ICRA retains fundamental grade of 4/5 to United Spirits

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ICRA retains fundamental grade of 4/5 to United Spirits

ICRA Equity Research Service has come out with its update note on United Spirits Limited (USL)’s Q3 FY12 results. The research firm has retained the fundamental grading of '4/5' and revised valuation grading to 'C' from 'B' to the company in its January 25, 2012 report.

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ICRA Equity Research Service has come out with its update note on United Spirits Limited (USL)'s Q3 FY12 results. The research firm has retained the fundamental grading of '4/5' and revised valuation grading to 'C' from 'B' to the company in its January 25, 2012 report.

In Q3 FY12, United Spirits Limited (USL) reported a disappointing volume growth of 0.7% on a standalone basis largely due to the impact of moderation in demand owing to increased taxes in West Bengal and strong push in sales of local brands in Tamil Nadu by the Government's distribution system. In terms of value growth, the company's standalone revenues after adjusting for the impact of merger of Balaji Distilleries, grew by 13% on YoY basis, reflecting a ~12% growth due to price increases and improving product mix. The sharp moderation in demand in India was mitigated to an extent by the strong operating performance in W&M business which witnessed a growth of 28.6% in top line and reported much improved profitability metrics. Overall, the results have been weaker than our expectations largely due to contraction in standalone volumes and margins, increasing competitive intensity from global as well as domestic players, higher tax out-go for the company and increasing debt levels.

In terms of profitability, USL's EBITDA margins at 10.2% declined sharply by 430 bps on YoY basis driven largely driven by cost pressures on the raw material and advertising and promotional front. During the quarter, the spirit cost per case went up by 15% (or Rs. 21 per case) owing to sharp rise in ENA prices while the advertising and promotional expenses increased by 28.5% (on QoQ basis) to Rs. 267 crore owing to launch related expenses for two premium brands. With almost flat volumes, and sharp contraction in EBITDA margins, the company's net profit declined to Rs. 47.1 crore in Q3 FY12 on standalone basis. This coupled with higher tax out go also pulled down the net profit at consolidated level to Rs. 185.3 crore, reflecting a decline of 42% on YoY basis. While in the near term, we expect profitability indicators to improve with moderation in spirits prices, the company's strategy of backward integration and focus on increasing share of premium brands is likely to support margin improvement in the long-run.

Considering the steady growth prospects for the alcoholic beverages industry and company's strong brand position, wide product portfolio and pan-India manufacturing and distribution footprint, we retain the fundamental grade of "4/5" assigned to USL. Additionally, the company's strategy to strengthen backward integration and enhance share of more profitable premium segment brands both in India and in Whyte & Mackay (W&M) also supports a favourable long term view. However, while we have retained our fundamental grade, we have revised the company's valuation grade to 'C' from 'B' largely reflecting the downward revision in volumes and earnings estimates despite the sharp correction in share price. The grading however assumes that USL would not extend any financial support to any of its group companies. Any change in this however would lead a review of the grades.

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To read the full report click on the attachment