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United Spirits (UNSP.BO)
3QFY11 Below Expectations; Focus Shifts to B/S, Cash Flows
~10% EBITDA miss — Recurring EBITDA at Rs2.7bn was below expectations,
impacted by the higher input cost pressures, even as other revenues/cost
assumptions were in line with estimates. EBITDA margins at ~17.1% (ex Balaji
Distilleries merger, including brand launch expenses) were ~190bps below
estimate (up 20bps Q/Q). PAT missed our/consensus estimates by ~16/10%.
Raw materials outlook remains stable — Wet goods costs were ~Rs143/case
(vs. Rs138/case in 2Q). Mgmt mentioned that costs are softening, but will be fully
reflected only from 1HFY12 as inventories are locked in at current levels. Given
the somewhat hazy outlook on input costs, we have hiked our total raw material
assumption to Rs163/161 per case (Rs161/153 per case earlier) for FY11/12E.
Mounting debt levels — We note the incremental working capital/revenue ratio is
~0.4-0.5x, implying every Rs10bn increase in revenues requires Rs4.5bn (avg.)
investment in working capital. An EBITDA generation of ~Rs2bn (@ 20% margin)
implies the company needs to 'invest' net Rs3bn in working capital (including
interest on working capital). Thus, it is difficult to envisage a scenario where debt
levels decline. UNSP has an aggressive capex/investment plan - aggregating
~Rs12bn over FY11-13E as it augments primary distillation capabilities from ~15%
to 35-40% of overall capacity. Mgmt may refinance debt of Rs22.4bn (W&M loan)
with a long-term bond as cash flows will be utilized for capex requirements.
Paring earnings — We pare FY11-13E EPS by 23-29% driven by ~11-12% cut in
parent EBITDA (lower GMs) & ~10% cut in W&M EBITDA (mgmt guidance). We
factor marginal dilution for the Balaji merger. Our TP is revised to Rs1192 as we
cut EBITDA multiple on parent business to 13.5x Mar12E from 15x, maintaining
25% premium to developed market peers & factoring rising competitive intensity.
Maintain Hold — The stock has corrected significantly – ~58% from its peak in
Oct10 and is trading at ~23x on FY12 P/E, but we believe the safety margin is still
inadequate, given slight headwinds on costs pressures and mounting debt levels.
3QFY11 Results Review
3Q recurring EBITDA missed estimates by ~10% as cost pressures were higher
than expected. The operating profit miss, coupled with higher effective tax rate,
led to a recurring PAT miss of ~16% on our forecasts. Cost pressures are
expected to continue into 4Q (mgmt indicated inventories were locked) - the
softening trend in costs will be visible only from end 4Q. Other revenue/cost
assumptions were in line with estimates. EBITDA margins at ~17.1% (excluding
Balaji Distilleries merger, including brand launch expenses) were 190bps below
our expectations.
Volume growth was stable and largely in line with expectations at 30.3m cases,
up 14% Y/Y, ahead of mgmt's 1H expectation that growth would exceed 12%.
We believe this is the key metric to monitor to determine if a) overall industry
growth is tapering off, or b) if UNSP as the primary incumbent is ceding market
share to smaller players. Revenue growth (after adjusting for accounting
changes on inclusion of contract manufacturing units) in 3Q was ~17%: some
amount of uptrading + price mix evident but less than the 5% trend of the
previous Qs.
Wet goods cost were ~Rs143/case in 3QFY11, 4% higher sequentially
(Rs138/case in 2QFY11); however, ~6% lower on a YoY basis (~Rs152/case in
3QFY10). Management mentioned that costs are softening but will be fully
reflected only from 1HFY12, as inventories are locked in at current levels.
W&M generated GBP 22.5m EBITDA in 9MFY11 (vs. ~22.4m GBP in 9MFY10,
ex bulk sales). FY11E EBITDA guidance was at least GBP 30m. As of Dec
2010, W&M scotch inventory was 104m liters, valued at 430m GBP (4.15
GBP/o.l.a.)
Current consolidated debt levels are Rs62bn (Rs55bn end FY10), and we
expect these levels to continue to trend upwards.
Revising Earnings Estimates, Target Price
Our domestic business PAT estimates are pared 21-26% over FY11-13E as we
a) tweak gross margin forecasts – in line with recent trends; b) increase our
brand-building spend assumptions and c) factor higher interest costs.
Revenues have been increased as we incorporate the Balaji Distilleries merger;
however, there is a negative impact on our earlier margin forecasts.
We have also revised W&M estimates given management’s revised guidance –
we pare EBITDA estimates by around 10%.
Overall, consolidated EBITDA estimates are revised downwards by 13-14%
over FY11-13E. EPS estimates are lowered by 23-29% given a) operating profit
cut; b) rise in our interest expenses assumptions; and; c) as we factor the ~4%
dilution after the Balaji Distilleries merger.
