowell’s No.1 Brandy.
• Gin: Includes brands like Tanqueray, Gordon’s (under license).
• Other Spirits: This category might include liqueurs and other specialty spirits.

Flagship or Signature Product Lines: McDowell’s No.1 is a flagship brand, known for its widespread popularity and strong market presence. Brands like Royal Challenge and Signature are important parts of the premium segment.

Manufacturing Facilities and Production Capacity: USL has a network of manufacturing facilities across India. Production capacity is substantial and adjusted to meet market demand. Exact figures on specific capacity per facility are not readily available publicly.

Quality Certifications and Standards: USL adheres to stringent quality control measures and holds relevant certifications (e.g., ISO standards) to ensure product quality and safety.

Recent Product Launches or R&D Initiatives: USL continues to innovate with new product launches, often focusing on premiumization, flavor extensions, and ready-to-drink options.

Primary Customers #

Geographic Markets (Domestic vs. International): The primary market for USL is India. They also export to select international markets, focusing on regions with significant Indian diaspora or potential for premium spirit consumption.

Distribution Network and Sales Channels: USL has an extensive distribution network across India, reaching both urban and rural markets. They utilize various sales channels, including:

• Retail Outlets: Liquor stores, supermarkets, and other retail establishments.
• On-Premise Consumption: Bars, restaurants, hotels, and clubs.
• Institutional Sales: Sales to government agencies or large institutions (subject to regulatory restrictions).

Major Competitors #

Direct Competitors in India and Globally:

• Pernod Ricard India: A major competitor with a strong portfolio of international and Indian brands.
• Allied Blenders & Distillers (ABD): Another significant player in the Indian spirits market with popular brands.
• Radico Khaitan: An Indian company with a growing presence in the domestic market.
• International Players: Global players like Diageo, Pernod Ricard, and Brown-Forman also compete with USL in the premium and prestige segments.

Comparative Market Share Analysis: Market share figures fluctuate and are tracked by industry research firms. USL, Pernod Ricard India, and Allied Blenders & Distillers are among the leading players in terms of market share in India.

How They Differentiate from Competitors:

• Extensive Portfolio: USL has a wide range of brands catering to various consumer segments and price points.
• Diageo Expertise: Access to Diageo’s global expertise in brand building, marketing, and distribution.
• Strong Distribution Network: A well-established distribution network across India.
• Focus on Premiumization: Strategic focus on growing the premium and prestige segments.

Industry Challenges and Opportunities:

• Challenges: High excise duties, complex regulatory environment, competition from illicit liquor, and evolving consumer preferences.
• Opportunities: Increasing disposable incomes, growing urbanization, rising demand for premium spirits, and expanding distribution channels.

Future Outlook #

Expansion Plans or Growth Strategy: USL’s growth strategy likely involves:

• Premiumization: Further expansion of premium and prestige brands.
• Innovation: New product launches and flavor extensions.
• Geographic Expansion: Targeting growth in key states and regions.
• Digital Marketing: Leveraging digital channels to reach consumers.

Sustainability Initiatives or ESG Commitments: Expect USL to strengthen its sustainability efforts, focusing on responsible alcohol consumption, water conservation, waste management, and community development programs.

Industry Trends Affecting Their Business: Key industry trends include:

• Premiumization: Consumers are increasingly willing to spend more on higher-quality spirits.
• Growth of RTD (Ready-to-Drink) Beverages: The RTD category is experiencing rapid growth.
• Digitalization: The use of digital marketing and e-commerce is becoming more important.
• Health and Wellness Trends: Increasing consumer interest in healthier and lower-alcohol options.

Long-Term Vision and Strategic Goals: USL’s long-term vision is likely to remain a leading beverage alcohol company in India, committed to responsible growth, profitability, and shareholder value creation. This will be achieved through a focus on premium brands, innovation, efficient operations, and sustainable business practices.

