Rating Rationale
December 13, 2018 | Mumbai
United Spirits Limited
Ratings Reaffirmed
 
Rating Action
Total Bank Loan Facilities Rated Rs.3925 Crore
Long Term Rating CRISIL AA+/Stable (Reaffirmed)
Short Term Rating CRISIL A1+ (Reaffirmed)
 
Rs.750 Crore Non Convertible Debentures CRISIL AA+/Stable (Reaffirmed)
Rs.1500 Crore Commercial Paper Programme CRISIL A1+ (Reaffirmed)
1 crore = 10 million
Refer to annexure for Details of Instruments & Bank Facilities
Detailed Rationale

CRISIL has reaffirmed its 'CRISIL AA+/Stable/CRISIL A1+' ratings to the bank facilities and debt programme of United Spirits Limited (USL).
 
The ratings continues 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. These strengths are partially offset by vulnerability to changing regulatory environment and average financial risk profile.
 
Net sales in fiscal 2018 was marginally impacted due to unprecedented regulatory headwinds; combined with route to market changes - that occurred in a few states, net sales declined in fiscal 2018 to Rs 8,591 crore from Rs 8,818 crore in fiscal 2017, mainly due to franchising of the popular segment sales in several states. However, EBITDA (earnings before interest, depreciation and amortization) increased to Rs 1419 crore from Rs 1094 crore over the same period. In the first half of fiscal 2019, reported net sales has increased by 14%, primarily driven by the continued strong performance of prestige and above segment.
 
Financial risk profile has steadily improved since takeover by Diageo, with gearing improving to 1.41 times in fiscal 2018 from 2.32 times in fiscal 2017 driven by the deleveraging effort of the company. Consequently, the capital structure has also improved significantly and is expected to improve further over the medium term.

Analytical Approach

For arriving at the rating, CRISIL has combined the business and financial risk profiles of USL and its 18 subsidiaries as they are in the similar line of business and have close strategic linkages with USL. Please refer table 1, which captures the list of entities considered and their analytical treatment of consolidation.
 
The rating also factors in the benefits of being a subsidiary of Diageo which holds 54.78% stake in the company. CRISIL believes that USL will, in case of exigencies, receive support from Diageo for timely repayment of debt obligations, considering USL is strategically important to Diageo's growth plans as it is in same line of business.

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

Key Rating Drivers & Detailed Description
Strengths
* Operational and technical support received from parent, Diageo: USL's credit profile benefits from being a part of Diageo group. Post take over, for all practical purposes USL is identified as 'Diageo India' by the group even though officially the name has not been changed.
 
Diageo has focused on improving product quality, brand equity, channel management, and working capital efficiency, along with driving premiumisation of the portfolio. Moreover, USL is critical, as evidenced by focus of global management to reap benefits in the Indian market. Although USL currently contributes only 8.7% of group's net sales, USL is central to the group's growth strategy.
 
USL also receives strong management and operational support from Diageo in addition to the strong financial flexibility, business synergies and strengthened governance structure as reflected in common bankers and declining interest and finance cost over the years. 
 
Diageo, through a series of transactions and open offers, has acquired 54.78% stake in USL.
 
CRISIL believes USL will remain strategically important to Diageo, and thus will continue to receive strong management and operational support from the parent. The rating of USL though will remain sensitive to the credit profile of the parent.
 
* Leadership position in the spirits industry in India: USL's strong brand equity, leading position in the Indian spirits markets, solid revenue base, and strong profitability, as well as its broad spread of products across categories and price points and well-balanced geographic presence, underpin our assessment of the group's business risk profile as excellent.
 
Owing to its comfortable business risk profile, performance in fiscal 2018 was resilient (leading to only 2.6% decline in net sales) despite unprecedented headwinds for the industry, including but not limited to the highway ban and the implementation of GST, in addition to a change in business model adopted by the company. As the operating environment has stabilised, in the first half of fiscal 2018-2019 company has recorded healthy net sales growth of 14% with healthy EBITDA margins of 14.7%.
 
CRISIL expects revenue to grow at a healthy pace on the back of established position in the domestic spirits market, focus on premiumisation, favourable demand outlook and support from the parent.
 
