Management Speak: United Spirits (Neutral) - Improving environment to drive growth!
We present key takeaways of our interaction with United Spirits (UNSP) from its annual analyst meet. Having navigated a volatile FY18 impacted by GST, highway ban and route to market disruptions, management now believes it is well placed to deliver double-digit (~10%) revenue growth in FY19. With marketing spends having stabilized at higher levels, management re-iterated its guidance of mid-to-high teen operating margins over the medium term (from 12.5% in FY18), supported by higher revenue growth and continued productivity gains across cost items. Our assumptions for FY18-20E factor in 11% revenue and 26% EBITDA CAGR (flat and 7%, respectively, over FY16-18E), which we believe encapsulates management’s growth expectations. With the stock trading at 30xFY20E EBITDA, we believe growth expectations are adequately factored in the price. We await a better entry point; Maintain Neutral.
Double-digit revenue growth outlook: Management’s guidance of ~10% revenue growth target will be led by mid teen growth in the prestige and above segment and low single-digit growth in the popular segment (led by UNSP’s priority states). A mix of innovative marketing behind its core premium brands and product innovation (Captain Morgan rum) is expected to drive the mid-teen growth in the prestige and above segment.
Operating margin target at mid to high teens: EBITDA margin improvement of 110bp in FY18 was led by sharp 465bp increase in gross margins. Standalone EBITDA margin expansion (we have factored in 350bp expansion over FY18-20E to 16%) will be a function of higher revenue growth compared to last 5 years (flat) and continued productivity benefits across all costs.
Balance sheet improvement to continue: UNSP has reduced its net debt in FY18 by Rs8.07bn, led by a mix of non-core asset sale, low capex (Rs1.34bn) and savings in working capital (Rs3.07bn). Management believes reduction in working capital days, marginal capex (~Rs2bn annually) and continued monetization of non-core assets will result in continued net debt reduction going forward from Rs32.6bn currently.
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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