United Spirits' Q1FY19 results (Neutral) - Weak volumes and higher operating expenses drive earnings miss
Q1FY19 result highlights
- United Spirits’ (UNSP) standalone revenues increased 13% yoy at Rs20bn(est: Rs20.7bn), EBITDA increased 22% yoy at Rs1.9bn (est: Rs2.5bn). Reported PAT increased 29% yoy to Rs813m (est: Rs1.2bn)
- Excluding one off impact of operational model changes, net sales were up by 14% yoy (volume growth of 4%). Prestige and above net sales increased by 19% yoy with volume growth of 13.1% yoy. Popular segment sales declined by 3% yoy, with a volume decline of 9.4% yoy. Excluding one off impact, popular net sales were flat with a volume decline of 4% yoy.
- Gross margins improved by 310bps yoy (excluding one off impact margins were up 266bps yoy) as input cost inflation & GST impact was offset by price hikes and benefits of productivity initiatives.
- Staff cost increased by 24% yoy, primarily due to the one-off restructuring of Rs. 360m in the quarter. Advertising spends were up 30% yoy due to higher investment behind brands with marketing spends activated behind the IPL and FIFA World Cup. Other overheads increased 14% yoy mainly due to investment in capability building projects. Adjusting for one off restructuring costs and operating model changes, underlying EBITDA was up 28% yoy with margin expansion of 127bps yoy to 11.3%.
- Interest cost declined 20% yoy due to favourable rates/mix of debt.
Key positives: Continued gross margin improvement.
Key negative: Weak volume growth. Higher advertising spends
Impact on financials: We reduce our FY19/20E earnings by 6%/5%.
Valuation & view
Given the low base, we expected Q1FY19 to set the tone for a strong FY19 performance for UNSP. However, the higher operating expenses and weak volumes, especially in the popular segment have resulted in the company falling short. We continue to factor a healthy 22% consolidated earnings CAGR for UNSP over FY18-21E which it can achieve through steady volume growth and margin improvement. However, given the frequent downward revision to our estimates due to a miss on margins, we believe visibility to consistent earnings delivery remains in question. We believe in the company’s brand strength and premiumization potential and will await better entry point as volume and earnings growth visibility improves. Maintain 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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