United Spirits Limited (MCDOWELL-N) Q2 FY23 Earnings Concall Transcript

United Spirits Limited (NSE:MCDOWELL-N) Q2 FY23 Earnings Concall Oct. 25, 2022

Corporate Participants:

Hina Nagarajan — Managing Director and Chief Executive Officer

Pradeep Jain — Chief Financial Officer

Analysts:

Abneesh Roy — Nuvama Institutional Equities — Analyst

Harit Kapoor — Investec — Analyst

Palak Shah — Infina Finance — Analyst

Latika Chopra — J.P. Morgan — Analyst

Prakash Kapadia — Anived Portfolio Managers — Analyst

Chetan Shah — Jeet Capital — Analyst

Mehul Desai — — Analyst

Manish Poddar — Motilal Oswal AMC — Analyst

Prolin — Goldfish Capital — Analyst

Presentation:

Operator

Welcome to United Spirits Limited Diageo India’s Second Quarter Earnings Conference Call.

Hosting the call today from USL limited are Ms. Hina Nagarajan, Managing Director and Chief Executive Officer; and Pradeep Jain, Chief Financial Officer. [Operator Instructions] Please note that this conference is being recorded.

I now hand the conference over to Ms. Hina Nagarajan. Thank you and, over to you, ma’am.

Hina Nagarajan — Managing Director and Chief Executive Officer

Thanks so much. Hi, good evening, ladies and gentlemen. Thank you for joining us on the second quarter earnings call of United Spirits Limited.

At the outset, I would like to take the opportunity of wishing all of you and your families are very joyous and safe Diwali you. I hope you had a lovely unconstrained celebration this year after a couple of years of very quiet Diwali during COVID. As always, it’s a delight to interact with all of you and I’m joined today by Richa, our Investor Relations Head and Pradeep, our CFO.

I intend to, covering the following today in the opening comments, a little bit on the consumer context in the current environment that we are seeing it. A short update on the key pillars of our strategy communicated last year, especially the portfolio reshape and the Society 2030 goal, some context on the results that we announced last Friday. And then we can open it up for Q&A.

On the consumer context, while inflation has been a bugbear in the recent past, the larger consumption story anchored in premiumization continued strongly for our consumers. Premium and luxury consumers are driving growth ahead of Middle India, Prestige Consumer and the latter are also coming back to pre-COVID growth trajectory. Affluent consumers continue repertoire drinking with non-whisky categories like gin and other white spirits gaining further traction. This has also indicative of consumers increasingly wants — wanting to drink better, not more. Among the Middle India consumers, while we are witnessing downgrading in the larger FMCG space. I would say, the Prestige consumers in our category are managing their wallet share by moving to smaller size SKU, but not downgrading to lower-price brands. This is reflective of the brand affinity in our categories.

On the strategic side on our strategy pillar, our portfolio reshapes strategy is accelerating. We have covered a lot of grounds and we are relentlessly added. We have announced earlier in the quarter that an investment of INR45 crores was made by the company for its state-of-the art craft and innovation hub in Ponda, Goa. This investment is in-line with the company’s strategy to accelerate transformational innovation and strengthen our craft and premium portfolio. Our recent innovations, renovations, position us better to meet changing consumer tastes and preferences and will propel growth.

Godawan, our Indian single malt is now available in five states Rajasthan, Delhi, Goa, Karnataka, Haryana and launched in the international markets of UAE. It will soon be available in the U.K. and in the United States of America. Black Dog renovation that was rolled-out last year continues to be well-accepted by consumers, leading to continued momentum on the brands. We continue to scale-up the campaign with global icon Keira Knightley across digital platforms as well as out-of-home. Royal Challenge American Pride has now become available in eight states. During the quarter, we are launching the brand in October in three more space, Maharashtra, Rajasthan, Punjab. On Signature, the momentum from the renovation last year continued on the back of significant improvements in consumer equity with consumers really appreciating the creamy blend and differentiated packaging and crafted from nature proposition.

With focused energies on Royal Challenge, we have been able to lead the growth in that segment in this quarter. It grew on the back of both competitive pricing as well as renovation, especially in the states of Maharashtra, Telangana, Delhi and we are now in the process of extending the renovated Royal Challenge to other states in the country. On McDowell’s No.1, our intellectual property of Yaari Jam with its tribute to the Singer KK has driven huge engagements with over 2 billion views and the first-of-its-kind consumer engagement in the relevance space. Despite segment headwinds, this is one segment, where we do see some impact of the inflation but despite those headwinds McDowell’s No.1 has delivered really good performance.

Last, but not the least a critical component of our portfolio reshapes strategy, we have successfully completed the sale of the entire business undertaking associated with 32 brands in the popular segments to Inbrew Beverages Private Limited and has given effect to the franchise of 11 other brands in that segment for a period of five years. The completion of this transaction enables us to unequivocally focused on Prestige and above and capitalize on the rapidly changing consumer and category trends. Five manufacturing facilities have been transferred, four of these third-party and one of our own manufacturing to Inbrew. We have also provided continuously of jobs and benefits to employees working on this portfolio, who have now moved from Diageo USL to be partly of the Inbrew team.

On the digital side, in.thebar.com is the hub for our brands to enable hosting lending pages of different brand campaign. The biggest initiative has been linked to e-commerce in West Bengal building the direct-to-consumer linkage of the bar with third-party aggregators like Swiggy, Boozie, BigBasket for consumers visiting the bar from that market. The social content calendar, which comprises of cocktails knowledge, drinks, bars, bartender sort of picks brands and celebrations also went live with now regular content available to consumers. We will continue to scale this up with more content, better user experience and engagement for the community.

