united spirits limited at an inflection point of decadal

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United Spirits Limited

At an inflection point of decadal growth…

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TABLE OF CONTENTS

Summary 3

Valuation & Peer comparison 4

Financial analysis & projections 8

Key Growth Drivers 9

New growth strategy to be unveiled soon 9

Indian alcohol segment to see sustained growth 10

USL is present across price point 10

Ready portfolio of global brands 11

Multi-locational facilities and outsourcing of ‘Popular brands’ 12

Business Quality score 14

Annual report analysis 15

Key management persons 18

Key risks and concerns 19

Quarterly financials & commentary 20

Financial Statement Analysis & Projections 23

Disclaimer 24

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A subsidiary of global leader Diageo, United Spirits Limited (USL) is India’s leading

alcoholic beverage company. It has an outstanding portfolio of not only international

brands (such as Johnnie Walker, Black Dog, Black & White, etc.) but also home-grown

labels (Antiquity, Royal Challenge, McDowell’s No 1, among many others) many of

which are market leaders in their own right.

Since the takeover in FY13, a large part of Diageo’s time and energy was spent on

restructuring the business and organization. As it has cleared all legacy issues,

deleveraged the balance sheet and put in place a high growth business strategy, we

believe that USL is at an inflection point in its growth story. We initiate coverage with

a BUY for a 24-month price target of INR 1,230 (75x FY24E EPS), representing an

upside of 26.5% from the CMP of INR 973.

Our optimism stems from the following:

Along with a pan-India distribution, its multi-locational manufacturing

footprint enables it to overcome the high intra-state taxation, which is not

available to most of its peers. This provides for competitive pricing.

Its strategy to focus on premiumisation is already panning out. This, coupled

with the impending launch of its portfolio of international brands, should

enable USL to outperform industry growth.

Outsourced manufacturing & franchising of “Popular” brands (royalty

income) will help reduce working capital and bolster return ratios.

Accelerated home consumption during the pandemic & emergence of new e-

commerce channels to aid volume growth.

Over FY17-21, USL has reduced its net debt by INR 3,515 cr. The current pace

of cash flow generation should help USL to become net debt free in FY22

itself.

Diageo has the highest ESG score among global peers. While USL’s ESG score

significantly lags that of its parent, we believe that adherence to best global

practices is only a matter of time.

Key Financial Data (INR Cr, unless specified)

Revenue EBITDA

Net Profit

EBITDA (%)

Net Profit

(%) EPS (₹)

BVPS (₹)

RoE (%)

RoIC (%)

P/E (X) P/BV

(X)

EV/ EBITDA

(X)

FY20 9,325.4 1,572.3 658.9 16.9 7.1 9.3 51.3 17.7 21.3 104.7 19.0 45.5

FY21 8,131.3 1,052.7 383.6 12.9 4.7 5.4 56.7 9.3 15.3 179.9 17.2 67.9

FY22E 9,373.4 1,347.6 770.2 14.4 8.2 10.6 67.3 15.8 21.6 91.8 14.5 53.1

FY23E 10,525.0 1,580.0 969.9 15.0 9.2 13.3 80.6 16.6 24.2 72.9 12.1 45.2

FY24E 11,820.2 1,898.7 1,192.1 16.1 10.1 16.4 97.1 16.9 27.4 59.3 10.0 37.7

BUY @ CMP INR 973 Target: INR 1,230 in 24 months Upside Potential: 26.5%

At an inflection point of decadal growth…

Industry Alcohol

Scrip Details

Face Value (INR) 2.0

Market Cap (INR Cr) 70,698.2

Price (INR) 973

No of Shares O/S (Cr) 72.66

3M Avg Vol (000) 2,729.34

52W High/Low (INR) 991/495

Dividend Yield (%) 0.0

Shareholding (%) Jun 2021

Promoter 56.7

Institution 28.9

Public 14.4

TOTAL 100.0

Price Chart

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United Spirits Limited Ltd

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USL valuation and price performance

Source: Company, Ventura research

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Adj Price 19.87x 52.87x

85.87x 118.87x 151.87x

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USL trades at a premium to Diageo given the growth potential in Indian market

Premium/Disc to Diageo

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USL stock has underperformed the sector & broader market,strong potential to catch up

USL Nifty FMCG Sensex

14.0

58.938.8

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62.033.3

64.9

49.1

28.1

47.448.2

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USL Diageo RoyalUnibrew

UnitedBreweries

PernodRicard

With new management in place, USL's ESG score should start mirroring that of parent Diageo

Environmental score Social score Governence score

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Our Bull and Bear Case Scenarios

We have prepared a Bull and Bear case scenario with a 3 variable sensitivity based on FY24

revenues and EBITDA margins & target PE

Bull Case: We have assumed FY24 revenues of Rs 12,820 cr in FY24 (CAGR of 16.4%)

and EBITDA margins of 17.8% (+486bps), which will result in a Bull Case price target of

INR 1,716 per share (upside of 76.4% from CMP). We assign an FY24 target PE of 85x.

Bear Case: We have assumed FY24 revenues of Rs 10,820 cr in FY24 (CAGR of 10.0%)

and EBITDA margins of 15.8% (+286bps), which will result in a Bear Case price target

of INR 735 per share (downside of 24.5% from CMP). We assign FY24 target PE of 50x.

Bull & Bear Case Scenario

Investment triggers

Completion of restructuring exercise: Most of the legacy issues are behind it and the

management is now focused completely on increasing market share and return ratios.

The balance sheet is far healthier than when Diageo took over the management

control of USL.

Diageo’s robust portfolio: USL can effortlessly tap into the Diageo’s international

portfolio & introduce products where white spaces exist.

Catalysts

Faster than expected increase in market share: Faster rise in market share can lead to

significant re-rating of the stock and hence leaves a potential upside risk.

Increase in franchise value of RCB: We have not taken the same into consideration

and remains an upside risk to our PT.

