United Spirits Ltd. share price target

Activation of the Scotch portfolio in ~2,000 outlets across India, resulted in better availability and wider range in these outlets. This could result in healthy demand for BIO and BII Scotch, when overseas travel and higher duty free sales (booked as part of Diageo global revenues) resume....

United Spirits Limited is the largest spirits company in the branded spirits market in India.

USL continued to reinvest and renovate its biggest core brands i.e. McDowell's No. 1 and Royal Challenge with an innovative packaging and new blends, even during the pandemic. The management indicated that McDowell's No 1 renovation received a good response from customers. The management also focused its resources on capitalising newer trends such as consumption in home premises. Ad spends are expected to return to 89% of revenues as the situation normalises and the company will continue...

United Spirits (UNSP) reported in-line sales and significantly better-thanexpected EBITDA and PAT in 4QFY21. The key highlight of the result was the net debt declining to INR5.6b at end-FY21 (from INR20.7b at end-FY20) the net debt has halved even over Sep'20 levels. While deleveraging has historically been a key success area for UNSP, it was particularly laudable in FY21 given the weak operating environment. Therefore, ROCE dipped just 50bp to 16.8% despite a ~42% EPS reduction in FY21. This gives us confidence that ROCE, which had been improving steadily in recent years,...

Consumer sentiment continues to improve month on month. After 49% YoY volume decline in 1QFY21, volumes had already recovered to flattish levels YoY by 3QFY21. Thus, further sequential improvement is encouraging. Innovation and renovation activity is also likely to pick up further. Mr Kripalu believes the ongoing Prestige and Above (P&A;) trend would only accelerate as high involvement categories such as alcohol would move toward premium products as they get more affordable for the population. An ongoing strategic review of the Popular segment (to be completed by Dec'21)...

Higher A&P; expense to support volume growth USL continued to reinvest and renovate its biggest core brands i.e. McDowell's No. 1 and Royal Challenge with an innovative packaging and new blends, even during the pandemic. A&P; expense continued at healthy 8-9% levels during Q2 and Q3, which supported the volume growth seen in the P&A; and popular segment. The management also focused its resources on capitalising newer trends such as consumption in the home premises and with family members. USL has 80 brands of Scotch, IMFL, brandy, rum,...

USL reported results with a faster than expected recovery QoQ in volumes (leading to mere 3.4% YoY decline in volumes), in spite of the continued closure of on-trade channels in various states, higher taxation post-Covid scenario and also contraction in the business in Andhra Pradesh. The recovery also saw higher growth in the P&A; segment (up 116% QoQ and flat YoY) compared to the popular segment (up 90% QoQ but down 7% YoY). The company also increased its A&P; expenses during the quarter, to launch its two renovated core brands (McDowell's No 1 and Royal Challenge)....

28 July 2020 United Spirits (UNSP) declared dismal 1QFY21 EBITDA/net loss (albeit lower than our expectations). Further, Premium & Above segment (P&A;) is likely to underperform (unlike previous years) leading to mix deterioration. Also, the full impact of the sharp excise hikes by various states would be felt 2QFY21 onwards. All these factors lead to weak earnings expectations though we do not expect EBITDA losses 2QFY21 onwards. Our DCF-based calculations and P/E multiples of 47x FY22E EPS indicate that valuations seem currently lofty given the uncertainty prevailing over earnings growth in the sector. We had downgraded the UNSP stock to due to rising concerns on the Alcobev sectors earnings growth in the COVID and immediate post-COVID era. After adjusting for one-time bulk Scotch sales last year, underlying net sales declined 51%. P&A; and Popular volumes declined 51.5% and 46.

UNSP's Q4FY20 was in-line but weak at operating level with volume decline of 13% YoY (P&A; 20%). Adjusted for one-off bulk sales, Revenue/ EBITDA/APAT were -14.8/-10.6/-28.2% YoY. Reported revenue/EBITDA/PAT were -11.4/-12.4/-14.6% YoY. Yet, UNSP's earnings print is impressive in backdrop of weak volume growth and decline in Gross margin of 433/220bps YoY/QoQ. Persistent cost controls in line-items below GP is enticing for second consecutive quarter. For perspective, below GP costs declined from...

1 June 2020 UNSPs 4QFY20 results were worse than expectations. If bulk scotch sales (that could be lumpy but not extraordinary) are excluded, then results would be even weaker. While UNSPs PAT CAGR for 5 years ending FY20 stood at 33%, FY21 and FY22E are likely to be the lost years for UNSP and other alcohol companies with negligible earnings growth. Impact of extremely sharp excise increases across states would only exacerbate the pressure on FY21 profitability. Further, we believe profitability is already sharply impacted by (a) the absence of any sales until 3 May, and (b) absence of sales from on-trade channel (20- 25% of sales), which is expected to last for a significantly large part of the year after the latest MHA guidelines. on UNSP on account of fair valuations. Standalone net sales declined 11.4% YoY to INR19.9b (v/s est. the one-off sale of bulk Scotch, declined 14.8%.