Time to sell United Spirits post recent run-up, says CLSA

United Spirits has scaled multiple highs in recent weeks as investors continued to celebrate the Vijay Mallya-owned firm's deal to sell a majority stake to world's largest spirits company Diageo. But it may have now hit a buffer, with risk-reward ratios no more favourable, feels CLSA Asia Pacific Markets.

Even as several brokerages still advise investors "buy" the stock (latest being Nomura last week ), CLSA on Monday downgraded  United Spirits to "sell" with a target of Rs 1,900.

"We believe that United Spirits business has an attractive long term potential. In the near-term though, deal consummation risks and business restructuring led profitability impact makes risk-reward less favourable," CLSA analysts Vivek Maheshwari and Bhavesh Shah said on Monday.

The CLSA analysts argue that with the recent stock run-up (it hit new high of Rs 2,150 last week) , there is a growing risk on the success of the preferential issue given its discount to the spot price. 
 
"The surge in United Spirits' stock price has raised concerns on the success of the preferential issue, where pricing is almost at a 30 percent discount to the spot. While Diageo still could get to 25 percent under the agreement through an acquisition of stake from UB group, this will not lead to Rs 21 billion infusion in the company and consequent deleveraging, which preferential allotment entails," they add. 
 
Diageo will still have an option to increase stake via creeping acquisition (5 percent every year) or there could still be another round of preferential issue. But would Diageo be comfortable with the investment at a significant premium to the original price of Rs 1,440 is a big question?.

Also the street has been guzzling down United Spirits shares in the hope that the company will hit a high with the addition of Diageo's premium global brands like Smirnoff Vodka. But in the near-term it could be a totally different picture.

"The Diageo management sounded upbeat on the long term potential for United Spirits, but sounded a word of caution due to potential loss of business (volumes) in the near-term as the group institutes global practices, along with the natural disruption due to changes. This along with higher marketing spends would weigh on margins in the the coming years, a trend seen in other geographies as well," say Maheshwari and Shah.

United Spirits closed at Rs 2,001.70 on NSE on Monday, up 0.3 percent.