Maintain ADD on United Spirits - In-line volume; mix impacts margin - HDFC Securities

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

UNSP posted net revenue growth of 57% YoY (HSIE 73%) and a decline of 27% on Q1FY20. Volume performance was healthy as it increased by 61% YoY to 15.8mn (HSIE 15.4mn). There was a miss in P&A realisation, which corrected by 12% QoQ to INR 1,346/case, owing to adverse brand/state mix. The benign raw material inflation resulted in 296bps YoY expansion in gross margin to 44.6% (HSIE 43.9%). Despite a beat on gross margin, negative op lev and high employee cost led to miss in EBITDA margin, which came in at 10% (HSIE 14%). Employee cost was up 56% YoY (51% QoQ) to INR 1.87bn (the highest in 12 quarters). A&P spend was up 62% YoY (-70% in Q1FY21), lower than our estimates, as the company made controlled investments due to the lockdown. While Q1FY22 was a miss, with operations fully recovered, we expect the premiumisation momentum to pick up again, improving the product mix. India is a spirit market with long term premiumisation drivers. The new CEO can accelerate this trend for UNSP with her global experience. We maintain our EPS estimates for FY22/FY23/FY24. We value UNSP at 42x P/E on Jun-23E EPS (standalone) to derive a target price of INR 660 (including INR 24/share of non- core assets). Maintain ADD.

In-line volume, weak realisation due to mix: Net revenue was up by 57% YoY (-54% in Q1FY21 and +12% in Q4FY21, +73% HSIE). P&A revenue was up by 58% (-52% in Q1FY21, +26% in Q4FY21, HSIE 85%), impacted by lockdowns in key regions. Popular revenue grew 60% YoY (-51% in Q1FY21, -3% in Q4FY21, HSIE 56%). P&A volumes were up by 60% YoY (-51% in Q1FY21 and +19% in Q4FY21, HSIE 65%) while Popular volumes grew 63% YoY (-47% in Q1FY21 and -2% in Q4FY21, HSIE 50%). P&A realisation was down 1% (-1.6 in Q1FY21, +5.3% in Q4FY21) to INR 1,346/case. Popular realisation declined by 1.4% (-8.4 in Q1FY21, +1.6% in Q4FY21). With markets opening and the company reverting to full operations, we expect realisations improvement.

Healthy gross margin, negative op lev impacts EBITDA margin: Gross margin was up by 296bps YoY and 66bps QoQ to 44%. A&P spend was INR 838mn - at 5.2% of revenue - lower than our estimates as the company took calibrated steps to reduce costs during the lockdown. Employee costs were up 56% YoY (51% QoQ) to INR 1.87bn. EBITDA margin come in at 10.4% (HSIE 14.2%).

Con call takeaways: (1) The impact of demand in north India (a large Scotch consuming region) had an unfavorable impact on the price mix. (2) The company has passed on the cost of glass, while pricing decisions on neutral spirits will be taken by the government in Sep. (3) The alco-bev industry has coverage of 50,000 retail points, of which 35,000 make about 80-90% of the business. (4) The company targets 1.5-2% value chain extraction every year; (5) India is a sprit market (with premiumisation trend) while Africa is a beer market. (6) It has taken a price hike of ~0.5-0.6%.

Shares of UNITED SPIRITS LTD. was last trading in BSE at Rs. 644.45 as compared to the previous close of Rs. 657.65. The total number of shares traded during the day was 61328 in over 2457 trades.

The stock hit an intraday high of Rs. 662.55 and intraday low of 642.6. The net turnover during the day was Rs. 40082000.

Source : Equity Bulls

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