United Spirits Rating: Hold- Competitive intensity and pricing are concerns

We maintain our anti-consensus cautious stance on the liquor industry and see high competitive intensity, particularly from Pernod. India is a must-win market for Pernod, and it expects India and China to drive the bulk of industry growth. Pernod’s India portfolio is seeing strong premiumisation in its legacy Seagram’s portfolio and its international brands’ business growth is booming in India.

Although we continue to have concerns on high competitive intensity and low pricing power, we retain ‘Hold’ on USL on the back of valuation comfort (stock down 27% from peak) and confidence in the new MD. We expect USL also to see premiumisation, but margins are likely to remain under pressure in the near term.

Pernod Capital markets day: KTAs on India from PPT, transcript
In India, Pernod has a 45% market share, and its sales grew 25% y-o-y last year. Sales of international brands grew 58%. Seagram’s whiskey grew by 22%, seeing strong premiumisation. Entry-level Imperial Blue grew at mid-teens. Royal Stag and blended side grew at 20s and then the upper end of Seagram, which is a standard scotch segment, 100 Pipers, grew into 40s. It launched India’s first premium smoky whiskey (Blender’s Pride) which has captured 2.5% of market share – first brand digitally launched in the Covid era.

100 Pipers blended malt whiskey created a new category with a 1.2% market share. Scotch is about 10% of business in India with Indian made whiskey about 90%.
Pernod is giving consumers a differentiated drinking experience. It launched Jameson Black Barrel and Chivas XV. Both are seeing a good response. Pernod is further deepening connect with the young and the woman consumer cohort with a captive campaign and activation. Further, it has unleashed retail execution excellence, which is a data-driven and algorithm-led recommendation engine. This gives recommendations to 1,000-strong sales force, which makes close to 7,000 retail visits per day.

Outlook: Premium focus but low pricing power
In India, regulatory challenges exist, but some state governments are trying to create an ecosystem that eases business. We continue to have concerns on high competitive intensity and low pricing power in the liquor industry. Gross margin is likely to remain under pressure given limited pricing power and high competition from Pernod and Radico. USL, in our view, will continue to focus on premiumisation, which has large growth potential. USL’s recent sale of popular brands is in line with this. We also like USL’s foray into premium craft drinks. We continue to like: i) the new MD delivering well on her stated strategy; and ii) USL’s decision to sell off part of its lower-end portfolio, which should drive sharper focus on core premium brands. Maintain ‘HOLD/SN’ with a TP of Rs 845.