United Spirits' Q1FY20 results (Neutral) - Strong cost control drives earnings beat, sustainability is the key…

Q1FY20 result highlights

• USL’s reported standalone rev. grew by 10% yoy to Rs22.2bn, EBITDA grew by 95% yoy to Rs3.95bn, PAT was up 143% yoy to Rs1.97bn.
• Adj standalone rev. (for one-off scotch sale of Rs970m) grew by 6% yoy to Rs21.2bn (est: Rs21.8bn), adjusted EBITDA grew by 42% yoy to Rs3.39bn (est: Rs2.5bn) with a margin expansion of 407bps to 16%.
• Underlying volumes increased by 7% yoy. P&A segment net sales increased by 8.7% yoy with a volume growth of 8.4% yoy. Excluding one-off impact, underlying net sales for popular segment increased by 3% yoy with a volume growth of 5% yoy. 
• Gross margins declined by 290bps yoy to 47.3% (excluding one off gross margins were down 359bps yoy to 46.6%) impacted by higher input costs and part-absorption of excise duty hike in Maharashtra.
• Staff cost decreased by 33% yoy, albeit on a high base (one off restructuring cost of Rs360m in 1QFY19). Adjusting for one-off costs, staff cost was down 19% yoy led by a) cost efficiencies and b) higher provisioning of variable component in base quarter. Adspends down 19% yoy on high base and due to elections. Other expenses were down 11% yoy aided by cost efficiency and benefit of ~50bps due to implementation of IND AS 116.

Key positives: Strong control over other overheads.

Key negatives: Weak price/mix & uptick in ENA prices.

Impact on financials: We increase standalone EBITDA by 9%/9% for FY20/21E.

Valuations & view

UNSP’s 1QFY19 were inline on volume front, with realisation & gross margins remaining weak and are unlikely to improve given the firming up of ENA & lack of price hikes in key markets. While strong cost control was impressive, the visibility on sustaining the same going ahead remains low especially on adpends & staff costs, which have been quite volatile historically too. However, we are now factoring higher standalone EBITDA CAGR of 18% with margin expansion of 220bps over FY19-21E and have increased our target multiple. We believe current valuations at 50x/41x standalone FY20/21E EPS, provide limited upsides in the current context. Maintain Neutral. Key Risks - Price hike in key markets, favorable outcome on treasury stock dispute with IDBI bank.