MOSL: UNITED SPIRITS (Neutral)-Disappointing operating performance, fair valuations limit upside
United Spirits: Disappointing operating performance, fair valuations limit upside
(UNSP IN, Mkt Cap USD5.8b, CMP INR573, TP INR620, 8% Upside, Neutral)
- UNSP posted standalone net sales growth of 10.5% YoY to INR25b, with volumes growing 3.8% YoY (est. of +9%) on a base of 14.2% decline. Prestige & Above volumes grew 12% YoY while Popular volumes declined 3.6% YoY (underlying Popular volumes down 2% YoY). EBITDA grew 27.7% to INR3.5b (est. INR3.9b). Adjusted PAT grew 44.3% to INR2.1b (est. INR2.3b).
- 9MFY19 performance: Sales/EBITDA/adj. PAT grew 12.4%/41%/61.9%. EBITDA margin expanded 300bp YoY to 15%.
- Concall highlights: (1) Input cost environment is witnessing an upturn, particularly in glass and to a lesser extent in ENA; (2) Since there were no price hikes off late and inputs costs are hardening, gross margins have been impacted sequentially in 3QFY19.
- Valuation view: The massive volatility in EBITDA margins was witnessed again in another quarter of disappointing numbers for UNSP. Despite a favorable base, volume growth in the Popular segment disappointed. Election related disruptions are also likely in the near term. With rising material costs off low levels, absence of any price increase and some absorption of the excise increase in Maharashtra, we believe the near-term margin outlook is subdued leading to 8.8%/5.0%/2.2% decline in our EPS forecasts for FY19/FY20/FY21. Nevertheless, the stock is down 15% over the past two months and has reached Jan’15 levels, despite adjusted PAT rising 4x to INR7.5b over the period. Given the uncertainty over its route to mid-high teens EBITDA margins, valuations are fair at ~40xFY20 EPS. Our DCF-based target price of INR620 leaves limited room for an upside, leading us to maintain Neutral rating on the stock.
United Spirits Limited is a spirits company engaged in the business of manufacture, purchase and sale of alcoholic beverages. The Company operates through two segments: India and Outside India. The India segment is engaged in the business of manufacture, purchase and sale of Beverage Alcohol (Spirits and Wines), including through Tie-up units/brand franchisees within India. The Outside India segment is engaged in the business of manufacture, purchase and sale of Beverage Alcohol (Spirits and Wines), including through Tie-up units/brand franchisees outside India. Its product portfolio includes whisky, vodka and rum segments, and caters to various consumers through luxury, premium, prestige and popular spirits categories. Its brand portfolio includes McDowell's No.1, Royal Challenge, Signature and Antiquity. It has over 80 (74 excluding Royalty and Franchise units) manufacturing facilities spread across approximately 20 states and over three union territories in India.
Motilal Oswal Financial Services Ltd. is a reputed name in Financial Services and Online Trading with group companies providing services such as Private Wealth Management, Retail Broking and Distribution, Institutional Broking, Asset Management, Investment Banking, Private Equity, Commodity Broking, Currency Broking, Principal Strategies & Home Finance.
Motilal Oswal Securities is a group company of Motilal Oswal Financial Service Limited which started as a stock trading company and has blossomed into well diversified firm offering a range of financial products and services. Motilal Oswal has built a reputation as the source for best stock trading company and this has taken a wealth of experience, knowledge and expertise, constantly working in tandem, over the years.
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