MOSL: UNITED SPIRITS (Neutral)-Significant EBITDA beat led by gross margin improvement

​United Spirits: Significant EBITDA beat led by gross margin improvement

(UNSP IN, Mkt Cap USD5.8b, CMP INR3029, TP INR2970, 2% Downside, Neutral)

• UNSP’s standalone net sales fell 3.7% YoY to INR19.5b, with a 15.9% YoY decline (est. of -7%) in overall volumes. Management attributed the decline in sales to the highway ban and the one-off impact of operating model changes. Management expects the highway ban impact to normalize by end-3QFY18.
• Prestige & Above (63% of net sales) volumes rose 2.2% YoY (sales up 10%), while Popular volumes declined 28.2% YoY (sales down 22%).
• Performance excluding the one-off impact of operating model changes: Underlying net sales increased 4% YoY. Prestige & Above sales were up 12% YoY, while Popular sales were down 9% YoY.
• Gross margin expanded 560bp YoY (160bp QoQ) to 47.6%, led by price increase, productivity initiatives, premiumization and operating model changes. Advertising expenses increased by 100bp YoY. EBITDA margin after adjusting for exceptional items expanded 260bp YoY to 14%.
• EBITDA grew 18.5% YoY to INR2.7b (est. of INR2.6b). Interest costs declined 25.5% YoY to INR659m, led by debt reduction and favorable rates. Adjusted PAT grew 39.6% YoY to INR1.4b (est. of INR1.2b).
• Conference call highlights: 1) Medium-term objective: Double-digits sales growth and mid-to-high-teens margins. 2) Management now expects the effect of GST on margins in FY18 to be moderate, unlike fears of a sharp contraction.