Financial Performance Overview #

3-Year Trend Analysis of Key Financial Metrics #

• Revenue from Operations (Standalone): Decreased by 7.9% in FY 2023-24 (₹25,389 crore) compared to FY 2022-23 (₹27,578 crore).
• Revenue from Operations (Consolidated): Decreased by 6.5%.
• Profit After Tax (Standalone): Increased by 24.7% in FY 2023-24 (₹1,312 crore) compared to FY 2022-23 (₹1,052 crore).
• Profit after Tax (Consolidated): Increased by 25%.
• EBITDA Margin (Standalone): Stood at 16% for FY 2023-24.
• Market Capitalization: Nearly doubled from FY21 levels, reaching approximately ₹82,500 crore by the end of FY24.
• Net Debt (Standalone): Net cash positive with a net cash position of ₹1,808 crores as of March 31, 2024.
• EPS: Increased from 14.46 (2022-23) to 18.04 (2023-24).
• Dividend: Return to dividend distribution. Interim dividend declared at ₹4 per share, with a final dividend of ₹5 per share recommended.

Business Segment Performance #

• Prestige & Above (P&A) Segment: Contributed 87.4% of net sales, growing by 11.9% in FY 2023-24, driven by premiumization and increased brand loyalty.
• Popular Segment: Contributed to 10% of net sales. Experienced a 39.4% net sales decline, primarily due to the strategic review, slump sale, and franchising of brands.
• Sales Volume: Dropped by 15.2%.
• Portfolio: Seven ‘one-million+ case’ trademarks in the portfolio.

Major Strategic Initiatives and Progress #

• Portfolio Reshaping: Focus on premiumization, with new launches and renovations, including Godawan single malt and McDowell’s & Co Distiller’s Batch Indian Single Malt. Launch of the global Tequila brand Don Julio in India, and acquisition of a minority stake in Inspired Hospitality Private Limited (Pistola).
• Building an Organization of the Future: Investments in talent, digital transformation, and operational efficiency. Initiatives include the ‘Celebrating You’ Employee Value Proposition campaign, and Employee Resource Groups (Spirited Women’s Network and Rainbow Network) to promote inclusion and diversity.
• ESG Agenda Acceleration: Progress on Society 2030 goals, including removal of mono-cartons, increased use of recycled content in packaging, and micro-enterprise initiatives to support women farmers.

Risk Landscape Changes #

• Regulatory Risks: Ongoing challenges due to stringent regulations on production, distribution, and pricing.
• Market Risks: Inflationary pressures and subdued sequential demand.
• Operational Risk: Cyber Risks & Data Security.
• Supply Chain Risk: Potential impact from changes in raw material and water availability.
• Counterfeiting Risks: Harm to consumers, damage to brand reputation, and financial losses.

ESG Initiatives and Metrics #

• Environmental: 48% improvement in water-use efficiency in distilleries, 87% reduction in greenhouse gas emissions from operations. 99% of packaging material is widely recyclable.
• Social: Over 6 lakh people educated through responsible drinking programs. 2,060 individuals trained in hospitality skills under the ‘Learning for Life’ program.
• Governance: Employee engagement score of 89%. Recognized as a gold employer for LGBT+ inclusion by the India Workplace Equality Index (IWEI).
• Water Replenishment: 9000 Cu. M Water Replenishment capacity created.
• Renewable energy: 98.6% use in operations

Management Outlook #

• Cautious optimism for growth, underpinned by sustained brand investments and the long-term potential of the Indian consumer market.
• Focus on revenue growth management and value chain productivity to create sustained value for all stakeholders.
• Commitment to innovate and “Make in India for the world,” with investments in enhancing capabilities.

Detailed Analysis #

Financial Position Analysis of United Spirits Limited #

Balance Sheet Analysis: 3-Year Comparative (Consolidated, in INR Crores) #

Significant Changes in Major Line Items (>10% YoY) (Consolidated) #

• Non-Current Assets: Increased by 9.8%, primarily driven by a decrease of right-of-use assets.
• Current Assets: Increased significantly by 18.34%, primarily due to increased trade receivables and cash.
• Total Liabilities: Increase by 9.72%, mostly attributed to an increase in other current liabilities.
• Other Equity: Increased by 19.16%, reflecting a higher profit for the year.

