Detailed Rationale

CRISIL Ratings has reaffirmed its ‘CRISIL AAA/Stable’ rating on the long-term bank facilities of United Spirits Ltd (USL) while reassigning its ‘CRISIL A1+’ rating to the short-term bank facilities.

 

The rating reflects the strong financial risk profile of USL, minimal debt, accruals of ~Rs 1,000 crore and modest capital expenditure (capex) plans of ~Rs 200 crore. The rating  also factors the leadership position of USL in the domestic Indian-made foreign liquor (IMFL) segment along with strong operating efficiency.

 

Operating performance has improved in the first nine months of fiscal 2024 with revenues increasing by 5.3% year-on-year, along with improvement in the operating margin by ~500 basis points to 19.5% from 14.6% driven by operational efficiencies, change in product mix (increasing contribution of higher margin products) and lower other expenses. Sales volumes have declined in fiscal 2024 mainly due to few brands under popular segment. However, on like-to-like basis, volumes are expected to grow by 1-2%. CRISIL Rating expects revenue growth to remain healthy at ~10% in fiscal 2024 driven by improving realisations and higher focus on Prestige & Above segment. Margin is expected to sustain over 16% during the medium term, aided by various measures undertaken over the past several years including premiumisation of products and leveraging of fixed overheads.

 

The ratings continue to reflect a leadership position in the spirits industry in India, strong and diversified product portfolio, and operational and technical support it receives from its parent, Diageo Plc (rated 'A-/Stable/A2' by S&P Global Ratings [S&P]). These strengths are partially offset by exposure to regulated nature of the industry.

Analytical Approach

For arriving at the ratings, CRISIL Ratings has combined the business and financial risk profiles of USL and its subsidiaries as they are in the same line of business and have a common management. The ratings also factor in the support USL receives from its ultimate parent, Diageo Plc, which holds 55.88% stake in the company.

 

Please refer Annexure - List of Entities Consolidated, which captures the list of entities considered and their analytical treatment of consolidation.

Key Rating Drivers & Detailed Description

Strengths:

• Leadership position in the spirits industry in India: USL is one of the top players in the Indian spirits industry, driven by its strong brand equity, wide product portfolio across product categories as well as price points and Pan India presence. The company has a strong distribution network and point-of-sale coverage; it operates via over 70,000 outlets across India. It has 14 own operational manufacturing facilities across eight states in India. These are in addition to many third-party facilities producing alcoholic beverages for USL.

 

• Strong and diversified product portfolio with established brands: USL benefits from strong brand awareness with a diverse range of products across various price points operating in all segments of popular, prestige, premium and luxury. The company has nine brands that sell more than a million cases each year, of which one brand sells more than 25 million cases annually. Its portfolio also includes several global brands such as Johnnie Walker, Baileys, Smirnoff etc. as well as a solid portfolio of local brands and premium products. USL has also entered the craft segment under brands such as Epitome Reserve and Godawan.

 

• Operational and technical support it receives from parent, Diageo Plc: USL shares strong linkages with the Diageo group (holding 55.88% stake), which has complete management control over the entity. There are strong business synergies with the implementation of global best practices across functions. USL also has access to some of the premium brands of Diageo (Johnnie Walker, Smirnoff, Baileys etc.) and also receives strong management and operational support from the parent.

 

Weakness:

• Exposure to regulated nature of industry: USL remains exposed to regulated nature of the industry due to restrictions by state governments on production, movement and sale of spirits. The distribution remains highly controlled by government in most of the states while in some of the states, pricing is also controlled. The company remains exposed to changing regulatory environment. In the past, fiscal 2018 was a disruptive year for the industry owing to implementation of the Goods and Services Tax and the Supreme Court ruling to ban liquor vendors within 500 metre of national and state highways impacted 30,000 stores (30-40% of total liquor vendors). Similarly, the industry has also seen complete ban on liquor sale by some of the states in the past. However, this is partly offset by Pan-India presence of USL and the regulations largely driven by the respective states.

Liquidity: Superior

Liquidity is likely to remain healthy. In the absence of any repayment obligation, cash accrual – projected of over Rs 1,000 crore for fiscals 2024 and 2025 (without factoring dividend payout) should aid financial flexibility. Cash and cash equivalents were Rs 1,985 crore as on December 31, 2023. The utilisation of fund-based limit was minimal (less than 10% on average over the 12 months through December 2023). The surplus cash available in the form of cash accrual, bank lines and cash and cash equivalents should be sufficient to meet the yearly capex of ~Rs 200 crore and incremental working capital requirement.

 

ESG Profile:

CRISIL Ratings believes that the Environment, Social, and Governance (ESG) profile of USL supports its already strong credit risk profile.

 

The alcohol sector has a moderate environmental impact, primarily driven by its raw material sourcing strategies and water intensive processes. It also has a moderate social impact due to aspect related to alcohol abuse, underage consumption as well as risk of government intervention including restriction on sales, regulation of marketing practices, higher tax etc. USL’s strong focus on addressing these risks supports the already strong credit risk profile of USL.

