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United Spirits Limited
Overweight ; UNSP.BO, UNSP IN
3Q FY11 : Marginally below estimates; re-calibrating expectations
• Earnings marginally below estimates: United Spirits registered LTL (exBalaji) net sales, EBITDA and PAT growth of 17%, 18% and 7%
respectively for 3Q FY11. While sales growth was in line with estimates,
EBITDA was c3% below our expectations on account of slightly higherthan-anticipated input costs. UNSP consolidated financials for Balaji
Distilleries (a toll manufacturing unit) starting Apr'10 in 3Q FY11, which
led to higher reported sales, though EBITDA and earnings were not affected
much. Whyte & Mackay’s performance was subdued during the quarter.
• Volume growth of 14%, LTL price/mix growth of 7%: Overall net sales
growth was 21% (adjusting for Balaji merger), supported by volume growth
of 14%. During 9M FY11, UNSP registered 12% volume growth, in line
with our full year FY11 volume growth estimate of 12%. Faster growth for
premium brands (c14% in 9M FY11) is aiding healthy price/mix growth.
• Re-calibrating ENA cost assumptions: During 3Q FY11 ENA cost/case
was up 3.5% q/q, although it was down 6% on a y/y basis. While
management expects raw material tailwinds to strengthen starting in 4Q
FY11, the quantum of decline is likely to be lower than our estimate, and
we now build a 7% decline in ENA costs in FY11E and flat costs in FY12E
(vs our earlier expectation of c10% decline). Diversion of molasses towards
ethanol manufacture has kept the ENA price decline under check.
• Increased net debt (by Rs2.5B) on a sequential basis in 3Q FY11 was
largely attributable to capex loans (acquisition of Pioneer Distilleries),
working-capital-related loans, and exchange difference for Whyte & Mackay
acquisition loans. As of Dec. 10, consolidated net debt was cRs56.6B.
• Earnings estimate revisions: Our EPS estimates for FY11-12 are lowered
by 14-19% on account of 1) incorporation of 5.2MM shares issued for Balaji
Distilleries merger which leads to c5% EPS dilution, 2) higher ENA and
packaging cost assumptions, 3) higher interest charges on account of
increased debt levels and potential debt re-financing at higher rates, and 4)
lower EBITDA estimates for Whyte & Mackay.
Price target and valuation analysis
Our EPS estimates for FY11-12 are lowered by 14-20% on account of
1) the incorporation of 5.2MM shares issued for Balaji Distilleries
merger which leads to c5% EPS dilution, 2) higher ENA and packaging
cost assumptions, 3) higher interest charges on account of higher debt
levels and potential debt re-financing at higher rates, and 4) lower
EBITDA estimates for Whyte & Mackay.
We use an EV/EBITDA target multiple of 14x for the domestic
business, which is at a 20% premium to global spirits companies, and a
10x EV/EBITDA target multiple for Whyte & Mackay business, which
is at a 10% discount to global spirits valuations. We assign a premium
to the domestic business given the higher growth prospects, while we
believe the discount for Whyte & Mackay is justified considering it has
a private label business along with branded business. We roll forward
our PT timeframe to Mar-12 from Sep-11. Our new sum-of-the-parts
PT is Rs1,362 (down from Rs1,660) based on the above-mentioned
multiples and revised earnings.
Key risks to our PT and rating are - 1) a sharp rise in ENA prices if the
sugar cane crop next year comes in significantly lower, 2) a significant
slowdown in domestic liquor consumption, and 3) high group leverage
and promoter’s pledged stake in UNSP.
Earnings estimate revisions
Our EPS estimates for FY11-12 are lowered by 14-20% on account of 1)
incorporation of 5.2MM shares issued for Balaji Distilleries merger which leads to
c5% EPS dilution, 2) higher ENA and packaging cost assumptions, 3) higher interest
charges on account of increased debt levels and potential debt re-financing at higher
rates, and 4) lower EBITDA estimates for Whyte & Mackay.
For the domestic business we now build in a 7% decline in ENA costs for FY11 and
assume flat costs for FY12, versus our earlier expectation of a c10% decline.
Diversion of molasses for ethanol manufacture has resulted in a lower-thananticipated y/y fall in ENA prices. Further we have raised our estimates for
packaging (glass) costs marginally. As a result our domestic EBITDA estimates are
revised down by 9% and 12% respectively for FY11 and FY12.
