United Spirits - Premium brands to post ~16% cagr over next 2 years - IIFL

United Spirits (UNSP) has improved its market share in the Prestige and above category in the current fiscal as 9m FY13 volumes increased 18% yoy compared to 12% industry growth. Although company expects Prestige brands to post ~22% cagr over next 2-3 years, we have conservatively built in a ~16% compounded growth over FY13-15.

Margin set to improve ~110bps over FY13-15

UNSP has set its sight on portfolio premiumization and move away from just volume growth on overall basis; the latter would anyway be increasing difficult on a large >120mn case base. The share of premium brands in total volumes would increase from 22% in FY12 to ~33% in FY15 which would help support margin. The success of such a strategy has been amply demonstrated by Pernod Ricard India (Source: ET article dated Mar 5, 2013). Pernod's three whisky brands-Royal Stag, Blenders Pride and Imperial Blue make up 98% of its volumes which in turn is just one-fifth that of United Spirits'. Yet, according to the media report, Pernod India's sales jumped 34% while PAT surged 77% to Rs.5.9bn in CY12, much higher than UNSP standalone FY12 PAT of Rs.3.4bn. Combined with improved backward integration in distillation and in-house glass manufacture, we expect margin to rise 110bps over next two years.

Diageo to introduce variants around existing brands

Given the huge brand spread offered by United Spirits, Diageo indicated in its post acquisition conference call that it would not introduce new brands from its stable; it would rather innovate around existing brands or launch brand variants. The focus on premiumization would continue at UNSP as evident from the faster growth of 'Prestige and above' category of brands which have grown faster than both regular as well as overall volume growth of the company. Though the focus at UNSP is now firmly on growing premium brands, Diageo also indicated it would not completely remove itself from the lower end of the market and continue to offer branded spirits at a level just above the country liquor which would help bring consumers into the branded spirits fold.

In terms of synergy with Diageo India, United Spirits would receive a standard distribution margin of 3-5% of net sales value for distributing Diageo's products.

Diageo deal, portfolio shift to improve key metrics; recommend BUY

In the medium term, UNSP is likely to reap gains from its premiumization strategy as revenue mix shifts towards higher priced brands. In addition, deal with Diageo would help lower net leverage to 0.5x and provide an incremental 30% upside to FY14 EPS based on post tax interest cost savings. We expect EBIDTA to outpace revenue cagr of ~8% over next 2 years supported by margin expansion. Recommend BUY.

Source : Equity Bulls

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