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United Spirits Ltd
UW: Another round of EPS downgrades likely
Results below expectations; benefits premiumisation and
lower material cost not evident
Cutting FY12/13 EPS estimates by c24% on higher
overheads, interest costs
Maintain UW and reduce TP from INR1,310 to INR905; valued
on SOTP basis using 8x EV/EBITDA for W&M and 11x for
rest of the business
Results below expectations: USL reported Q3 adjusted sales growth of 17% on the back
of 14% volume growth, implying just 300bps benefit from premiumisation and price
increases, which is lower than our expectation of 500-600bps. Moreover, adjusted gross
margin contracted slightly in spite of an increase in average selling price and a decline in
wet-goods costs, reinforcing our belief that the expectations on input cost deflation may
be overplayed. Adjusted EBITDA grew in line with top-line growth, supporting our
arguments on benefits of premiumisation not being visible at the bottom-line. Debt
March-December 2010 was up cINR9.5bn, putting to rest expectations of substantial
benefits from financial leverage.
Cutting estimates: We are revising our EPS estimates for FY11/12/13 by 12%/24%/23%
on the back of lower input cost benefit, higher overheads, and higher interest costs. We
are now 28% below consensus estimates on FY12. Moreover, the impact on cash flow
generation is likely to be more severe given that working capital and capex assumptions
are unlikely to go down in line with net profits. Competitive intensity is increasing and we
do not think that A&P is likely to come down in near future. Moreover, the ramp up in the
W&M business is below expectations, with the non-bulk business showing no growth.
Maintain Underweight: We are cutting our target price from INR1,310 to INR905,
rolling over to FY13. In addition to the cut in earnings, we are cutting our EV/EBITDA
multiple for the Indian business from 13x to 11x and for W&M business from 10x to 8x to
account for the lower earnings growth, returns and cash-flow generation. Our target price
denotes an 8% downside and we maintain our Underweight rating on the stock.
The results above are not comparable due to the merger of Balaji Distilleries Ltd. The management has in
the post results call and presentation given adjusted (like for like) figures, which we will be quoting in our
discussion below.
For Q3, adjusted sales were up 17% on the back of 14% volume growth. A 300bps spread between
volume and value growth (which would be a combination of price increases and premiumisation) is
below our expectation of c500-600bps.
Adjusted gross margins are down by c80bps – this is against our and Street expectations of a gross
margin expansion on the back of lower wet goods costs, price increases, and premiumisation, in spite
of higher packaging material costs. However, we are surprised this has not happened. We had
highlighted our belief in our initiation report dated 10 November 2010 (pages 12-16) that the benefit
on account of raw material costs is being over-estimated and will be modest at best.
For YTD, the addition of the standalone and W&M EBITDA is cINR9.5bn. However, the company
presentation states the consolidated EBITDA at INR8.22bn. We had highlighted in our initiation note
(page 18) that this issue exists and often leads to downgrades in consolidated EPS estimates towards
the end of the fiscal year.
The W&M business does not look encouraging even after excluding the bulk business, which has
been discontinued. YTD, the business was flat on EBITDA and on sales. We believe that building a
branded business globally is a difficult task, which requires a lot of brand investment. Ramp up on
this could be slower than expected. (Page 19-21 of our initiation report)
Adjusted EBITDA growth (including higher A&P spend, as we do not think that A&P is going to
come down in a hurry) has been in line with sales growth. Benefits of premiumisation are not visible
on the bottom line as highlighted on page 17 of our initiation note.
There is an increase of INR9.5bn in debt over this fiscal (i.e. March-December 2010 – this despite
generating a cash profit of cINR4bn). This is a big increase and expectations were that debt would
remain flat or go down. We had highlighted the issue of high capex in our initiation note (page 22).
Road ahead
We see no positive catalysts for the foreseeable future. We would like to comment on the following:
Wet goods cost will go down slightly in Q4 but not substantial enough. Costs on glass could go up
offsetting all gains. In FY12, we do not expect any input cost benefit yoy.
Going ahead, we could see a one time cost impact of INR300m on account of restructuring W&M
debt plus expenses on IPL.