Bull Case Price

INR 1,716 per share

Target Price

INR 1,230 per share

CMP

INR 973 per share

Bear Case Price

INR 735 per share

Revenues CAGR of 16.4% over FY21-

24 and EBITDA margins of 17.8% in

FY24. Target PE of 85x.

Revenues CAGR of 10.0% over FY21-

24 and EBITDA margins of 15.8% in

FY24. Target PE of 50x.

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Valuation and Comparable Metric of Domestic and Global Alcohol companies

Source: Company Reports, Ventura Research, Bloomberg

Company Name Mkt CapPEG

2021-242021 2022 2023 2021 2022 2023 2021 2022 2023 2021 2022 2023 2021 2022 2023 2021 2022 2023 2021 2022 2023 2021 2022 2023

Domestic Peers

UNITED SPIRITS LTD 9,554 1.3 67.9 53.1 45.2 179.9 91.8 72.9 17.2 14.5 12.1 9.3 15.8 16.6 15.3 21.6 24.2 1,099 1,267 1,422 12.9 14.4 15.0 4.7 8.2 9.2

GLOBUS SPIRITS LTD 532 0.5 14.4 13.2 10.1 25.5 22.2 16.5 6.1 4.8 3.7 24.1 21.6 22.5 32.4 29.5 35.5 166 201 243 20.7 18.7 20.1 11.4 10.9 12.1

RADICO KHAITAN LTD 1,968 1.1 36.0 28.3 23.4 52.6 42.2 33.3 8.1 6.8 5.7 15.5 16.1 17.0 18.3 23.1 26.2 322 376 431 17.1 17.6 18.6 11.6 11.8 12.7

ASSOCIATED ALCOHOLS 104 0.6 7.8 7.5 6.1 13.3 13.0 10.5 3.1 2.5 2.0 23.0 19.0 19.0 41.2 36.6 35.7 572 67 81 20.5 18.8 19.2 13.3 11.9 12.2

UNITED BREWERIES LTD 5,980 0.5 116.6 50.8 33.6 392.0 100.3 59.3 12.2 11.2 9.7 3.1 11.1 16.3 4.4 19.0 26.8 572 804 1,050 8.9 14.3 16.6 2.7 7.4 9.6

Global Peers

TREASURY WINE ESTATES 6,323 1.0 16.6 13.9 12.0 33.8 26.5 21.9 2.4 2.4 2.3 6.9 8.9 10.3 9.1 12.0 13.9 2,005 1,807 1,938 21.6 27.4 29.2 9.3 13.2 14.9

ROYAL UNIBREW 6,209 2.6 20.8 18.7 17.4 29.5 26.9 24.5 11.3 10.5 9.7 38.5 39.0 39.7 24.2 26.5 28.1 1,327 1,527 1,591 24.5 23.5 24.2 15.9 15.1 15.9

DIAGEO PLC 116,806 2.4 23.5 21.3 19.5 32.6 28.4 25.9 13.5 11.0 10.5 41.3 38.8 40.6 20.2 20.3 21.6 17,155 18,407 19,561 33.0 34.2 35.2 20.9 22.3 23.1

PERNOD RICARD 60,343 1.3 21.3 19.4 17.5 38.8 28.9 26.0 3.4 3.3 3.1 8.8 11.4 11.9 10.6 11.5 12.5 10,527 11,256 12,054 30.9 31.4 32.3 14.8 18.5 19.2

Figures are in USD Mn (unless specified) EV/EBITDA (X) P/E (X) P/BV (X) RoE (%) RoIC (%) Sales EBITDA Margin (%) Net Margin (%)

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Post COVID, USL earnings are expected to rebound faster than others

Source: Ventura Research, ACE Equity & Bloomberg, Size of bubble indicates FY23 revenues

ASSOCIATED ALCOHOLS

UNITED SPIRITS LTD

UNITED BREWERIES LTD

RADICO KHAITAN LTD

GLOBUS SPIRITS LTD

TREASURY WINE ESTATES

ROYAL UNIBREW

DIAGEO PLC

PERNOD RICARD

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ASSOCIATED ALCOHOLS

UNITED SPIRITS LTD

UNITED BREWERIES LTD

RADICO KHAITAN LTD

GLOBUS SPIRITS LTDRoyal Brew

Treasury wine

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Financial Analysis and Projections

Going forward, we expect USL’s total volumes and revenues to grow at a CAGR of 11.8% to

98.9 mn cases and 13.3% to INR 11,820.2 cr over FY21-24E. Also, EBITDA and PAT margins

are expected to expand by 312bps and 537bps to 16.1% and 10.1%, respectively.

Subsequently, RoE and RoIC are expected to improve to 16.9% (+759bps) and 27.4%

(+1,203bps), respectively, by FY24. The company has generated a cash flow of >INR 5,000

cr from operations in the last 5 years, resulting in massive debt repayment (net debt now

only at 0.2x equity v/s 2.3x in FY17)

Financial Summary

Source: Company Reports & Ventura Research

Fig in INR Cr (unless

specified)FY20 FY21 FY22E FY23E FY24E FY25E FY26E FY27E FY28E FY29E FY30E

Volumes in mn cases 79.7 70.7 80.9 89.5 98.9 107.8 117.5 127.6 138.2 149.5 161.2

Revenue 9,325.4 8,131.3 9,373.4 10,525.0 11,820.2 13,124.2 14,556.6 16,097.6 17,745.6 19,557.6 21,469.9

YoY Growth (%) (12.8) 15.3 12.3 12.3 11.0 10.9 10.6 10.2 10.2 9.8

Operating Expenses 5,028.9 4,455.6 5,061.6 5,630.9 6,264.7 6,890.2 7,642.2 8,370.8 9,050.3 9,876.6 10,734.9

Employee Cost 530.0 556.4 667.7 714.4 760.9 721.8 800.6 885.4 887.3 977.9 1,073.5

Other Expenses 2,194.2 2,066.6 2,296.5 2,599.7 2,895.9 3,149.8 3,493.6 3,782.9 4,170.2 4,693.8 5,152.8

