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United Spirits (UNSP)
Consumer products
Time to say ‘Cheers!’.We believe structural positives outweigh the concerns
surrounding United Spirits, importantly, the stock’s recent underperformance provides
an entry opportunity. In its favor, United Spirits’ is benefiting from rising entry barriers
(a recent change in the procurement policy of beer in Andhra Pradesh benefits the UB
group disproportionately). We forecast financial leverage-driven earnings CAGR of 37%
over FY2010-13E and RoACE improvement of 500 bps to 16.4%. The Supply-demand
for Scotch also bodes well for the W&M acquisition (Scotch whisky production has
grown 0.8% CAGR in 1980-2008). A key risk is constrained pricing power.
Valuation: Market dominance in a multi-year growth story warrants premium over staples
We assign a target of Rs1,550 on UNSP based on SOTP (EV/EBITDA multiple of 16X FY2012E for
the Indian business and 10X for W&M). We believe the Indian business deserves a premium to
staples because of (1) dominant market share (>40%) in a secular growth industry, (2) extant high
entry barriers (increasing further, in our view) in the Indian market and (3) improving financial
leverage. We value W&M at par with the average EV/EBITDA for developed markets.
Robust volume-led sales growth, gross margin expansion is key
We model volume growth of 14% and 13% in FY2011E and FY2012E with average realization
growth of 3% for the India business. For W&M, we model a 37% sales decline in FY2011E and a
modest 10% sales growth in FY2012E given the company’s aim to sell high-value aged Scotch
rather than focus high volumes in the short term.
We model EBITDA and PAT CAGR of 14% and 37% over FY2010-13E—higher PAT CAGR due to
positive effects of financial leverage. UNSP’s adspends have averaged ~12% (of sales) over the
past five years—while we note that liquor companies engage in surrogate advertising, the
quantum of advertising is surprisingly high. We note that the interest outgo for UNSP is
substantially higher than other staple companies in India (GCPL and Dabur have indicated that
their cost of borrowing is ~3% in foreign currency, whereas UNSP has prepaid dollar debt).
Key risk is muted pricing power coupled with cyclicality in input costs
Key worries are (1) relatively muted pricing power coupled with cyclicality in input costs, (2) W&M
likely to contribute meaningfully to margins with a lag, (3) government regulation/deregulation, (4)
agri-based raw materials leading to uncertainty in margins, (5) brand building is a long gestation
investment, (6) watch for treatment of forex transactions, (7) UNSP needs to watch for competitors
with niches, (8) surprisingly high adspends, (9) significantly higher capex compared with other
consumer companies and (10) pledged shares by promoter.
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