Shares of United Spirits Ltd rose more than 6 percent on the National Stock Exchange on October 29, also hitting a 52-week high of Rs 963.40. This on a day when the benchmark Nifty 50 index fell 1 percent.
Good quarter
Investors were pleased with the liquor company’s September quarter results announced this week. Standalone net profit more than doubled year-on-year (up 113 percent) to Rs 273 crore, helped by a significant expansion in operating margins.
The EBITDA (earnings before interest, tax, depreciation and amortisation) margin rose 480 basis points to 17.4 percent in Q2. One basis point is one-hundredth of a percentage point.
Advertising and sales promotion expenses fell as a percentage of revenue, supporting the margin expansion. Excluding one-offs, the underlying EBITDA margin rose 194 bps to 16.4 percent. Net sales increased 14 percent to Rs 2,447 crore.
United Spirits said the off-trade segment (grocery, independent retail) gained momentum after the second wave of the Covid-19 pandemic. The on-trade segment (restaurants, bars) continues to recover gradually with the easing of restrictions.
Net sales of the prestige & above (P&A) segment grew 20.8 percent, led by high double-digit growth in Scotch whisky during the quarter. On the other hand, net sales of the popular segment remained flat. Volumes of the P&A segment rose 6 percent, whereas popular segment volumes rose by 0.4 percent.
Encouraging outlook
Managing director Hina Nagarajan shared her vision and strategy for the Diageo subsidiary at an investor presentation on October 28.
“United Spirits’ new CEO Hina Nagarajan articulated her aspirations (sustained double-digit growth with mid-to-high teen EBITDA margin) and strategy for United Spirits. We highlight (1) overarching focus on premiumisation, especially BIO/BII scotch portfolio; (2) thrust on renovation/innovation and leveraging Diageo’s global portfolio; and (3) ambition to defend/recover market share across the P&A segment,” Kotak Institutional Equities said in a report on October 29.
BIO is bottled in origin and BII refers to bottled in India.
The broker added, “We like Hina’s clarity of thought and sense of urgency to turn around the business, and expect sharper and speedier execution. The extent of success hinges on externalities (regulatory developments).”
Emkay Global Financial Services said, “Growth outlook is improving with increased aggression, recovering volume trends post re-opening and regulatory easing. The margin outlook appears stable. Management aims for profitable growth and has retained earlier margin guidance. While inflationary pressures are rising, particularly in glass, mix gains and cost reductions are likely to offset the impact in the near term.”
The easing of restrictions after the second Covid-19 wave and higher number of vaccinations augur well for consumer sentiment in general. United Spirits is likely to benefit from this unless a third wave hits the country.
Rich valuations
The United Spirits stock has appreciated by about 65 percent so far this calendar year, rendering valuations pricey. This may limit meaningful upsides immediately.
The stock gained 6 percent to Rs 947.35 at the close on the NSE on October 29. Kotak and Emkay’s target price for the stock stands at Rs 950 and Rs 1,015, respectively.
Based on the average FY23 EPS estimates of a few brokerages, the United Spirits’ stock trades at about 58 times. That is not cheap. Investors will closely watch execution of the company’s strategies in the days to come.