Working Capital Trends (Consolidated) #

Analysis: The increase in Working Capital, from 2609 to 3474, shows improved liquidity and operational efficiency.

Asset Quality Metrics (Consolidated) #

Analysis: Increase in allowance for doubtful receivables shows a proactive approach to potential credit risks.

Debt Structure and Maturity Profile (Consolidated) #

• Maturity Profile: The provided data lacks a detailed maturity schedule beyond current maturities. Based on available information, the Company settled the Sales Tax Deferment Liability and reported a small balance on working capital loans (payable on demand).
• Debt/Equity Ratio: The Net debt/equity ratio has not been calculated since the company is in a net cash position.

Off-Balance Sheet Items #

Analysis: A large portion of Contingent Liabilities relates to Tax matters.

Risk Assessment: United Spirits Limited #

Strategic Risks #

• Severity: High. Restrictions on market accessibility and pricing environment volatility, alongside competitive intensity, directly impact profitability.
• Likelihood: High, due to the heavily regulated nature of the industry.
• Trend: Stable, as the risk is an ongoing concern.
• Mitigation Strategies: Continuous engagement with external stakeholders, industry-level initiatives, and advocating for favorable excise policies.
• Control Effectiveness: Partially Effective, demonstrated by securing pricing in several states but was still not enough to fully offset inflation.
• Potential Financial Impact: Significant, as pricing pressures could lead to margin compression and affect the Company’s drive for double-digit topline growth and mid-high teen operating margins.
• Premiumisation Focus: A core part of USL’s strategy is premiumisation, with the Prestige & Above segment contributing 87% of net sales in FY24. A shift in consumers spending habits and choiceful consumption would be a severe impact.

Operational Risks #

• Severity: High, particularly concerning counterfeiting, supply chain agility, and cyber/data security.
• Likelihood: Counterfeiting is a persistent threat (High likelihood). Cyber risk is Medium to High. Supply chain disruptions can be Medium to High depending on external factors.
• Trend: Increasing, reflecting a growing focus on digitalization.
• Mitigation Strategies:
  • Counterfeiting: Mobilizing industry action, implementing anti-counterfeiting technology, working with e-commerce sites.
  • Cyber Risk: Enterprise-wide risk management processes, centralized inventory of IT assets, regular patching, and employee training.
• Control Effectiveness: Partially effective. While there are mitigation activities, the evolving nature of the threat indicates an ongoing focus area.
• Potential Financial Impact:
  • Counterfeiting: Direct financial losses, damage to brand reputation, and potential legal liabilities.
  • Cyber/Data Security: Significant, including financial loss, operational disruption, and reputational damage.

Financial Risks #

• Severity: High, due to ongoing inflationary pressures, fluctuations in the cost of goods sold (COGS), and interest rates.
• Likelihood: High, as inflationary pressures and input cost volatility are persistent concerns.
• Trend: Fluctuation, depending on the macroeconomic factors.
• Mitigation Strategies: Focus on revenue growth management, value chain productivity, and hedging.
• Control Effectiveness: Partially Effective. Revenue management and cost control programs are in place, but external economic factors present challenges.
• Potential financial impact: Cost of goods sold represented around 49.1% of net sales for FY24. Inflationary pressures could further increase this percentage, compressing margins.

