Visit http://indiaer.blogspot.com/ for complete details Strong expectations from Sep Q
Exceptional volume growth and easing of margin pressures
We expect Liquor companies to do well on two counts – 1) Re-stocking in Andhra
to lead to strong topline growth as volume growth should be close to ~20% and 2)
Initial easing of margin pressures as partial benefit of lower molasses prices start
flowing in. Also, United Spirits should benefit from lower
interest costs.
United Spirits - We forecast a strong 100% earnings growth led by an
exceptionally strong topline growth of 26% which will benefit from re-stocking
in Andhra Pradesh. We also expect a healthy margin gain led by lower input
costs and scale benefits for overheads and staff costs.
Our price objective of Rs2,000 is based on sum-of-the-parts valuation for the core
business at Rs1,870 and the value of unsold treasury stock at Rs130. For the
core business, our preferred valuation methodology is a target P/E multiple on
one-year forward EPS. Our target multiple for USL is 22x, which on FY12E EPS
of Rs84 gives us a value of Rs1,870. We believe this multiple, which is in line with
the FMCG sector, is justified given the significantly higher earnings growth for
USL vs FMCG sector, which compensates for the firm's earnings dependence on
the molasses cycle and lower ROE. We value unsold treasury stock at our PO.
Upside risks: Stronger demand and higher-than-expected molasses price decline.
Downside risks: Rise in domestic debt, a slowdown in demand, and a lower-thanexpected
molasses price decline.
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