United Spirits' Q3FY18 results (Downgrade to Neutral) - Revenue miss; valuations factoring the best case
Q3FY18 result highlights
- USL’s standalone revenues declined by 8% yoy (est: 4% yoy) at Rs22.6bn, EBITDA decreased by 7% yoy at Rs2.7bn (est:Rs4bn). PAT before exceptional was flat yoy at Rs1.47bn (est: Rs2.2bn).
- Prestige and Above segment net sales decreased by 3% yoy with a volume de-growth of 2% yoy. Excluding one-off impact, net sales were down 1% yoy. The volume growth was impacted due to route market change in Haryana (~7-8% of volumes) which is a key market for this segment.
- Popular segment sales declined by 16% yoy, with a volume decline of 22% yoy. Excluding one off impact, underlying net sales for popular segment declined by 2% yoy,. Priority states sales grew by 6% for the quarter.
- Gross margins improved by 540bps yoy (excluding one off impact gross margins were up 373bps yoy) led by price hikes, benefits of productivity initiatives and franchise operations. Reported EBITDA declined by 7% yoy with a margin being flat at 12% also impacted by higher marketing spends. Adjusting for one of impacts, underlying EBITDA was down 4% yoy with margin contraction of 29bps yoy.
Key positives: Continued gross margin improvement
Key negative: Weakness in volumes
Impact on financials: Factoring weak volume performance, we reduce our FY18E consolidated earnings by 7%.
Valuations and View
Apart from the one offs, the weak revenue growth for USL is also indicative of a muted realization increase in spite of price increases. We believe the route to market changes will impact growth for another quarter and hence cut FY18 earnings. We are factoring a strong recovery and a 30% EBITDA growth in FY19 and expect USL to achieve its target of double digit revenue growth and mid teen margins for the first full year in FY19 and build from there in FY20. The stock has delivered a 35% return since our upgrade in the last quarter on the assumption of growth rebounding and lower RM prices driving margin improvement. However, even after factoring strong revenue growth and a reduction in ENA prices, we believe valuations at 30.3xFY20E EBITDA factor the best case; we downgrade UNSP to Neutral.
United Spirits is engaged in the business of manufacture, purchase, sale and distribution of alcoholic beverages, mainly, whiskey, brandy and rum. Co. is the flagship company of the UB Group Spirits Business. Co. conducts its activities in the Indian Made Foreign Liquor (IMFL) industry segment through Tie-up manufacturing/brand franchise. Co. maintains a portfolio of 60 brands, sourced through its manufacturing network which comprises 12 owned distilleries and 27 contracted sources of supply. Co.'s brand names include, Black Dog, Single Malt, No. 1 McDowell's brandy, Caesar, Red Riband, White Mischief, Celebration XXX, Old Cask, etc.
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