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Research
Initiate coverage on United Spirits with 'buy' rating – TP Rs.2173 - Geojit BNP Paribas Financial Services
Posted On : 2013-03-13 20:31:01( TIMEZONE : IST )
- Initiated coverage on United Spirit with 'buy' rating. The target price is set at Rs.2173. The stock is currently traded in the range of Rs.1896.
- The company's volume based growth strategy backfired, leading to a weak operating performance, balance sheet deterioration, negative FCF and stock de-rating.
- Its unmatched supply and distribution network, its brand creation,an Indian market with structural drivers and high barrier to entry would have been key attraction for UK drinks group Diageo.
- Diageo is likely to attempt to transform United Spirits through the premiumisation of its products, induce best practices to improve operational efficiencies, repair balance sheet and bring back the company to generate free cash flows (FCF).
- Strong performance of Pernod India is an indication that efficient management can deliver the desired results over time.
- The stock has doubled in value over the last year and its current valuation suggests that near term triggers are priced in.
- It seems that there is further scope for valuation expansion if execution is faster than expected.
- Any attempt by Diageo to increase ownership would be keenly followed by investors.
- Diageo has a 100% subsidiary in India and this would be a major risk.
- Over the last two years, Diageo has been scouting for acquisitions in emerging markets, which involves targeting high-growth markets where it can get a direct presence in the distribution system.
- Diageo has proved to be disciplined in its M&A approach, resulting in relatively good/short payback periods.
- Diageo's stated strategy in these markets has been to increase premiumisation, induce best practices in procurement and bring efficiencies to the system.
- According to analysts covering the stock, Diageo has the best corporate governance among the covered alcoholic beverage stocks and its execution track record is strong. This is expected to benefit United Spirits.