We revise our target price to Rs1192 (from Rs1770) on our revised estimates
and as we cut EBITDA multiple on parent business to 13.5x Mar12E from 15x
earlier, maintaining ~25% premium to developed market peers, and the
increase in competitive intensity in the Indian market. We continue to value the
W&M EBITDA at 9x (which is a ~20% discount to the global majors) and
ascribe Rs40/share to the Bangalore IPL cricket team franchise at investment.
Reiterate Hold.
Quants View − Unattractive
United Spirits currently lies in the Unattractive quadrant of our Value-
Momentum map with weak momentum and weak value scores. It has been a
resident there since the past 2 months. Compared to its peers in the Food
Beverage & Tobacco sector, United Spirits fares worse on the valuation metric
and on the momentum metric. Similarly, compared to its peers in its home
market of India, United Spirits fares worse on the valuation metric and on the
momentum metric.
From a macro perspective, United Spirits has a high Beta to the region so is
likely to rise (or fall) faster than the region. It is also likely to benefit from
widening Asian interest rates, falling EM yields and a weaker US Dollar.
United Spirits
Valuation
Our target price of Rs1192 is based on a two-part EV/EBITDA methodology. We
value the domestic operations at 13.5x Mar12E EV/EBITDA. The multiple is at
a 25% premium to international peers. We think this is merited, given that: a)
volume growth in India continues at mid teen levels vs. nominal growth in
developed markets, b) With >55% market share, UNSP's market positioning in
a high growth market is attractive, and c) India's demographic story is also
attractive from a longer term alcohol consumption story. We value the W&M
EBITDA stream at 9x (which is a ~20% discount to the global majors). We think
this discount is merited, because of W&M's status as a bulk scotch
manufacturer. While over the longer term, we think that W&M could re-rate,
given management focus on building the branded business; but it is still early
days - thus we maintain the discount given the execution risks. We also ascribe
Rs40/share to value the Bangalore IPL cricket team franchise at investment.
Risks
We rate United Spirits shares Medium Risk, instead of Low Risk as suggested
by our quantitative risk-rating system, which tracks 260-day historical shareprice
volatility. We believe this is warranted as the capital structure of the
company remains a challenge vis-à-vis other peers in the India consumer
space.
The key downside risks to our rating and target price include: 1) the liquor
industry is highly regulated and thus any change in policy (like increase in
taxes, further control on distribution or an outright ban on liquor sales in some
states) could adversely impact growth and profitability; 2) high interest
expenses may impact earnings growth, if United Spirits is unable to deleverage
its balance sheet over the medium term. Key upside risks to our target price
stem from a) lower ENA costs than our current estimates forecast and b) mgmt
ability to pare discretionary costs that may buttress operating margins.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
United Spirits (UNSP.BO)
3QFY11 Below Expectations; Focus Shifts to B/S, Cash Flows
~10% EBITDA miss — Recurring EBITDA at Rs2.7bn was below expectations,
impacted by the higher input cost pressures, even as other revenues/cost
assumptions were in line with estimates. EBITDA margins at ~17.1% (ex Balaji
Distilleries merger, including brand launch expenses) were ~190bps below
estimate (up 20bps Q/Q). PAT missed our/consensus estimates by ~16/10%.
Raw materials outlook remains stable — Wet goods costs were ~Rs143/case
(vs. Rs138/case in 2Q). Mgmt mentioned that costs are softening, but will be fully
reflected only from 1HFY12 as inventories are locked in at current levels. Given
the somewhat hazy outlook on input costs, we have hiked our total raw material
assumption to Rs163/161 per case (Rs161/153 per case earlier) for FY11/12E.
Mounting debt levels — We note the incremental working capital/revenue ratio is
~0.4-0.5x, implying every Rs10bn increase in revenues requires Rs4.5bn (avg.)
investment in working capital. An EBITDA generation of ~Rs2bn (@ 20% margin)
implies the company needs to 'invest' net Rs3bn in working capital (including
interest on working capital). Thus, it is difficult to envisage a scenario where debt
levels decline. UNSP has an aggressive capex/investment plan - aggregating
~Rs12bn over FY11-13E as it augments primary distillation capabilities from ~15%
to 35-40% of overall capacity. Mgmt may refinance debt of Rs22.4bn (W&M loan)
with a long-term bond as cash flows will be utilized for capex requirements.
Paring earnings — We pare FY11-13E EPS by 23-29% driven by ~11-12% cut in
parent EBITDA (lower GMs) & ~10% cut in W&M EBITDA (mgmt guidance). We
factor marginal dilution for the Balaji merger. Our TP is revised to Rs1192 as we
cut EBITDA multiple on parent business to 13.5x Mar12E from 15x, maintaining
25% premium to developed market peers & factoring rising competitive intensity.
Maintain Hold — The stock has corrected significantly – ~58% from its peak in
Oct10 and is trading at ~23x on FY12 P/E, but we believe the safety margin is still
inadequate, given slight headwinds on costs pressures and mounting debt levels.
