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Research
United Spirits - Big re-rating on the cards; maintain BUY, TP Rs 2,100 - Religare
Posted On : 2012-11-12 01:03:31( TIMEZONE : IST )
Diageo PLC has acquired a controlling stake (27.4%) in UNSP for Rs 1,440/sh, which is a significant positive for minority shareholders. UNSP is likely to receive a cash infusion of Rs 33bn, which would improve its capital structure as well as margin profile in the medium to long term through premiumisation and operational efficiencies. We upgrade FY14/FY15 earnings by ~50% each and maintain BUY with a revised Septeber'13 TP of Rs 2,100 (30x Sep'14 EPS, 54% upside) from Rs 750 earlier.
Diageo, the global liquor giant, takes control: Diageo's acquisition of a controlling stake with board control and management rights is a key positive for minority shareholders. It would help re-rate the company as it eliminates the key overhang of UB group debt concerns. It would also allow UNSP to compete more effectively at the premium end of the IMFL market where Diageo could bring in its expertise. Diageo would look to raise operating margins back to 19-20% over the medium term driven by increased focus on premiumisation and operational efficiencies.
Balance sheet and return ratios to improve sharply: Diageo will pay Rs 57.2bn for a 27.4% stake in UNSP (with Rs 33bn likely to be injected into UNSP). We believe a majority of the cash infusion into UNSP would go toward servicing its debt with the D/E ratio likely to improve from 1.6x in FY12 to ~0.4x in FY14. We expect return ratios for the company to improve from 4-5% levels currently to 14-15% in the next two years.
EPS upgraded by ~50%, TP raised to Rs 2,100 - maintain BUY: We upgrade our earnings estimates for UNSP by ~50% each for FY14/FY15 on account of improvement in leverage, which would be earnings accretive, and gradual margin expansion from depressed levels currently. We believe there is potential for a sharp re-rating of the business given the company's market positioning and PE premium for a cleaner structure. We raise our Sep'13 TP to Rs 2,100 based on 30x Sep'14 EPS.