EBITDA 1,572.3 1,052.7 1,347.6 1,580.0 1,898.7 2,362.3 2,620.2 3,058.5 3,637.9 4,009.3 4,508.7

YoY Growth (%) (33.0) 28.0 17.2 20.2 24.4 10.9 16.7 18.9 10.2 12.5

EBITDA per case 197.3 148.9 166.5 176.6 192.0 219.1 223.0 239.8 263.3 268.1 279.7

Margin (%) 16.9 12.9 14.4 15.0 16.1 18.0 18.0 19.0 20.5 20.5 21.0

PAT 658.9 383.6 770.2 969.9 1,192.1 1,545.2 1,702.4 2,009.8 2,425.9 2,673.6 3,019.9

YoY Growth (%) (41.8) 100.8 25.9 22.9 29.6 10.2 18.1 20.7 10.2 13.0

PAT per case 82.7 54.3 95.2 108.4 120.6 143.3 144.9 157.6 175.6 178.8 187.3

Margin (%) 7.1 4.7 8.2 9.2 10.1 11.8 11.7 12.5 13.7 13.7 14.1

Shareholders' Fund 3,728.0 4,119.8 4,890.0 5,860.0 7,052.1 8,597.3 10,299.7 12,309.6 14,735.5 17,409.1 20,429.0

Return on Equity (%) 17.7 9.3 15.8 16.6 16.9 18.0 16.5 16.3 16.5 15.4 14.8

Capital Employed 6,101.7 4,998.8 5,733.6 6,596.7 7,643.1 9,253.5 11,027.6 13,114.4 15,622.8 18,387.0 21,502.5

Return on Capital

Employed (%)21.1 15.1 18.3 18.8 19.9 21.3 19.8 19.6 19.9 18.6 18.0

Invested Capital 6,028.2 4,914.9 4,850.4 5,128.2 5,555.6 5,784.5 6,141.2 6,501.9 6,856.2 7,245.4 7,620.4

Return on Invested

Capital (%)21.3 15.3 21.6 24.2 27.4 34.0 35.6 39.6 45.3 47.2 50.7

Cash Flow from Operations 783.2 1,817.7 892.9 877.5 969.0 1,602.8 1,784.1 2,121.6 2,578.0 2,841.3 3,234.2

Cash Flow from Investing (193.6) (99.2) 1.9 (101.2) (109.7) (181.4) (307.4) (327.6) (346.6) (380.8) (396.1)

Cash Flow from Financing (739.9) (1,706.8) (89.3) (191.1) (240.3) (39.8) (59.4) (67.8) (77.3) (85.4) (97.6)

Net Cash Flow (150.3) 11.7 805.4 585.3 618.9 1,381.6 1,417.3 1,726.2 2,154.0 2,375.0 2,740.5

NOPLAT 760.8 483.0 791.3 981.8 1,201.0 1,555.1 1,724.2 2,033.9 2,452.5 2,702.9 3,052.0

Free Cash Flow 676.7 1,475.3 1,154.7 939.4 938.7 1,473.7 1,529.8 1,838.0 2,281.9 2,811.4 3,213.7

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Key growth drivers

Although Diageo has been in the driver’s seat since FY13, the performance over the period

FY13-21 was extremely lacklustre. USL’s overall volume growth was lower than the spirit

industry’s volume growth as a better part of Diageo’s energy and bandwidth was spent on:

Cleaning up legacy irregularities mainly pertaining to liabilities.

Seizing control over ex-promoter’s equity.

Deleveraging the balance sheet &

Deepening understanding of the market dynamics

Over FY18-21, USL’s financial performance was subpar with revenues de-growing at 1.8%.

In terms of segmental performance:

P&A volume growth was flat while Popular volumes de-grew at 7% CAGR.

In terms of value, P&A/Premium category grew at a CAGR of 2/-8% respectively

leading to a total value growth of -1% CAGR.

EBITDA over the same period de-grew at 4.5% with margins compressing by 111bps to

12.9%. Net profit declined at a 15.4% CAGR to INR 383.6 cr.

Having dealt with the legacy issues and taking into consideration the tailwinds of the Indian

alcoholic beverage industry, we believe that USL is now on the verge of an inflection point

in its growth story (click here).

Going forward, we expect USL’s total volumes and revenues to grow at a CAGR of 11.8% to

98.9 mn cases and 13.3% to INR 11,820 cr over FY21-24E. Also, EBITDA and PAT margins are

expected to expand by 312bps and 537bps to 16.1% and 10.1% respectively. Subsequently,

RoE and RoIC are expected to improve to 16.9% (+759bps) and 27.4% (+1,203bps)

respectively, by FY24. USL is expected to turn net debt free by FY22 onwards.

New growth strategy to be unveiled soon

The new MD Hina Nagarajan has assumed responsibility since July 1st 2021. While she is

expected to unveil a new strategy to the shareholders in the near term, recent initiatives

clearly demonstrate that the focus will be on premiumisation, regaining lost market share,

outsourcing of the popular brands (Associated alcohol is expected to be a big beneficiary

here), focus on profitability and improving shareholder returns.

Indian alcoholic beverages markets to sustain a growth of ~7% till FY30 due to…

Increase in the disposable income of the middle class.

India’s demographic mix is skewed towards younger people and over 60% of the

population is in the age group of 15-45 years.

https://economictimes.indiatimes.com/industry/cons-products/liquor/diageo-owned-united-spirits-outperforms-pernod-richard-in-premium-segment/articleshow/85864232.cms?from=mdr

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Increased acceptance of alcohol as part of recreation activities.

Introduction of a new channel, namely online sales, is expected to usher in a new

avenue for demand growth.

USL’s portfolio of brands traverses virtually every price point across all categories of

spirits

Diageo has SKU’s across every price point

Source: Company Reports & Ventura Research, Blue dot indicate that brand is P&A whereas red indicates popular

Glenfiddich

Gold Label reserve

Johnnie Walker Black label

Mc Dowell No 1

Royal challenge

Bag Piper

Honeybee

Mc Dowells

Captain Morgan

Mc Dowell No 1 Celebration

Bagpiper Rum

Tanqueray

Blue Riband

Ketel One

Ciroc

Romanov

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WHISKY BRANDY RUM GIN VODKA

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Ready portfolio of global brands

There are several brands in Diageo’s international kitty that have not been introduced in

the Indian market as yet. This provides a strong visibility of new product launches across

categories that should help sustain growth over the longer term.

