Maintain ADD on United Spirits - Strong P&A recovery; margins show improvement - HDFC Securities

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

UNSP posted a strong recovery in 2QFY21, although one-off provisions impacted margins. Revenue/EBITDA declined by 7/35% YoY (HSEI -11/-28%). Recovery in P&A was strong with value/volume growth of 1/0% YoY, despite the delayed reopening of on-trade (20-25% mix). Underlying growth in P&A (ex-AP impact and bulk scotch sales in 2QFY20) was strong at 7%. Popular continued to remain under pressure as excise-led price hikes kept the demand muted. UNSP saw sequential improvement in its gross margin, although margin remained under pressure YoY due to inventory provision and loss of franchise sales in Andhra Pradesh (adj GM at 43% is in line with expected). The underlying EBITDA margin (ex-one time inventory provision) was at 14.5% (HSIE 14.3%). We expect the recovery trend to continue in 2HFY21, led by stability before festive season and weddings. The reopening of pubs and bars will also aid on-trade consumption. We maintain our EPS estimate for FY21/FY22/23. We roll forward to Sep-22E EPS and value UNSP at 42x P/E to derive a target price of Rs 593. Maintain ADD.

Healthy recovery in P&A: Net revenue declined by 7% YoY (+3% in 2QFY20 and -54% in 1QFY21). After adjusting for last year's bulk scotch sales, the underlying revenue shows a decline of 3% YoY only. P&A clocked strong recovery as volume remained flat YoY while revenue grew 1% YoY, driven by the national renovation of McDowell's No. 1 and Royal Challenge. However, Popular continued to struggle with val/vol dip of 7/12% YoY.

Underlying margins in line: Gross margin contracted by 283bps YoY (-650bps in 2QFY20 and -567bps in 1QFY21) vs an expectation of 200bps YoY decline due to one-off inventory provision in Andhra Pradesh. The decline in South franchise business also impacted margin. Employee/ASP/Other expenses grew by 1/6/2% YoY. EBITDA margin contracted sharply by 553bps YoY to 12.6% (-181bps in 2QFY20 and EBITDA loss of Rs 776mn in 1QFY21) vs an expectation of 333bps YoY dip. EBITDA declined by 35% YoY (HSIE -27%). Adj EBITDA margin stood at 14.5% (HSIE 14.3%). PAT declined by 43% YoY. A&P investments resumed, and we expect the company to continue investing behind its brands in 2HFY21.

Call takeaways: (1) On-trade revenue has recovered to ~50% of the pre-COVID level in states which have eased restrictions; (2) wedding demand has witnessed recovery, although it has been gradual as event sizes are smaller; (3) the company has benefitted from migration from beer to hard liquor as in-home consumption has grown significantly; (4) it expects mild inflation in ENA in 2HFY21 due to the recent Ethanol Blending Policy; (5) it intends to monetise non-core assets and continue reducing debt and interest.

Shares of UNITED SPIRITS LTD. was last trading in BSE at Rs.544 as compared to the previous close of Rs. 534.65. The total number of shares traded during the day was 220727 in over 8015 trades.

The stock hit an intraday high of Rs. 553 and intraday low of 533.45. The net turnover during the day was Rs. 120355923.

Source : Equity Bulls

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