Buy United Spirits; target of Rs 670: ICICI Direct

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ICICI Direct's research report on United Spirits

Q1FY21 volumes for United Spirit’s de-grew 49% mainly due to broad based decline in both Prestige & Above (P&A), Popular segments due to lockdown in April, May. P&A category volume fell 52% YoY while the Popular category de-grew 47%. P&A volumes declined owing to continued closure of on-premise outlets and drying up of social occasions for liquor consumption. Gross margin declined 570 bps to 41.7% with gross profit down 59% YoY to Rs 429 crore. At the EBITDA level, the company reported a loss of Rs 78 crore (I-direct estimate: loss of Rs 70 crore) compared to a profit of Rs 395 crore in Q1FY20. The company reported a loss before tax and exceptional item of Rs 182 crore vs. profit before tax and exceptional items of Rs 303 crore in Q1FY20. During Q1FY21, the company has accounted for Rs 75 crore as exceptional expense on account of ‘Raising the Bar’ campaign, which aims to provide non-cash support to qualifying pubs, bars and restaurants serving alcohol in major cities. Consequently, the company reported loss before tax of Rs 257 crore. Tax write back to the tune of Rs 42 crore curtailed net loss for the quarter to Rs 215 crore (Q1FY20: profit of Rs 197 crore).

Outlook

The management remains cautiously optimistic on the resilience of the business and ability to adapt in the difficult situation. On the balance sheet front, the management has actively lowered debt even during a challenging FY20 and can reduce it further over next two years. Online ordering and home delivery channels can be structurally positive for the industry as it would enhance the reach and add new set of customers and expand the customer base over the longer term. We value the stock at ~43x FY22 EPS to arrive at a target price of Rs 670 with a BUY rating.

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