On Society 2030 goals, we continue to progress towards our Society 2030 goals, aligning proactively with the SEBI disclosure requirements on business responsibility and sustainability report for next year. We have published on our website an Independent Environmental, Social and Governance Report for the fiscal 2021-’22, it has been prepared in accordance with Global Reporting Initiative standards, the disclosures are also met with United Nations Global Compact principles and Sustainability Accounting Standards Board sector-specific standards. This will further align with Diageo plc’s ESG reporting index 2022. We request you to go through the above ESG disclosures both quantitative, qualitative for a comprehensive understanding of our objective and progress in this space.

Now a little bit on our financial performance, we have delivered strong topline growth and resilient EBITDA performance, like-for-like our business is bigger and stronger versus pre-pandemic levels of 2019. We have delivered a growth of almost 18% in the second quarter. P&A growth stands at 23% growing on a strong base and the highest underlying growth in the last 24 quarters. The price-mix during the quarter was at 9.4% reflecting the higher-growth in more premium segments as we moving up the consumer price level.

More importantly, we are seeing sequential gains driven by the recent innovation and brand renovation in both mid Prestige and upper Prestige. Double-digit inflation and ongoing scotch pricing discussions led supply constraints adversely impacted our gross margin. Our marketing reinvestment rate during the quarter was 5.5% of net sales. We continue to drive customer-centric activation, strengthen our brand equity and premiumize the portfolio. We have also leveraged media opportunities on the back of marquee cricket associations like that on Asia Cup and the India-England series and of course, you must be delighted with Virat performance in the match that happened just a couple of days ago or yesterday — yeah, a day ago, yes.

EBITDA was INR446 crores and EBITDA margin was 15.5%. Underlying EBITDA, excluding one-off in previous year was up 11%. Exceptional items primarily include a net one-time profit arising from the slump sale of the business undertaking associated with 32 brands in the popular segment. Profit after tax, after incorporating the tax-adjusted exceptional gain was at INR563 crore in the quarter, up 105.9%. Our outlook on inflation and pricing we do expect double-digit inflationary pressures to continue to impact in the near-term driven by the sequential surge in prices of inputs going into glass manufacturer and ENA. We are cautiously awaiting the ethanol blending policy that will stand announced in this coming quarter.

On the flip side, we are also seeing some green shoots in paper price and crude linked commodities. Pricing realized in some of the states will now start ramping-up in the quarters to follow. Revenue growth management and delivering on our productivity initiatives across the value chain will also help us to partially come back the inflationary headwinds.

In conclusion, all I want to say is that we are confident in the resilience of our business. Our strategy and our ability to navigate headwinds as our team has demonstrated over the last couple of years. We remain focused on our strategy of reshaping the portfolio, driving commercial excellence in-store and on-premise, revenue growth management and everyday efficiency and productivity extraction, this gives us the confidence to deliver sustainable growth and create long-term value for all our stakeholders.

With this, we can now open the lines for Q&A.

Questions and Answers:

Operator

Thank you very much. [Operator Instructions] The first question is from the line of Abneesh Roy from Nuvama Institutional Equities. Please go ahead.

Abneesh Roy — Nuvama Institutional Equities — Analyst

Yeah, thanks. My first question is on demand side. So you made two remarks, one was the premium and luxury growing faster than the overall P&A. And second is the customer is not downtrading, he is consuming smaller SKUs just like an FMCG. So is it possible to give some insight, some numbers on both of these? And a related question on overall P&A was, when I compare to pre-COVID, in terms of the specific channels, say, pubs, bars, larger event consumption for example, say large weddings or the offset in hotel. Is it now back to the pre-COVID whatever data you have if you can share on that?

Hina Nagarajan — Managing Director and Chief Executive Officer

Hi, Abneesh. Your question on — I’ll answer the second question first, which is that our events, marriages back to pre-COVID levels. Actually, yes, there are. And marriages are back and how, I mean, we’re seeing larger and larger marriages. So that’s pretty good for our demand forecast. Luxury, premium, I mean, we continue to see the double-digit growth that we have been saying for a while that has not changed really over the last few years. So the premiumization trend is continuing there. I would say, the — even on the Prestige side, we are seeing pretty healthy growth. I would only caution that, look it’s just a few quarters after the opening up of the market. So I don’t feel that the demand in these segments has fully settled. I would say, basically made upper Prestige. But there is some level of premiumization that’s continuing in these segments. We’ve seen a little bit of slowdown on lower Prestige, right, which is primarily attributed to, I would say, up trade from the popular and the country liquor. This is a bit slower than what we’ve seen over the last few years. But having said that, I think our brands are performing very competitively in each of these segments and overall, we feel very confident about the demand scenario in the industry.

Abneesh Roy — Nuvama Institutional Equities — Analyst

Sure. My second question is on the specific statements you made on two of your brand. From Royal Challenge, you mentioned competitive pricing and in McDowell’s, you mentioned some inflation impact. Now inflation is across the board as a portfolio itself, what do you mean when you said that McDonald’s is facing the inflationary impact?

Hina Nagarajan — Managing Director and Chief Executive Officer

No. No. My comment on — McDowell’s was largely to explain that we see some slowdown in the lower Prestige category on account of inflation hitting that category of consumers and therefore some slowdown in up trades from say popular or country liquor to this segment. So that’s the clarification on inflationary impact on the categories other than McDowell’s. So on Royal Challenge, I mean, if we — we were not fully competitively priced in a couple of states and we have corrected that pricing. To be competitive in those states and the brand is actually showing very good growth momentum, not only in those states but across the market.