 

Key ESG Highlights:

• USL aims to have its operations powered by 100% renewable electricity by 2030. Till date, USL has already achieved 98.6% renewable electricity through in-house steam turbines, bio-gas engines and solar plants
• USL has reduced greenhouse gas emissions by 89% in fiscal 2023 and eliminated the use of coal across distillery operations
• USL aims to use 40% less water than today for every drink it makes by 2030 and replenish more water than it uses in all its water-stressed areas by 2026; it reported 44% improvement in water efficiency in distilleries and by 30% in packaging in fiscal 2023 against target of 40% by 2030
• As part of its Society 2030 targets, USL is working to increase representation of women to 33% within the organisation and 50% in USL’s Leadership Team
• To address the issues of alcohol abuse and underage drinking, USL has consistently undertaken corporate actions--including offering educational programs and upholding a marketing code of conduct--to address these social concerns
• USL’s governance structure is characterized by majority of board comprising of independent directors, presence of non-executive chairman, split in chairman and CEO position, and extensive disclosures

 

ESG is gaining importance among investors and lenders. USL’s commitment to ESG will play a key role in enhancing stakeholder confidence, given shareholding by foreign portfolio investors and access to both domestic and foreign capital markets.

Outlook: Stable

USL will continue to benefit from its leading market position and healthy operating efficiencies along with ongoing support from the parent.

Rating Sensitivity factors

Downward factors:

• Downgrade in rating of parent by S&P or change in stance of support from the parent
• Operating performance adversely affected, with operating margin below 10% on a sustained basis
• Debt-funded capex/acquisition, leading to net debt to Ebitda ratio over 1.5 times on a sustained basis

About the Company

USL is the largest Indian spirits company that manufactures, sells and distributes beverage alcohol, producing and selling around 60 million cases of Scotch whisky, IMFL whisky, brandy, rum, vodka, gin and wine. Its portfolio of over 15 brands includes McDowell's No.1, Royal Challenge, Signature, and Antiquity as well as Diageo’s iconic brands such as Johnnie Walker, VAT 69, Black & White, Smirnoff and Ciroc.

Key Financial Indicators (Consolidated)*

As on/for the period ended March 31		2023	2022
Operating income	Rs crore	10375	9423
PAT	Rs crore	1126	811
PAT margin	%	10.9	8.6
Adjusted debt/adjusted networth	Times	0.00	0.08
Adjusted interest coverage	Times	14.1	17.0

*As per analytical adjustments made by CRISIL Ratings

Any other information: Not Applicable

Annexure - Details of Instrument(s)

ISIN	Name of the instrument	Date of Allotment	Coupon Rate (%)	Maturity Date	Issue size (Rs.Crore)	Complexity Level	Rating assigned with outlook
NA	Fund-Based Facilities&	NA	NA	NA	250	NA	CRISIL AAA/Stable
NA	Fund-Based Facilities	NA	NA	NA	10	NA	CRISIL AAA/Stable
NA	Fund-Based Facilities&	NA	NA	NA	140	NA	CRISIL AAA/Stable
NA	Fund-Based Facilities	NA	NA	NA	50	NA	CRISIL AAA/Stable
NA	Fund-Based Facilities&	NA	NA	NA	350	NA	CRISIL AAA/Stable
NA	Fund-Based Facilities&	NA	NA	NA	350	NA	CRISIL AAA/Stable
NA	Fund-Based Facilities&	NA	NA	NA	150	NA	CRISIL AAA/Stable
NA	Non-Fund Based Limit^	NA	NA	NA	10	NA	CRISIL A1+
NA	Non-Fund Based Limit	NA	NA	NA	40	NA	CRISIL A1+

& - Interchangeable with non-fund based limit

^ - Interchangeable with fund based limit

Annexure – List of entities consolidated

Names of Entities Consolidated	Extent of Consolidation	Rationale for Consolidation
Asian Opportunities & Investments Ltd	Fully consolidated	Same business and close business linkages
Palmer Investment Group Ltd	Fully consolidated	Same business and close business linkages
Shaw Wallace Overseas Ltd	Fully consolidated	Same business and close business linkages
USL Holdings Ltd	Fully consolidated	Same business and close business linkages
USL Holdings (UK) Ltd	Fully consolidated	Same business and close business linkages
United Spirits (UK) Ltd	Fully consolidated	Same business and close business linkages
United Spirits (Great Britain) Ltd	Fully consolidated	Same business and close business linkages
McDowell & Co. (Scotland) Ltd	Fully consolidated	Same business and close business linkages
Royal Challengers Sports Pvt Ltd	Fully consolidated	Same business and close business linkages
United Spirits (Shanghai) Trading Company Ltd @	Fully consolidated	Same business and close business linkages
Sovereign Distilleries Ltd @@	Fully consolidated	Same business and close business linkages
United Spirits Singapore Trading Pte Ltd (Formerly known as Whyte and Mackay Singapore Pte Ltd) $	Fully consolidated	Same business and close business linkages

@Ceased to be a subsidiary wef January 12, 2023

@@ Divested on January 24, 2023

$Ceased to be a subsidiary wef November 04, 2022