HDFC Securities is bullish on United Spirits has recommended buy rating on the stock with a target price of Rs 650 in its research report dated July 24, 2019.
HDFC Securities' research report on United Spirits
Net revenues grew by 10.3% aided by one-time bulk sales of scotch to parent (adj. rev grew by 6% vs. est. of 9.6%). Underlying volumes grew by 7% (P&A 8%, popular 5%) on a modest base of 4%. Price/mix was negative (a first in the last 3 years) despite premium brands growing faster. This is attributed to partial absorption of excise duty hike in Maharashtra (Jan-19) and adverse state mix. Co is strategically holding prices for a few brands in Maharashtra (growth and margin accretive to UNSP) to remain competitive. UNSP has taken ~1.5-5% price increase across ten states over the last 6 months to pass on hardening of ENA cost. However, underlying GM cracked by 359bps (vs. est of -405bps) owing to insufficient price hikes and partial absorption of Maharashtra excise duty. Management is actively working with more states to pass on input cost inflation (key monitorable). Restructuring drive (employee/other expenses) and tight lid on A&P spend (despite World Cup) in an election quarter led to robust underlying EBITDA growth of 42% to Rs 3.41bn vs. exp of Rs 2.95bn. Employee/ASP/Other expenses declined by 19/19/14%. Underlying EBITDA margins expanded by sharp 407bps to 16% (exp. +205bps). Margin expansion hereon is uphill (low-hanging fruits behind) but still on the cards. We model 300bps expansion over FY19-21E. Near term outlook is mixed with softer base waning, RM prices remaining stiff, consumption demand moderating and possibility of liquor ban in AP (3-4% of revenue/EBITDA).
UNSP’s performance was stellar despite impact of general elections. Restructuring drive and control on A&P spends during elections drove beat in EBITDA. We believe UNSP will continue to tighten the screws on overheads and benefit from premiumisation. This drives our 21% EBITDA growth over FY19-21E (vs. 21% CAGR over FY16-19). We value at 40x FY21E EPS with TP of Rs 650. Maintain BUY.
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