* Strong and diversified product portfolio with established brands: USL benefits from strong brand awareness of its diverse portfolio of well-recognised brands across several categories, and a growing share in the premium segment. The company has an outstanding portfolio of premium brands such as Johnnie Walker, Black Dog, Black & White, VAT 69, Smirnoff, Antiquity, Signature, Royal Challenge and McDowell's No.1 amongst others.
 
The company's focus on premiumisation in the recent years has led to the share of Prestige and Above (P&A) portfolio growing to 63% of net sales (in value terms) in fiscal 2018 from 53% in fiscal 2016. Moreover, operating margin has also improved in the first half of Fiscal 2019 on account of better product mix, franchising of the popular brands in non-priority states, and consistent focus on productivity initiatives (such as integration of supply chain and standardised bottles).
 
CRISIL expects the company to steadily improve its margins, as USL further leverages on its strategy of prioritising premium brands over regular brands.
 
Weakness
* Moderate though improving financial risk profile: Post acquisition by Diageo, the management had focused on deleveraging its balance sheet by divesting its stake in non-strategic subsidiaries and sale of non-core assets over the past few years. CRISIL expects, the de-leveraging to continue as the management intends to further monetise non-core assets over the medium term. In first half of fiscal 2019 the standalone net debt reduced by over 600 crore to around Rs 2,600 crore.
 
Moreover, with improving accrual, the de-leveraging is expected to continue thereby improving the overall credit metrics. Moreover, management's focus on improving working capital management and further divestment of non-core assets will likely aid the deleveraging process.
 
* Vulnerability to changing regulatory environment: Fiscal 2018 was a disruptive year for the industry on account of a national ban on liquor vendors within proximity to highways as well as GST implementation. However, USL has shown resilience in the face of these regulatory headwind, as reflected in healthy profitability margins in fiscal 2018enabled by its productivity programme, relentless focus on, premiumisation, and shift to franchisee model of popular segment in certain states.
Outlook: Stable

CRISIL believes that USL will maintain its leadership position in the spirits industry over the medium term, supported by its strong and diversified product portfolio and the operational and technical support it receives from its parent leading to improvement in profitability. In addition, the capital structure is expected to improve with growth in accruals.
 
Upward Scenario
* Significant improvement in operational performance on back of increasing proportion of P&A segment, adoption of franchisee model and rationalization of cost.
* Higher than expected reduction in debt leading to improved capital structure on the back of improving profitability.
* Higher than expected support from Diageo Plc.
 
Downward Scenario
* Lower than anticipated operational performance due to adverse regulatory policies impacting the business profile
* Weakening in capital structure or debt protection metrics, on back of higher than anticipated capex or stretch in working capital
* Rating will remain sensitive to credit profile or change in stance of support of the parent
 
Liquidity
USL enjoys healthy liquidity driven by expected cash accruals of more than Rs 750 crore per annum in fiscal 2019 and fiscal 2020 and cash and cash equivalents of Rs 330 crore as on March 31, 2018. USL also has access to fund based limits of Rs 4450 crore, utilized to the tune of 26% on an average over the 12 months ended September 2018. The company has long term repayment obligations around Rs 359 crore in fiscal 2019 with capex of around Rs 200 crore per annum expected to finance through internal accruals. Outstanding CP to the tune of Rs 360 crore as on September 30, 2018 is backed by unutilized bank lines and is expected to be rolled over on maturity. Its bank lines are expected to meet its incremental working capital requirements.

About the Company

USL is the country's leading beverage alcohol company and a subsidiary of global leader Diageo Plc. The company manufactures, sells and distributes an outstanding portfolio of premium brands such as Johnnie Walker, Black Dog, Black & White, VAT 69, Smirnoff, Antiquity, Signature, Royal Challenge and McDowell's No.1 amongst others.
 
Headquartered in Bengaluru, the wide footprint is supported by a committed team of over 4000 employees, 51manufacturing facilities across states and union territories in India as on Sep-18, a strong distribution network and a state-of-the-art Technic Centre.

