CLSA cuts United Spirits after stock rallies 30% in a month

Moneycontrol Bureau

Vijay Mallya owned United Spirits has surged 30% in the last one month and now CLSA Asia-Pacific Markets feels there may not be much fizz left in the stock. The brokerage on Thursday downgraded the stock to "underperform" from "outperform." CLSA said the stock appears to be "fully valued" post the rally and there are near-term earnings pressures ahead, which led to the ratings downgrade, The brokerage expects United Spirits' fourth quarter standalone earnings will slip 18% year-on-year on the back of continued high input costs and a sharp 34% rise in interest costs. "United Sprits' input costs (ENA) have seen a sharp inflation in the last few quarters and have been surprising negatively. Third quarter in fact had ENA prices touching an all time high of Rs164/case. Our interactions with the sugar companies indicate that fourth quarter prices have seen limited corrections, which imply that much expected ENA price correction may not come through even in Q4," said Mahesh Nandurkar and Vivek Maheshwari of CLSA. The analysts are also concerned over United Spirits' mounting debts. End of third quarter, the company had debt of Rs 7,700 crore, they say and are not expecting any de-leveraging even this fiscal as capital expenditure and working capital requirements are likely to remain high. United Spirits is looking to raise USD 225 million via FCCBs (foreign currency convertible bonds), which Nandurkar and Maheshwari say will help, but there is uncertainty over its timeline. The company said earlier this month that its FCCB issue will be delayed as bankers have asked for audited accounts till March 2012. So the FCCB issue is unlikely to go ahead until the company has its audited accounting numbers till March ready. CLSA put a target price of Rs 750 on the stock. United Spirits was down 1.3% at Rs 707.30 on NSE in morning trade.