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High ad spends weigh on margin; watchful of policy changes

• United Spirits (UNSP) reported revenue growth of 8% YoY (in line) in 1QFY26, with total volume growth of 9.4% (beat). It was supported by UNSP’s re-entry into AP (since Sep’24), along with continued innovation, renovation, and other initiatives. The Prestige & Above (P&A) segment clocked volume and value growth of 9% each. The Popular segment posted 11.6% volume growth and 13.6% revenue growth.
• The price mix was flat given soft demand at the top end, along with seasonality of the business in 1QFY26. The price mix, excluding AP, was 2.3% YoY.
• Gross margin contracted 50bp YoY to 44% (in line). Excluding the one-off impact of INR400m, gross margin expanded by 110bp YoY, backed by efficiency gains and stable RM prices. EBITDA margin contracted by 320bp YoY to 16.3% (in line), impacted by higher A&P spends. Going ahead, we model ~18% EBITDA margin in FY26 and FY27.
• UNSP’s re-entry into AP contributed to its incremental volumes. We model a 9% revenue CAGR over FY25-28E. Given the rich valuations, we maintain our Neutral rating with a TP of INR1,500, based on 50x Jun’27E standalone EPS and an additional INR250/share for its RCB and other non-core assets.

In-line performance; higher A&P spends dent margin

• Volume up 9.4%: Standalone net sales grew 8% YoY to INR25.5b (est. INR25b). P&A revenue (90% revenue mix) was up 9% YoY and popular revenue grew by 14% YoY. The growth was driven by UNSP’s re-entry into AP, along with continued innovation, renovation, and revenue growth management initiatives. Total volume rose 9%, with P&A volume up 9% YoY (9% in 4Q) to 12.6m cases (est. 12.1m cases) and Popular volume up 12% YoY to 2.4m cases (est. 2.3m cases).
• Margins contract: Gross margin contracted 50bp YoY to 44% (est. 44.5%). Excluding the one-off indirect tax impact of INR400m in 1Q, underlying gross profit rose 11% and gross margin expanded by 110bp YoY, supported by steady revenue growth management initiatives, productivity gains, and relatively stable COGS inflation. A&P spends rose 36% YoY, employee costs were up 2% YoY, and other expenses increased by 19% YoY. EBITDA margin contracted by 320bp YoY to 16.3% (est. 16.8%) due to higher A&P spends.
• Pressure on profits: EBITDA was down 9% YoY at INR4.2b (est. INR4.2b). Underlying EBITDA (excluding the one-off impact) was down 0.7% YoY. PBT fell 11% YoY to INR3.6b (est. INR3.8b). APAT declined marginally by 1% YoY to INR3.0b (est. INR2.9b).

Highlights from the management commentary

• UNSP remains optimistic about domestic consumption given an upbeat monsoon and some early signs of urban consumption recovery.
• The Maharashtra excise duty hike has resulted in MRP spike in the range of 30- 40%. Maharashtra contributes in mid- to high-teens to UNSP in value terms. It is too early to comment on new developments.
• UNSP is seeing progressive policy changes in some states like UP, MP, and Jharkhand.
• ENA and glass were stable in the quarter. However, UNSP expects ENA prices to inch up as the new ethanol policy is announced by the government around SepOct’25.
• The one-off tax provision of INR400m spans over a five-year period, so on an annualized basis, it will be INR60-80m.
• Management expects EBIT growth to moderate but still aims to keep it slightly ahead of revenue growth.

Valuation and view

• We keep our EPS estimates largely unchanged for FY26 and FY27. The improvement in margins is supported by a favorable shift toward premium products and effective cost-control measures. We model ~18% EBITDA margin in FY26 and FY27.
• UNSP sold a large part of its Popular portfolio to focus on its global strategy for the premium portfolio. The liquor industry is currently witnessing an upgrading trend, which aligns well with UNSP’s renewed emphasis on P&A, supporting the long-term liquor upgrading narrative in India.
• We remain watchful of any developments happening in Maharashtra as it contributes mid- to high-teens to UNSP in value terms. That said, liquor policies in many states are becoming more favorable, driving consumer upgrades and increased frequency. UNSP is well positioned to capitalize on this large opportunity.
• The company’s re-entry into AP has contributed to its incremental volumes. We model a 9% revenue CAGR over FY25-28E. Given the rich valuations, we maintain our Neutral rating with a TP of INR1,500, based on 50x Jun’27E standalone EPS and an additional INR250/share for its RCB and other non-core assets.