Pradeep Jain — Chief Financial Officer

Yeah. And maybe an additional build Abneesh, from my side is that look, I mean if, Hina and I have consistently maintained over the last two, three quarters that when we renovated McDowell’s and RC, we were not really kind of delighted with how RC has performed, right. And therefore over the last three, four quarters, we were working on reengineering the blend to kind of make it grow further and now what we have done with the Delhi RTM change and this competitive pricing reaction in Maharashtra, in Telangana, we are pretty happy with the way they’ve responded.

Abneesh Roy — Nuvama Institutional Equities — Analyst

Sir, one follow-up on that. Your corrective action in Royal Challenge has it led to any retaliation by the other player? And on Delhi market, if you could elaborate, what is the current situation?

Pradeep Jain — Chief Financial Officer

So like we said, we were overpriced in a few of the critical market. We’ve just become competitive on pricing, right? So that addresses your first question, Abneesh. And on Delhi market, maybe I’ll hand over to Hina to talk about the renovation that we did and —

Hina Nagarajan — Managing Director and Chief Executive Officer

Look so, I can’t speak about retaliation. I think all competition following their strategy and continue to follow their strategy. And for us, clearly, we had said that we will reshape the value proposition in mid Prestige through the renovation of Royal Challenge and I think we are feeling very confident that we have managed to now reshape the value proposition and we are seeing good results for Royal Challenge whiskey and therefore we are rolling out this renovation to many more space sequentially. So I think our strategy is now falling in-place as we had expected it to and competitors continue to follow their own strategy.

Abneesh Roy — Nuvama Institutional Equities — Analyst

Sure. That’s very helpful. That’s all from my side. Thanks a lot.

Hina Nagarajan — Managing Director and Chief Executive Officer

Thanks, Abneesh.

Pradeep Jain — Chief Financial Officer

Thanks, Abneesh.

Operator

Thank you. The next question is from the line of Harit from Investec. Please go ahead.

Harit Kapoor — Investec — Analyst

Yeah, hi, good evening, everybody. Wish you all a very happy Diwali.

Pradeep Jain — Chief Financial Officer

Good evening.

Harit Kapoor — Investec — Analyst

So I just had two questions. Firstly was on the quarter. So you mentioned that in your release that, you have successfully concluded discussions in few states for scotch prices. So would that — would we assume now that some of these — most of this is now in done with and supplies are normally resumed. Are — give us an update on that — on those discussions as well as what’s been the impact of that in quarter two for you?

Hina Nagarajan — Managing Director and Chief Executive Officer

Two, see in some of the states, we have concluded discussions and supplies will be normalized in the quarter, even in the couple that are friendly and we expect closure on that during the current quarter. So you can assume supply will get start getting normalized during the quarter.

Harit Kapoor — Investec — Analyst

And are we calling out? What is the impact in quarter two on account of this? Any basis point impact that you would had on that are not supplying any state?

Pradeep Jain — Chief Financial Officer

Harit, in quarter two, the quarter that have just passed.

Harit Kapoor — Investec — Analyst

Yeah. Yeah.

Pradeep Jain — Chief Financial Officer

Okay. And maybe I’ll just start and then Hina can build. Look it’s not just one isolated factor of the BIO supply. There a couple of balancing practice I would say, in terms of the benefits that we have got, right. I think, it’s two things, one is, Puja in West Bengal was a little ahead compared to last year, right? So therefore the loading that happened into the trade happened a month earlier. Last year, it was October, this year large part of it was September and it’s full large that it does impact national numbers and also we were lapping a soft base of last year in two states, which have again Delhi and Bengal because both for gearing for RTM change last year in October-November. So therefore the July-August-September numbers were didn’t fogged, right, and conversely, these two benefits that we had in July-August-September this year are kind of balanced by the BIO supplies, right, due to the pricing discussion, right.

Now net-net, yes, the two are kind of querying of each other. Maybe some amount of moderation will happen to the 23% P&A growth that we have said. But we’ll have to wait-and-watch over the next two, three months. How much of that? Does that answer it?

Harit Kapoor — Investec — Analyst

Yeah, correct. Thank you so much. The second question was on, if you look at the first half, you’ve done about close to 14.5% margins. I think 13.8% if you adjust for the one-off in quarter one and 15.5% in this quarter. This is in-spite of your gross margins being close to 500 bps plus down versus normalized levels if I could call them so. Does that give you more confidence on the medium term guidance of mid to-high teens or other? Is there a possibility that given your cost structure currently would look at maybe a revised guidance given the fact that you already –almost hitting a mid-teen number with such high inflationary pressures.

Pradeep Jain — Chief Financial Officer

So look, Harit, and again, let me start. I request you to build-on that. So first of all, yes, absolutely, we are committed to our mid to high teen guidance, right? And obviously, it’s our desire to kind of try and stay true to that. Now having said that let me start with what we are happy about, right? We are happy with the growth momentum, right, which continues to give us an operating leverage in our fixed cost. So that is something that we are happy about, right. We are also happy about the fact to exactly what you mentioned that if you take the inflation impact, our gross margin is probably off by about 720 to 730 bps, right? But we are offsetting a good one-third of that theme through a combination of headline pricing, mix management and management productivity, right. So that again, kind of, reassures us. Now having said that, if you also — then we are also kind of maintaining a good cost discipline on our overall fixed overhead, right, so that allows us to get a further operating leverage on our P&L. Now what Hina and I would hardly want to do a little more is the 5.5% on A&P. We would want to ideally inch that back to about 8% to 9% A&P levels, right. And in this kind of environment right, when the inflation at full steep etc., you will end up making some tough choices and calibrating that a little bit, right. So that’s the way, I’ll pass in case, Hina has any additional build-on that.

