UNITED SPIRITS The party has just begun :: Edelweiss

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􀂃 Robust sales growth on back of 16% volume increase
United Spirits’ (USL) Q2FY11 net sales increased 25.4% Y-o-Y to INR 13.54 bn
(vs. our estimate of INR 13.50 bn). Reported PAT increased 7% Y-o-Y to INR
746 mn (vs. our estimate of INR 905 mn). Volume jumped 16% Y-o-Y (6% Y-o-
Y in Q1FY11), ~10% of which was because of price mix improvement. 20%
growth was recorded in top end brands. Q2 is seasonally the weakest quarter
and the company sold 26.6 mn cases (26.7 mn cases in Q1FY11).

􀂃 Higher A&P a drag on PAT
The company incurred launch and promotional expenses of INR 250 mn in
Q2FY11 for three new launches of McDowell No.1 Platinum Whisky, Black Dog,
and McDowell VSOP Brandy. A&P increased 86.6% to INR 1.56 bn. If EBITDA
were adjusted for this launch and promotional expenses, USL has a 35% Y-o-Y
growth in EBITDA with a margin of ~19%. The company intends to invest ~INR
150-200 mn further in Q3FY11 in these new brands.

􀂃 Lower interest costs on consolidated basis
Interest cost increased by INR 232 mn to INR 983 mn due to refinancing of
overseas loan and increase in working capital. However, on a consolidated basis,
interest costs dipped from INR 2,800 mn to INR 2,510 mn in H1FY11.

􀂃 W&M brand gaining recognition; good growth from France
Whyte & Mackay’s (W&M) H1FY11 EBITDA increased 17% to GBP 14.03 mn,
while PBT increased 415% to GBP 6.7 mn. Two bottles of 64-year old Dalmore
Trinitas were sold for GBP 100,000 each, which is the highest price of a single
bottle of malt thus far. We believe W&M brands are on the right path of
transformation from bulk whisky to gaining strong brand equity. Bouvet
Ladubay’s, the French wine subsidiary, sales increased 23% to EUR 9.04 mn and
EBITDA increased 79% to EUR 1.46 mn.

􀂃 Outlook and valuations: Positive; maintain ‘BUY’
Volume growth in Q2FY11 was impressive even after considering the Andhra restocking.
We believe strong domestic volume growth will continue following good
festive season and margins will expand following product mix improvement.
W&M brands are gaining recognition and are on the right track of transforming
from bulk scotch to branded player. We maintain ‘BUY’ recommendation on the
stock and rate it ‘Sector Outperformer’ on relative return basis.