Neutral on United Spirits - Motilal Oswal

UNITED SPIRITS: 8-10% increase in container glass prices to impact margins; Neutral

HSIL (formerly Hindustan Sanitaryware) has indicated 8-10% increase in container glass prices from Feb/March.

The increase in glass prices has been prompted by sharp increase in furnace oil and energy prices (23-24% of sales for container glass manufacturers.

We note that packaging costs are 22% of net sales and glass bottles is major part of packaging costs; will result in as much as 15-17% increase in input costs.

We note that pricing environment in IMFL is not conducive as free markets account for only 30-35% of industry sales.

Our estimates currently factor in 4% increase in packaging material prices in the current year and another 3.5% in FY12.

We believe United Spirits is facing strong headwinds 1) 15-17% increase in glass prices in the past 6-8 months, 2) lower than expected decline in molasses/ENA prices, and 3) rising interest rate due to tight liquidity in the domestic market (domestic loans are Rs39b). The stock trades at 33.8x FY11 EPS of Rs39.9, 23.3x FY12 EPS of Rs52.4 and 17.5x FY13 EPS of Rs69.8. Maintain Neutral.

Source : Equity Bulls

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