United Spirits Ltd - Q2FY21 Result Update - YES Securities

While regulatory and demand uncertainty still remains, strong P&A recovery and market share gains make us constructive on the stock

- Result Highlights - Revenue down 6.6% (3.4% ex-one offs) driven by resilient off-trade sales; Prestige & Above (P&A) sales up 1% while Popular sales down 12.5%; gross margins down 280bps to 42.1% given inventory provisioning in AP and decline in South franchise business; EBITDA margins down 550bps to 12.6% given higher A&P spends on renovation of McD No.1 and RC and IPL advertising; interest costs up 12% and PAT down 43%; strong WC and receivables improvement.

- Outlook - Remain cautiously optimistic with reopening of on-premise sales and upcoming festive season; no quantitative guidance given the COVID uncertainty but strong fundamentals are helping navigate the company as per evolving environment.

- Management commentary - Environment remains challenging but happy with progressive improvement; off-trade channel back to pre-COVID levels, supply and commercial teams have done well on execution to follow new protocols; Route to Market change in AP led to sharp contraction of business; positive price mix; 7.6% growth in P&A ex-AP; repaid 780cr debt in 1H led by WC improvement; commodity volatility going ahead to be limited but ethanol blending policy can drive mild inflation in 2H.

- Sales mix in P&A segment - Within P&A, overall price mix positive helped by some price hikes as well; duty free sales currently at 10-15% of normal so benefit can continue; price positioning has improves in North Indian for premium brands.

- Gross margin decline and outlook - AP RTM change has had big impact on both own and franchise business, volume decline led to negative operating leverage.

- Potential margin levers - Realized price hikes in 6-7 states and hoping for more states to allow next year; Karnataka has not given hike for many years; cost efficiencies will continue.

- Demand outlook - Strong performance of BIO portfolio to continue; on-trade is about 25% of sales where footfalls remains less than 50% of normal even after re-opening but initial trends encouraging; in-home penetration has gone up significantly helped by DIY cocktail promotions; some collateral benefits of COVID can sustain; ticket size has increased.

- Remain cautious on demand - While renovation benefit not fully played out yet in all states, on-trade has not fully opened and festive season consumer behavior still uncertain so remain cautious for near-term.

- Balance sheet improvement - 780cr debt reduction in 1H, 33% reduction on account of normalisation of one-off increase due to lockdown and remaining due to better operating cashflows.

- Renovation of key brands - Intend to charge a premium over competitor brands post renovation of Mc Dowells No.1 and RC whisky based on regulatory approvals.

- AP issue - Remains a regulatory deadlock as of now; efforts and advocacy program from company continues; remain cautiously optimistic as in similar historical issues in other states

- Channel filling benefit - Some benefit given lower channel inventory in 1Q but that is completely normal for 2Q every year.

- Spirits vs beer - Not sure if there would be a structural shift away from beer to spirits once on-trade fully opens although short-term benefits visible.

- Valuation and view - The stock is currently trading at 39x/31x FY22/FY23 earnings after a few months of underperformance, and we believe the risk-reward is favorable at current valuations. While headwinds like the current AP issue and RM volatility will always remain in this industry, the strong recovery and market share gains in P&A category makes us more constructive on the medium-term outlook.

https://ysil.in/docs/default-source/research/instieq/united-spirits-q2fy21.pdf

Shares of UNITED SPIRITS LTD. was last trading in BSE at Rs.534.35 as compared to the previous close of Rs. 509.95. The total number of shares traded during the day was 313198 in over 9258 trades.

The stock hit an intraday high of Rs. 540.75 and intraday low of 509.95. The net turnover during the day was Rs. 165744442.

Source : Equity Bulls

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