United Spirits- Uninspiring 4Q; delayed price hike :: Macquarie Research

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United Spirits
Uninspiring 4Q; delayed price hike
Event
 United Spirits reported 4Q FY11 results, with net sales of Rs16.2bn and PAT
of Rs774mn. Although the top line was ahead of our and the street’s
expectations, PAT was below estimates on account of margin pressure due to
higher spirit and packaging material costs. Volumes were up 12% YoY to
28.8mn cases in 4Q.

Impact
 Sales growth healthy, but price hike delayed. UNSP reported 4Q net sales
of Rs16.2bn, led by 12% volume growth. Revenue for the full year also grew
29% YoY to Rs49.8bn on the back of 12% volume growth. Allowance for late
and staggered price increases in various markets to pass through input cost
increases will kick in from the current quarter and should help sales growth in
FY12E. UNSP, including subsidiaries, achieved volume of ~114mn cases in
FY11 and plans to ramp up sales to 200mn cases by FY16.
 EBITDA margin declined 100bp in 4Q due to Balaji integration. UNSP
reported EBITDA of Rs2.3bn (up 19% YoY), with a margin of 14.4%.
Integration of Balaji Distilleries (revenue of Rs1.1bn) also impacted the margin
by ~100bp. Margin also came under pressure due to higher packaging and
bottling costs and a late government grant of price hikes. However, spirits cost
was down 1.5% YoY in 4Q and was up 5% QoQ.
 Payoff from backward integration still a few quarters away. UNSP’s
strategy to acquire primary distilleries is on track, and the company has recently
acquired a 41.5% stake in Sovereign Distilleries with a dual substrate capacity
of 180 KLPD. Along with this acquisition, the company has reached a 35% self
sufficiency level in primary distilleries against its goal of ~50%. These primary
distilleries should help improve margin in the latter half of FY12E.
 Disappointing PAT growth in 4Q. The company reported PAT growth of
~36% to Rs774mn, which was significantly lower than our expectation. PAT
growth was impacted by a lower EBITDA margin and a late price increase
undertaken to pass through input costs.
Earnings and target price revision
 We are cutting our earnings estimates to ~6% for both FY12 and FY13. We
are also cutting our target price to Rs1,400 from Rs1,600.
Price catalyst
 12-month price target: Rs1,400.00 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 likely to improve, although this may be a
bit delayed due to higher primary distillation capacity and dual substrate mix.
We remain positive on UNSP’s long-term story and also think that the W&M
strategy will create long-term value for the stock going forward.