United Spirits- High brand spends impact Q2FY11:: JPMorgan

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United Spirits Limited
Overweight
UNSP.BO, UNSP IN
High brand spends impact Q2FY11


• Higher brand spend weighs on earnings growth. United Spirits registered
Net sales, EBITDA and PAT growth of 25%, 20% and 7% respectively
during Q2FY11. Earnings growth was subdued on account of sharp 87% y/y
increase in A&P spend. Management noted that A&P expenses were higher
on account of launch and initial promotion expenses of three new brands.
Reported A&P spend factors in Rs250mn for these expenses and Rs150mn
for third party costs (not included in Q2FY10).
• Volume growth of 16%, LTL price/mix growth of 5%. Overall net sales
growth was 25%, which appears high due to change in revenue accounting
policy for tie-up units. On a like-for-like basis, value growth was 21%,
including volume growth of 16% and price/mix growth of 5%. During
1HFY11 UNSP has registered 11% volume growth and we maintain our
year FY11 volume growth estimate at 12%.
• Raw material tailwinds to strengthen starting Q4FY11. ENA cost/case
declined 3% q/q and 8-9% y/y to cRs139/case during Q2FY11. While ENA
cost/case will move up marginally during Q3FY11 to Rs140-141/case, we
expect these costs to fall significantly starting Q4FY11 as sugarcane
crushing season starts in Nov'10.
• Increased net debt levels (by Rs2bn) on a sequential basis in Q2FY11
largely attributed to working capital related loans and exchange difference
for Whyte & Mackay acquisition loans. UNSP took three tie-up units in
Southern India on 10-year leases in Q1FY11 which led to higher WC
investments. Given high capex requirements (Rs11bn over next 3 years), we
do not anticipate significant decline in net debt levels for the full-year FY11.
As of Sep’10, consolidated net debt was cRs54bn.
• Maintain OW. Our PAT estimate for FY11 is lowered by 5% as we
incorporate higher brand spend. Stock has corrected sharply (by 7%) on
back of earnings miss. While earnings could be choppy in the near term
(primarily on account of higher A&P spends), it does not impact our mid to
long term view and we believe this sharp correction is likely to give
investors a buying opportunity.