Compliance/Regulatory Risks #

• Severity: High, due to strict regulations on production, distribution, and marketing, including excise duties, licensing, and food safety standards.
• Likelihood: High, given the nature of the industry and changes in regulation.
• Trend: Stable. Ongoing, inherent risk.
• Mitigation Strategies: Compliance programs, legal advice, engagement with regulatory bodies. Breach Management Standard and ‘SpeakUp’ the whistle blower mechanism.
• Control Effectiveness: Partially Effective. Compliance frameworks are in place, but the regulatory landscape is complex.
• Potential Financial Impact: Significant, including fines, penalties, license revocation, and reputational damage. Outstanding dues of income tax, sales tax, service tax, excise duty and entry tax amount to substantial potential financial liabilities if disputes are not resolved favorably.

Emerging Risks: Climate Change and Sustainability #

• Severity: High.
• Likelihood: Medium to High, growing concern.
• Trend: Increasing.
• Mitigation Strategy:
  • Society 2030: Spirit of Progress action plan, focusing on grain-to-glass sustainability, water replenishment, low-carbon initiatives, and sustainable packaging.
  • Initiatives like mangrove regeneration, tree planting, and regenerative agriculture programs.
  • Water replenishment initiatives exceeded targets by 25% and achieved three years ahead of 2026 goals.
  • Improvement in water-use efficiency in distilleries (48%) and packaging (31%).
  • Reduction in greenhouse gas emissions from operations by 87% and achieved zero coal status in distillery operations.
• Control Effectiveness: Good, progressing well on ESG goals
• Potential Financial Impact:
  • Water stress impact assessment in operations: Water-use efficiency in distilleries has improved by 48% and 31% in packaging.
  • Greenhouse gas emission reduction: reduced by 87% from the base year FY20 and is at 98.6% of renewable energy use status.
  • Elimination of the use of coal fossil fuel from operations and transition to renewable energy

Strategic Analysis of United Spirits Limited #

Long-Term Strategic Goals and Progress #

• Goal: To be a top-performing CPG company in India, delivering sustained double-digit, profitable topline growth and long-term value creation.
  • Progress: Achieved a net sales increase of 3.1% in FY 2023-24, reaching ` 10,692 crore, driven by premiumization (Prestige & Above segment net sales grew by 11.9%). The Company has returned to dividend distribution. Profit after tax increased by 24.7% on a standalone basis, reaching a net profit margin of 12.3%
• Goal: Reshape the portfolio focusing on the Prestige & Above (P&A) segment.
  • Progress: P&A segment contributed 87.4% of net sales in FY24, showing progress in premiumization.
• Goal: Achieve net-zero carbon emmisions (Scope 1 & 2) across direct operations by 2030.
  • Progress: Reduced greenhouse gas emissions from operations by 87% and achieved zero coal status in distillery operations.

Competitive Advantages and Market Positioning #

• Advantage: Largest alcohol beverage company in India with a comprehensive brand portfolio (about 63 brands) spanning various price points and categories, including Scotch whisky, IMFL whisky, brandy, rum, vodka, and gin.
• Advantage: Extensive distribution network with access to over 70,000 outlets and a pan-India manufacturing presence with 36 facilities.
• Advantage: Strong brand equity and leadership position, enabling significant influence on industry issues.
• Market Positioning: Leader in both volume and value terms, strengthened by integration with Diageo’s brand portfolio. Leveraging the “Make in India” for the world theme.
• Challenges: State Government restrictions and intense competition fueled by growth prospects.

Innovation Initiatives and R&D Effectiveness #

• Initiatives: Launched new products and renovations, including McDowell’s & Co Distiller’s Batch Indian Single Malt, Don Julio tequila in India, Godawan (multiple award-winning), and new flavors of Tanqueray. Revitalization of brands like Antiquity and Royal Challenge American Pride. Transformation of McDowell’s No.1 into House of McDowell’s.
• R&D Focus: Investment in distillation, maturation, innovation, and consumer insights capabilities.
• Effectiveness: Multiple international awards for Godawan, indicating successful product development. Royal Challenge American Pride is among the fastest-growing innovations. R&D efforts are focused on aligning with consumer preferences for premium and craft spirits.

