India Trends Will Erode Margins Amid Rising Competition

Key Takeaways

• Evolving consumer preferences and rising regulatory pressures threaten long-term sales growth, revenue stability, and the effectiveness of marketing initiatives.
  
• Intensifying competition, reliance on lower-margin products, and waning cost benefits may squeeze profitability and limit future margin expansion.
  
• Premiumization, regulatory tailwinds, expanding distribution, operational efficiencies, and favorable demographic trends are expected to drive revenue growth and margin improvement for United Spirits.

Catalysts

Engages in the manufacture, sale, and distribution of alcoholic beverages and other allied spirits in India and internationally.

• Shifting consumer preferences among younger generations towards lower alcohol consumption and increasing health consciousness present a significant risk to long-term volume growth and overall revenue for United Spirits, as the legal drinking age population in India may not convert into sustained higher per capita consumption.
  
• Heightened regulatory pressures, such as tightening advertising, anti-alcohol messaging, and evolving ESG requirements, are expected to increase compliance costs and restrict the company's marketing effectiveness, eroding net margins and limiting future earnings growth.
  
• The company's ongoing reliance on lower-margin mass and affordable segments, as seen in the highlighted strong performance of McDowell's in Andhra Pradesh and the Lower Prestige category, exposes United Spirits to risk of downtrading and competitive pricing pressure, which can squeeze profitability and stall margin expansion.
  
• Mounting competition from both global entrants and emerging craft and alternative beverage brands will likely fragment the market further and dilute United Spirits' pricing power, making it increasingly difficult to sustain market share and premiumization-led revenue growth.
  
• While recent operational gains-such as efficiency improvements and cost optimization-are largely realized, the company now faces diminishing incremental cost benefits, suggesting that EBITDA margins will become increasingly vulnerable to inflationary pressures and commodity price volatility in the absence of strong top-line growth.

United Spirits Future Earnings and Revenue Growth

Assumptions

• This narrative explores a more pessimistic perspective on United Spirits compared to the consensus, based on a Fair Value that aligns with the bearish cohort of analysts.
• The bearish analysts are assuming United Spirits's revenue will grow by 9.9% annually over the next 3 years.
• The bearish analysts assume that profit margins will increase from 13.1% today to 14.7% in 3 years time.
• The bearish analysts expect earnings to reach ₹23.6 billion (and earnings per share of ₹32.91) by about July 2028, up from ₹15.8 billion today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the price target of the more bearish analyst cohort, the company would need to trade at a PE ratio of 51.7x on those 2028 earnings, down from 61.9x today. This future PE is greater than the current PE for the IN Beverage industry at 36.7x.
• Analysts expect the number of shares outstanding to remain consistent over the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 12.55%, as per the Simply Wall St company report.

United Spirits Future Earnings Per Share Growth

Risks

• The India-U.K. free trade agreement has reduced Scotch import duties significantly, which management expects will lead to a high single-digit reduction in consumer prices and a resulting uplift in volumes for premium products, directly boosting revenue growth and supporting margin expansion as consumer mix shifts upward.
  
• Progressive policy changes in key states, such as the doubling of spirits retail outlets in Uttar Pradesh and the reopening of Andhra Pradesh after five years, are expanding access to large addressable markets, which is likely to drive both volume and value growth over time.
  
• The company continues to execute a strong premiumization strategy, with the majority of growth coming from the higher-margin Prestige and Above portfolio, and management is investing in brand building and innovation to further enhance brand equity and support long-term improvement in net margins and profitability.
  
• Operational efficiencies through ongoing supply chain optimization, cost rationalization, and digitalization initiatives are on track, with significant cost savings already delivered and further benefits expected, which should underpin improvements in EBITDA margins and return on capital employed.
  
• Long-term secular trends such as rising incomes, expanding middle class, urbanization, and a growing legal drinking age population in India are expected to provide enduring tailwinds for United Spirits' revenue and earnings growth, contradicting expectations of a sustained share price decline.

Valuation

• The assumed bearish price target for United Spirits is ₹1206.81, which represents two standard deviations below the consensus price target of ₹1619.1. This valuation is based on what can be assumed as the expectations of United Spirits's future earnings growth, profit margins and other risk factors from analysts on the more bearish end of the spectrum.
  
• However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of ₹1885.0, and the most bearish reporting a price target of just ₹1022.0.
  
• In order for you to agree with the bearish analysts, you'd need to believe that by 2028, revenues will be ₹160.3 billion, earnings will come to ₹23.6 billion, and it would be trading on a PE ratio of 51.7x, assuming you use a discount rate of 12.5%.
  
• Given the current share price of ₹1378.2, the bearish analyst price target of ₹1206.81 is 14.2% lower. Despite analysts expecting the underlying buisness to improve, they seem to believe the market's expectations are too high.
  
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.