For Whyte & Mackay we have revised down our EBITDA estimates for FY11 and
FY12 by 9-10% to GBP30MM and GBP34MM, respectively, in line with recent
comments/guidance provided by management.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
United Spirits Limited
Overweight ; UNSP.BO, UNSP IN
3Q FY11 : Marginally below estimates; re-calibrating expectations
• Earnings marginally below estimates: United Spirits registered LTL (exBalaji) net sales, EBITDA and PAT growth of 17%, 18% and 7%
respectively for 3Q FY11. While sales growth was in line with estimates,
EBITDA was c3% below our expectations on account of slightly higherthan-anticipated input costs. UNSP consolidated financials for Balaji
Distilleries (a toll manufacturing unit) starting Apr'10 in 3Q FY11, which
led to higher reported sales, though EBITDA and earnings were not affected
much. Whyte & Mackay’s performance was subdued during the quarter.
• Volume growth of 14%, LTL price/mix growth of 7%: Overall net sales
growth was 21% (adjusting for Balaji merger), supported by volume growth
of 14%. During 9M FY11, UNSP registered 12% volume growth, in line
with our full year FY11 volume growth estimate of 12%. Faster growth for
premium brands (c14% in 9M FY11) is aiding healthy price/mix growth.
• Re-calibrating ENA cost assumptions: During 3Q FY11 ENA cost/case
was up 3.5% q/q, although it was down 6% on a y/y basis. While
management expects raw material tailwinds to strengthen starting in 4Q
FY11, the quantum of decline is likely to be lower than our estimate, and
we now build a 7% decline in ENA costs in FY11E and flat costs in FY12E
(vs our earlier expectation of c10% decline). Diversion of molasses towards
ethanol manufacture has kept the ENA price decline under check.
• Increased net debt (by Rs2.5B) on a sequential basis in 3Q FY11 was
largely attributable to capex loans (acquisition of Pioneer Distilleries),
working-capital-related loans, and exchange difference for Whyte & Mackay
acquisition loans. As of Dec. 10, consolidated net debt was cRs56.6B.
• Earnings estimate revisions: Our EPS estimates for FY11-12 are lowered
by 14-19% on account of 1) incorporation of 5.2MM shares issued for Balaji
Distilleries merger which leads to c5% EPS dilution, 2) higher ENA and
packaging cost assumptions, 3) higher interest charges on account of
increased debt levels and potential debt re-financing at higher rates, and 4)
lower EBITDA estimates for Whyte & Mackay.
Price target and valuation analysis
Our EPS estimates for FY11-12 are lowered by 14-20% on account of
1) the incorporation of 5.2MM shares issued for Balaji Distilleries
merger which leads to c5% EPS dilution, 2) higher ENA and packaging
cost assumptions, 3) higher interest charges on account of higher debt
levels and potential debt re-financing at higher rates, and 4) lower
EBITDA estimates for Whyte & Mackay.
We use an EV/EBITDA target multiple of 14x for the domestic
business, which is at a 20% premium to global spirits companies, and a
10x EV/EBITDA target multiple for Whyte & Mackay business, which
is at a 10% discount to global spirits valuations. We assign a premium
to the domestic business given the higher growth prospects, while we
believe the discount for Whyte & Mackay is justified considering it has
a private label business along with branded business. We roll forward
our PT timeframe to Mar-12 from Sep-11. Our new sum-of-the-parts
PT is Rs1,362 (down from Rs1,660) based on the above-mentioned
multiples and revised earnings.
Key risks to our PT and rating are - 1) a sharp rise in ENA prices if the
sugar cane crop next year comes in significantly lower, 2) a significant
slowdown in domestic liquor consumption, and 3) high group leverage
and promoter’s pledged stake in UNSP.
Earnings estimate revisions
Our EPS estimates for FY11-12 are lowered by 14-20% on account of 1)
incorporation of 5.2MM shares issued for Balaji Distilleries merger which leads to
c5% EPS dilution, 2) higher ENA and packaging cost assumptions, 3) higher interest
charges on account of increased debt levels and potential debt re-financing at higher
rates, and 4) lower EBITDA estimates for Whyte & Mackay.
For the domestic business we now build in a 7% decline in ENA costs for FY11 and
assume flat costs for FY12, versus our earlier expectation of a c10% decline.
Diversion of molasses for ethanol manufacture has resulted in a lower-thananticipated y/y fall in ENA prices. Further we have raised our estimates for
packaging (glass) costs marginally. As a result our domestic EBITDA estimates are
revised down by 9% and 12% respectively for FY11 and FY12.
For Whyte & Mackay we have revised down our EBITDA estimates for FY11 and
FY12 by 9-10% to GBP30MM and GBP34MM, respectively, in line with recent
comments/guidance provided by management.
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