Whisky category has large product gaps for USL compared to Diageo

International brands introduced in India

International brands yet to be introduced in India

Whisky Cardhu Bell's

Ragganmore Buchanan's

Glenkinchie Haig Club

Johnnie Walker Mortlach

Talisker Grand Old Parr

Vat 69 White Horse

Lagavulin Windsor

Caol ila John Walker & Sons

Clynelish Royal Lochnagar

Dalwhinnie Glen Elgin

Bulleit

Crown Royal

7

Liqueur Baileys Sheridan's

Gin Tanqueray Gilbey's

Gordon's

Beer None Senator

Guinness

Harp

Kilkenny

Tusker

Rum Captain Morgan Ron Zacapa

Cacique

Bundaberg

Pampero

Source: Company websites & Ventura Research

USL has already mentioned in Q2FY22 concall that the company would be focusing on

launching white spirits products in India along with vodka.

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Multi locational manufacturing facilities to aid in scaling up volumes

USL has 15 owned manufacturing locations which is among the highest manufacturing

footprint among spirits companies in India. Given that high intra-state taxation restricts

movement of alcoholic beverages across states, availability of pan-India manufacturing

bases helps to increase scale.

USL has highest number of owned plants across states compared to peers

States USL Pernod Ricard Radico ABD AABL Globus

UP 2 1 1 - - -

Karnataka 2 1 - 1 - -

Rajasthan 2 1 1 - 1

Telangana 2 1 - 2 - -

West Bengal 1 1 - 1 - 1

Punjab - 1 - -

Haryana - 1 1 1 - 1

Maharashtra 4 1 - 1 -

AP - 1 1 1 - -

Odisha 1 1 - - - -

Goa 1 - - - - -

MP - 1 - - 1 -

Jharkhand - 1 - - - -

Assam - 1 - - - -

Uttarakhand - - 1 - - -

Madhya Pradesh - - - 1 - -

Tripura - - - 1 - -

Bihar - - - - - 1

Source: Company Reports & Ventura Research, Numbers denote manufacturing locations

‘Popular’ brands outsourcing and margin expansion to improve free cash flow generation

and thereby improve return ratios

Earlier, the blended margins were lower due to high value contribution from the popular

portfolio. Increased franchising of its popular portfolio (at approx. 6-7% royalty) should lead

to a gradual improvement in the EBITDA margins while sharply lowering capital employed.

With increasing contribution from the P&A segment, we forecast EBITDA to grow at a faster

CAGR of 21.7% to INR 1,898.7 cr over FY21-24. Margins are set to expand by 312bps to

16.1% by FY24.

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USL’s operational Performance

Source: Company & Ventura Research

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P&A / Popular sales are expected to grow at 14.2/11.6% CAGR over FY21-24 in value

P&A sales - LHS Popular sales - LHS

P&A volumes - RHS Popular volumes - RHS

INR cr mn cases

43 47 51 58 64 67 68 71 71 72 72

57 53 49 42 36 33 32 29 29 28 28

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Popular sales - LHS P&A sales - LHS

P&A volume growth- RHS Popular volume growth-RHS

% %

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EBITDA/PAT is expected to grow at 21.7%/45.9% CAGR over FY21-24E

EBITDA - LHS PAT - LHS

EBITDA margin - RHS PAT margin- RHS

INR cr % 0

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Return ratios are expected to improve from hereon

RoE RoCE RoIC WACC

%

(5,000)

(4,000)

(3,000)

(2,000)

(1,000)

0

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2,000

3,000

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USL has been continuosly generating positive CFO

CFO FCFF

INR cr

-2.0

-1.0

0.0

1.0

2.0

3.0

4.0

5.0

FY16 FY17 FY18 FY19 FY20 FY21 FY22E FY23E FY24E

USL has been continuosly delveraging its balance sheet

Net debt/equity Net debt/EBITDA

Total debt/equity Total debt/EBITDA

14 | P a g e ( 1 s t N o v 2 0 2 1 )


Business Quality Score

Key Criteria Score Risk Comments

Management & Leadership

Management Quality 7 Low The management is of high quality, however it has not been able to deliver operationally as focus was on deleveraging rather than market share gains.

Promoters Holding Pledge 7 Low The promoter holding is 56.8% (same in the past 12 month) and promoter pledging as of 30th Jun 2021 is 1.2%

Board of Directors Profile 8 Low The board consists of 10 directors with significant experience in manufacturing, accounts/finance, strategic planning and operations

Industry Consideration

Industry Growth 8 Low Spirits industry is expected to witness good growth unlike in the past where it faced issues of demonetization, COVID etc.

Regulatory Environment or Risk 3 High Alcohol industry operates in a highly regulated environment in India.

Entry Barriers / Competition 8 Low Entry barriers are high due to consumer brand loyalty, license hurdles etc.

Business Prospects

New Business / Client Potential 8 Low Diageo’s international portfolio can help to fill white spaces in the Indian market

Market Share Potential 6 Low While USL has been losing market share in the past, we believe that most of the legacy issues are now behind it and the company is all set to win back its lost share.

Margin Expansion Potential 9 Low Movement from popular to P&A can lead to margin gains

Earnings Growth 9 Low Post COVID, earnings are expected to rebound strongly given low base, revenge spending etc.

Valuation and Risk

Balance Sheet Strength 7 Low The balance sheet is now in a better shape than earlier. However, room for improvement exists.

Debt Profile 8 Low USL has been continuously deleveraging in last 4-5 years. This coupled with strong FCF generation should make debt servicing manageable.

FCF Generation 7 Low With all the key drivers in place, we are expecting positive FCF generation.

