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United Spirits (USL) plans to invest ~ INR 5-6 bn to set up glass manufacturing
plants.
Back-end integration to counter input costs volatility
USL had highlighted in the past that an oligopolistic situation in the glass
industry ensured that when international prices of oil dipped, the price hike
granted to glass container suppliers was not fully rolled back. Hence USL, largest
consumer of glass in India, was not able to benefit from commodity tailwinds. In
Q3FY11 conference call, USL had flagged its intention to refinance standalone
debt to focus on capex in glass and distillation capacities.
PET/tetra packs an alternative; but has limitations
Use of PET/ tetra packs has helped overcome pressure from glass. While PET
accounts for 20% of volumes, tetra packs are ~10% of volumes, growing faster
than the glass segment. Though an alternative, we believe, PET/tetra packs will
face deterrents from long-term premiumisation trend in the IMFL category.
Short-term pain; long-term gain
USL’s FY11E debt/equity is ~1.5x, with cost of domestic debt ~11.5-11.75%.
Hindustan National Glass (HNG), the largest glass supplier in India with ~55%
market share and six manufacturing locations across India, has increased the
sales price of glass to INR 18,680 / MT (~10% price increase) in Q3FY11. Power
and fuel constitute major costs of producing glass and with crude prices
remaining strong, we believe glass prices are set to soar. Thus, USL’s plan to
expedite capex in glass (glass costs are ~25% of USL sales) is a step in the right
direction to improve the liquor business’ profitability.
Outlook and valuations: Correction overdone; maintain ‘BUY’
Volume growth has been impressive and we believe margins, over longer term,
will expand following product mix improvement and backend integration in glass
and distilleries. Key risks: (a) high debt levels; (b) rising cost of debt; (c)
increased working capital; (d) competition from multinational and regional
players; (e) execution risk in backward integration; and (f) higher raw material
prices. We believe negatives are factored in the recent stock correction and
maintain ‘BUY/ Sector Performer’ recommendation/rating on the stock.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
United Spirits (USL) plans to invest ~ INR 5-6 bn to set up glass manufacturing
plants.
Back-end integration to counter input costs volatility
USL had highlighted in the past that an oligopolistic situation in the glass
industry ensured that when international prices of oil dipped, the price hike
granted to glass container suppliers was not fully rolled back. Hence USL, largest
consumer of glass in India, was not able to benefit from commodity tailwinds. In
Q3FY11 conference call, USL had flagged its intention to refinance standalone
debt to focus on capex in glass and distillation capacities.
PET/tetra packs an alternative; but has limitations
Use of PET/ tetra packs has helped overcome pressure from glass. While PET
accounts for 20% of volumes, tetra packs are ~10% of volumes, growing faster
than the glass segment. Though an alternative, we believe, PET/tetra packs will
face deterrents from long-term premiumisation trend in the IMFL category.
Short-term pain; long-term gain
USL’s FY11E debt/equity is ~1.5x, with cost of domestic debt ~11.5-11.75%.
Hindustan National Glass (HNG), the largest glass supplier in India with ~55%
market share and six manufacturing locations across India, has increased the
sales price of glass to INR 18,680 / MT (~10% price increase) in Q3FY11. Power
and fuel constitute major costs of producing glass and with crude prices
remaining strong, we believe glass prices are set to soar. Thus, USL’s plan to
expedite capex in glass (glass costs are ~25% of USL sales) is a step in the right
direction to improve the liquor business’ profitability.
Outlook and valuations: Correction overdone; maintain ‘BUY’
Volume growth has been impressive and we believe margins, over longer term,
will expand following product mix improvement and backend integration in glass
and distilleries. Key risks: (a) high debt levels; (b) rising cost of debt; (c)
increased working capital; (d) competition from multinational and regional
players; (e) execution risk in backward integration; and (f) higher raw material
prices. We believe negatives are factored in the recent stock correction and
maintain ‘BUY/ Sector Performer’ recommendation/rating on the stock.
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