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MOSL: UNITED SPIRITS (Buy)-Strong execution in P&A, RM pressure abating

United Spirits: Strong execution in P&A, RM pressure abating

(UNSP IN, Mkt Cap USD6.7b, CMP INR656, TP INR801, 22% Upside, Buy)

 

• UNSP not only reported 8% sales growth in the Prestige & Above (P&A) segment (mainly led by the return of mix improvement and despite a challenging base of 16% growth in 3QFY19), but also ended the quarter with healthy winter and Christmas/New Year eve sales. This is comforting, particularly when looked at the uncertain outlook on P&A at end-2QFY20.
• After facing RM cost pressure for a few quarters, management cited some relief on ENA costs over the last two months.
• Despite significant pressure on the gross margin from ENA costs, the company (contrary to expectations of EBITDA margin pressure for FY20) reported ~120bp YoY operating margin improvement in 9MFY20 (adjusted for bulk scotch), including 210bp YoY expansion in 3QFY20.
• Premiumization trend returned with each sub-segment growing faster than the one beneath it. 

Sales growth below expectations but significant beat on EBITDA 

• Standalone net sales grew 3.4% YoY to INR25.8b (our estimate: INR26.8b).
• Reported volumes declined 1.8% YoY (our estimate: +5%). P&A volumes grew 2.7% YoY, while Popular volumes were down sharply by 6.5% YoY.
• EBITDA grew 18.4% YoY to INR4.2b (our estimate: INR3.7b).
• Despite significant gross margin compression, the EBITDA margin expanded 210bp YoY to 16.4% (our estimate: 13.8%), primarily led by savings in operating costs and to a lesser extent by the lower marketing reinvestment rate (other expenses were down 390bp YoY, staff costs were down 150bp YoY and ad spends were down 100bp YoY).
• PBT grew 7.9% YoY to INR3.4b (our estimate: INR3.2b). Adj. PAT was up 21.7% at INR2.6b (our estimate: INR2.4b), led by higher EBITDA and lower corporate tax rates.
• For 9MFY20, sales/EBITDA/PAT growth stood at 5.4%/18.9%/18.3% YoY.