Buy United Spirits; target of Rs 650: ICICI Direct

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ICICI Direct's research report on United Spirits

Q4FY20 volumes of United Spirit de-grew 13%, mainly due to broad based consumption slowdown. In line with the weak performance of its major competitor Pernod Ricard, USL also faced strong headwinds in the P&A category (fell 20% YoY), while the Popular category de-grew 7%. The weak performance on the volume front comes on a weak base of 1% volume growth in Q4FY19. Further, H1FY21 is expected to remain muted, amid lockdown, excise and cess hikes by various states. EBITDA margins grew mere 101 bps YoY to 13.6% on a low base (mainly due to unfavourable product mix and higher other expenses). Subsequently, resultant EBITDA, PAT, de-grew 4%, 81%, respectively (weak operating leverage further impacted by higher depreciation, lower other income and higher tax rate).

Outlook

Although concerns remain like uncertainty regards the pandemic, the management has displayed discipline and prudence when dealing with evolving customer needs. We value the stock at ~36x FY22 EPS to arrive at a target price of Rs 650 and maintain our BUY rating.

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