Time to sell United Spirits, says CLSA
Shares of Vijay Mallya's United Spirits surged over 6% on Tuesday, following its out of court settlement with Kishore Chhabria's ABD over the ownership of the Officers Choice brand. A settlement of legal issues may then open the doors for a deal with Diageo, which will help United Spirits pare its huge debt.
October 09, 2012 / 17:13 IST
Moneycontrol Bureau
Shares of Vijay Mallya's United Spirits surged over 6% on Tuesday, following its out of court settlement with Kishore Chhabria's ABD over the ownership of the Officers Choice brand. A settlement of legal issues may then open the doors for a deal with Diageo, which will help United Spirits pare its huge debt.Brokerage CLSA says its time to "sell" United Spirits now, following the improved sentiments in the stock. United Spirits has jumped over 25% in the last one month alone."The recent newsflow on Diageo-United Spirits deal has improved the sentiments on the stock. We see this potential deal as a game changer and our scenario analysis indicates current fair value at Rs1,200-1,600 a share," CLSA analysts Vivek Maheshwari and Mahesh Nandurkar said.United Spirits currently has a debt of USD 1.5 billion, due to its acquisition of scotch maker Whyte & Mackay, rising working capital and capital expenditure among other reasons.A stake sale to Diageo will help the company reduce net gearing among other things and the partnership, if a deal does happen, will also help in the long-term perspective in the areas of portfolio premiumisation and technology, the analysts said. However, significant upsides may be limited in the near-term, they added.United Spirits and Diageo have already confirmed that they are in discussions, but say there is no certainty that it will lead to a transaction.Furthermore, the CLSA analysts say there are also other issues that need clarity. For instance, there could be anti-trust issues in the UK as while United Spirits has acquired Whyte & Mackay, Diageo is also present in the scotch market. Also Diageo is already present in India and so there could be a conflict of interest. Also, there is no clarity on any open offer for minority shareholders depending on the final deal, they say.Maheshwari and Nandurkar, add that a potential deal could lead to a 40-100% upgrade in their earnings per share estimates on United Spirits for FY13. United Spirits shares were trading up 6.4% at Rs 1,257 on NSE in noon trade on NSE on Tuesday. CLSA has a 12-month target price of Rs 725 on the stock. Discover the latest Business News, Sensex, and Nifty updates. Obtain Personal Finance insights, tax queries, and expert opinions on Moneycontrol or download the Moneycontrol App to stay updated!
