Deal will have 15% positive impact on USL's EPS: Religare

Varun Lochab of Religare Capital Markets explains to CNBC-TV18 that the sale of United Spirits Ltd (USL) stake to Diageo would have a 10-15 percent positive impact on USL's EPS.

Below is an edited transcript of the analysis on CNBC-TV18 Q: So, these are the details, 27.4 percent stake at a price of Rs 1,440 with an open offer of 26 percent to follow soon. How are you reading this deal now is it in line with expectations?
A: Yes, it is pretty much in line with expectations. So, as we thought it is a combination of primary and secondary- 10 percent would be the primary issue and the rest would be picked up from UBHL. This would be followed by an open offer and even in terms of pricing, it is largely in that range that we have estimated. Q: We have seen USL run up to about Rs 1,400 in anticipation. Now with this deal actually coming in at Rs 1,440 where do you see this stock headed? Do you see the open offer being successful at Rs 1,440? Is Diageo likely to get the entire upto- 26-percent stake?
A: I don't think there will be too many investors who would be tendering their shares at this price because now the medium-to-long term prospects for the company look very promising. I don't think there will be lot of tendering. So, Diageo won't be able to get to 53 percent. Q: Is there a case for a valuation re-rating for United Spirits now that Diageo has stake in United Spirits? Do you see a chance of a rerating?
A: I think rerating is definitely possible. Q: At what valuation multiples?
A: It depends how fast the operational improvements are implemented. But definitely the stock will now trade anywhere between 25-35 times forward multiples at the minimum and with definitely a scope for strong EBITDA growth led by margin expansion over a period of time. So, we believe that in the medium-to-long term, the stock will have an upside from these levels as well. Q: So where would you put the medium-term target on United Spirits at?
A: Obviously, we will have to work out the numbers in terms of the impact, but if you see the deal is EPS-accretive because the debt which will be going off the balance-sheet and equity issuance is definitely EPS-accretive. So there will be a upside to earnings estimate then there will be a valuation rerating as well. So, I clearly see an upside from current levels on a 12-month basis. But by how much exactly, we will be estimate only after seeing all the details. Q: In your estimate, would the debt come down to and then what would be the interest savings on quarterly-basis?
A: I think 10 percent preferential allotment should give the company somewhere around Rs 2,000 crore. These estimates are very rough. The average cost of debt that the company is paying is around 11-12 percent. So, there will be an over-Rs 200 crore saving on an annual basis on interest cost. Commensurately, there will be a dilution. But if you see the net, there will be a positive impact on EPS of anywhere between 10-15 percent. Q: What do you make of the preferential allotment and the price?
A: The price will be the same was anyway expected. So, I think preferential allotment had to come because Diageo would also want to infuse money into the company to reduce the debt. So, it is pretty much on expected lines.