United Spirits – Non-trade performance and resilient margin – ICICI Securities


A strong Prestige & Above segment and a resilient off-trade channel helped the volume impression of + 8% at 4TFY21. Trade restrictions and problems in West Bengal and Andhra Pradesh continued to have an impact. Favorable gross margins, cost control and operating leverage contributed to a superior margin performance (EBITDA margin up 490 bps yoy to 18.5%). Improved cash generation helped reduce net debt to 5 billion rupees. The generation of OCF / FCF in FY21 was 17.3 billion rupees / 16.2 billion rupees (the highest in many years). The new distribution model (online ordering and home delivery), if maintained, can be a structural positive for the industry. Hina Nagarajan succeeds Anand Kripalu as CEO effective July 1 – some investors see it as a potential stock revaluation event (see report Leadership Matters). Retain ADD; TP Rs650.

– Decent recovery in Q4 despite the constraints: Turnover / EBITDA / PAT up 12% / 52% / 125%; The 2-year revenue CAGR decreased 0.6%. Underlying sales (excluding the sale of bulk Scotch in base) increased 16%. The volume growth of 8% (the 2-year CAGR still down 3%) was driven by resilience in the non-trade as on-trade continued to experience weakness. However, Andhra Pradesh’s contraction in activity continued to impact volumes. Prestige & Above volumes were up 19% (2 year CAGR: -2%) and Popular was down 2% (2 year CAGR of -4%). The recovery of the scotch portfolio benefited the P&A segment while the popular portfolio was impacted by a weak performance, in particular in West Bengal (tax increase).

– EBITDA margin increased to 18.5%: gross margin increased by 180 basis points to 43.9% thanks to (1) a superior product and government mix, (2) benevolent commodity prices and (3) an overall focus on productivity. The published EBITDA margin increased 490 bps to 18.5%. This is explained by an operational leverage effect (other opex -170 basis points and personnel costs largely stable as a% of sales); a 15% reduction in ad spend also contributed to the expansion of margins. Advertising spending over the previous two quarters has been high to support the refurbishment of McDowell’s No. 1 whiskey and Royal Challenge.

– Other highlights: cash generation improved thanks to the increase in other liabilities and lower investment intensity (down 33% year-on-year). OCF / FCF increased 2.6x / 3.5x to reach 17.3 billion rupees / 16.2 billion rupees. The cash was used for the repayment of short term loans (the net debt fell to only 5 billion rupees).

– Valuation and risks: we largely maintain our estimate of profits; revenue modeling / EBITDA / PAT CAGR of 16% / 39% / 65% over fiscal years 21-23 E. Hold ADD with a revised DCF-based target price of Rs 650. At our target price, the stock will trade at 41x P / E multiple Mar-23E. The main downside risks are a significant drop in trade due to tax hikes, continued weakness in trade due to operating restrictions and a possible ban on spirits in the states.

UNITED SPIRITS LTD. was the last BSE trade at Rs.571.7 from the previous close of Rs. 572.3. The total number of shares traded during the day was 78,750 in more than 3,150 transactions.

The stock hit an intraday high of Rs. 578 and an intraday low of 570.1. The net turnover during the day was Rs. 45,147,413.


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