Hina Nagarajan — Managing Director and Chief Executive Officer

Yeah, I would say, the year will continue to be challenging. Look I mean, our inflationary pressures we are not seeing them come down like other FMCG companies, right, primarily because of the raw materials we use, which are glass and ENA. So I would say, there’ll be pluses and minuses. I mean some pricing will flow-through better in the coming quarter, a little bit of a mixed advantage we will have, but on the contract — on the other side, we do want to go up on A&P as Pradeep said. So I would say that, I mean, we will try and, of course, stay true to our mid to high teens but I see our margins pretty much in this — in this range for the next few quarters.

Pradeep Jain — Chief Financial Officer

Yeah. In the lower end of the mid to high teens. Yeah.

Harit Kapoor — Investec — Analyst

Got it. Thank you very much. I’ll come back for more. Thank you.

Hina Nagarajan — Managing Director and Chief Executive Officer

Thank you, Harit.

Pradeep Jain — Chief Financial Officer

Thank you, Harit.

Operator

Thank you. The next question is from the line of Palak Shah from Infina Finance. Please go ahead.

Pradeep Jain — Chief Financial Officer

Hi, Palak.

Palak Shah — Infina Finance — Analyst

Hi. Thank you so much for taking my question. And well wishes for the festival. First question was sort of check with you after the deal conclusion, what sort of quantifiable working capital release that seen?

Hina Nagarajan — Managing Director and Chief Executive Officer

Working capital release.

Pradeep Jain — Chief Financial Officer

Okay, Palak, yeah, did I get the question, right? You’re saying that post the deal closure how much of working capital has got released?

Palak Shah — Infina Finance — Analyst

Yes. Yes.

Pradeep Jain — Chief Financial Officer

Okay. So the number is roughly about — it will come in two phases, right, the number is roughly about INR420 crores. INR280 crores to INR285 crores is part of the slump sale and then the balance 11 brands that we have franchise that leads to a further relief of about INR140 crores, right? Those are the broad ballpark numbers.

Palak Shah — Infina Finance — Analyst

Got it. Secondly, just on the gross margin front, as Hina mentioned that there has been a lot of premiumization that has happened this quarter, plus if you look at exercise that’s reflective in the excise component coming down in sort of 68% to 65% this quarter, anyone on a Y-o-Y basis despite of that our gross margin actually contracted 39.5%. Is that indicative of a high inflation and unless you get a price hikes from the larger states like Maharashtra and Karnataka, you would actually be able to go back to that 44%, 45% gross margin.

Pradeep Jain — Chief Financial Officer

Yeah. Yeah. So Palak, like I said, I mean we’ve always maintained that the inflation that is impacting us is roughly in the double-digit range — double-digit to low-teens, right? And then it’s pure math, right, on a 40% gross margin, right, roughly that whatever low-double-digit inflation will knock-off roughly about 750 bps of your gross margin, simple math, right. And then what we have — what is actually diluted by is roughly about 480 bps, right? So therefore the way you will have to see it is that what we are being able to recoup, right, despite the commodity inflation, right. What I do acknowledge is there is still not too much of pricing flowing through in our P&L, right, to the points that last year some of the BIO reversals happened. We had to participate as — forced by the government and then a couple of competitive pricing actions that we have to get back to parity etc., right. So therefore there’s not too much of pricing going through. Having said that, the inflation have also likely to continue, right.

For example, you’ve seen the natural gas pricing announced by the government that’s a 40% increase already on top of an 80% to 90% increase that made in April, right, for that sequential inflation will continue but we are confident having seen the approvals come through etc. Pricing will also kind of ramp-up in the coming quarters, right. So that’s broadly what it is, our gross margin will remain under pressure right now. And we will have to just play with the other lines of the P&L and the other value drivers to kind of maintain our EBITDA margins.

Palak Shah — Infina Finance — Analyst

Got it. Just if a follow-up on this, which states have you actually got price hikes during Q2?

Pradeep Jain — Chief Financial Officer

So we have got in the last three to six months over six states, right. I’m just kind of looking at — so we got pricing in Haryana, Punjab, UP, West Bengal, some pricing in Maharashtra and some pricing in Karnataka. So we have good pricing in all these states.

Palak Shah — Infina Finance — Analyst

Got it.

Pradeep Jain — Chief Financial Officer

Rajasthan, we had got pricing in the April-June quarter. Assam we had gone — got FT pricing in the Jan-March quarter.

Palak Shah — Infina Finance — Analyst

Got it. Great. Thank you so much for this. Thanks for the answer. Best wishes for the festival.

Hina Nagarajan — Managing Director and Chief Executive Officer

Thank you so much.

Operator

Thank you. The next question is from the line of Latika Chopra from J.P. Morgan. Please go ahead.

Latika Chopra — J.P. Morgan — Analyst

Yeah. Hi. I hope — okay I just — for the just digging a little bit more into the pricing part, would it be possible to tell us with 8% price-mix growth for P&A portfolio. How much of this could be pure pricing because you did take some competitive pricing actions and you did get incremental price hikes from few states as well. So I just wanted to understand, where does next price effect settles down? What is the mix effect out of this 8%?

Pradeep Jain — Chief Financial Officer

Yeah, it’s largely mix, Latika, it’s largely mix, 90% of this is largely mix in this quarter. Like I said, net pricing flow through is minimal because of the negative and the positive. But we expect that to ramp-up, right. As the negative fallout, right, and we are we’ve got fresh pricing from the states that in fact will ramp-up significantly in the coming quarters.

Latika Chopra — J.P. Morgan — Analyst

So Pradeep, is it fair to assume that gross margins kind of bottomed-out because does scotch pricing discussions, which was concluded in some more might come in, will flow-through fully in Q3 and that also happens to be seasonally a strong quarter for you.

