United Spirits - Resilient off-trade and margin performance - ICICI Securities

Strong Prestige & Above segment and a resilient off-trade channel aided volume print of +8% in 4QFY21. Restrictions in on-trade and issues in West Bengal and Andhra Pradesh continued to impact. Favourable gross margins, costs controls and operating leverage helped deliver a superior margin performance (EBITDA margin up 490 bps YoY to 18.5%). Improved cash generation aided net debt reduction to Rs5bn. OCF/FCF generation in FY21 was Rs17.3bn / Rs16.2bn (highest in many years). New distribution model (online ordering and home delivery), if sustained, can be a structural positive for the industry. Hina Nagarajan succeeds Anand Kripalu as CEO effective July 1 - some investors view it as a potential stock re-rating event (See report Leadership matters). Retain ADD; TP Rs650.

- Decent Q4 recovery amidst the constraints: Revenue / EBITDA / PAT was up 12% / 52% / 125%; 2-year revenue CAGR was down 0.6%. Underlying sales (ex-bulk Scotch sale in base) was up 16%. Volume growth of 8% (2-year CAGR still down 3%) was on the back of resilience in off-trade with on-trade continuing to see weakness. However, contraction of Andhra Pradesh business continued to impact volumes. Prestige & Above volumes were up 19% (2-year CAGR: -2%) and Popular was down 2% (2-year CAGR of -4%). Recovery in the scotch portfolio benefitted the P&A segment while popular portfolio was impacted by weak performance particularly in West Bengal (higher taxes).

- EBITDA margin expands to 18.5%: Gross margin expanded 180bps to 43.9% on the back of (1) superior product and state mix, (2) benign commodity prices, and (3) overall productivity focus. Reported EBITDA margin expanded 490 bps to 18.5%. This was driven by operating leverage benefit (other opex -170bps and largely flat staff costs as % of revenues); cut of 15% in ad-spends also aided margin expansion. Ad-spends in the previous two quarters were high to support renovation of McDowell's No. 1 and Royal Challenge Whisky.

- Other highlights: Cash generation improved driven by increase in other liabilities and lower capex intensity (down 33% YoY). OCF / FCF grew 2.6x / 3.5x to Rs17.3bn / Rs16.2bn. Cash was utilised towards repayment of short-term borrowings (net debt is down to only Rs5bn).

- Valuation and risks: We largely maintain our earnings estimate; modelling revenue / EBITDA / PAT CAGR of 16% / 39% / 65% over FY21-23E. Maintain ADD with a DCF-based revised target price of Rs 650. At our target price, the stock will trade at 41x P/E multiple Mar-23E. Key downside risks are significant downtrading due to tax hikes, continued weakness in on-trade due to operating restrictions and a potential ban of spirits in states.

Shares of UNITED SPIRITS LTD. was last trading in BSE at Rs.571.7 as compared to the previous close of Rs. 572.3. The total number of shares traded during the day was 78750 in over 3150 trades.

The stock hit an intraday high of Rs. 578 and intraday low of 570.1. The net turnover during the day was Rs. 45147413.

Source : Equity Bulls

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