Maintain ADD on United Spirits - Weak show; gradual recovery expected - HDFC Securities

Mr. Varun Lohchab, Head Institutional Research & Mr. Naveen Trivedi, Institutional Research Analyst, HDFC Securities.

United Spirits posted a disappointing set of numbers as the revenue declined 54% YoY and there was an EBITDA loss of Rs 776mn. IMFL industry saw >50% decline in volume due to COVID-led lockdown. Recovery in May and June was strong, although localised lockdowns have slowed down the rate of recovery in July. The downtrading trend was not significant, and the P&A mix is expected to improve in the ensuing quarters. GM pressure (>500bps dip YoY) was on account of (1) low franchise income (160bps impact), (2) inventory-led provision (150bps impact), (3) cost inflation (150bps impact), (4) weak P&A volumes, and (5) adverse mix in popular. Going forward, we expect lower impact of these headwinds, and the company may achieve 44-45% gross margin. Improvement in the balance sheet was encouraging as collections were healthy in 1Q. Owing to the big miss in 1Q and slower recovery in P&A, we cut our EPS estimate by 34/4/4% for FY21/FY22/FY23. We value UNSP at 42x P/E on Jun-22E EPS and derive a target price of Rs 569. Maintain ADD.

Weak volumes and realisation: Revenue declined by 54% YoY (+10% in 1QFY20 and -11% in 4QFY20). P&A saw value/volume decline of 52% YoY while popular saw value/volume decline of 51/47% YoY. However, premium products and new launches continued to perform well.

Loss in EBITDA: Gross margin fell sharply by 567bps YoY to 41.7% (-291bps in 1QFY20 and -400bps in 4QFY20) vs estimated 44.8%. Employee/A&P/other expenses declined 12/70/22% YoY. The company recorded a loss of Rs 776mn at the EBTIDA level. The loss at the APAT level fell to Rs 1,403mn vs an expected profit of Rs 535mn.

Call takeaways: (1) All plants of the company are now fully operational; (2) 80-85% shops were operational within a month of states allowing the sale of liquor; (3) West Bengal and Orissa performed better than Maharashtra as Swiggy, Zomato were allowed to deliver liquor; (4) franchise income in the normal course is Rs 1.6-2bn per year. The company expects it to be ~40% lower going forward, (5) ENA is likely to remain stable and support gross margin, going forward, and (6) the company took a price hike in 7-8 states.

Shares of UNITED SPIRITS LTD. was last trading in BSE at Rs.577.5 as compared to the previous close of Rs. 585.45. The total number of shares traded during the day was 94219 in over 4189 trades.

The stock hit an intraday high of Rs. 591.4 and intraday low of 575.1. The net turnover during the day was Rs. 54834909.

Source : Equity Bulls

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