Interest costs would be unlikely to come off due to debt being much higher than anticipated. This is
likely to impact bottom-line, as well as cashflows.
UNSP is likely to keep diluting shares to fund growth – this could result in EPS growth being slower
net profit growth.
Consensus estimates are likely to come down substantially. We believe this is to a some extent
already factored in the price.
Cash flow generation is likely to take a hit, as profits come in lower than our original expectations
while working capital intensity and capex do not change vs. our previous expectations. This is likely
to result in FCF/Net profit ratio declining from c30% to c20% for the next one to two years.
Change in estimates
We are changing our estimates to factor in higher-than-previously estimated input costs, overheadss and
interest costs.
Valuation and risks
We value USL on an SOTP basis. We value the India business at an EV/EBITDA of 11x. We reduce our
multiple from 13x to 11x to account for the reduced earnings growth. Our 11x estimate is at a c35%
discount to average FMCG multiples to account for lower cash generation vs. FMCG peers and higher tax
rate.
We value W&M at an EV/EBITDA multiple of 8x, vs. 10x earlier, again factoring the slower growth in
this business vs. our previous expectation. Our multiple is at a c20% discount to global peers keeping in
mind the nascent stage of the business and the consequent higher risk attached.
SOTP valuation – March 2012
INRm
USL
EBITDA March 2013 12,819
EV/EBITDA Multiple 11
EV 141,006
Whyte & Mackay
EBITDA March 2013 2,780
EV/EBITDA Multiple 8
EV 22,237
Total EV 163,243
Net debt March 2012 52,449
Market cap 110,794
O/s shares 122.4
Target price 905
Source: HSBC
Under our research model, for Indian stocks without a volatility indicator, the Neutral band is 5ppt above
and below the hurdle rate of 11%. This translates into a Neutral rating band of 6- 6% above the current
share price. Our target price of INR1,310 for USL represents a potential return of negative 7.6%,
including the anticipated 0.1% dividend yield; thus, we maintain our Underweight rating.
Risks to the upside include: raw material prices are lower-than-expected, working capital improvement,
balance sheet position (leverage) improvement, competition slackening, and premiumisation accelerating.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
United Spirits Ltd
UW: Another round of EPS downgrades likely
Results below expectations; benefits premiumisation and
lower material cost not evident
Cutting FY12/13 EPS estimates by c24% on higher
overheads, interest costs
Maintain UW and reduce TP from INR1,310 to INR905; valued
on SOTP basis using 8x EV/EBITDA for W&M and 11x for
rest of the business
Results below expectations: USL reported Q3 adjusted sales growth of 17% on the back
of 14% volume growth, implying just 300bps benefit from premiumisation and price
increases, which is lower than our expectation of 500-600bps. Moreover, adjusted gross
margin contracted slightly in spite of an increase in average selling price and a decline in
wet-goods costs, reinforcing our belief that the expectations on input cost deflation may
be overplayed. Adjusted EBITDA grew in line with top-line growth, supporting our
arguments on benefits of premiumisation not being visible at the bottom-line. Debt
March-December 2010 was up cINR9.5bn, putting to rest expectations of substantial
benefits from financial leverage.
Cutting estimates: We are revising our EPS estimates for FY11/12/13 by 12%/24%/23%
on the back of lower input cost benefit, higher overheads, and higher interest costs. We
are now 28% below consensus estimates on FY12. Moreover, the impact on cash flow
generation is likely to be more severe given that working capital and capex assumptions
are unlikely to go down in line with net profits. Competitive intensity is increasing and we
do not think that A&P is likely to come down in near future. Moreover, the ramp up in the
W&M business is below expectations, with the non-bulk business showing no growth.
Maintain Underweight: We are cutting our target price from INR1,310 to INR905,
rolling over to FY13. In addition to the cut in earnings, we are cutting our EV/EBITDA
multiple for the Indian business from 13x to 11x and for W&M business from 10x to 8x to
account for the lower earnings growth, returns and cash-flow generation. Our target price
denotes an 8% downside and we maintain our Underweight rating on the stock.
The results above are not comparable due to the merger of Balaji Distilleries Ltd. The management has in
the post results call and presentation given adjusted (like for like) figures, which we will be quoting in our
discussion below.