3QFY11 Results Review
3Q recurring EBITDA missed estimates by ~10% as cost pressures were higher
than expected. The operating profit miss, coupled with higher effective tax rate,
led to a recurring PAT miss of ~16% on our forecasts. Cost pressures are
expected to continue into 4Q (mgmt indicated inventories were locked) - the
softening trend in costs will be visible only from end 4Q. Other revenue/cost
assumptions were in line with estimates. EBITDA margins at ~17.1% (excluding
Balaji Distilleries merger, including brand launch expenses) were 190bps below
our expectations.
Volume growth was stable and largely in line with expectations at 30.3m cases,
up 14% Y/Y, ahead of mgmt's 1H expectation that growth would exceed 12%.
We believe this is the key metric to monitor to determine if a) overall industry
growth is tapering off, or b) if UNSP as the primary incumbent is ceding market
share to smaller players. Revenue growth (after adjusting for accounting
changes on inclusion of contract manufacturing units) in 3Q was ~17%: some
amount of uptrading + price mix evident but less than the 5% trend of the
previous Qs.
Wet goods cost were ~Rs143/case in 3QFY11, 4% higher sequentially
(Rs138/case in 2QFY11); however, ~6% lower on a YoY basis (~Rs152/case in
3QFY10). Management mentioned that costs are softening but will be fully
reflected only from 1HFY12, as inventories are locked in at current levels.
W&M generated GBP 22.5m EBITDA in 9MFY11 (vs. ~22.4m GBP in 9MFY10,
ex bulk sales). FY11E EBITDA guidance was at least GBP 30m. As of Dec
2010, W&M scotch inventory was 104m liters, valued at 430m GBP (4.15
GBP/o.l.a.)
Current consolidated debt levels are Rs62bn (Rs55bn end FY10), and we
expect these levels to continue to trend upwards.
Revising Earnings Estimates, Target Price
Our domestic business PAT estimates are pared 21-26% over FY11-13E as we
a) tweak gross margin forecasts – in line with recent trends; b) increase our
brand-building spend assumptions and c) factor higher interest costs.
Revenues have been increased as we incorporate the Balaji Distilleries merger;
however, there is a negative impact on our earlier margin forecasts.
We have also revised W&M estimates given management’s revised guidance –
we pare EBITDA estimates by around 10%.
Overall, consolidated EBITDA estimates are revised downwards by 13-14%
over FY11-13E. EPS estimates are lowered by 23-29% given a) operating profit
cut; b) rise in our interest expenses assumptions; and; c) as we factor the ~4%
dilution after the Balaji Distilleries merger.
We revise our target price to Rs1192 (from Rs1770) on our revised estimates
and as we cut EBITDA multiple on parent business to 13.5x Mar12E from 15x
earlier, maintaining ~25% premium to developed market peers, and the
increase in competitive intensity in the Indian market. We continue to value the
W&M EBITDA at 9x (which is a ~20% discount to the global majors) and
ascribe Rs40/share to the Bangalore IPL cricket team franchise at investment.
Reiterate Hold.
Quants View − Unattractive
United Spirits currently lies in the Unattractive quadrant of our Value-
Momentum map with weak momentum and weak value scores. It has been a
resident there since the past 2 months. Compared to its peers in the Food
Beverage & Tobacco sector, United Spirits fares worse on the valuation metric
and on the momentum metric. Similarly, compared to its peers in its home
market of India, United Spirits fares worse on the valuation metric and on the
momentum metric.
From a macro perspective, United Spirits has a high Beta to the region so is
likely to rise (or fall) faster than the region. It is also likely to benefit from
widening Asian interest rates, falling EM yields and a weaker US Dollar.
United Spirits
Valuation
Our target price of Rs1192 is based on a two-part EV/EBITDA methodology. We
value the domestic operations at 13.5x Mar12E EV/EBITDA. The multiple is at
a 25% premium to international peers. We think this is merited, given that: a)
volume growth in India continues at mid teen levels vs. nominal growth in
developed markets, b) With >55% market share, UNSP's market positioning in
a high growth market is attractive, and c) India's demographic story is also
attractive from a longer term alcohol consumption story. We value the W&M
EBITDA stream at 9x (which is a ~20% discount to the global majors). We think
this discount is merited, because of W&M's status as a bulk scotch
manufacturer. While over the longer term, we think that W&M could re-rate,
given management focus on building the branded business; but it is still early
days - thus we maintain the discount given the execution risks. We also ascribe
Rs40/share to value the Bangalore IPL cricket team franchise at investment.
Risks
We rate United Spirits shares Medium Risk, instead of Low Risk as suggested
by our quantitative risk-rating system, which tracks 260-day historical shareprice
volatility. We believe this is warranted as the capital structure of the
company remains a challenge vis-à-vis other peers in the India consumer
space.
The key downside risks to our rating and target price include: 1) the liquor
industry is highly regulated and thus any change in policy (like increase in
taxes, further control on distribution or an outright ban on liquor sales in some
states) could adversely impact growth and profitability; 2) high interest
expenses may impact earnings growth, if United Spirits is unable to deleverage
its balance sheet over the medium term. Key upside risks to our target price
stem from a) lower ENA costs than our current estimates forecast and b) mgmt
ability to pare discretionary costs that may buttress operating margins.
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