MOSL: UNITED SPIRITS (Neutral)-High valuations and GST overhang cap potential upside
United Spirits: High valuations and GST overhang cap potential upside
(UNSP IN, Mkt Cap USD7.0b, CMP INR3386, TP INR3435, 1% Upside, Neutral)
We attended United Spirits' (UNSP) analyst meet. Key takeaways:
- Management reiterated its medium-term target of double-digit sales growth and mid-to-high teen margins. Double-digit sales will be driven by mid-teens growth in the Prestige & Above (P&A) segment and low-single-digit growth in the residual Popular segment in its three states of operation.
- Unlike in the past, incremental expansion in the EBITDA margin will be more because of scale benefits and cost savings than gross margin.
- While the regulatory environment is becoming conducive, the amenability to further price hike requested from states is still not clear.
- Despite assuming double-digit sales growth for both FY19 and FY20, EBITDA margins of 15.5% in FY19 and 16.5% in FY20 (v/s 12.5% in FY18, 12.6% in 4QFY18) and a further reduction in the working capital, one-year-forward valuations remain high.
- Moreover, the overhang of possible inclusion of extra neutral alcohol (ENA) within the ambit of the goods and services tax (GST) remains, and the potential impact from this could knock off 10-15% from EBITDA. We, thus, maintain our Neutral rating on the stock with a DCF-based target price of INR3,435.
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.
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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