Pradeep Jain — Chief Financial Officer

Latika, I would — Hina and I want to believe yes, now unfortunately the commodity environment remains a little volatile, right? I would have been in a far more confident position to agree with you but come first October natural gas pricing has happened, 40%, right. As a result of which we are having to give the price increase to our glass suppliers. And then the big impact of the Delhi RTM. That’s a reversal. That’s a big blow all fine and done. Delhi was adding about — in the last four quarters, Delhi was adding about almost like four to five points of national growth, right. And as the Delhi RTM has reverted back to its original pre-RDM change conflict, right, we will have to figure out a way to recoup that loss through the rest of the country. How much of that we will be able to recoup that is kind of yet to be established.

Latika Chopra — J.P. Morgan — Analyst

So as been stand up, Pradeep, does it imply the Delhi is kind of no-go in, I mean, what’s really happening there? Are you — the sell-through the lesser, significantly lower?

Pradeep Jain — Chief Financial Officer

Sorry, the —

Hina Nagarajan — Managing Director and Chief Executive Officer

In Delhi.

Pradeep Jain — Chief Financial Officer

Okay, the sell-throughs, okay. No. We are waiting for things to stabilize, Latika, right. I mean the new RTM has come into effect. I mean, the rule impacts RTM has come into effect from towards September end, first week of October. Our sense is that things will stabilize over the next 60 days to 90 days and then we will be in a better position to callout what’s the longer-term impact of Delhi, it’s two kind of volatile right now to talk what the long-term implication update?

Latika Chopra — J.P. Morgan — Analyst

All right. And then the last bit that I wanted to check was on your efforts towards non-whisky portfolio and I think I mentioned that in opening comments as well. What kind of growth are you seeing in this portfolio what are the brands that excite you is that something which could become a meaningful part of your growth contribution over the next couple of years.

Hina Nagarajan — Managing Director and Chief Executive Officer

Sure. I mean I would say that both gin and vodka, right, are the categories that are really growing well. Largely because I think, consumable, they are highly mixable drinks, right, and they make for fantastic cocktails and cocktails has really taken off especially post pandemic, right. I mean during the pandemic and post, I mean the cocktail culture, especially driven by millennial. So I am very excited by both the categories. I mean we have really activated Tanqueray and Godawan, our gin brands, right, and in the Tanqueray in the branch occasion, Godawan in the sudden occasion and both brands are seeing very, very strong double-digit growth I would say. Smirnoff, I mean we introduced the pocket format of Smirnoff a quarter ago — quarter or two ago and it rolled-out during the thing and we’ve done activation on-premise with Smirnoff, right, with our range of — I mean, our vodka going along with a range of other drinks and Smirnoff is also growing at a very healthy double-digit growth rate. So I’m quite excited by the whites category. I think this category will continue to grow with millennial and this whole refer to our drinking that, I was talking about in my opening narrative, which especially at the premium and luxury seems to be a phenomenon to state. So we are continuing to invest behind these brands and grow them.

Latika Chopra — J.P. Morgan — Analyst

Sure. Thank you, Hina. Thank you, Pradeep.

Pradeep Jain — Chief Financial Officer

Thanks, Latika.

Operator

Thank you. The next question is from the line of Prakash Kapadia from Anived Portfolio Managers. Please go ahead.

Pradeep Jain — Chief Financial Officer

Hi, Prakash.

Prakash Kapadia — Anived Portfolio Managers — Analyst

Hi. Thanks for the opportunity. Two questions from my end, how large is Delhi contribution to our annual sales if you could give some percentage.

Pradeep Jain — Chief Financial Officer

Delhi will be broadly — I just have some broad ballpark numbers it will be about 6%, 7% of our national P&A business.

Prakash Kapadia — Anived Portfolio Managers — Analyst

7%, okay, got it.

Hina Nagarajan — Managing Director and Chief Executive Officer

This was on the revised ramped-up volumes Prakash. Now as I’ve said to Latika earlier, we’ll have to wait for what the volume settle down to, right?

Prakash Kapadia — Anived Portfolio Managers — Analyst

Right, right, I understood. And even in the first half, we’ve seen broadly a 50% impact on sales due to volume and 50% impact due to price and mix, as we our progress more towards P&A and that contribution increases post the divestment that should be two-third, one-third going forward, is that the right understanding?

Pradeep Jain — Chief Financial Officer

You mean volume to mix.

Prakash Kapadia — Anived Portfolio Managers — Analyst

Yeah.

Pradeep Jain — Chief Financial Officer

I would say, well, yes probably like, we had said earlier when we are selling the full portfolio our price-mix should stabilize around the 7% to 8% range, right, once we have the full scotch availability and we are supplying across the country, right, and the full portfolio of price-mix should be about 7%, 8%. And then yes our aspiration would be that volume can also — so probably it will remain in this — in the 50-50 kind of reach.

Hina Nagarajan — Managing Director and Chief Executive Officer

I expect it to remain same way [Speech Overlap] volume growth in the Prestige categories and things. So I wouldn’t expect that to major lead change. [Speech Overlap]

Pradeep Jain — Chief Financial Officer

It should be in the 50-50 range.

Prakash Kapadia — Anived Portfolio Managers — Analyst

And lastly, even — as this again contribution of the premium segment increases there have been cotton cost reductions that have been declines due to some of the mix changes could you callout a number or annual impact, which could happen once on a full-year basis or next year once this entire sale has gone through.

Pradeep Jain — Chief Financial Officer

Sorry, Prakash. So I missed the question. Can you repeat that? So I know it’s to do with the divestiture. So once the divestitures [Speech Overlap]

Prakash Kapadia — Anived Portfolio Managers — Analyst

Once the divestiture is done. Yeah, on annual basis if you could help us understand your cotton costs will decline as we premiumize and we don’t put outer curtains on the premium brands. So is there a number which you can —

Pradeep Jain — Chief Financial Officer

I think — to do with the divestiture process, it’s got nothing to do with the divestiture, right?

