United Spirits' Q2FY20 results (Neutral) - Mixed bag

Q2FY20 result highlights

• USL’s reported standalone revenues increased by 3.2% yoy to Rs22.9bn, EBITDA fell by 6% yoy to Rs4.15bn, PAT fell by 13% yoy to Rs2.2bn.
• The revenue has benefit of one-time sale of bulk scotch of ~Rs713m. Adj. standalone revenue was flat at Rs22.2bn (est: Rs25.8bn), underlying EBITDA decreased by 12% yoy to Rs3.9bn (est: Rs4.1bn) with a margin contraction of 240bps to 17.5% (est: 17.4%).
• Underlying P&A volume were up by 2.9% yoy (est:7%), Popular Volumes fell 1% yoy (est: 0%), impacted by slowdown in consumer demand, liquidity challenges in certain markets as well as temporary supply chain disruption in Scotch portfolio.
• Reported gross margins declined by 520bps yoy to 45% (excluding one off impact gross margins were down 490bps yoy to 45.3%) impacted by higher input costs, adverse mix and due to part-absorption of excise duty hike in Maharashtra.
• Staff cost increased by 3% yoy. Advertising spends down 13.5% yoy aided by phasing effect of marketing investments. Other expenses were down 11% yoy. Reported EBITDA decreased by 6% yoy with a margin decline of 180bps yoy to 18.1%. Adjusting for one-off impacts, margin contraction was 240bps yoy to 17.5%.

Key positives: Strong control over other overheads.

Key negatives: Weak volumes & gross margins.

Impact on financials: No material change in FY20/21E EBITDA. EPS increase in FY21 is due to lower tax rate.

Valuations & view

UNSP’s 2QFY19 result was a mixed bag as one off disruptions, higher input costs & adverse mix impacted volumes & gross margins, however continued tight control over costs helped in cushioning the impact on operating margins. With one-off operational issues now behind & some moderation in ENA prices, volume & margin trajectory is likely to improve sequentially, however, benign consumer demand and high competitive intensity provide limited scope for earnings upsides. We would wait for more sustainable pick up in P&A volumes & gross margins to turn constructive on the name. We believe current valuations at 42x standalone FY21E earnings, adequately captures the already baked in positives. Maintain Neutral.