Dividend Policy 3 High USL has not paid dividend in the past and has deployed the cash for payment of debt

Total Score 98 Medium

The overall risk profile of the company is good and we consider it as a medium risk company for investments Ventura score (%) 70

Source: Company Reports & Ventura Research, Total score >=75 = low risk, between 50-74 = medium risk, less than 50= high risk

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Annual Report Analysis

We analyzed the FY21 annual report of USL and our key observations are as follows:

Key takeaways

Brands – USL has set out the vision to become the best performing, most trusted and

respected consumer goods company in India. For this, it has been working on a five-point

agenda viz,

Strengthen & Accelerate core brands

Evolve route to consumer

Drive out cost to invest in growth and expand margins

Lead USL and industry towards the highest ideals of corporate citizenship

Creating a future-ready organization

9 brands with sales >1 mn cases - USL has 9 brands in its portfolio which sell more than

a million cases every year, of which 1 brand sell more than 25 million cases annually.

Distribution presence- USL has a robust distribution network of more than 70,000 outlets.

Mix of P&A- Total volumes stood at 70.7 mn cases as against 79.75 mn cases in FY20

resulting in softness in volume by ~11%.

Medium term guidance- USL is on track to deliver on its medium-term goal of delivering

double-digit topline growth and achieve mid-high teen EBITDA margins led by better pricing

and cost optimization.

Board meetings

During the financial year 2020-21 the Board of Directors met 7 times on May 27, 2020, July 27,

2020, September 18, 2020, November 04, 2020, December 10, 2020, January 27, 2021 and

March 23, 2021 and the gap between any two Board Meetings did not exceed 120 days as

required by the Companies Act. The attendance of all the members was satisfactory.

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Board member attendance has been satisfactory overall

Name of director Board

meetings Meetings attended % attendance

Mahendra Sharma 7 7 100% Anand Kripalu 7 7 100% Sanjeev Churiwala* 3 3 100% V.K Viswanathan 7 7 100% Indu Shahani 7 7 100% D Sivanandhan 7 7 100% Rajeev Gupta 7 7 100% Vinod Rao 7 6 86% John Kennedy 7 6 86% Randall Ingber 7 7 100% Total attendance 66 64 97%


Remuneration to KMP

The remuneration is commensurate with the size of the company and operating performance.

Remuneration of independent directors is increasing which is a good governance practice.

Remuneration of top management has more or less followed performance


Auditor qualifications

PWC is the auditor and there were qualifications highlighted by them in "Emphasis of matter”

in the FY21 Annual Report.

They are:

Transaction inquiry carried out with respect to erstwhile Chairman

Excess managerial remuneration paid (above ceiling limit of companies act) in FY15 to

then CFO.

In cr INR FY18 FY19 FY20 FY21 CAGR

MD & CEO 13.0 15.3 22.9 13.1 0.4%

As a % of PBT 1.4% 1.5% 2.0% 2.4%

Independent directors 2.3 2.4 2.4 2.6 3.9%

As a % of PBT 0.3% 0.2% 0.2% 0.5%

CFO 4.3 5.3 7.1 2.3 NA*

As a % of PBT 0.5% 0.5% 0.6% 0.4%

Total 19.6 23.0 32.5 18.0 -2.9%

* Mr Sanjeev Churiwala left the company in mid year in FY20-21

In cr INR FY18 FY19 FY20 FY21 CAGR

Revenues 8,590.6 9,340.8 9,325.4 8,131.3 -1.8%

EBITDA 1,207.2 1,393.6 1,572.3 1,052.7 -4.5%

PAT 633.8 700.2 658.9 383.6 -15.4%

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Royalty payments

USL is making royalty payments for some of its brands to the parent annually.

USL has been regularly making royalty payments to the parent

In cr INR FY18 FY19 FY20 FY21

Royalty 10.5 9.1 9.7 5.9

As a % of revenue 0.1% 0.1% 0.1% 0.1%


Major Related Party Transactions with promoters, key management persons

and promoter owned entities

There were no material related party transactions in FY21 except those carried out with

subsidiary, associates etc in the normal business parlance.

Contingent Liabilities

Contingent liabilities as a % of networth are coming down over the years. However, as on FY21,

USL has contingent income tax liability of INR 736.2 cr primarily related to exposures under

transfer pricing and disallowance of certain expenses that the group had claimed as deductions

in its income Tax returns.

Contingent Liabilities are reasonably high

Source: Company Reports & Ventura research

In cr INR FY18 FY19 FY20 FY21

Tax demands 1133.0 1316.1 1307.6 1202.3

Civil l itigations 296.6 155.5 186.4 174.1

Total 1429.6 1471.6 1494.0 1376.4

As a % of revenue 16.6% 15.8% 16.0% 16.9%

As a % of networth 59.1% 47.6% 40.1% 33.4%

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Key management personnel (KMP) details

USL’s management has global exposure and experience of working in big MNC’s

Key Person Designation Details

Hina Nagarajan MD & CEO Hina Nagarajan joined Diageo India in April 2021 as CEO-designate. Earlier, she was MD, Diageo - Africa Emerging Markets (AEM) since August 2018.Her key responsibilities included P&L delivery and whitespace entry strategies.

Aarif Aziz Chief Human resource

officer

He is responsible for building people and organizational capability aligned to deliver the corporate objective of building capable leaders and attracting right talent.

Abanti Sankaranarayanan

Chief Strategy and Corporate Affairs

Officer

Her responsibilities include Alcohol Policy, Regulatory & Trade matters, Market Access, Corporate Communications & Reputation and programs to address alcohol misuse, champion responsible consumption and deliver Social Impact.

Deepika Warrier Chief marketing officer Deepika Warrier leads the Marketing function at Diageo India. As Chief Marketing Office, Deepika oversees marketing and innovation for Diageo India’s wide range of award-winning alcohol and beverage portfolio.

Kedar Ulman Chief Supply Chain

Officer He is responsible for Diageo India’s complex supply chain comprising a wide India footprint of 60 manufacturing locations and procurement.