M&A Strategy and Execution #

• Strategy: Portfolio reshaping and exploring new growth engines aligned with the premiumization strategy.
• Execution: Acquired a minority stake in Inspired Hospitality Private Limited (owners of Brand Pistola - a premium agave brand). Previously acquired Nao Spirits & Beverages Private Limited. Concluded the slump sale of a business undertaking associated with 32 brands and the franchising of 11 Popular brands.

Management’s Track Record in Execution #

• Market capitalization almost doubled from FY21 levels.
• Track Record: Successful turnaround to sustained earnings growth and profitability, leading to dividend distribution after nearly a decade. Navigated external headwinds strategically, delivering resilient performance. Rebased consolidated net sales growth of 14.2%.
• Management Change: Hina Nagarajan was appointed as Managing Director and Chief Executive Officer for the remaining term from 1st July 2024 to 30th June 2026.

Capital Allocation Strategy #

• Strategy: Focus on returning value to shareholders, and investments in brand development, market expansion and operational efficiency.
• Execution: Resumed dividend distribution with an interim dividend of 4 per share and a recommended final dividend of 5 per share for FY 2023-24. Investments in brands, innovations, digital technologies, and multi-year supply chain agility program.
• Debt-free company.

Organizational Changes and Their Impact #

• Changes: Appointment of new Independent Directors (Dr. Indu Bhushan and Mr. Mukesh Hari Butani effective 1st March 2024) and Non-Executive Director (Ms. Emily Kathryn Gibson effective 7th September 2023). Re-appointment of Mr. Pradeep Jain, designated as ‘Executive Director and Chief Financial Officer’
  • Impact: Strengthens board expertise in relevant areas like FMCG, telecommunications, and IT, supporting the Company’s strategic direction.
• Changes: Launch of Employee Value Proposition campaign ‘Celebrating You’ and Employee Resource Groups (Spirited Women’s Network and Rainbow Network) to foster inclusion and diversity. Launched comprehensive online Inclusive Culture hub.
  • Impact: 43% of women among new hires and 50% women represented in the Executive Team. Improvement in employee engagement score to 89%. Leaders, managers and employees with best-in-class capability interventions, overview of our aspirational culture aligned to behaviours of psychological safety and daily cultural practices.

ESG Framework: United Spirits Limited Analysis #

Environmental Metrics and Targets #

• Water-Use Efficiency: Distillery water-use efficiency improved by 48% against the FY20 baseline, exceeding the 2030 target of 40%. Packaging water-use efficiency improved by 31% against the FY20 baseline.
• Water Replenishment: The Company created a water replenishment capacity of over 9,000 Cu.M. and has replenished more than 1 Million Cu.M. of water in the last three years across water-stressed sites, exceeding the 2026 target by 25% and achieving it three years ahead of schedule.
• Carbon Emissions: Greenhouse gas emissions from operations were reduced by 87% against the FY20 baseline. Distillery operations achieved zero coal status.
• Renewable Energy: In-house solar energy generation capacity increased from 1.3 MW to 2.6 MW. 98.6% of energy use in operations is renewable, positioning the company to achieve 100% renewable energy status before the 2030 target.
• Sustainable Packaging: Over 99% of packaging material is widely recyclable. More than 50% of purchased packaging material is made from recycled content. Mono cartons were removed from 95% of the portfolio. Recyclable PET containers were introduced.
• Regenerative Agriculture Program: Under the program, techniques are implemented among 60 villages in the state of Haryana and Punjab.

Social Responsibility Programs #

• ‘Learning for Life’ Program: Trained 2,060 individuals from under-represented communities in hospitality skills, with over 50% being women.
• Partnership with Skill Council for Persons with Disability (SCPwD): Trained 110 individuals with speech and hearing impairments for hospitality sector roles, with plans to scale up to 300 individuals.
• Diageo Bar Academy: Trained over 9,400 bar owners and bartenders.
• ‘Act Smart India’ Program: Educated 191,861 youth on the hazards of underage drinking.
• ‘Wrong Side of the Road’ Initiative: 435,164 consumers participated in sessions on anti-drink driving, in collaboration with 31 Regional Transport Offices.
• Partnership created with the Alwar District Forest Department and with the Skill Council for persons with disablity.
• Support to Police Departments: Support provided to Uttar Pradesh, Punjab and Telangana by providing advanced breath analysers.