Highlights from the management commentary Operational environment and outlook

• Management indicated that discretionary consumption remains tepid. That said, early indicators suggest that consumer spending is growing in mid-teens, which is encouraging. However, UNSP requires 30-35% growth in consumer spending to be revenue neutral.
• UNSP remains optimistic about domestic consumption given an upbeat monsoon and some early signs of urban consumption recovery.
• The Maharashtra excise duty hike has resulted in MRP spike in the range of 30- 40%. Maharashtra contributes in mid- to high-teens to UNSP in value terms. It is too early to comment on new developments.
• UNSP is seeing progressive policy changes in some states like UP, MP, and Jharkhand.
• Quarterly growth, excluding Andhra Pradesh, was 3.2% both for the total portfolio and P&A segment. UNSP stated that as demand moderated at the top end and in line with seasonality of the business, its price mix was flat during the quarter. Price mix for the quarter, excluding AP, was 2.3% YoY.
• AP contributed 8% to the overall 9% volume growth in P&A and popular segments. Excl. AP, overall growth was 1.7% and P&A was 2.7%.
• The UK FTA is expected to benefit both the BII and Bottled in Origin (BIO) segments. The company has a long inventory pipeline for imported products, which will be launched when benefits from import duty reductions are realized.
• Premiumization, innovation, and format-led recruitment continue to be UNSP’s key growth levers.
• UNSP remains optimistic about the medium-term opportunity to lead India's Alcobev premiumization curve with differentiated and tailored opportunities.
• UNSP has completed the acquisition of Now Spirits in 1Q, which has brought brands like Greater Than and Hapusa into UNSP’s portfolio. Maharashtra policy change
• On the MML policy, UNSP stated that states, like Rajasthan and UP, have experimented with similar policies; however, due to limited success, they were rolled back. UNSP is uncertain if Maharashtra will roll back the same.
• UNSP has not entirely passed on the duty hikes and has absorbed some. For example, in the middle prestige level, it has absorbed significant pricing action, and in lower prestige, it has marginally absorbed. In popular, it passed on everything as there was a minimum price requirement.
• During the Maharashtra excise duty changes, the company deliberately kept inventory levels low and cleaned their pipeline due to lack of clarity.
• UNSP remains cautiously optimistic about Maharashtra’s demand outlook and will reallocate resources to optimize growth and offset the expected decline in the state.
• After the excise duty change, UNSP has not seen any aggressive spike in competitive intensity.
• Maharashtra’s contribution to the overall portfolio is in the mid-to-high single digits.

Costs and Margins

• ENA and glass were stable in the quarter. However, UNSP expects ENA prices to inch up as the new ethanol policy is announced by the government around SepOct’25.
• Glass inflation was mitigated through alternative sourcing, alternative packaging solutions and long-term vendor contracts, which contributed positively to cost and gross margin. That said, UNSP expects some supply-related disruptions in the upcoming quarters in glass owing to planned shutdowns by key suppliers in East and West India.
• The one-off tax provision of INR400m spans over a five-year period, so on an annualized basis, it will be INR60-80m. UNSP is working on neutralizing this amount.
• The marketing reinvestment rate during the quarter was 9.3% of net sales. Management indicated that while it may appear elevated for a seasonally low quarter, it is a conscious step taken to build brand visibility throughout the year. The company plans to maintain A&P spends at 9.5-10% of sales.
• Management expects EBIT growth to moderate but still aims to keep it slightly ahead of revenue growth. Brands/new launches/re-launches
• In Upper Prestige, signature-making high-sales in high salience, RCAP entered the CSD channel, boosting institutional access.
• In Mid Prestige, Royal Challenge delivered double-digit growth and performed competitively, led by cultural activations like Bold Share Me and India's first AlKhabib e-sports campaign. That format innovation on Royal Challenge has scaled up effectively and is delivering healthy double-digit YoY growth across the launch stage.
• The Pocket pack provides consumer penetration through convenience, enables productivity realization, and significantly reduces the carbon footprint.
• Newly launched McDowell's Double Oaked Barrel has been well received by customers. The 180ml pack format further supports penetration and trials. Consumer feedback on smoothness and premium value has been very encouraging, as per the management.
• McDowell X series sustains its momentum, especially in the eastern states, and is helping UNSP gain share in the wide experience.
• The India single malt, Godawan continues to register strong growth, supported by the recent launch at the Bangalore duty-free and other markets, and strong traction in the CSD channel. Its UK debut included listings at Selfridges and SodaSquare.
• In the White's portfolio, the recently launched Smirnoff flavors exceeded UNSP’s internal benchmarks across Haryana, Maharashtra, Karnataka, Goa, and UP. Don Julio recorded strong double-digit growth, driven by customer activations. It remains a front-runner in the fast-growing luxury tequila segment, and is improving sequentially.

Valuation and view

• We keep our EPS estimates largely unchanged for FY26 and FY27. Margin improvement is supported by a favorable shift toward premium products and effective cost-control measures. We model ~18% EBITDA margin in FY26 and FY27.
• UNSP sold a large part of its Popular portfolio to focus on its global strategy for the premium portfolio. The liquor industry is currently experiencing an upgrading trend, which aligns well with UNSP’s renewed emphasis on P&A, supporting the long-term liquor upgrading narrative in India.
• We remain watchful of any developments happening in Maharashtra as it contributes in mid- to high-teens to UNSP in value terms. That said, liquor policies in many states are becoming more favorable, driving consumer upgrades and increased frequency. UNSP is well positioned to capitalize on this large opportunity.
• The company’s re-entry into AP has contributed to its incremental volumes. We model a 9% revenue CAGR over FY25-28E. Given the rich valuations, we maintain our Neutral rating with a TP of INR1,500, based on 50x Jun’27E standalone EPS and an additional INR250/share for its RCB and other non-core assets.

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