Prakash Kapadia — Anived Portfolio Managers — Analyst

Mix will also change, so as the mix changes the gross margin obviously will trend upwards and this as a percentage of cost could reduce I was trying to assess the annual reduction due to this change? Irrespective of the divesture, if you can call-out that would be helpful.

Pradeep Jain — Chief Financial Officer

I mean we haven’t really called that out so-far, right, but yes, I mean we are consciously kind of going to face that out right starting from another couple of quarters down the line. We haven’t publicly called that quite number and we once the —

Hina Nagarajan — Managing Director and Chief Executive Officer

Once the year end comes out and then we’ll have more clarity on that.

Pradeep Jain — Chief Financial Officer

We will have actually pressure.

Prakash Kapadia — Anived Portfolio Managers — Analyst

Thank you. All the best.

Hina Nagarajan — Managing Director and Chief Executive Officer

Thank you so much.

Pradeep Jain — Chief Financial Officer

Thank you.

Operator

Thank you. The next question is from the line of Chetan Shah from Jeet Capital. Please go ahead.

Chetan Shah — Jeet Capital — Analyst

Hi, thanks, wishing you all a Happy Diwali. Just one quick and maybe a little broader question, I’m just taking the liberty to the Hina madam is around. Then if you see our mix of volume and revenue in the three different categories, if one wants to fast-forward and look at business profile, three years from today or five years from today, what is the most optimal mix which you would want to see it, beyond which you may not want to tinker around with a mix of both volume and the value mix, just to get a sense from our from a team’s point-of-view that, looking at India as a market, which has a customer in all the three segments. So how do you see that shaping up?

Hina Nagarajan — Managing Director and Chief Executive Officer

Yeah. I think we did cover it briefly in the previous question. I mean. We’ve been delivering 8%, 9%, 10% mix as we transition in the portfolio. My expectation is that over a steady-state, right, maybe in a couple of years whatever we expect the mix to settle at about I would say 6% to 7% impact, right. So I mean the broader reshape of the portfolio we have completed now with the divestiture and the franchising of our popular the big action that we want to repeat on our portfolio reshaping is done and as we grow P&A now and focus more on that I would imagine that a steady-state 6% to 7% mix impact would probably be something that we will use as a measure of success.

Chetan Shah — Jeet Capital — Analyst

Great. Thanks. Maybe in couple of questions before you kind of alluded about the opportunity into a gin and other category. If I may take the liberty to do to understand from a Diageo’s global product portfolio, you kind of spoke about this couple of quarters back also, but just to get a sense, how do you see this? I know from a competitive point-of-view may not want to talk about it, but just as a category if you can give us some sense which can become a future growth driver maybe from next year or five years what is that apart from the whisky as a category from a volume point-of-view, if you can share that would be very, very help?

Hina Nagarajan — Managing Director and Chief Executive Officer

Sure. Sure. I mean, from a global point-of-view, we saw gin really explode, I would say, particularly during the pandemic. And basically, it had a lot of momentum in last three to five years I would say. And in India, we saw the moment on gin start really maybe a couple of years ago, right, and vodka also has in our country it is growing quite well. So as I would say that vodka is around the globe it’s not as fast-growing as gin, but vodka is growing very fast in India. So like, I said, I’m quite excited about the growth potential in the whites category both gin and vodka. Even the craft gin segment is quite exciting and as you know, we’ve invested in now brand which is [indecipherable] and Greater Than Gin engines, which are the craft side of gin. So we’re quite excited about this category. I do have to say though that we want to be more value-focused than volume and we will play joyfully in the premium segments in the right segments in Prestige and above in both these categories, and this is reflective of our overall philosophy of supporting consumers to drink better not more. So the value strategy with drinking better not more and we are quite committed to moderate consumption but help people drink much better products.

Chetan Shah — Jeet Capital — Analyst

Thanks. And just one small last question from my side in terms of the premix drink, which is kind of another fade, which goes and comes, goes and comes, do we have any thought process around that specific segment because we spoke about white spirit. Just to get your view on that and wish you and team all the best and happy and a prosperous New Year?

Hina Nagarajan — Managing Director and Chief Executive Officer

Yeah, thank you. And I think you are talking about ready-to-drink category, I think if I’m not mistaken, right, so it’s category that we have said look we saw traction in ready-to-drink say in-markets like USA and in the U.K., right, during COVID. In India, the category is — it’s been pretty volatile actually for a while it has not really grown there are some smaller players who have come in now and we are seeing some selective growth it’s a category that we are watching. It is a category that we are watching more from a future back and if we see the trend really accelerate and the consumer acceptance of premixed drinks go up substantively then we have a very rich portfolio of drinks in our global portfolio that we could potentially bring to India. All we could explore making the ready-to-drink in India itself. So it’s the categories that we are watching. And we will look at participations if we feel the time is right and the traction is high.

Chetan Shah — Jeet Capital — Analyst

Great, ma’am. Thank you so much and wish you all the best.

Hina Nagarajan — Managing Director and Chief Executive Officer

Thank you so much.

Operator

Thank you. Next question is from the line of Mehul Desai from Gain [Phonetic]. Please go ahead.

Mehul Desai — — Analyst

Hi. Good evening, all. So I have just two questions, one was obviously you’ve seen hyperinflation in some of your raw material especially ENA. In that context, how you see backward integration, what is your thought on backward integration? We see that as a possibility in coming years, which Diageo would like to look at? That’s the first question. And second question on the packaging side, I think there were lot of articles wherein that has been mentioned about the mobile of one-off items. Do you see that as them no material benefit coming to you guys also especially on the lower end of ENA segment? Maybe not starting FY’23 but let’s say in FY’24?