Governance Structure and Effectiveness #

• Board Composition: The Board has a balanced mix of Executive, Non-Executive, and Independent Directors.
• Board Committees: The Company has Audit, Risk Management, Nomination and Remuneration, Stakeholders Relationship and General, Corporate Social Responsibility & Environmental, Social and Governance, and Committee of Directors. All recommendations of these committees were accepted by the Board.
• Independent Directors Meetings: Independent Directors met four times during the year without the presence of non-independent directors or management.
• SpeakUp Mechanism: The Company has adopted mechanism which is operated independently.
• Related Party Transactions: All related party transactions were undertaken on an arm’s length basis and in the ordinary course of business.
• Board Evaluation: All the criteria for performance evaluation was carried out.
• Audit Committee: The Audit Commitee has reviewed the quarterly and annual results.

ESG Ratings and Peer Comparison #

• ESG Risk Rating: Improved from 23.0 to 20.6, according to Sustainalytics.
• MSCI Rating: Maintained an ‘A’ rating for the past two years.
• CSRHUB ESG Score: Improved from 75 in 2022 to 88 in 2024.
• Peer Comparison: The document positions Diageo India as an industry leader in promoting gender diversity.
• Recognition: The Company received awards for ESG and CSR, Excellence in contribution to ESG" by the Ambrosia INDSPIRIT Awards 2024 and the “CSR Company of the year” by Spiritz Magazine

Regulatory Compliance and Future Preparations #

• ESG Action Plan: ‘Society 2030: Spirit of Progress’ is aligned with the Company’s purpose and the UN Sustainable Development Goals.
• Plastic Waste Management: The Company adheres to Extended Producer Responsibility (EPR) commitments, collecting 100% of generated plastic waste.
• Compliance: The company has complied with all applicable requirements.
• Secretarial Audit: A secretarial audit was conducted, and the report does not contain any qualifications, reservations, or adverse remarks.
• SEBI Circular: The Company has complied with the circular dated November 3,2021 and amended on December 14,2021, March 16,2023, November 17,2023 and June 10,2024.

Segment-wise Financial Analysis - United Spirits Limited (FY 2023-24) #

Management Guidance and Assumptions #

• Overall Mission: To be a top-performing consumer packaged goods company in India, delivering sustained double-digit, profitable topline growth, and creating long-term value for all stakeholders.
• Profitability Target: Aiming for mid-high teen operating margins.
• Premiumization Focus: Continued strong emphasis on premiumization, reflected in the Prestige & Above (P&A) segment focus.
• Rebased Financials: Management refers to “rebased” accounts, adjusted for the Pioneer Distilleries Limited (PDL) merger, slump sale, and franchising of the popular portfolio.

Market Growth Forecasts #

• India is viewed as one of the fastest-growing alcoholic beverage markets globally.
• Mid-to-Long Term Growth: Optimistic outlook for the medium-to-long term, driven by favorable macros like India’s economic growth, rising premiumization, and increasing aspiration for new experiences.
• Short Term Challenges: Management remains cautiously optimistic about growth, with the short-term challenges, including inflationary headwinds and moderated demand.

