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United Spirits (UNSP.BO)
Upgrade to Buy: Value in Vice
Upgrade to Buy from Hold — We upgrade, given a) we expect cost pressures to
abate from 2HFY12, as UNSP achieves greater self sufficiency in ENA production
(almost 35% of total requirements will be produced internally, vs. 11% earlier), b)
pricing remains healthy – UNSP increased prices by ~2.5-3% in April, price hikes in AP/
TN over 1HFY12 or early 2HFY12 should buoy margins, c) earnings disappointments
are reflected in forward estimates – FY12/13 consensus estimates have been cut by
32-33% from peak levels, and d) the stock has corrected by ~35% from its recent peak
in Oct/Nov 2010, reflecting most of the earnings disappointments. UNSP is now one of
our preferred plays in the Indian consumer space.
Target price of Rs1,277 — We pare our FY12 earnings estimates by 13% ( below
consensus) as we a) cut volumes by 2% as we anticipate a slowdown in Maharashtra
where volumes might be impacted due to a massive increase in duties (and prices), &
b) adjust GMs for higher glass/packaging costs. Our FY13E EPS has been increased
by ~3% as we factor UNSP’s cost reduction initiatives. Our TP is raised to Rs1,277 as
we roll forward to Sept12E (from Mar12E), maintaining our 13.5x/9x target EV/EBITDA
multiple for parent/W&M. We keep our Rs40/share value for the IPL franchise.
W&M continues to stay the course — Mgmt notes that by FY14/FY15, W&M’s
EBITDA should return to around 55m GBP, driven by its thrust on improving its own
brands mix (estimated today at ~40% of revenues – target is ~60-65%). Debt
restructuring of ~325m GBP loan should enable UNSP to fund its Rs10bn capex plan
through internal accruals.
Debt levels were steady in 4Q — UNSP’s consolidated debt was ~Rs63bn end FY11
(debt-equity of ~1.4x). We expect debt to sustain at current levels, given capex
requirements, but note there is some upside, if mgmt is able to reduce cycle times for
finished goods/stocks at depots.
Key risks to our Buy call — a) Higher than forecast ENA prices, b) capex plan is
implemented slower than expected; c) Other group related concerns.
United Spirits
Company description
United Spirits is the largest player in India's branded spirits market with more than a
55% market share. It pursues an inorganic growth strategy, acquiring secondlargest Indian liquor manufacturer Shaw Wallace and scotch manufacturer Whyte &
Mackay. While the Shaw Wallace acquisition enhanced its competitive position,
raising its market share in branded spirits market, Whyte & Mackay gave it access
to scotch inventory to drive the next leg of its India growth strategy. UNSP also
acquired French winemaker Bouvet Ladubay - the wine arm of champagne major
Taittinger and plans to introduce its products to the Indian market. UNSP also owns
the Bangalore IPL cricket team ‘Royal Challengers' in a 100%-owned subsidiary.
Investment strategy
We rate United Spirits shares Buy/Medium Risk (1M). The company is well
positioned to benefit from India's organized liquor market that is growing at a rate of
~10-15% (driven by rising disposable incomes, favorable demographics and a shift
in consumption patterns). Pricing environment remains fairly healthy; which coupled
with management’s cost control initiatives - bodes well for profitability. We expect
commodity cost pressures to abate from 2HFY12, as UNSP achieves greater self
sufficiency in ENA production. Whyte & Mackay’s shift to branded products is a
long-term positive in our view. There have been concerns on account of high
leverage - we think the worst is behind us – UNSP's debt levels are likely to remain
stable at current levels, despite its aggressive capex plans.
Valuation
Our target price of Rs1,277 is based on a two-part EV/EBITDA methodology. We
value the domestic operations at 13.5x Sept12E EV/EBITDA. The multiple is at a
25% premium to international peers. We think this is merited, given that: a) volume
growth in India continues at mid teen levels vs. nominal growth in developed
markets, b) With >55% market share, UNSP's market positioning in a high growth
market is attractive, and c) India's demographic story is also attractive from a longer
term alcohol consumption story. We value the W&M EBITDA stream at 9x (which is
a ~20% discount to the global majors). We think this discount is merited, because of
W&M's status as a bulk scotch manufacturer. While over the longer term, we think
that W&M could re-rate, given management focus on building the branded
business; but it is still early days - thus we maintain the discount given the execution
risks. We also ascribe Rs40/share to value the Bangalore IPL cricket team franchise
at investment.
