United Spirits Ltd. share price target

Gross margin in Q2FY20 declined 410 bps to 45% due to an increase in input cost. However, the company curtailed its marketing, employee and other expenses during the quarter, which restricted the decline in EBITDA margin. Owing to the subdued market scenario the company reduced its marketing and advertisement spend by ~ 240 bps to 7.6%. However, USL is likely to increase the marketing and advertisement spend in the upcoming festive...

Diageo's global market leadership (17/40% share in spirits/scotch) and its dominance in premium segment drives our confidence on UNSP. India is a critical market for Diageo, given the scale (largest Whisky market), leadership position and opportunity to premiumise. UNSP's premiumisation journey is on track (P&A revenue mix up 800bps vs. FY17) supported by aggressive A&P spend and de-focus on popular brands (franchise model). Restructuring drive, richer product mix, WC efficiencies (80 days vs. 120 days in FY17) have led to strong FCF generation over the last 3 years (cumulative Rs 32bn). Thereby, co has been able to deleverage balance sheet (net debt is at Rs 25bn vs. 40bn in FY17). We expect more of the same over FY19-21E (Rs 21bn FCF generation and Rs 12bn debt repayment). UNSPs performance was stellar despite impact of general elections. Restructuring drive and control on A&P; spends during elections drove beat in EBITDA. We believe UNSP will continue to tighten the screws on overheads and benefit from premiumisation. This drives our 21% EBITDA growth over FY19-21E (vs. 21% CAGR over FY16-19). We value at 40x FY21E EPS with TP of Rs 650. Maintain BUY.

23 July 2019 to INR22.2b (v/s our est. 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%. volumes were up 4% YoY (underlying* Popular volumes up 5% YoY). EBITDA grew 66.4% to INR4b (v/s est. Adjusted PAT grew 88.5% to INR2b (v/s est.

DART View: Premiumisation and margin expansion story continues UNSP's Q1FY20 revenue grew a weak 5.6% YoY (adjusted). The gross margin also fell 359bps to 46.6%. However, EBITDA/PAT (adjusted) rose 42/98% YoY, due to steep cost control. It is likely to achieve the guided...

Controlled expense management enables strong EBITDA growth USL's gross margin in Q1FY20 declined 290 bps to 47.2% due to increase in input cost. However, the company curtailed its marketing, employee and other expenses during the quarter. Owing to general elections, the company reduced its marketing & advertisement spend by ~280 bps to 7.7%....

Prestige & above segment contribution to revenues increased from 63% in FY18 to 66% in FY19. The management expects the P&A; segment to contribute ~ 85%, 90% by 2025, 2030, respectively. On the growth front, P&A; segment is expected to grow at mid teen while popular segment is expected to grow at low single digits in the medium term USL's Scotch grew 28% in FY19 with bottled in origin growing 48% and bottled in India growing 18%. The management highlighted that each higher segment was growing faster than the lower segment showing...

High barriers to entry, inelastic demand, and long-term consumption play; coupled with transformation of UNSP viz. premiumisation, cost control and de-leveraging attracts investors. We believe in this. UNSP is on track to deliver the guided low-teens revenue growth and mid-high teens EBITDA margin. United Spirits (UNSPs) 4QFY19 was in-line but weak. This is led by subdued revenue growth and increase in RM costs. Long-term industry opportunity is attractive. 20% price correction in trailing year makes the valuation attractive (45/34x FY20/21E). Maintain estimates and BUY with TP of Rs 650 (+20%) @ 40x FY21E EPS.

P&A; share in the product mix grew to 66% in FY19 from 58% in FY17. P&A; segment clocked volume growth of 12% compared to volume de-growth of 3% in the popular segment (comprises ~50% of total volumes). As per the management, growth has largely been higher in upper prestige, luxury and scotch segment (Johnnie Walker, Black & White growing at highest rates), supported by activations like commercials, branding, etc. USL would continue to invest in future while strengthening its investments in brand building (A&P;). Given the experience of working across distribution models coupled with...

Standalone net sales grew 3.5% YoY to INR22.5b (our est. INR22.6b), with reported volumes growing 1% YoY (our est. 2% decline); underlying volumes were up 2%. Prestige & above volumes grew 7.1% YoY while Popular volumes were down 4.5% YoY (underlying Popular volumes declined 3% YoY). EBITDA grew 2.9% to INR2.8b (our est. INR2.87b). Underlying* EBITDA grew 8% YoY. Adj. PAT declined 29.3% to INR1.31b (our est. INR1.47b). Concall highlights: (1) Management is seeing some recovery in sentiment post elections; it expects the improvement to continue; (2) 10 odd states saw price...

4QFY19 standalone net sales grew 10.7% YoY (off a strong base) to INR16.3b (our est. INR16.5b). EBITDA declined 17.8% YoY to INR1.7b (our est. INR2.5b), while Adj. PAT declined 25.3% YoY to INR679m (our est. INR1.1b). Volumes are estimated to have grown at 9% with likely market share gains as well. Standalone Gross margins declined 220bp YoY (our est. -60bp) to 50.5% likely due to higher barley costs. Employee costs were up 10bp YoY to 7.6% while other expenses were up 130bp to 32.4%. Consequently, standalone EBITDA margins were down 360bp YoY to 10.5% (our est. 15.0%)....