Planned Strategic Initiatives #

• Portfolio Reshape:
  • Continued investment in brands, focusing on the P&A segment growth.
  • Enhance consumer engagement and build long-term brand equity.
  • Scale up of successful launches and renovations.
  • Strategic shift towards premiumization with the rebranding of McDowell’s No.1 to House of McDowell’s.
  • Exploration of new growth engines by acquiring minority stakes in companies like Pistola.
• Building an Organization of the Future:
  • Investments in digital capabilities, including digital marketing, owned platforms, and consumer data.
  • Multiyear supply chain agility program.
  • Talent development, inclusion, and diversity initiatives.
  • Systematic efforts to increase agility and quick response capabilities.
• Diageo in Society (ESG):
  • Focus on grain-to-glass sustainability, promoting positive drinking, and championing inclusion and diversity.
  • Water stewardship initiatives, aiming to replenish more water than used.
  • Accelerating to a low-carbon world, targeting net-zero carbon emissions.
  • Efforts to make packaging widely recyclable and increase recycled content.

Capital Expenditure Plans #

• The document provided mentions a capital expenditure of approximately 25 crores for research & development which includes renovation and innovation in 2024.
• The document details the elimination of the use of coal fossil fuel from operations by switching to bio-fuels such as agriculture waste, rice husk, etc.
• Planned continued investment in brands and capabilities.
• Continued investment in India to enhance its capabilities.

Efficiency Improvement Targets #

• Value Chain Productivity: Focus on revenue growth management and value chain productivity for sustained value creation.
• Water-Use Efficiency: Improvement in water-use efficiency in distilleries by 48% and in packaging, by 31% in FY24, against the target of 40% by 2030.
• Supply Chain: Multiyear supply chain agility program to strengthen the end-to-end manufacturing footprint.
• Operating Margins: Targeting mid-high teen EBITDA margins, driven by premiumization, pricing, and cost optimization.

Potential Challenges and Opportunities #

• Challenges:
  • Inflationary pressures and subdued consumer demand (short-term).
  • Stringent regulations and pricing control by state governments.
  • Intense competition within the industry.
  • Risk of spurious liquor consumption impacting the Popular segment.
  • Potential supply chain disruptions due to geopolitical conflicts.
  • Increasing excise duties impacting consumer prices.
• Opportunities:
  • Favorable demographics, including a large and growing young population, increasing disposable incomes.
  • Growing social acceptance of alcoholic beverages.
  • Premiumization trend, with consumers shifting towards higher-quality, experiential drinking occasions.
  • Expansion in premium categories like Tequila and craft spirits.
  • Growing on-trade consumption, gifting, and cocktail culture.

Scenario Analysis and Sensitivity to Key Assumptions #

• Premiumization Success: Sensitivity: Highly sensitive. The company’s financial performance hinges significantly on the success of its premiumization strategy. Failure to gain traction in the P&A segment could negatively affect revenue growth and profitability targets.
• Inflationary Pressure: Sensitivity: High Sensitivity. Higher-than-anticipated inflation could squeeze consumer spending and impact demand, particularly in the more price-sensitive segments.
• Regulatory Changes: High Sensitivity. Any adverse changes in excise duties, pricing regulations, or distribution policies by state governments could severely impact profitability.
• Competition: The ability of the Company to continue to successfully compete with major brands in various segments will be essential to sustain the 10%+ CAGR.
• Supply Chain: Sensitivity: Highly Sensitive. Any fossil fuel shortages or disruptions in the supply chain could lead to severe losses.

Audit and Compliance Analysis of United Spirits Limited #

Auditor’s Opinion and Qualifications #

• Price Waterhouse & Co Chartered Accountants LLP issued an unmodified (unqualified) opinion on both the standalone and consolidated financial statements.
• Emphasis of Matter paragraphs were included in both reports, highlighting:
  • Uncertainties related to past transactions, including potential fund diversions and ongoing regulatory inquiries.
  • A dispute with IDBI Bank regarding retained pledged assets.
• CARO report stated that the auditors of one subsidiary has issued a qualification.

