Maintain ADD on United Spirits - In-line revenue; beat in margin with sharp cost control - HDFC Securities

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

UNSP continued its sequential recovery as the company posted net revenue growth of 11.6% YoY (HSIE 11.5%), flat on two-year CAGR. The underlying net sales (ex-bulk scotch sales last year) grew by 16.1%. The premiumisation trend sustained as P&A volumes posted 19% YoY growth; volume salience of P&A stood at 51% in 4Q vs. 46% last year (FY21 mix at 52.6% vs. 51.3% in FY20). P&A/Popular revenue contracted by 7/18% YoY in FY21 with volume contraction of 9/14%. Gross margin continued to see expansion on the back of improved product mix and benign RM inflation. However, sharp cost control surprised us and resulted in best EBITDA margin (in 10 quarters) of 18.5%. A&P spend declined by 15% YoY despite 33% decline in 4QFY20 and muted spend in 9MFY21. EBITDA margin saw a sharp 490bps YoY expansion to 18.5% (HSIE 14%). EBITDA registered robust 52% growth in 4Q while FY21 EBITDA declined by 34% YoY. Off-trade was strong in FY21 and helped lower the impact of the missing on-trade traction. Improving trends for premium portfolio in FY21 is a positive sign. We cut our EPS estimates by 5% for FY22 while maintain for FY23. We value UNSP at 42x P/E on Mar-23E EPS (standalone) to derive a target price of INR 640 (including INR 24/share of non-core assets). Maintain ADD.

P&A mix increasing in FY21: Net revenue was up by 11.6% YoY (-11.4% in 4QFY20 and -4% in 3QFY21), in line with our expectation. P&A revenue was up by 26% (-16% in 4QFY20, -1% in 3QFY21, HSIE 24%), driven by healthy demand for scotch. Popular revenue declined by 3% YoY despite 11% decline in the previous year. P&A volumes were up by 19% YoY (-20% in 4QFY20 and flat in 3QFY21) while Popular volumes declined by 2% YoY (-7% in 4QFY20 and -2% in 3QFY21). P&A realisation was up by 5% (+5.5 in 4QFY20, -1% in 3QFY21) to INR 1,527/case. Popular realisation declined by 2% (-5% in 4QFY20, -5% in 3QFY21). Revenue recovery was supported by focused marketing campaigns for in-home occasions and renovation of core brands.

Beat in margin: Gross margin was up by 178bps YoY to 44% (down by 70bpsQoQ). A&P spend declined by 15% YoY despite the base of 33% decline (- 25% on 2-year CAGR) and muted spend in 9MFY21. A&P was down by 20% for FY21 (-17% in FY20) and, as a percentage of revenue, it stood at 7.2% for FY21 vs. 8% for FY20 and 9.6% for FY19. Similarly, employee costs were controlled and increased by only 12% YoY (despite base of 35% decline). Thereby, EBITDA margin saw sharp 490bps YoY expansion to 18.5% (HSIE 14%) vs <13% EBITDA margin in FY21; we expect 16% margin for FY22/23.

Call takeaways: (1) Premium portfolio performed well in FY21, with consumers upgrading brands; (2) Scotch grew faster than IMFL as consumers have become less price sensitive; (3) raw material inflation is expected in FY22 but not much; (4) Scotch are growing in strong double digits, BIOs are growing faster than BII; (5) COVID impact is unlike last year's but still significant; (6) other expenses also include Andhra Pradesh unwinding cost.

Shares of UNITED SPIRITS LTD. was last trading in BSE at Rs.588.2 as compared to the previous close of Rs. 572.7. The total number of shares traded during the day was 310082 in over 7906 trades.

The stock hit an intraday high of Rs. 594.45 and intraday low of 574.1. The net turnover during the day was Rs. 181837372.

Source : Equity Bulls

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