Macquarie Research: United Spirits -One-offs boost profit; target Rs 1,600

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United Spirits -One-offs boost profit
Event
 United Spirits reported 3QFY11 results with net sales of Rs19.6bn and PAT of
Rs1.3bn, ahead of our and street expectations. However, adjusted net sales
and profit of Rs15.9bn (Up 17%) and Rs1.1bn (Up 12%), respectively, were in
line with our estimates. Volume was up 14%, to 30.4mn cases. The stock has
corrected (~17%) almost twice as much as broader market in the last month
despite strong fundamentals. We reiterate Outperform.

Impact
 Reported 3Q results include BDL consolidation and one-off. UNSP
reported 3Q net sales of Rs19.6bn and PAT of Rs1.3bn. Reported sales and
net profit include 9-month results of Balaji Distilleries (BDL). BDL’s 9-month
sales and net profit were Rs3.7bn and Rs20mn. The company also reported a
prior-period tax refund of Rs370mn in Tamil Nadu and foreign exchange loss
of Rs130mn.      
 17% sales growth led by volume in premium segment. UNSP reported
strong 14% volume growth, in line with industry growth. While regular brands
grew by 13%, frontline premium brands grew 14% YoY, aligned to company’s
premiumisation strategy. Sales growth was supported by key brands such as
Black Dog (↑55%), DSP Black (↑40%), Old Tavern (↑33%), Antiquity (↑20%),
Signature Rare (↑22%) and McDowell's No. 1 (↑14%).
 Margin intact, dual substrate strategy to benefit in future. UNSP’s
3QFY11 EBITDA margin stood flat at 17%. Molasses and spirit prices have
started softening (Rs138/case in January from Rs145/case in 3Q), which
should boost margins in FY12E. Recent acquisition of distillation capacity will
also help improve margins from 2H’FY12. Diversification in substrate mix
(60% molasses and 40% grain) will reduce margin volatility in medium term.
 W&M guidance maintained. UNSP has maintained full year EBITDA
guidance of GBP30mn for W&M (Whyte & Mackay). W&M reported EBITDA
and PBT of GBP22.5mn and GBP11.5mn in 9-months of FY11. Also, branded
strategy helped W&M improve comparable EBITDA margin by 75bp. W&M’s
104mn litres inventory is valued at GBP430mn.

Earnings and target price revision
 No change.

Price catalyst
 12-month price target: Rs1,600.00 based on a Sum of Parts methodology.
 Catalyst: Strong volume growth

Action and recommendation
 Reiterate Outperform. We believe UNSP will continue to deliver strong
volume growth and its margin is also set to improve due to higher distillation
capacity and dual substrate mix. We remain positive on UNSP and also think
that W&M strategy will create long-term value for the stock.