United Spirits Ltd - Research Report

 

Private Client Research

Rating

Buy

Sector

Breweries & Distilleries

Company

United Spirits Ltd

Reco Price
Rs. 2252.00
Price Target (1 Year)
Rs. 2702.00
Upside
19.98%

Date

May 31, 2017
Sensex
31145.80
CNX Nifty
9621.25

Exchange

Code

NSE
MCDOWELL-N
BSE
532432

At inflection point with benefits of premiumisation and franchising to kick in.

At the inflection point to growth:
United Spirits Limited (USL), which was taken over by Diageo PLC in FY14, is positioned for a turnaround as a result of transformational changes within the company and in its business focus. USL will shift focus from volume business to premium business, reduce capex needs by riding the franchisee opportunity and repay debts resulting from free cash flows thereby improving the company’s balance sheet.

Change in management – a positive:
Post acquisition of United Spirits Limited (USL), Diageo has completely revamped the products, brands and workforce of the company. The company is engaging with key stakeholders (regulators, State Government and other players) to professionalize its set-up. Though this might lead to some pain in the near term with respect to sales decline, market share loss and lowering of entry barriers, in the longer run, it will create a true consumer company based on a high quality product and brand portfolio, better customer connect, and efficient regulatory environment. Thus, the focus has shifted towards enhancing fundamental business capabilities with the aim of driving profitability, improving balance sheet health and return ratios.

Working towards attaining profit leadership:
USL has been franchising brands in low-growth and low-profit markets like Kerala and Tamil Nadu to drive its business and achieve its true profitability. The strategy is to retain complete brand portfolio in the 3 key states of Karnataka (25% of sales), Maharashtra (15-20% of sales), and West Bengal (~10% of sales). The company is also working on increasing contribution from premium brands and improving efficiency of operations to move towards the path of profit leadership. As a part of this initiative, USL has been able to take up volume contribution from premium brands to 57% from 38% in FY11. Going forward, the management has indicated price hikes of 3-4% per annum.

Generating free cash flows:
The combination of rising profitability and improving balance sheet health is likely to significantly improve cash flow generation for the company. Also with franchising of popular brands, USL is unlikely to require any further capacity addition which will keep capex requirements in check. Majority of the annual capex will be spent on capability enhancement through investments in technology, distribution infrastructure and upgrades of manufacturing facilities. Thus, the combination of limited capex along with sale of non-core assets will lead to higher free cash flow generation in the future.

Improved balance sheet – a positive going forward:
Diageo has managed to clean up USL’s balance sheet by writing off Rs. 45 billion and significantly reducing loans and advances over the last few years. Although working capital remains a challenge for the alcoholic beverage industry in India, franchising of low profit markets will help in improving payment cycles, which, in turn, will improve the company’s balance sheet. Further, shifting focus from the volume business will reduce the incremental need for capex, thus leading to more efficient cash utilization. This, in turn, will enhance free cash flows, which will be used to pare down debt and improve profitability of the company going forward.

Stock Data

CMP (Rs)
2265.35
Face value (Rs)
10
52 Week Range (Rs)
2698.70 - 1773.45
Market cap (Rs Crores)
32950.89
Price To Book Value (x)
17.63
P/E Ratio
201.12
EV/EBIDTA (x)
35.43

One Year indexed Stock Performance

United Spirits LtdSensex
United Spirits Ltd
Return (%)
1m
6m
12m
36m
Absolute
17.15
17.92
-8.14
-20.42
Sensex
4.09
16.86
16.79
26.17

Shareholders

(in %)
31-Mar
Promoter
58.48
Public
41.52
Others
0.00
Total
100

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Industry

The size of the Indian alcoholic market is ~850mm cases per annum and has been growing at ~5% CAGR since 2010-11. The split between spirits, beer and country liquor is 37%, 37% and 26% respectively. Growth has been the highest for beer at 5% CAGR followed by spirit at 4% while the country liquor segment has remained stagnant. Some of the key drivers of this growth are low penetration rate as currently only ~25% of Indians consume alcohol (this is expected to increase), rising income levels, which is expected to improve affordability and changing lifestyles leading to rising consumption levels among youth and women.

