United Spirits - On a strong footing; BUY : Nomura

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􀁾 Action
We are moving our price target higher by 12.5% and reiterating our BUY rating on
the stock. While additional brand investment drove Q2FY11 headline numbers
lower than both our and consensus expectations, it will spur long-term mix
improvement. Domestic business remains on a strong footing, and we would use
current weakness to buy into the stock.
􀁡Catalysts
Sharp fall in raw material prices over H2FY11 & FY12 will help drive profitability
higher.
Anchor themes
We expect volume growth in the Indian liquor market to clock 12-13% growth over
the medium term, given the significant underpenetration. United Spirits is expected
to be a key beneficiary on account of its dominant market share and the strict
regulatory regime favouring the incumbent.


On a strong footing
􀁣 Q2FY11 results largely in line
Headline Q2FY11 numbers appear to be weak, impacted by the
additional brand building investment of Rs250mn, which we believe
will drive mix improvement going forward. Adjusting for that, results
were strong and in line with our expectations.
􀁤 Domestic business on a strong footing
Domestic business volume growth has been strong in H1FY11 at 11%
and this was also impacted by destocking in the key state of Andhra
Pradesh in Q1. The company has been able to introduce selective
price increases and has also seen mix benefits come through in Q2.
We expect this momentum to build in H2FY11.
􀁥 Input cost outlook favourable
Outlook on input costs is favourable into H2FY11 and FY12 as a
strong sugarcane crop is expected to lead to strong supply of
molasses. With company profitability very sensitive to input costs, we
expect significant improvement in profitability in H2FY11.
􀁦 Changing estimates
We have now incorporated new guidance at W&M into our numbers.
We have also rebased our expectations for the domestic business for
the next couple of years, as we expect significant improvement in
profitability.
􀁧 Reiterating BUY with increased PT of Rs1,800
We are rolling forward our price target which leads to a 12.5%
increase to Rs1,800. We value the W&M business at 7x EV/EBITDA
& domestic business at 14x EV/EBITDA. We would use current
weakness in the stock as a buying opportunity.