United Spirits' Q3FY20 results (Neutral) - 3Q mixed bag, commentary on outlook turns positive

Q3FY20 result highlights

• Standalone rev. grew by 3.4% yoy to Rs25.8bn (est:Rs25.4bn), EBITDA grew by 18.4% yoy to Rs4.24bn (est:Rs4.1bn), PAT grew by 34.5% yoy to Rs2.6bn (est: Rs2.8bn).
• Overall volumes fell by 1.8% yoy (est: +2.0%). P&A volume were up 2.7% yoy (est: +5%), Popular Volumes declined 6.5% yoy (est:-1%).P&A sales grew 8.3% yoy implying positive price/mix. Popular segment sales declined 5.3% yoy (Priority states sales were down 4%).
• Reported Gross margins declined by 420bps yoy to 44.4% (down 90bps qoq on adj basis, down 60bps on reported basis) impacted by higher input costs (ENA & Other blending material). 
• Staff cost decreased by 20% yoy aided by productivity led gains. Advertising spends down 6% yoy (from 10.7% of sales in 3QFY19 to 9.7% of sales in 3QFY20). Other expenses were down 19.8% yoy aided by cost efficiencies & zero provisions. Reported EBITDA grew by 18.4% yoy with a margin expansion of 210bps yoy to 16.4%.

Key positives: Positive commentary on outlook, tight control over costs.

Key negatives: Weak volumes & qoq decline in gross margins.

Impact on financials: No material change in FY21E standalone EBITDA. Introduce FY22E estimates.

Valuations & view

UNSP’s 3QFY19 result was a mixed bag with volume & gross margins remaining weak, however, tight control over the cost continued to offset the impact of the same resulting in better than estimated EBITDA growth. The key positive was that management sounded more confident on a) improving the momentum in P&A segment through relevant market interventions and b) does not expect deterioration in gross margins with ENA prices likely to have peaked out. We like the story and are factoring healthy volume CAGR of 7% (P&A volume CAGR of 10%), coupled with 100bps+ gross/EBITDA margin expansion over FY19-22E. However, after the sharp run-up in stock price post results, it is now trading at 44x FY21E standalone EPS (higher than avg. PE for FMCG coverage universe), thereby providing limited upside. We roll forward to FY22E, to arrive at revised target price of Rs689. Maintain Neutral rating & believe any correction in stock prices should be used to add positions. P&A volume trajectory, ENA price movement & state budgets will be the key monitorables for the FY21E.