United Spirits - Faster-than-expected recovery shows resilience of off-trade channel - ICICI Securities

2Q underlying revenue and volume decline of just 3% is significantly better than consensus expectations. Flat volumes in Prestige & Above segment despite on-trade channel being largely closed (high salience) is a significant outperformance. Renovation of core brands - McDowell's No. 1 and Royal Challenge Whisky and re-opening of on-trade channel could potentially accelerate top-line recovery and drive growth. New distribution model (online ordering and home delivery), if sustained, can be a structural positive for the industry - improve accessibility, help premiumise and remove in-home consumption stigma. Retain ADD. Earnings call on 5th Nov (Thursday) 1200 hrs (IST): dial-in number +91 22 6280 1250.

- Q2 recovery is much better than expected: Revenue / EBITDA / PAT declined 7% / 35% / 43%. Underlying sales (ex-bulk Scotch sale in base) declined 3% with 3% volume decline driven by strong resilience by off-trade despite on-trade largely being shut and contraction in owned and franchised business in Andhra Pradesh. Prestige & Above volumes were flat while sales grew 1%. Popular segment sales declined 12% (10% decline in priority states) with volume decline of 7%. Decline in popular segment was due to decline in demand driven by increase in consumer prices (increase in excise duty by various states) and inferior state mix.

- Profitability impacted by one-off provisions, increased ad-spends and negative operating leverage: Gross margin declined 280bps to 42.1% due to lower franchise income in south, one-off inventory provision due to contraction of business in Andhra Pradesh. Adjusting for one-off inventory provision, GM declined 180ps to 43.2%. Reported EBITDA margin declined 550bps to 12.6%. This was driven by negative operating leverage (staff cost +20bps, other opex +150bps) and increase in ad-spends (+100bps) to support national renovation of McDowell's No. 1 and Royal Challenge Whisky. Adjusting for one-off inventory provision, EBITDA margin declined 360bps to 14.5%.

- Other highlights: Cash generation improved driven by increase in other liabilities and lower capex intensity (-40% YoY). OCF / FCF grew 3.2x / 8.7x to Rs8.5bn / Rs7.8bn. Cash was utilised towards repayment of short-term borrowings of Rs7.8bn.

- Valuation and risks: We reduce our earnings estimates by 11-12%; modelling revenue / EBITDA / PAT CAGR of 1% / 2% / 12% over FY20-22E. Maintain ADD with a DCF-based revised target price of Rs 580 (was Rs 650 earlier). At our target price, the stock will trade at 39x P/E multiple Sep-22E. Key downside risks are significant downtrading due to tax hikes and a potential ban of spirits in states.

Shares of UNITED SPIRITS LTD. was last trading in BSE at Rs.510.1 as compared to the previous close of Rs. 509.85. The total number of shares traded during the day was 42934 in over 1913 trades.

The stock hit an intraday high of Rs. 515 and intraday low of 508.6. The net turnover during the day was Rs. 21969407.

Source : Equity Bulls

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