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MOSL: UNITED SPIRITS (Buy)- Good results in a difficult environment, earnings growth outlook healthy

UNITED SPIRITS: Good results in a difficult environment, earnings growth outlook healthy

(UNSP IN, Mkt Cap USD6.2b, CMP INR589, TP INR700, 19% Upside, Buy)

 

• Standalone net sales grew 10.4% YoY to INR22.2b (v/s our est. INR22.3b). Net sales excluding sale of bulk scotch grew 6%, impacted by the general elections. Reported volume growth stood at 6% YoY (v/s est. of 8% YoY); underlying volume was up 7%. Prestige & above volumes grew 8% YoY, while Popular volumes were up 4% YoY (underlying* Popular volumes up 5% YoY). EBITDA grew 66.4% to INR4b (v/s est. of INR2.7b). Underlying EBITDA grew 42% YoY. Adjusted PAT grew 88.5% to INR2b (v/s est. of INR1.3b).
• Concall highlights: (1) Management expects gross margin pressures to abate as cost inflation of glass has ceased and ENA costs have slightly inched up, (2) 15 states have seen price increase in recent quarters, and (3) Severance costs along with reduction in factories is leading to reduction in staff costs.
• Valuation view: There has been no major change in forecasts after healthy results in a weak environment (due to the impact of elections on alcohol players). After single-digit EBITDA growth in both FY17 and FY18, operating performance improved sharply with double-digit sales growth and 25% EBITDA growth in FY19. Momentum seems likely to sustain in FY20 despite near-term gross margin pressures. The case for sustaining its target of double-digit sales growth and mid-to-high teens margins is getting stronger due to (a) major disruptions now appearing to be in the past, (b) continued mix improvement, (c) benefits of cost savings, and (d) faster pace of price increases obtained from state governments compared to the past. Better balance sheet management is another key trigger. Valuations of 35.5x FY21EPS and 21.9x FY21EV/EBITDA are at a slight discount to consumer peer average, despite better earnings visibility. Compared to alcohol peers, UBBL, UNSP's valuations are at 25% and 10% discount on P/E and EV/ EBITDA, despite better earnings growth prospects and better ROCEs. Maintain Buy with DCF-derived TP of INR700.