Maintain Buy on United Spirits - Motilal Oswal

UNITED SPIRITS: Acquisition of Pioneer Distilleries to increase ENA capacity by 57m liters; Cost reduction upto Rs450m/annum plus tax incentives; Buy

United Spirits (UNSP IN, Mkt Cap US$4.1b, CMP Rs1,624, Buy) has announced the acquisition of 54.69% stake in Pioneer Distilleries Ltd for a consideration of Rs730m. United Spirits will make an open offer for additional 20% stake in the company which will entail an incremental Rs270m. Following are the deal highlights:

Pioneer Distilleries: Plagued by high input prices, low utilization

- Pioneer has a working capacity of 100 kiloliters/day (36m liters/annum) of molasses-based spirit near Nanded in Maharashtra. In addition it has another 60 kiloliters/day (21m liters/annum) capacity under installation for grain-based spirit. It has a license for absolute alcohol plant and bottling unit also.

- The company has reported sharp deterioration in performance in the past 2-3 years as capacity utilization has declined from 87% to 34%. Net sales have declined from Rs670m in FY08 to Rs480m in FY10. Adj PAT has declined from Rs113m in FY08 to Rs45m in FY10.

- For 1QFY11, it has reported loss of Rs141m on sales of Rs236m, mainly due to high stock adjustment.

- The company has been conferred the status of 'Mega Project' by Government of Maharashtra on the basis of fixed capital investment and is entitled for industrial promotion subsidy and other incentives by way of refund of Sales Tax, VAT etc. The total value of such incentives is up to Rs1.6b.

Acquisition is in line with United Spirits' stated strategy; seems a good fit

- The acquisition is line with United Spirits' stated strategy to reduce dependence on the outsourcing of ENA by setting up greenfield units and also acquisition of existing units.

- The acquisition makes available a ready unit with both molasses and grain based capacity and huge tax incentives.

- This will save the company around Rs8/bulk liter from inhouse production. This could save the company around Rs450m/annum at full capacity, excluding the tax incentives.

- Pioneer along with earlier acquisition of Tern Distilleries will result in United Spirits having 22% inhouse capacity of ENA. We note that the company would require nearly 410m liters of ENA in FY11 and close to 470m liters in FY12. The acquisitions have added up 72m liters to the total capacity of the company.

- We expect capacity utilization levels at Pioneer to increase due to bumper harvest of sugarcane and growing inhouse requirement of ENA from United Spirits.

- United Spirits can install bottling unit as Pioneer has a license for the same, which further improves profit potential from the deal.

Valuation and view

- United Spirits remains one of the best plays on consumption boom in India. We estimate a steady 13-14% volume growth in the coming few years.

- We expect the company to undertake sale of 8.3m treasury shares and further reduce debt from current levels of Rs54b.

- We estimate 12% decline in ENA prices for FY11 and a further 5% in FY12 which will enable 51% PAT CAGR over FY10-12.

- Success of Whyte & Mackay in branded scotch and higher-than-expected decline in input costs are potential upsides to our estimates.

- The stock trades at 38.6x FY11 EPS of Rs42 and 26.5x FY12 EPS of Rs61.3. Maintain Buy.

Source : Equity Bulls

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