| United Spirits Limited | ||||||
| Long-term rating upgraded to 'CRISIL AAA/Stable'; short-term rating reaffirmed; debt instruments withdrawn | ||||||
| Rating Action | ||||||
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| 1 crore = 10 million | ||||||
| Refer to Annexure for Details of Instruments & Bank Facilities |
Detailed Rationale CRISIL Ratings has upgraded its rating on the long-term bank facilities of United Spirits Limited (USL) to ‘CRISIL AAA/Stable’ from ‘CRISIL AA+/Positive’; while reaffirming its ‘CRISIL A1+’ rating on the short-term bank facilities.
CRISIL Ratings has also withdrawn its rating on Rs 750 crore non-convertible debentures, Rs 500 crore commercial paper programme and Rs 1,125 crore of bank loan facilities of USL based on client request and on receipt of independent confirmation and requisite documents. The withdrawal is in line with the CRISIL Ratings’ policy of withdrawal.
The upgrade reflects a belief that the financial risk profile of USL will improve in the near term, given significant deleveraging achieved, strong cash accrual of around Rs 1,000 crore and modest capital expenditure (capex) plans of around Rs 250 crore while sustaining the leadership position in domestic Indian-made foreign liquor (IMFL) segment along with strong operating efficiency.
The company has repaid its entire long-term loan and reduced working capital debt, thereby improving the capital structure; gearing reduced to 0.19 time as on September 30, 2021, as compared to 0.73 time as on March 31, 2020. Similarly, the net debt to EBITDA (earnings before interest taxes depreciation and amortisation) improved to 0.5 time during the first half of fiscal 2022 as compared to 0.7 time and 1.5 times during fiscals 2021 and 2020, respectively.
Operating performance also improved significantly after gradual reopening of the economy from the second quarter of last fiscal. Operating income increased by 31% on-year during the first half of fiscal 2022, while the operating margin increased to 15.5% from 6.6% due to higher fixed cost absorption despite marginal rise in the raw material prices. The operating margin is expected to sustain over 15% during the medium term, driven 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 55.94% 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:
USL has around 25% share 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.
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 McDowell’s No 1 (brandy), Celebration (Rum), Blue Riband (Gin), Romanov, as well as a solid portfolio of local brands and premium products. The company has also entered the Indian craft segment under the brand, Epitome Reserve, which is India’s first 100% rice grain whisky.
USL shares strong linkages with the Diageo group (holding 55.94% stake), which has complete management control over the entity. There are strong business synergies with the implementation of global best practices across functions while USL also has access to some of the premium brands of Diageo (such as Johnnie Walker, Smirnoff and Baileys). The company also receives strong management and operational support from the parent. Further, the company is planning to enter into the craft beer segment in India using the brand, Guinness, which is one of the globally recognised brands of Diageo.
Weakness:
USL remains exposed to regulated nature of the industry due to restrictions by the state governments on production, movement and sale of spirits. The distribution remains highly controlled by the 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. Fiscals 2020 and 2021 saw significant increase in excise duty across various states, which also impacted the operating performance. 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 the 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 at around Rs 1,000 crore per annum for fiscals 2022 and 2023 – should aid financial flexibility. Cash and cash equivalents were Rs 64 crore as on September 30, 2021. The fund-based limit of Rs 2,675 crore was barely utilised, at 20% on an average over the 12 months through September 2021. The surplus cash available in cash accrual, bank lines and cash and cash equivalents should be sufficient to meet the yearly capex of around Rs 250 crore and incremental working capital requirement. |
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
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About the Company USL is the largest Indian spirits company that manufactures, sells and distributes beverage alcohol, producing and selling around 80 million cases of Scotch whisky, IMFL whisky, brandy, rum, vodka, gin and wine. Its portfolio of over 80 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.
For the six months through September 2021, the company reported consolidated profit after tax (PAT) of Rs 337 crore on operating income of Rs 4,229 crore against loss of Rs 199 crore on operating income of Rs 3,228 crore for the corresponding period of the previous fiscal. |
Key Financial Indicators (Consolidated)*
*As per analytical adjustments made by CRISIL Ratings | ||||||||||||||||||||||||
Any other information: Not applicable |
| Note on complexity levels of the rated instrument: CRISIL Ratings' complexity levels are assigned to various types of financial instruments. The CRISIL Ratings' complexity levels are available on www.crisil.com/complexity-levels. Users are advised to refer to the CRISIL Ratings' complexity levels for instruments that they consider for investment. Users may also call the Customer Service Helpdesk with queries on specific instruments. |
Annexure - Details of Instrument(s)
*Interchangeable with non-fund-based limit ^Interchangeable with fund-based limit |
Annexure – List of entities consolidated
* - Montrose International ceased to be a subsidiary with effect from April 16, 2021. ** USL sold its entire stake (equity shares) and compulsory convertible preference shares through a share purchase agreement on August 03, 2021 |
| Annexure - Rating History for last 3 Years | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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| All amounts are in Rs.Cr. | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Annexure - Details of Bank Lenders & Facilities | |||||||||||||||||||||||||||||||||||||||||||||||||||
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*Interchangeable with non-fund-based limit
^Interchangeable with fund-based limit
Criteria Details
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