Company

United Spirits Limited (USL) became a subsidiary of Diageo PLC after acquiring 54.8% in FY14 from Vijay Mallya. Founded in 1826, USL is the largest spirits company in India engaged in the business of manufacturing, purchasing and selling alcoholic beverages.

Its products segments include whiskey, vodka and rum. The company caters to various consumers through luxury, premium, prestige and popular spirit categories. Its brand portfolio includes McDowell’s No.1, Royal Challenge, Signature and Antiquity. It has 15 millionaire brands including 3 brands with over 10mn cases per annum in sales. USL has over 74 manufacturing units spread across approximately 23 states and 3 union territories in India.

Profit & Loss Statement:- (Consolidated)
(Rs Crores)
Particulars
Mar-14
Mar-15
Mar-16
Mar-17
Mar-18E
Mar-19E
Income:-
  • Net Sales
  • Other op income
  • Total revenue
  • Growth (%)
  • Total Expenditure
  • EBITDA
  • % Margin
  • Other Income
  • Operating Profit
  • Interest
  • PBDT
  • Depreciation
  • Profit Before Taxation & Exceptional Items
  • Exceptional Income / Expenses
  • Tax
  • Profit After Tax
  • Oher comprehensive income
  • Share of Associates/ Non controlling interest in Profit/(Loss)
  • Report consol PAT
  • Adjusted PAT
  • Adjusted EPS
  • 10,500.9
  • 114.5
  • 10,615.4
  • -
  • 10,752.8
  • (137.4)
  • (1.3)
  • 685.9
  • 548.5
  • 1,322.5
  • (774.0)
  • 202.6
  • (976.6)
  • (3,235.7)
  • 274.6
  • (4,486.9)
  • -
  • (2.2)
  • (4,489.1)
  • (1,251.2)
  • (86.1)
  • 9,159.3
  • 175.6
  • 9,334.9
  • -12.1%
  • 9,301.9
  • 33.0
  • 0.4
  • 81.1
  • 114.1
  • 687.3
  • (573.2)
  • 222.8
  • (796.0)
  • (839.1)
  • 48.6
  • (1,683.7)
  • -
  • (4.0)
  • (1,687.7)
  • (844.6)
  • (58.1)
  • 8,373.7
  • 121.2
  • 8,494.9
  • -9.0%
  • 7,514.6
  • 980.3
  • 11.7
  • 27.9
  • 1,008.2
  • 457.4
  • 550.8
  • 157.2
  • 393.6
  • (27.4)
  • 222.8
  • 143.4
  • 29.0
  • (5.2)
  • 167.2
  • 170.8
  • 11.8
  • 8,743.4
  • 74.1
  • 8,817.5
  • 3.8%
  • 7,813.7
  • 1,003.8
  • 11.5
  • 90.7
  • 1,094.5
  • 375.1
  • 719.4
  • 188.6
  • 530.8
  • (368.1)
  • 69.7
  • 93.0
  • 46.8
  • 7.1
  • 146.9
  • 461.1
  • 31.7
  • 9,575.2
  • 80.0
  • 9,655.2
  • 9.5%
  • 8,474.0
  • 1,181.1
  • 12.3
  • 95.0
  • 1,276.1
  • 330.0
  • 946.1
  • 175.0
  • 771.1
  • -
  • 218.0
  • 553.1
  • -
  • -
  • 553.1
  • 553.1
  • 38.1
  • 10,731.8
  • 82.0
  • 10,813.8
  • 12.0%
  • 9,347.4
  • 1,466.4
  • 13.7
  • 96.0
  • 1,562.4
  • 285.0
  • 1,277.4
  • 188.0
  • 1,089.4
  • -
  • 356.0
  • 733.4
  • -
  • -
  • 733.4
  • 733.4
  • 50.5
Source: Stockaxis Research, Company Data

Valuation

With the transformational steps taken by Diageo, USL is positioned for a turnaround. The management has been successful in transforming key aspects of the business, merging 2 very different companies, dealing with legacy issues, and instituting global standards and controls while improving the company’s performance. The company is also focused on capturing the long term opportunity in the attractive alcoholic beverage market in India. We value USL at ~28.3x FY19E consolidated EV/EBITDA and recommend a ‘Buy’ with a target price of Rs. 2,702 giving an upside of ~20%.

 

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