| United Spirits Limited | ||||||
| Long-term rating reaffirmed; Short-term rating Withdrawn | ||||||
| Rating Action | ||||||
| ||||||
| Note: None of the Directors on CRISIL Ratings Limited’s Board are members of rating committee and thus do not participate in discussion or assignment of any ratings. The Board of Directors also does not discuss any ratings at its meetings. | ||||||
| 1 crore = 10 million | ||||||
| Refer to Annexure for Details of Instruments & Bank Facilities |
Detailed Rationale CRISIL Ratings has reaffirmed its ‘CRISIL AAA/Stable’ rating on the long term bank facilities of United Spirits Limited (USL). CRISIL Ratings has also withdrawn its rating on the bank facilities worth Rs 1450 crore at the request of the company and the same is in line with withdrawal policy of CRISIL Ratings.
The rating reflects improving financial risk profile supported by significant deleveraging, strong cash accrual of around Rs 1,000 crore and modest capital expenditure (capex) plans of around Rs 100-200 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 0.06 time as on September 30, 2022 from 0.17 times in the previous year. Operating performance has also improved significantly in the first nine months of fiscal 2023 with revenues increasing by 13% year-on-year, however the operating margin moderated by 180 basis points to 14.57% from 16.39% due to higher raw material cost. 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.
With its continuing focus towards premiumization of its portfolio, company has completed sale of 32 brands in its popular portfolio (accounting for 66% of the volume of popular segment) to Inbrew Beverages Private Ltd under slump sale for a total consideration of Rs 818 crores in September 2022. CRISIL Rating expects the overall volumes for fiscal 2023 to decline by 9-10 % year-on-year due to slump sale of popular brands, however revenue growth is expected to remain robust at over 9% driven by higher focus on Prestige & Above segment.
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: Leadership position in the spirits industry in India 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 70000 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 McDowell’s No 1 (brandy), Celebration (Rum),etc. as well as a solid portfolio of local brands and premium products. The company has also entered the Indian craft segment under brands such as Epitome Reserve, Godawan and Signature.
Operational and technical support it receives from parent, Diageo Plc 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.
Weakness: Exposure to regulated nature of industry 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, 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 2023 and 2024 – should aid financial flexibility. Cash and cash equivalents were Rs 810 crore as on September 30, 2022. The fund-based limit of Rs 2,185 crore was minimally utilised, less than 5% on an average over the 12 months through November 2022. 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 100- 200 crores and incremental working capital requirement.
ESG Profile: CRISIL Ratings believes that USL’s Environment, Social, and Governance (ESG) profile supports its already strong credit risk profile.
The alcohol sector has a moderate environmental impact, primarily driven by its raw material sourcing strategies and waste 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 and higher tax.
USL’s strong focus on addressing these ESG risks supports its already strong credit risk profile.
Key ESG Highlights: USL aims to have its operations powered by 100% renewable electricity by 2030 by doubling onsite solar potential across its manufacturing facilities. Till date, USL has already achieved 98% renewable electricity through in-house steam turbines, bio-gas engines and solar plants.
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. In fiscal 2022, USL reported 58 percent improvement in water efficiency in operations through technology upgradation, water conservation, wastewater treatment, water recycling and rain water harvesting.
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.
There is growing importance of ESG among investors and lenders. CRISIL Ratings believes the company’s continuous commitment to embed sustainability principles across the organization and its value chain will play a key role in enhancing stakeholder confidence. |
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
|
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 nine months through December 2022, the company reported consolidated profit after tax (PAT) of Rs 1023 crore on operating income of Rs 8108 crore against profit of Rs 632 crore on operating income of Rs 7177 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: |
Annexure - Details of Instrument(s)
*Interchangeable with non fund based limit ^Interchangeable with fund based limit. |
Annexure – List of entities consolidated
**USL sold its entire stake (equity shares) and compulsory convertible preference shares through a share purchase agreement on August 03, 2021 ^Amalgamated with United Spirits in Q3 of Fiscal 2023 @Ceased to be a subsidiary wef January 12, 2023. @@ Divested on January 24, 2023 $Ceased to be a subsidiary wef November 04,2022 |
| Annexure - Rating History for last 3 Years | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
|
||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| All amounts are in Rs.Cr. | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Annexure - Details of Bank Lenders & Facilities | |||
| Facility | Amount (Rs.Crore) | Name of Lender | Rating |
| Fund-Based Facilities* | 200 | Bank of America N.A. | Withdrawn |
| Fund-Based Facilities* | 50 | Bank of America N.A. | CRISIL AAA/Stable |
| Fund-Based Facilities* | 200 | Citibank N. A. | Withdrawn |
| Fund-Based Facilities* | 150 | Citibank N. A. | CRISIL AAA/Stable |
| Fund-Based Facilities* | 350 | Deutsche Bank | CRISIL AAA/Stable |
| Fund-Based Facilities* | 200 | HDFC Bank Limited | Withdrawn |
| Fund-Based Facilities* | 150 | HDFC Bank Limited | CRISIL AAA/Stable |
| Fund-Based Facilities* | 250 | ICICI Bank Limited | CRISIL AAA/Stable |
| Fund-Based Facilities* | 250 | ICICI Bank Limited | Withdrawn |
| Fund-Based Facilities* | 150 | Standard Chartered Bank Limited | Withdrawn |
| Fund-Based Facilities* | 350 | Standard Chartered Bank Limited | CRISIL AAA/Stable |
| Fund-Based Facilities* | 50 | The Hongkong and Shanghai Banking Corporation Limited | CRISIL AAA/Stable |
| Non-Fund Based Limit^ | 350 | Deutsche Bank | Withdrawn |
| Non-Fund Based Limit^ | 50 | HDFC Bank Limited | Withdrawn |
| Non-Fund Based Limit^ | 50 | Standard Chartered Bank Limited | Withdrawn |
This Annexure has been updated on 14-Mar-2023 in line with the lender-wise facility details as on 23-Feb-2023 received from the rated entity.
*Interchangeable with non fund based limit
^Interchangeable with fund based limit.
Criteria Details
|