United Spirits' Q2FY19 results (Neutral) - A great quarter in a good year!
Q2FY19 result highlights
- United Spirits’ (UNSP) standalone revenues increased 14% yoy at Rs22bn(est: Rs21.7bn), EBITDA increased 36% yoy at Rs4.3bn (est: Rs3.3bn). Reported PAT increased 69% yoy to Rs2.6m (est: Rs1.9bn)
- Excluding impact of operational model changes, net sales were up 15% yoy (volume growth of 10.3%). P&A net sales increased by 19% yoy (volume growth of 15.4% yoy). Popular segment sales increased by 8.1% yoy, with a volume growth of 5.3% yoy. Excluding impact of operating model changes, popular net sales were up 10% yoy.
- Gross margins improved by 150bps yoy (excluding one off impact margins were up 120bps yoy) as input cost inflation was offset by benefits of productivity initiatives.
- Staff cost decreased by 11% yoy while other expenses grew by 4% yoy thereby offsetting 38% yoy growth in Advertising spends. Adjusting for one off costs & operating model changes, underlying EBITDA was up 36% yoy with margin expansion of 303bps yoy to 19.4%.
- Other income declined by 18% yoy. Interest cost declined 37% yoy due to favorable rates/mix of debt as well as a one off Rs100m write back.
Key positives: Healthy volume growth, continued gross margin improvement.
Impact on financials: We increase our FY19/20/21E earnings by 12%/5%/6%.
Valuation & view
UNSP reported strong performance with higher volume growth & tight control over costs resulting in a significant earnings beat. With the regulatory environment remaining stable, we expect volume growth trajectory to remain healthy led by continued strong growth in the prestige and above segment and steady popular performance. While we believe UNSP can achieve its mid-teen EBITDA margin guidance aided by benefit from its productivity initiatives & operating leverage, the extent of margin expansion is likely to be lower in the ensuing quarters. We are factoring volume CAGR of ~7%, standalone EBITDA CAGR of 20% with margin expansion of 230bps, resulting in 23% consolidated earnings CAGR for UNSP over FY19-21E. We believe in the company’s brand equity and premiumization potential, however, with the stock trading at 26xFY20E EBITDA, we believe growth expectations are adequately factored in. We await a better entry point; Maintain Neutral
United Spirits Limited is a spirits company engaged in the business of manufacture, purchase and sale of alcoholic beverages. The Company operates through two segments: India and Outside India. The India segment is engaged in the business of manufacture, purchase and sale of Beverage Alcohol (Spirits and Wines), including through Tie-up units/brand franchisees within India. The Outside India segment is engaged in the business of manufacture, purchase and sale of Beverage Alcohol (Spirits and Wines), including through Tie-up units/brand franchisees outside India. Its product portfolio includes whisky, vodka and rum segments, and caters to various consumers through luxury, premium, prestige and popular spirits categories. Its brand portfolio includes McDowell's No.1, Royal Challenge, Signature and Antiquity. It has over 80 (74 excluding Royalty and Franchise units) manufacturing facilities spread across approximately 20 states and over three union territories in India.
IDFC Securities Ltd., a subsidiary of the Infrastructure Development Finance Company (IDFC) wherein the Government of India holds a 20% interest, is India's leading equities broker catering to most of the prominent financial institutions, both foreign and domestic investing in Indian equities. A research team of experienced and dedicated experts ensures the flow of critically investigated stock ideas and portfolio strategies for our clients. Our coverage spans across various growth sectors such as agriculture, automobiles, Consumer Goods, Technology, Healthcare, Infrastructure, Media, Power, Real Estate, Telecom, Capital Goods, Logistics, Cement amongst other sectors. Our clients value us for our strong research-led investment ideas, superior client servicing track record and exceptional execution skills.
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