Mamta Sundara General Counsel She is responsible for leading the legal function. Additionally, she also has responsibility for the real estate portfolio of USL.

Prathmesh Mishra Chief Commercial

Officer He is responsible for the business operations in India & additionally looks on the CSD business.

Pradeep Jain Chief Financial Officer Pradeep Jain is the Chief Financial Officer at Diageo India, and is a part of its Executive Committee.

Source: Company, Ventura Research

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Key Risks & Concerns

Restriction on direct promotion: Advertising by alcohol manufacturers in India is

banned, as a result the companies have to depend on surrogate advertising.

Minimum Legal age: All the states in India have legal ages varying between 18-25 years.

If these states increase the drinking age it could impact sales of alcohol.

Prohibition: Some states have banned alcohol with the objective of improving public

health and responsibility, although in the past, such bans have not been very

successful.

Irregular and High Taxation: The alcohol industry has been kept outside the purview of

GST. However, the industry would be liable to pay GST on the input raw materials,

which may impact the gross margins.

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Quarterly and Annual Performance


Rs in cr Q1FY20 Q2FY20 Q3FY20 Q4FY20 FY20 Q1FY21 Q2FY21 Q3FY21 Q4FY21 FY21 Q1FY22 Q2FY22 FY22E FY23E FY24E

Revenues 2433.1 2314.2 2587.6 1990.5 9325.4 1031.9 2196.0 2673.0 2230.4 8131.3 1721.7 2507.6 9373.4 10525.0 11820.2

RM cost 1175.1 1273.4 1434.0 1146.4 5028.9 598.6 1239.3 1376.5 1241.2 4455.6 899.5 1362.8 5061.6 5630.9 6264.7

As a % of sales 48.3% 55.0% 55.4% 57.6% 53.9% 58.0% 56.4% 51.5% 55.6% 54.8% 52.2% 54.3% 54.0% 53.5% 53.0%

Employee expense 141.9 142.3 129.3 109.4 522.9 124.0 143.3 160.2 128.9 556.4 191.5 171.1 667.7 714.4 760.9

As a % of sales 5.8% 6.1% 5.0% 5.5% 5.6% 12.0% 6.5% 6.0% 5.8% 6.8% 11.1% 6.8% 7.1% 6.8% 6.4%

Other expenses 625.6 490.4 598.6 486.7 2201.3 401.2 522.7 678.7 464.0 2066.6 442.2 504.6 2296.5 2599.7 2895.9

As a % of sales 25.7% 21.2% 23.1% 24.5% 23.6% 38.9% 23.8% 25.4% 20.8% 25.4% 25.7% 20.1% 24.5% 24.7% 24.5%

EBITDA 490.5 408.1 425.7 248.0 1572.3 (91.9) 290.7 457.6 396.3 1052.7 188.5 469.1 1347.6 1580.0 1898.7

As a % of sales 20.2% 17.6% 16.5% 12.5% 16.9% -8.9% 13.2% 17.1% 17.8% 12.9% 10.9% 18.7% 14.4% 15.0% 16.1%

Less: Depreciaton 63.0 71.2 66.0 85.1 285.3 73.9 69.3 78.9 77.0 299.1 74.3 76.3 299.9 336.8 378.2

EBIT 427.5 336.9 359.7 162.9 1287.0 (165.8) 221.4 378.7 319.3 753.6 114.2 392.8 1047.6 1243.2 1520.4

As a % of sales 17.6% 14.6% 13.9% 8.2% 13.8% -16.1% 10.1% 14.2% 14.3% 9.3% 6.6% 15.7% 11.2% 11.8% 12.9%

Less: Finance costs 58.1 50.3 50.7 52.9 212.0 55.5 55.8 42.9 33.4 187.6 25.4 6.9 56.2 84.2 94.6

Add: Other income 3.7 4.6 5.8 7.9 22.0 5.2 11.0 18.8 4.6 39.6 7.8 3.8 28.1 68.4 82.7

Add: Exceptionals 0.0 0.0 0.0 66.6 66.6 (75.0) 0.0 20.2 (9.5) (64.3) (45.3) 0.5 (44.8) 0.0 0.0

PBT 373.1 291.2 314.8 184.5 1163.6 (291.1) 176.6 374.8 281.0 541.3 51.3 390.2 974.7 1227.4 1508.6

As a % of sales 15.3% 12.6% 12.2% 9.3% 12.5% -28.2% 8.0% 14.0% 12.6% 6.7% 3.0% 15.6% 10.4% 11.7% 12.8%

Tax expense 190.8 132.7 82.0 134.2 539.7 (44.9) 51.1 94.0 77.7 177.9 1.0 103.8 245.3 308.9 379.7

Tax rate 51.1% 45.6% 26.0% 72.7% 46.4% 15.4% 28.9% 25.1% 27.7% 32.9% 1.9% 26.6% 25.2% 25.2% 25.2%

PAT before MI 182.3 158.5 232.8 50.3 623.9 (246.2) 125.5 280.8 203.3 363.4 50.3 286.4 729.4 918.5 1128.9

Add: Share from JV (0.6) (0.9) (0.8) (1.0) (3.3) (0.4) (0.4) (0.5) 0.0 (1.3) 0.0 0.0 0.0 0.0 0.0

Less: MI 20.4 5.5 (3.3) (9.1) 13.5 (5.1) (4.3) (6.7) (5.4) (21.5) (5.2) (5.4) 40.8 51.4 63.2

Consolidated PAT 202.1 163.1 235.3 58.4 658.9 (241.5) 129.4 287.0 208.7 383.6 55.5 291.8 770.2 969.9 1192.1

As a % of sales 8.3% 7.0% 9.1% 2.9% 7.1% -23.4% 5.9% 10.7% 9.4% 4.7% 3.2% 11.6% 8.2% 9.2% 10.1%

EPS (INR) 2.9 2.3 3.3 0.8 9.3 (3.4) 1.8 4.1 2.9 5.4 0.8 14.2 27.4 50.8

Networth 3728.0 4119.8 4890.0 5860.0 7052.1

BVPS (INR) 51.3 56.7 67.3 80.6 97.1

Net debt 2300.2 795.1 (39.6) (731.8) (1496.4)

Net debt/equity (x) 0.6 0.2 (0.0) (0.1) (0.2)

Net debt/EBITDA (x) 1.5 0.8 (0.0) (0.5) (0.8)

Return ratios (%)

RoE 17.7 9.3 15.8 16.6 16.9

RoCE 21.1 15.1 18.3 18.8 19.9

RoIC 21.3 15.3 21.6 24.2 27.4

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Summary of qualitative management commentary over the last few quarters

Key Criteria View Comments

Q2FY21

Business Performance NEUTRAL

Revenues down 5.1% YoY, EBITDA down 28.8% YoY, PBT down 39.4% YoY.

