Now that the divestment of certain brands is over, what plans do you have for the company moving forward?
The slump sale was very critical for our reshape strategy pillar. On the topline EBITDA, we are back to pre-Covid margin levels. On a total portfolio basis, we are back to the pre-Covid EBITDA level of 16 per cent and so are the PAT and EPS.
Our recent innovation and renovation have been meaningful and margin accretive. We are, however, witnessing inflationary pressure on ENA and glass and temporary supply chain issues. We are dialed upon product, pricing and mix to mitigate these inflationary pressures. Some States have given us a price increase.
On the net revenue growth management, we are cranking up the mix. In anticipation of the divestiture, we had already taken a lot of action. This is reflected in Q4 results. We will do a lot more to recoup the full operating heads in the next 16-18 months. We are very confident about our strategy despite short-term pressures. Whatever impact there is from the transaction, we will recoup it over a reasonable period of time.
How did the process of shortlisting companies for divestment of brands happen? What does Inbrew bring to the table? How has the royalty been structured?
We went through a very rigorous process over the last 15-18 months and our advisers were Morgan Stanley. It was done through a competitive bidding process. We zeroed in on Inbrew because the economic value was higher. We also found them very committed, engaged throughout the process and also very flexible given that it was a very complex deal to structure and was in two parts.
Inbrew is in the business of manufacturing and selling beer. And they are increasing their presence in spirits. They have a strong footprint in the north and that would enhance the distribution of brands. We will get a royalty over a period of five years. The royalty is lower during the initial years so that the buyer can invest and revitalise the business. As we go in the future, it will become higher.
Was it necessary to split the deal into parts instead of having all of them as a slump deal?
Ideally, we would have liked it to be a slump deal. These 11 brands that are done through a franchisee arrangement are subject to an encumbrance which we have disputed. We have paid the underlying loans and interest etc. Pending the resolution, the title will remain with USL. Therefore, it was structured in a manner that the buyer will have the right to use them as part of the footprint and build the business.
Don’t you think the sale of the brands will create a vacuum, at least in the short to medium term?
There is minimal dis-synergy with this portfolio. When we sell it, all the sales force and the manufacturing facility go with that. In terms of distribution, we had already separate field forces looking after this portfolio. It is not going to have any dis-synergy. The only temporary operating deleverage we have will be the corporate overhead. It has clearly not disrupted our business.
Will the money received from sale go towards clearing accumulated losses?
We have a very robust capital allocation strategy under the guidance of the USL board. We will continue to look for new growth opportunities and the cap will be used for that. Once the accumulated losses are wiped out, we will look at divided distribution. We have around ₹600 crore as accumulated losses which we hope to clear in the next few quarters. We are anyway, cash positive.
Are there any other brands which you plan to put on the block?
No. McDowell’s and Director ‘s Special were never part of the review. McDowell’s is a flagship in our portfolio and plays a strategic role in terms of up trade into prestige. Similarly, Director’s Special sits right on the cusp of popular and prestige and up trade into prestige. We have no further disposal plan.
You mentioned double-digit revenue growth through reshaping the portfolio. What is the status of that?
We have a strong growth portfolio. We plan to put more resources behind it and therefore, our premiumisation strategy makes us well-positioned in the sector where the fundamentals are strong. On a yearly basis, we will stick to the margin guidance of mid-to-high teens. But there have been headwinds in the margin in Q4 and there is inflationary pressure as well. But we will mitigate all that and stick to the guidance.