Key Financial Indicators *
As on/for the period ended March 31 2018 2017
Net Sales Rs crore 8591 8818
Profit after tax Rs crore 652 93
PAT margins % 7.4 1.1
Adjusted debt/Adjusted networth Times 1.41 2.32
Interest coverage Times 5.24 2.92
*Consolidated

Any other information: Not applicable

Note on complexity levels of the rated instrument:
CRISIL complexity levels are assigned to various types of financial instruments. The CRISIL complexity levels are available on www.crisil.com/complexity-levels. Users are advised to refer to the CRISIL 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)
ISIN Name of instrument Date of allotment Coupon rate (%) Maturity date Issue size (Rs crore) Rating assigned with outlook
NA Commercial paper NA NA 7-365 days 1500.00 CRISIL A1+
INE854D08011 Non-Convertible Debentures 28-Dec-2017 7.45 28-Dec-2020 750.00 CRISIL AA+/Stable
NA Fund-Based Facilities** NA NA NA 2925.00 CRISIL AA+/Stable
NA Non-Fund Based^ Limit NA NA NA 500.00 CRISIL A1+
NA Proposed Fund-Based Bank Limits NA NA NA 500.00 CRISIL AA+/Stable
**Interchangeable with non-fund based limits
^ Interchangeable with fund based limits
 
Annexure - Entities consolidated with USL
Fully consolidated entities:
Asian Opportunities & Investments Limited, Palmer Investment Group Limited, Tern Distilleries Private Limited, Shaw Wallace Overseas Limited, UB Sports Management Overseas Limited (Formerly known as JIHL Nominees Limited), Montrose International S.A, USL Holdings Limited, USL Holdings (UK) Limited, United Spirits (UK) Limited, United Spirits (Great Britain) Limited, Four Seasons Wines Limited, McDowell & Co. (Scotland) Limited, Royal Challengers Sports Private Limited, Liquidity Inc, United Spirits (Shanghai) Trading Company Limited, Sovereign Distilleries Limited, Pioneer Distilleries Limited, United Spirits Singapore Trading Pte Ltd (Formerly known as Whyte and Mackay Singapore Pte Ltd).
Annexure - Rating History for last 3 Years
  Current 2018 (History) 2017  2016  2015  Start of 2015
Instrument Type Outstanding Amount Rating Date Rating Date Rating Date Rating Date Rating Rating
Commercial Paper  ST  1500.00  CRISIL A1+  30-11-18  CRISIL A1+  14-11-17  CRISIL A1+    --    --  -- 
            25-10-17  CRISIL A1+           
Non Convertible Debentures  LT  750.00
12-12-18  		CRISIL AA+/Stable  30-11-18  CRISIL AA+/Stable  14-11-17  CRISIL AA+/Stable    --    --  -- 
Fund-based Bank Facilities  LT/ST  3425.00  CRISIL AA+/Stable  30-11-18  CRISIL AA+/Stable  14-11-17  CRISIL AA+/Stable    --    --  -- 
Non Fund-based Bank Facilities  LT/ST  500.00  CRISIL A1+  30-11-18  CRISIL A1+  14-11-17  CRISIL A1+    --    --  -- 
All amounts are in Rs.Cr.
Annexure - Details of various bank facilities
Current facilities Previous facilities
Facility Amount (Rs.Crore) Rating Facility Amount (Rs.Crore) Rating
Fund-Based Facilities ** 2925 CRISIL AA+/Stable Fund-Based Facilities** 2925 CRISIL AA+/Stable
Non-Fund Based Limit ^ 500 CRISIL A1+ Fund-Based Facilities 975 Withdrawn
Proposed Fund-Based Bank Limits 500 CRISIL AA+/Stable Non-Fund Based Limit^ 500 CRISIL A1+
-- 0 -- Proposed Fund-Based Bank Limits 500 CRISIL AA+/Stable
Total 3925 -- Total 4900 --
**Interchangeable with non-fund based limits
^ Interchangeable with fund based limits
Links to related criteria
CRISILs Approach to Financial Ratios
Rating criteria for manufaturing and service sector companies
CRISILs Criteria for Consolidation
Criteria for Notching up Stand Alone Ratings of Companies based on Parent Support

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