United Spirits' Q4FY18 results (Neutral) - EBITDA miss in spite of improving operating metrics
Q4FY18 result highlights
- USL’s standalone revenues increased by 7% yoy at Rs21.7bn(est: Rs20.9bn), EBITDA increased by 5% yoy at Rs2.7bn (est: Rs3.1bn). PBT (bei) increased by 97% yoy to Rs 3bn (est: Rs2.3bn). Reported PAT stood at Rs2.1bn versus loss of Rs1.04bn in base quarter.
- Excluding one off impact of operational model changes, net sales were up by 9% yoy. Prestige and Above segment net sales increased by 15.5% yoy with a volume growth of 15.3% yoy. Popular segment sales declined by 4% yoy, with a volume decline of 14% yoy. Excluding one offs, underlying net sales for popular segment grew by 2% yoy,.
- Gross margins improved by 460bps yoy (excluding one off impact gross margins were up 257bps yoy) led by price hikes, benefits of productivity initiatives and franchise operations.
- Staff cost increased by 53% yoy, due to a low base and higher variable pay-outs. Advertising spends 34% yoy. Resultant EBITDA margins decline by 30bps yoy to 12.6%. Adjusted EBITDA was down 11% yoy with margin contraction of 283bps yoy.
- Other income was up 6.5x to Rs1.2 bn on account of income of from property sale (Rs650mn) and sale of subsidiary (Rs330m).
Key positives: Continued gross margin improvement
Key negative: Higher staff cost & advertising spends
Impact on financials: We marginally reduce our FY19/20E earnings.
Valuation & view
With normalcy returning to the operating environment, USL’s revenue growth trajectory has improved significantly. With a healthy exit gross margin in Q4FY18, we expect overall gross margin expansion to continue over FY18-20E, albeit at a lower rate (250bp vs 550bp over FY16-18E). For USL to achieve a mid-teen EBITDA margin, the company will have to keep overhead costs under check so that all gross margin savings flow through at the operating levels. We believe that the company’s business model can achieve this and we are factoring a 16% EBITDA margin in FY20E (vs 12.5% in FY18). Though we are factoring strong EBITDA growth (26% CAGR over FY18-20E), we believe USL is fairly valued at current levels (29x EV/EBITDA in line with 5 year average), leaving little upsides from current levels. 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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