United Spirits- 2QFY11 PAT Misses by 25% As Ad Spends Soar :: Citi

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United Spirits (UNSP.BO)
Alert: 2QFY11 PAT Misses by 25% As Ad Spends Soar
 Results disappoint — Higher brand building spends of Rs250m in the quarter
resulted in PAT of Rs746m, missing our (and consensus’) Rs1bn estimates. Other
revenue / cost assumptions were in line with estimates. EBITDA margins at ~17%
declined ~60bps / ~280bps Y/Y and Q/Q, impacted by the ad spends. Interest
costs were a tad below estimates (elevated Y/Y as W&M debt is sequestered in
parent balance sheet). Debt / working capital appear in line with 1Q trends.
 Volume growth slightly lower than expectations — Management noted that 1HFY11
volume growth is 11% Y/Y and indicated that the growth rates should move up
slightly to 12% Y/Y. We reckon this is the key metric to monitor to determine if a)
overall industry growth is tapering off, or b) if UNSP as the primary incumbent is
ceding market share to smaller players. Revenue growth (after adjusting for
accounting changes on inclusion of contract manufacturing units) in 1H is ~17%
(~2.5% mix, ~2.5% price).
 Raw material outlook remains stable — Wet goods cost were ~Rs140/case (vs
Rs142/case in 1Q). Management mentioned that 3Q costs will be similar to 1H,
with the downtrend commencing from 4Q and into 1HFY12.
 Dissecting ad spends — Management noted that spends on brand building will be
higher to the extent of ~Rs400m (Rs250m + Rs150m in 3Q) in FY11E. Costs will
taper off into 4Q. These are for the roll out of flavored variants in vodka, the
national roll out of McDowell’s VSOP brandy, and the launch of McDowell’s No.1
Platinum whisky which is at a Rs20-30 price point higher than regular No.1.
Overall ad spends in 1HFY11 are Rs2.95bn (+72%Y/Y). Of this increase, Rs470m
is attributed to accounting policy changes (Contract bottler related spends
reflected in revenues and costs) and Rs250m brand launch spends. Adjusted for
these, ad costs are up 30% Y/Y – higher than volume growth / revenue, indicating
that competitive intensity is probably escalating.
 W&M continues to stay the course — W&M generated GBP 14m EBITDA in 1H (vs.
~6m GBP in 1Q), so healthy uptick Q/Q. FY11E EBITDA guidance was reiterated
as at least GBP 30m.
 Maintain Hold — Our earnings estimates remain unchanged at present, though we
do see downside risks to our current EPS estimates of ~Rs46/64 in FY11/12E. We
will revisit our assumptions on 3 aspects: a) volume growth (we are 12% at
present vs. 11% in 1H), b) wet goods (which is tracking in line with expectations),
though which might have some upside as the crushing season plays out, and c) ad
spends which at 30% Y/Y (adjusted for accounting / brand building) are higher
than our forecasts of 20% Y/Y into FY12/13E.