Pradeep Jain — Chief Financial Officer

Yeah. So let me take your first question which is the backward integration. Look nothing is off the table, right. Absolutely, nothing is off the table, however, I do want to share that our own experiences that you can kind of get the same level of efficiency and benefit through align partnership, right. But like, I said earlier, nothing is off the table, in case, we feel there were a great opportunity of backward integration, whether in partnership with someone, right, or on our own backing etc., we won’t shy away from kind of exploring it and taking it further, right. So that will be the response to the first question. Your second question just remind me, Mehul, what was your second question?

Mehul Desai — — Analyst

On the removal of mono [Speech Overlap]

Pradeep Jain — Chief Financial Officer

On the removal of — yeah, on the removal, and just to kind of cover the first question. I mean the one classic example that we gave is that we have [Technical Issues] an asset-light model. So we have always kind of effort to get additional growth capacity through align bottling partners, similarly our entire. Extra Neutral Alcohol footprint right of co-location etc., is always to third-party partners and aligned bottling partners, right. Now on the removal of carton we addressed at a couple of minutes ago, yes we are — we have communicated that we shall be doing that over the next couple of quarters in a phased manner starting with some brands and then gradually kind of expanding to the rest of the portfolio. We will be in a better position to share more details as we start taking those actions, right. Starting in the — let’s say in the Jan-March quarter.

Hina Nagarajan — Managing Director and Chief Executive Officer

So just to add, I would say, that the removal of carton is driven partially by productivity and costs consideration, but to a very large extent by us, sustainability objective for that. So this is one big way of removing or reducing our carbon footprint and our Society 2030 goals, which are very aggressive. I mean this is one of the big initiatives. And we are taking many more initiatives to reduce the carbon footprint. So I would say that this thought on removing the carton has come even before this unprecedented inflation and it is driven by that larger objective of sustainable.

Pradeep Jain — Chief Financial Officer

Given that’s the primary objective. And obviously, in the secondary objective is, getting that. So we will get some productivity, which in the current environment we will not complain about.

Mehul Desai — — Analyst

Thank you. Thank you, sir. That’s all from me.

Hina Nagarajan — Managing Director and Chief Executive Officer

Thank you.

Operator

Thank you. The next question is from the line of Manish Poddar from Motilal Oswal AMC. Please go ahead.

Manish Poddar — Motilal Oswal AMC — Analyst

Yeah, hi, team. Thanks for the call. So just want some clarity, if you could help me understand the ad-spend, which you’ve done this quarter. How much of that would be for BII and BIO?Yeah, hi, team. Thanks for the call. So just want some clarity, if you could help me understand the ad-spend, which you’ve done this quarter. How much of that would be for BII and BIO?

Pradeep Jain — Chief Financial Officer

I mean, we normally don’t share a breakup of that. We can just say that look because BIO some of the pricing discussions were on and our affiliates was a little low, right, we had consciously calibrated the A&P spending also on that segment, right. But normally we don’t share that level of detail, right, we will — all we can say is, leave the portfolio to us. We are committed to deliver at the mid to-high teen margin guidance in 15 basis.

Hina Nagarajan — Managing Director and Chief Executive Officer

And I would say that A&P spend is really in-service of brand equity of — building the brand equity of all the brands, our focus brands for us, when we renovated and innovated. Royal Challenge American Side, Royal Challenge whiskey Signature, we are putting the A&P spend behind all the key brands that we are focusing on. Black Dog, which was renovated and we drive huge amount of effectiveness and efficiency out of the spend to ramp-up our brand equity. And like Pradeep said, we have calibrated on BIO because the BIO supplies, pricing discussions were on. So quarter-from-quarter, I think we take those calls on which brands have the activations which brands have come down. Keep it quite dynamic as allocation of A&P spend.

Manish Poddar — Motilal Oswal AMC — Analyst

So just two points to clarify, first is, this 10% margin, this distribution margin do we — which we get is post the allocation of ad expense, right?

Pradeep Jain — Chief Financial Officer

That’s right.

Hina Nagarajan — Managing Director and Chief Executive Officer

That’s right.

Pradeep Jain — Chief Financial Officer

That’s right. It’s both allocation of ad spend and overheads also, right?

Manish Poddar — Motilal Oswal AMC — Analyst

And overheads also, right. So and let’s say with size and scale, I think this agreement was done somewhere around 2014-’15, if I’m not wrong. So this thing about seven, eight years now, so with size and scale, can we revoke this number or this is, I understand, it’s a global business transfer agreement, which you’ve been alluding earlier. But with — do you get operating leverage on this business that is what I’m trying to understand.

Pradeep Jain — Chief Financial Officer

So two responses. One is, it’s got nothing to do with the agreement signed earlier. Like I said, this is an independent global transfer pricing norms, right. So there is an independent third-party benchmarking study that if an independent third-party distributor was to import these brands and sell in India, what kind of a margin will they make, right. So that has — so that’s the kind of rationale of why we get the 10%, right? Now coming to your second point, do we get operating leverage, we get significant operating leverage, right. I mean like we said, the 10% is after full A&P spending and after the full overhead loading and because these are very, very high premium price brand, they do observe a fair amount of overhead, right. We’ve got dedicated sales team. We’ve got dedicated demand generation team etc., it’s a fairly high overhead structure model, right. So we get to absorb all that and then land at 10%, which we have said that on a EBITDA rupees per case as well as on a return on invested capital, it is highly-accretive to our book.

