United Spirits' Q3FY19 results (Neutral) - Input cost pressure leads to EBITDA miss

Q3FY19 result highlights

• Standalone revenues increased 10% yoy at Rs25bn(est: Rs25bn), EBITDA increased 28% yoy at Rs3.5bn (est: Rs3.76bn). Adjusted PAT increased 44% yoy to Rs2.1bn (est: Rs2.17bn)
• Prestige and above net sales increased by 16% yoy with volume growth of 12.1% yoy, albeit on a lower base (2% decline in 3QFY18). Popular segment sales decreased by 3% yoy, with a volume de-growth of 3.6% yoy. Excluding one off impact of operating model changes, popular net sales decreased by 2% yoy.
• Gross margins declined by 10bps yoy and 180bps qoq as benefit of improved mix and productivity initiatives was offset by adverse impact of COGS.
• Staff cost increased by 6% yoy, other expenses grew by 5% yoy while ad spends increased by 3% yoy (down 80bps yoy as a % to sales) resulting in EBITDA margin expansion of 190bps yoy. Adjusting for one off costs & operating model changes, underlying margin expansion was 91bps yoy.
• Other income increased by 160% yoy (includes Rs330m on account of property sale), depreciation was up 5% yoy. Interest cost declined 16% yoy due to favorable rates/mix of debt. Tax rate was up by ~820bps yoy resulting in adj PAT growth of 44% yoy.

Key positives: Healthy growth in P&A segment

Key negatives: Rising input costs and qoq decline in gross margins

Impact on financials: We cut our 20/21E earnings by 8-10%

Valuations & view

UNSP’s earnings were operationally below expectations, largely impacted by higher input costs. Baring near term disruption due to election, we expect revenue growth trajectory to remain healthy aided by P&A segment. While we appreciate UNSP’s aggressive focus on cost efficiencies & premiumisation, we believe, the extent of EBITDA margin expansion is going to be lower going forward as gross margin expansion will be challenging given the uptick in ENA/glass prices, lack of fresh price hikes and unfavorable base. We are factoring volume CAGR of ~7%, standalone EBITDA CAGR of 16% with margin expansion of 120bps, resulting in 21% consolidated earnings CAGR for UNSP over FY19-21E. Valuations at 27x/23x FY20/21E EBITDA appear fair given the emerging headwinds on margins.