Key Accounting Policies and Changes #

• The Company prepares financial statements under Ind AS.
• New/Amended Standards: The Group adopted amendments to Ind AS notified by the Ministry of Corporate Affairs effective April 1, 2023, which did not have a material impact. No changes were necessary as a consequence of amendments made to IND AS 12.
• Material accounting policies used are specified in respective notes.
• Revenue Recognition: Revenue is recognized upon transfer of control of goods (dispatch or delivery) or over time for services.
• Property, Plant & Equipment: Stated at historical cost less depreciation, calculated on a straight-line basis.
• Intangible Assets: Brands have indefinite useful lives and are tested for impairment. Computer software and Licenses amortized. Franchisee rights are amortised.
• Impairment: Non-financial assets are tested for impairment annually or when indicators exist.
• Financial Instrument: Financial assets are measured at amortised cost and a simplified approach is used for trade receivables, for expected credit losses.

Internal Control Effectiveness #

• The auditor’s report states that the Company and its Indian subsidiary maintained adequate internal financial controls over financial reporting, and these controls were operating effectively as of March 31, 2024.
• The audit trail feature of accounting software operated throughout the year, except for certain instances where audit trail is not maintained.

Regulatory Compliance Status #

• The Company is in general compliance with the provisions of the Companies Act, 2013, SEBI Regulations, and other applicable laws.
• The Secretarial Audit Report and Secretarial Compliance Report state general compliance with applicable provisions, with one exception of lapse in gap between the Risk Management Committee Meetings.
• The Company received show cause notices from the Ministry of Corporate Affairs (MCA) alleging violations of the Companies Act, 1956 and 2013. The Company is awaiting a response for a request of discontinuation of one proceeding.
• The Company made contributions to Provident Fund and other funds.

Legal Proceedings and Their Potential Impact #

• Additional Inquiry: Ongoing matters related to the “Additional Inquiry” into past transactions, including fund diversions and improper transactions, are mentioned. Recovery suits have been filed, but the financial impact is currently not estimable.
• Regulatory Notices: The Company received and responded to letters and notices from SEBI, ED, and RBI regarding past transactions.
• IDBI Bank Dispute: Ongoing litigation with IDBI Bank, with the Company believing it has a strong case for the recovery of retained assets and deposited amounts.
• Customer Claim: A significant claim (’ 365 crores) from a customer is being contested, with the Company believing it has a good case on merits.
• Tax Disputes: Contingent liabilities exist for various tax matters, including income tax, excise duty, and sales tax, with amounts under protest.
• Historical matters: Matters from 2014, 2016, 2019 onwards, relate to historical irregularities, regulatory inquiries, and ongoing legal proceedings, which expose the company to risks of fines, penalties, and reputational damage.

Related Party Transactions #

• The Company has a policy on Related Party Transactions and transactions are undertaken at arm’s length and are in the ordinary course of business.
• Material Related Party Transactions with Diageo Brands B. V. Netherlands (‘DBBV’) for the financial year 2024-25, individually and/or in aggregate upto an amount of ’ 1266 crore is being placed before members for their approval.
• Significant transactions with related parties include purchases, sales, royalty payments, reimbursement of expenses, and loans to/from subsidiaries. Specific amounts and balances are detailed in Note 36(b) and 36(c).

Subsequent Events #

• The Board recommended a final dividend of ’ 5 per equity share, subject to shareholder approval.
• The Group invested ’ 6 crores in Inspired Hospitality Private Limited, acquiring a 15% stake and classifying it as a joint venture (completed on May 9, 2024).

Analysis of Accounting Quality and Regulatory Risk Assessment #

• Accounting Quality: The use of an unmodified audit opinion suggests acceptable accounting quality, but the “Emphasis of Matter” paragraphs highlight ongoing uncertainties from past events that could affect future financial reporting. Use of external valuers and legal counsel is disclosed.
• Regulatory Risk: The Company faces significant regulatory risk due to:
  • The ongoing investigations and inquiries from various regulatory bodies.
  • The nature of its business (alcohol industry) being highly regulated, with potential for frequent changes in regulations.
  • Multiple disputes and legal proceedings with significant amounts involved.
• The Company had to restate its previous financial statements, as mentioned in the directors responsibility report, demonstrating risk.