Manish Poddar — Motilal Oswal AMC — Analyst

So sorry what I’m trying to understand — thanks for the explanation. What I’m trying to understand is, let’s say if you’re doing x rupees in absolute number today and let’s say that x rupees becomes to 2x for the next two or three years, and whatever the rate of growth and stuff is, I’m just trying to understand if you make — do you look at absolute margin or you look at EBITDA per case internally when you’re looking at this maths?

Pradeep Jain — Chief Financial Officer

No. In terms of what we are allowed to make or in terms of how [Speech Overlap]

Manish Poddar — Motilal Oswal AMC — Analyst

You allowed to make. What you allowed to make, let’s say?

Pradeep Jain — Chief Financial Officer

We grew 10% that’s a variable number, it’s a percentage margin number.

Manish Poddar — Motilal Oswal AMC — Analyst

It’s a percentage margin.

Pradeep Jain — Chief Financial Officer

It’s a percentage margin. That’s right.

Manish Poddar — Motilal Oswal AMC — Analyst

Okay. And so even let’s say — sorry just to hop on it. So let’s say even if you double in size you still make a 10% margin only?

Pradeep Jain — Chief Financial Officer

We will make a 10%, yeah, absolutely.

Manish Poddar — Motilal Oswal AMC — Analyst

That’s how it is?

Pradeep Jain — Chief Financial Officer

[Speech Overlap] benchmark change and that warrants are change in the margin.

Manish Poddar — Motilal Oswal AMC — Analyst

Because your ad-spend and all will get calibrated with size and scale, right. So I’m just trying to understand, does this margin number move up or that is static?

Pradeep Jain — Chief Financial Officer

Yeah. Similarly on overhead also we get operating leverage.

Manish Poddar — Motilal Oswal AMC — Analyst

Okay, fair enough. Thank you so much.

Pradeep Jain — Chief Financial Officer

Thank you.

Operator

Thank you. Our next question is from the line of Prolin from Goldfish Capital. Please go ahead.

Prolin — Goldfish Capital — Analyst

Yeah. Hi, team. Thank you for giving us the opportunity. Just want to understand your pricing negotiation that are [Technical Issues]

Pradeep Jain — Chief Financial Officer

Disturbance in your — there is a lot of background noise. We are not being able to hear your question.

Prolin — Goldfish Capital — Analyst

Is it better now? Hello.

Pradeep Jain — Chief Financial Officer

Yes, the background noise has gone away but it’s still a little bit checkered your voice.

Prolin — Goldfish Capital — Analyst

How is it now?

Pradeep Jain — Chief Financial Officer

This is better.

Prolin — Goldfish Capital — Analyst

I’m sorry. I’m sorry, my headphones. So yeah, so my question was on this price negotiation on sports that we’re having with various states. Hypothetically, let’s assume that in the next one year the prices were to go up right. So do we need to go back to the states, where the price negotiations have already taken place or have you negotiated a mechanism wherein any inflation can be a pass-through?

Hina Nagarajan — Managing Director and Chief Executive Officer

Well, to answer that, I wish the second part was [Technical Issues] unfortunately not so. The short answer is, we do have to go back annually and negotiate the price increase, again. We have not yet found a way to get the government to sort of set mechanism, where inflation-linked or whatever that you’re alluding to. So yes, we will have to go back and negotiate every year till such time that we can find over a reasonable mechanism with the government.

Pradeep Jain — Chief Financial Officer

I mean, what you have mentioned will be divided end stage.

Prolin — Goldfish Capital — Analyst

But have you been trying for this — have you been trying for this that actually?

Hina Nagarajan — Managing Director and Chief Executive Officer

And we’ll continue to advocate for that.

Prolin — Goldfish Capital — Analyst

Okay. That’s what, that’s what I wanted to check. And secondly now that the sale — the sale of the category has been completed and we will be generating lot of cash. Any thought process on what you want to do in terms of payout because you mentioned you need to recoup some of the losses we are almost near that phase, right. So if you want to comment on how the payout would span out in the next two years?

Pradeep Jain — Chief Financial Officer

Yeah. So I mean, we are kind of in discussions on how and like I said in the last call also, we would officially relieve our dividend distribution policy over the next three to four months as we are working through it. But just to give a broad dimension of numbers, when we exited March ’22, right, we had accumulated losses of about INR1,050 crores on our balance sheets. Now in the six months, after incorporating the one-time profit from the sale of the divestiture, we have recouped about INR750 crore of that INR750 crore to INR760 crore, right. So that leaves about INR300 crores, which over the next couple of quarters, right, if everything kind of remains as-is we should be able to recoup and therefore we should be in a position to kind of get back to dividend distribution by the end of this financial year.

Prolin — Goldfish Capital — Analyst

That’s great. Thanks a lot for answering my question and all the best and best wishes for this festive season.

Pradeep Jain — Chief Financial Officer

Thank you.

Hina Nagarajan — Managing Director and Chief Executive Officer

Thank you so much.

Operator

Thank you. This was the final question for today. If your question has not been answered, please feel free to contact Richa Periwal, Head-Investor Relations. I will now turn the floor back over to Ms. Hina Nagarajan for closing remarks.

Hina Nagarajan — Managing Director and Chief Executive Officer

Thank you very much and thanks to all of you for participating today and for all your questions. To wrap up, I would really like to say that I can best describe this time as a celebration of our culture and a great example of how diverse experiences and perspective price growth and create value within our organization. We continue to be very focused on building on our current topline momentum. We will continue to invest in and accelerate what’s already working and explore future growth opportunities to further unlock value from our ecosystem. Finally, I would like to express my gratitude to all for their continued resilience, fashion and ownership within our organization and a big thank you to all of you for your time today and your ongoing partnership and support of our business. Wish you all a really lovely festive season ahead. Thank you so much.

Operator

[Operator Closing Remarks]