On-trade continued to remain closed for a good part of Q2, the off-trade channel is pretty much back to pre-COVID level.

Continued roll out of renovated brands Mc Dowell No. 1 Whisky, Royal Challenge Whisky.

Outlook and strategy POSITIVE Efforts on to promote DIY (Do-it Yourself) to promote home consumption.

Q3FY21

Business Performance POSITIVE

Revenues up 3.3% YoY, EBITDA up 7.5% YoY, PBT up 19.1% YoY.

Bars, pubs and the restaurant were operational at 85% of time but with low occupancy.

Muted Christmas and new year celebrations impacted volumes.

CRISIL has reaffirmed its AA+/positive rating.

Outlook and strategy

POSITIVE

Not prudent to provide any short-term guidance on numbers, although focus on premiumisation will continue.

Q4FY21

Business Performance POSITIVE


Alcohol behaves like a semi essential category in a consumer share of wallet. Expect to recover faster than other discretionary categories.

Repertoire consumption declined during the pandemic and people prefer big and trusted brands and the biggest SKUs.

Outlook and strategy POSITIVE

Alcohol behaves like a semi essential category in a consumer share of wallet. Expect to recover faster than other discretionary categories.

Q1FY22

Business Performance NEGATIVE

Revenues up 66.8% YoY, EBITDA down 305.1% YoY, PBT down 117.6% YoY.

Back to full operations.

Made a foray into craft whisky with the launch of Epitome Reserve, a 100% rice grain whisky.

Outlook and strategy POSITIVE

Strategic review of popular brands that we announced a couple of quarters ago is on track and will be concluded as per the stated timelines.

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Q2FY22 Business Performance

POSITIVE


Outlook on reduction of customs duty remains good as the UK-India FTA negotiations are underway.

State level excise duty reduction on BIO scotch is already happening.

Mix is improving and consequently should result in mid-to-high single-digit realization growth compared to the 2-4% seen earlier.

Outlook and strategy

POSITIVE

Management would like to have a digital focus to reach customers.

Focus on white spirits & vodka in the medium term.

Source: Company Reports & Ventura

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Financial Analysis & Projections


Figures in Rs Cr FY20 FY21 FY22E FY23E FY24E Figures in Rs Cr FY20 FY21 FY22E FY23E FY24E

Income Statement Per Share Data & Yields

Net Revenue 9325.4 8131.3 9373.4 10525.0 11820.2 Adjusted EPS 9.3 5.4 10.6 13.3 16.4

YoY Growth (%) (0.2) (12.8) 15.3 12.3 12.3 Adjusted BVPS 51.3 56.7 67.3 80.6 97.1

RM costs 5028.9 4455.6 5061.6 5630.9 6264.7 CFO per share 11.0 25.6 12.3 12.1 13.3

YoY Growth (%) 67.3 (11.4) 13.6 11.2 11.3 CFO Yield (%) 1.1 2.6 1.3 1.2 1.4

Employee Benefit Expenses 530.0 556.4 667.7 714.4 760.9 FCF per share 9.2 20.9 15.6 12.9 12.9

YoY Growth (%) (23.2) 5.0 20.0 7.0 6.5 FCF Yield (%) 0.9 2.1 1.6 1.3 1.3

Other Operating Expenses 2194.2 2066.6 2296.5 2599.7 2895.9

YoY Growth (%) (48.4) (5.8) 11.1 13.2 11.4 Solvency Ratio (X)

EBITDA 1572.3 1052.7 1347.6 1580.0 1898.7 Net Debt to Equity 0.6 0.2 (0.0) (0.1) (0.2)

YoY Growth (%) 12.8 (33.0) 28.0 17.2 20.2 Net Debt to EBITDA 1.5 0.8 (0.0) (0.5) (0.8)

Margin (%) 16.9 12.9 14.4 15.0 16.1 Interest Coverage Ratio 6.1 4.0 18.6 14.8 16.1

Depreciation & Amortization 285.3 299.1 299.9 336.8 378.2

EBIT 1287.0 753.6 1047.6 1243.2 1520.4 Working Capital Ratios

YoY Growth (%) 9.2 (41.4) 39.0 18.7 22.3 Payable Days 46.9 63.6 60.0 57.0 55.0

Margin (%) 13.8 9.3 11.2 11.8 12.9 Receivable Days 89.4 98.2 95.0 95.0 93.0

Other Income 22.0 39.6 28.1 68.4 82.7 Inventory Days 75.4 92.1 80.0 80.0 78.0

Exceptional Items 66.6 (64.3) (44.8) 0.0 0.0 Net Working Capital Days 117.9 126.7 115.0 118.0 116.0

Finance Cost 212.0 187.6 56.2 84.2 94.6 Net current assets/sales (%) (1.3) 5.7 12.9 20.1 28.1

PBT 1163.6 541.3 974.7 1227.4 1508.6

YoY Growth (%) 14.8 (53.5) 80.1 25.9 22.9 Return Ratios (%)

Margin (%) 12.5 6.7 10.4 11.7 12.8 RoE 17.7 9.3 15.8 16.6 16.9

Tax 539.7 177.9 245.3 308.9 379.7 RoCE 21.1 15.1 18.3 18.8 19.9

Tax Rate (%) 46.4 32.9 25.2 25.2 25.2 RoIC 21.3 15.3 21.6 24.2 27.4

PAT 623.9 363.4 729.4 918.5 1128.9

MI/JV 35.0 20.2 40.8 51.4 63.2 Valuation (X)