For Q3, adjusted sales were up 17% on the back of 14% volume growth. A 300bps spread between
volume and value growth (which would be a combination of price increases and premiumisation) is
below our expectation of c500-600bps.
Adjusted gross margins are down by c80bps – this is against our and Street expectations of a gross
margin expansion on the back of lower wet goods costs, price increases, and premiumisation, in spite
of higher packaging material costs. However, we are surprised this has not happened. We had
highlighted our belief in our initiation report dated 10 November 2010 (pages 12-16) that the benefit
on account of raw material costs is being over-estimated and will be modest at best.
For YTD, the addition of the standalone and W&M EBITDA is cINR9.5bn. However, the company
presentation states the consolidated EBITDA at INR8.22bn. We had highlighted in our initiation note
(page 18) that this issue exists and often leads to downgrades in consolidated EPS estimates towards
the end of the fiscal year.
The W&M business does not look encouraging even after excluding the bulk business, which has
been discontinued. YTD, the business was flat on EBITDA and on sales. We believe that building a
branded business globally is a difficult task, which requires a lot of brand investment. Ramp up on
this could be slower than expected. (Page 19-21 of our initiation report)
Adjusted EBITDA growth (including higher A&P spend, as we do not think that A&P is going to
come down in a hurry) has been in line with sales growth. Benefits of premiumisation are not visible
on the bottom line as highlighted on page 17 of our initiation note.
There is an increase of INR9.5bn in debt over this fiscal (i.e. March-December 2010 – this despite
generating a cash profit of cINR4bn). This is a big increase and expectations were that debt would
remain flat or go down. We had highlighted the issue of high capex in our initiation note (page 22).
Road ahead
We see no positive catalysts for the foreseeable future. We would like to comment on the following:
Wet goods cost will go down slightly in Q4 but not substantial enough. Costs on glass could go up
offsetting all gains. In FY12, we do not expect any input cost benefit yoy.
Going ahead, we could see a one time cost impact of INR300m on account of restructuring W&M
debt plus expenses on IPL.
Interest costs would be unlikely to come off due to debt being much higher than anticipated. This is
likely to impact bottom-line, as well as cashflows.
UNSP is likely to keep diluting shares to fund growth – this could result in EPS growth being slower
net profit growth.
Consensus estimates are likely to come down substantially. We believe this is to a some extent
already factored in the price.
Cash flow generation is likely to take a hit, as profits come in lower than our original expectations
while working capital intensity and capex do not change vs. our previous expectations. This is likely
to result in FCF/Net profit ratio declining from c30% to c20% for the next one to two years.
Change in estimates
We are changing our estimates to factor in higher-than-previously estimated input costs, overheadss and
interest costs.
Valuation and risks
We value USL on an SOTP basis. We value the India business at an EV/EBITDA of 11x. We reduce our
multiple from 13x to 11x to account for the reduced earnings growth. Our 11x estimate is at a c35%
discount to average FMCG multiples to account for lower cash generation vs. FMCG peers and higher tax
rate.
We value W&M at an EV/EBITDA multiple of 8x, vs. 10x earlier, again factoring the slower growth in
this business vs. our previous expectation. Our multiple is at a c20% discount to global peers keeping in
mind the nascent stage of the business and the consequent higher risk attached.
SOTP valuation – March 2012
INRm
USL
EBITDA March 2013 12,819
EV/EBITDA Multiple 11
EV 141,006
Whyte & Mackay
EBITDA March 2013 2,780
EV/EBITDA Multiple 8
EV 22,237
Total EV 163,243
Net debt March 2012 52,449
Market cap 110,794
O/s shares 122.4
Target price 905
Source: HSBC
Under our research model, for Indian stocks without a volatility indicator, the Neutral band is 5ppt above
and below the hurdle rate of 11%. This translates into a Neutral rating band of 6- 6% above the current
share price. Our target price of INR1,310 for USL represents a potential return of negative 7.6%,
including the anticipated 0.1% dividend yield; thus, we maintain our Underweight rating.
Risks to the upside include: raw material prices are lower-than-expected, working capital improvement,
balance sheet position (leverage) improvement, competition slackening, and premiumisation accelerating.
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