CLSA: United Spirits to Underperform:: Delay in input price correction

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United Spirits to Underperform:: Delay in input price correction



Despite a rise in sugarcane production, ENA prices during 2HFY11 are
likely be similar at 1H levels due to higher demand for auto fuel blending.
W&M’s FY11 Ebitda is also likely to be lower than the revised guidance of
GBp33m. We consequently lower FY11-13CL earnings by 6-7%. While 3Q
earnings growth is likely to be 22% YoY driven by strong volume growth
and margin expansion, we expect stock to continue to underperform in
the near-term till greater clarity emerges on input prices.

Much awaited ENA price correction still eludes
The rise in sugarcane production helped United Spirits during 1HFY11 as it
witnessed an 8% decline in ENA prices (vs. FY10 average). Anticipated further
reduction is however not likely in 2H due to a rise in demand for auto fuel
blending and forward contracts. Fuel blending could take up as much as 860m
litres of ENA (~42% of overall production). We therefore raise our ENA price
assumptions and now model in almost flat prices during 2H (cf. ~7% drop
earlier) and a further 9% decline in FY12 (from 4Q) – the key reason for a 6-
7% earnings downgrade.

Downside risk to the guidance on Whyte & Mackay
During Jul-10, the management had reduced its FY11 Ebitda guidance for
Whyte & Mackay from GBp55m to GBp33m. Management now sounds further
cautious and further revised down the ebitda guidance to GBp30-33m due to
lower than expected volumes as well as lower realisations (lower pricing and
mix impact). We reduce FY11 Ebitda estimate to GBp31m and FY12-13 Ebitda
to GBp35-38m from GBp38-40m.

Volume growth continues to be strong; expect strong 3Q
Domestic business volume growth continues to remain strong and 3Q
volumes are likely to rise 12% YoY with a similar growth rate for full FY11. We
expect UNSP to report a 28% YoY rise in Ebitda on the back of 200bps
improvement in margins driven by lower input costs (on a YoY basis). Net
earnings should also rise by ~22%. We also highlight that reported earnings
would benefit from Balaji merger which would be accounted for during the
quarter and would be for nine month period.

Maintain Upf; would wait for clarity on input px trend, W&M
UNSP stock has corrected 12% in the last three months (underperforming
markets by 6ppt) and now trades at 24.3x FY12CL earnings. We maintain our
Upf rating on the stock and would wait for greater clarity on input price trend
and outlook for W&M business in order to change our view.