United Spirits margins expand as Karnataka policy supports premium growth

Investment View and Valuation

Motilal Oswal Financial Services retained its Neutral rating on United Spirits in its May 15, 2026 report following an in-line Q4 FY26 performance. Top-line growth remained soft, but margin delivery was healthy. The broker retained its target price of Rs 1,500 against the report CMP of Rs 1,315, implying 14 per cent upside.

MOFSL broadly maintained its FY26-FY28E estimates and expects United Spirits to deliver revenue and EBITDA compound annual growth rates of 10 per cent and 11 per cent, respectively, over FY26-FY28E.

Q4 FY26 Financial Performance

United Spirits reported standalone net sales growth of 3 per cent year-on-year to Rs 30.5 billion in Q4 FY26, marginally below MOFSL's estimate of Rs 30.7 billion. Overall sales volumes declined 6 per cent, compared with the broker's expectation of a 3 per cent decline.

Segment and Regional Trends

Prestige & Above, which contributed about 90 per cent of revenue, delivered 5 per cent value growth despite a 3 per cent volume decline to 13.1 million cases. Popular segment volumes declined 16 per cent to 2.6 million cases, while revenue fell 13 per cent.

The Maharashtra Made Liquor disruption affected Popular and lower-prestige sales in Maharashtra, while a high base in Andhra Pradesh also constrained growth. Excluding Maharashtra and Andhra Pradesh, revenue increased 9 per cent in Q4 FY26; Prestige & Above and the overall portfolio delivered 8.5 per cent revenue growth on this basis.

Margin and Profit Delivery

Profitability was stronger than the sales outcome. Gross margin expanded 280 basis points year-on-year to 47.3 per cent, supported by headline pricing, a favourable product mix and stable input costs. EBITDA margin rose 230 basis points to 19.4 per cent and was broadly in line with expectations, although EBITDA of Rs 5.9 billion was 1.9 per cent below MOFSL's estimate.

Adjusted profit after tax increased 16 per cent year-on-year to Rs 4.4 billion, ahead of the broker's estimate of Rs 4.3 billion. Reported interest costs included a Rs 440 million one-off provision for an old litigation matter, while other income included Rs 2.19 billion of interest on a tax refund. MOFSL used normalised interest and other-income assumptions for its profit-before-tax assessment.

For FY26, net sales, EBITDA and adjusted profit after tax grew 8 per cent, 12 per cent and 19 per cent, respectively.

Demand Recovery and FY27 Outlook

Management indicated early signs of demand recovery and expects strong double-digit FY27 growth in the Prestige & Above portfolio. Karnataka, which represents 6.5 per cent of United Spirits' mix, is viewed as a key potential driver under the new state policy.

• Prestige & Above prices in Karnataka have fallen by 15 per cent to 35 per cent.
• Popular prices are expected to rise by about 17 per cent.
• Management expects the Maharashtra Made Liquor disruption to recede, with no further impact from the second half of FY27.
• The company is responding through improved packaging, pocket packs and aggressive pricing, including the transformed McDowell's offering.

Brand Momentum and Innovation

Signature, Black & White and Johnnie Walker performed competitively. Smirnoff recorded triple-digit growth and gained market share, with management targeting an increase in Smirnoff net sales value from Rs 3.5 billion currently to Rs 10 billion over the next 18 months.

Don Julio has captured one-third of the tequila market. Following the divestment of the RCB business, management intends to sharpen its focus on core alcoholic operations.

Cost Pressures and Key Risks

Key risks and monitorables include weak near-term volumes, continued Maharashtra Made Liquor disruption, the Andhra Pradesh comparison base and packaging-cost inflation.

Management expects packaging-material costs to rise 4 per cent to 5 per cent in Q1 FY27. This could reduce portfolio gross margin by 125 to 150 basis points, equivalent to Rs 350 million to Rs 400 million. The company intends to offset half of the impact through pricing and half through productivity, while maintaining EBITDA margin in the mid-to-high teen range.

Estimates and Implied Valuation

MOFSL forecasts FY27E and FY28E EBITDA margins of 18.7 per cent and 18.9 per cent, respectively. At the report CMP of Rs 1,315, the stock trades at 51.8 times FY27E EPS and 46.4 times FY28E EPS.