Net Proft 658.9 383.6 770.2 969.9 1192.1 P/E 104.7 179.9 91.8 72.9 59.3

YoY Growth (%) (5.9) (41.8) 100.8 25.9 22.9 P/BV 19.0 17.2 14.5 12.1 10.0

Margin (%) 7.1 4.7 8.2 9.2 10.1 EV/EBITDA 45.5 67.9 53.1 45.2 37.7

EV/sales 7.7 8.8 7.6 6.8 6.0

Balance Sheet Cash Flow Statement

Share Capital 145.3 145.3 145.3 145.3 145.3 Profit Before Tax 1160.3 540.0 974.7 1227.4 1508.6

Total Reserves 3582.7 3974.5 4744.7 5714.7 6906.8 Add: Depreciation 285.3 299.1 299.9 336.8 378.2

Shareholders' Fund 3728.0 4119.8 4890.0 5860.0 7052.1 Add: Finance Cost (net) 190.0 148.0 28.1 15.8 11.8

Minority interest (41.3) (60.9) (20.1) 31.4 94.6 Others (100.0) 133.9 (254.3) (184.1) (101.9)

Long term borrowings 14.7 2.2 0.0 0.0 0.0 Change in working capital (169.6) 803.5 89.7 (209.5) (448.1)

Long Term Provisions 8.2 9.6 9.4 10.5 11.8 Less: Tax Paid (582.8) (106.8) (245.3) (308.9) (379.7)

Deferred tax liabilities 7.6 26.1 26.1 26.1 26.1 Cash Flow from Operations 783.2 1817.7 892.9 877.5 969.0

Other non current liabilities 140.3 102.5 131.2 147.4 177.3 Net Capital Expenditure (199.8) (110.3) (26.3) (169.6) (192.5)

Total Liabilities 3857.5 4199.3 5036.5 6076.0 7361.5 Dividend /Interest/Grants 6.2 11.1 28.1 68.4 82.7

Gross Block 2948.3 3019.0 3521.0 3685.6 3873.0 Cash Flow from Investing (193.6) (99.2) 1.9 (101.2) (109.7)

Less: Accumulated Depreciation 992.4 1125.9 1411.9 1748.7 2127.0 Change in Borrowings (490.5) (1481.5) (33.1) (106.9) (145.7)

Net Block 1955.9 1893.1 2109.0 1936.8 1746.0 Finance costs (212.0) (187.6) (56.2) (84.2) (94.6)

Capital WIP 121.1 96.7 0.0 0.0 0.0 Other financial activities (37.4) (37.7) 0.0 0.0 0.0

Investments 21.9 0.0 10.0 15.0 20.0 Cash Flow from Financing (739.9) (1706.8) (89.3) (191.1) (240.3)

Loans 193.8 181.3 1424.8 1684.0 1891.2 Net Cash Flow (150.3) 11.7 805.4 585.3 618.9

Other non current assets 1688.3 1562.9 281.2 326.3 378.2 Net foreign exchange differnce 0.0 0.0 0.0 0.0 0.0

Net Current Assets (123.5) 465.3 1211.9 2113.6 3326.3 Opening Balance of Cash 216.4 66.1 77.8 883.2 1468.5

Total Assets 3857.5 4199.3 5036.5 6076.1 7361.5 Closing Balance of Cash 66.1 77.8 883.2 1468.5 2087.5

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Disclosures and Disclaimer

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guaranteed and a loss of original capital may occur. Actual results may differ materially from those set forth in projections. Forward-looking statements are not

predictions and may be subject to change without notice. We do not provide tax advice to our clients, and all investors are strongly advised to consult regarding any

potential investment. VSL, the RA involved in the preparation of this research report and its associates accept no liabilities for any loss or damage of any kind arising out

of the use of this report. This report/document has been prepared by VSL, based upon information available to the public and sources, believed to be reliable. No

representation or warranty, express or implied is made that it is accurate or complete. VSL has reviewed the report and, in so far as it includes current or historical

information, it is believed to be reliable, although its accuracy and completeness cannot be guaranteed. The opinions expressed in this document/material are subject

to change without notice and have no obligation to tell you when opinions or information in this report change. This report or recommendations or information

contained herein do/does not constitute or purport to constitute investment advice in publicly accessible media and should not be reproduced, transmitted or published

by the recipient. The report is for the use and consumption of the recipient only. This publication may not be distributed to the public used by the public media without

the express written consent of VSL. This report or any portion hereof may not be printed, sold or distributed without the written consent of VSL. This document does

not constitute an offer or invitation to subscribe for or purchase or deal in any securities and neither this document nor anything contained herein shall form the basis

of any contract or commitment whatsoever. This document is strictly confidential and is being furnished to you solely for your information, may not be distributed to

the press or other media and may not be reproduced or redistributed to any other person. The opinions and projections expressed herein are entirely those of the

author and are given as part of the normal research activity of VSL and are given as of this date and are subject to change without notice. Any opinion estimate or

projection herein constitutes a view as of the date of this report and there can be no assurance that future results or events will be consistent with any such opinions,

estimate or projection. This document has not been prepared by or in conjunction with or on behalf of or at the instigation of, or by arrangement with the company or

any of its directors or any other person. Information in this document must not be relied upon as having been authorized or approved by the company or its directors

or any other person. Any opinions and projections contained herein are entirely those of the authors. None of the company or its directors or any other person accepts

any liability whatsoever for any loss arising from any use of this document or its contents or otherwise arising in connection therewith. The information contained herein

is not intended for publication or distribution or circulation in any manner whatsoever and any unauthorized reading, dissemination, distribution or copying of this

communication is prohibited unless otherwise expressly authorized. Please ensure that you have read “Risk Disclosure Document for Capital Market and Derivatives

Segments” as prescribed by Securities and Exchange Board of India before investing in Securities Market.

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