Risks
We rate United Spirits shares Medium Risk, instead of Low Risk as suggested by
our quantitative risk-rating system, which tracks 260-day historical share-price
volatility. We believe this is warranted as the capital structure of the company
remains a challenge vis-à-vis other peers in the India consumer space. The key
downside risks to our rating and target price include: 1) the liquor industry is highly
regulated and thus any change in policy (like increase in taxes, further control on
distribution or an outright ban on liquor sales in some states) could adversely impact
growth and profitability; 2) high interest expenses may impact earnings growth, if
United Spirits is unable to deleverage its balance sheet over the medium term; 3)
Concerns on group-related issues – promoter's pledged stake in UNSP and airline
business losses. Key upside risks to our target price stem from a) lower ENA costs
than our current estimates forecast and b) mgmt ability to pare discretionary costs
that may buttress operating margins.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
United Spirits (UNSP.BO)
Upgrade to Buy: Value in Vice
Upgrade to Buy from Hold — We upgrade, given a) we expect cost pressures to
abate from 2HFY12, as UNSP achieves greater self sufficiency in ENA production
(almost 35% of total requirements will be produced internally, vs. 11% earlier), b)
pricing remains healthy – UNSP increased prices by ~2.5-3% in April, price hikes in AP/
TN over 1HFY12 or early 2HFY12 should buoy margins, c) earnings disappointments
are reflected in forward estimates – FY12/13 consensus estimates have been cut by
32-33% from peak levels, and d) the stock has corrected by ~35% from its recent peak
in Oct/Nov 2010, reflecting most of the earnings disappointments. UNSP is now one of
our preferred plays in the Indian consumer space.
Target price of Rs1,277 — We pare our FY12 earnings estimates by 13% ( below
consensus) as we a) cut volumes by 2% as we anticipate a slowdown in Maharashtra
where volumes might be impacted due to a massive increase in duties (and prices), &
b) adjust GMs for higher glass/packaging costs. Our FY13E EPS has been increased
by ~3% as we factor UNSP’s cost reduction initiatives. Our TP is raised to Rs1,277 as
we roll forward to Sept12E (from Mar12E), maintaining our 13.5x/9x target EV/EBITDA
multiple for parent/W&M. We keep our Rs40/share value for the IPL franchise.
W&M continues to stay the course — Mgmt notes that by FY14/FY15, W&M’s
EBITDA should return to around 55m GBP, driven by its thrust on improving its own
brands mix (estimated today at ~40% of revenues – target is ~60-65%). Debt
restructuring of ~325m GBP loan should enable UNSP to fund its Rs10bn capex plan
through internal accruals.
Debt levels were steady in 4Q — UNSP’s consolidated debt was ~Rs63bn end FY11
(debt-equity of ~1.4x). We expect debt to sustain at current levels, given capex
requirements, but note there is some upside, if mgmt is able to reduce cycle times for
finished goods/stocks at depots.
Key risks to our Buy call — a) Higher than forecast ENA prices, b) capex plan is
implemented slower than expected; c) Other group related concerns.
United Spirits
Company description
United Spirits is the largest player in India's branded spirits market with more than a
55% market share. It pursues an inorganic growth strategy, acquiring secondlargest Indian liquor manufacturer Shaw Wallace and scotch manufacturer Whyte &
Mackay. While the Shaw Wallace acquisition enhanced its competitive position,
raising its market share in branded spirits market, Whyte & Mackay gave it access
to scotch inventory to drive the next leg of its India growth strategy. UNSP also
acquired French winemaker Bouvet Ladubay - the wine arm of champagne major
Taittinger and plans to introduce its products to the Indian market. UNSP also owns
the Bangalore IPL cricket team ‘Royal Challengers' in a 100%-owned subsidiary.
Investment strategy
We rate United Spirits shares Buy/Medium Risk (1M). The company is well
positioned to benefit from India's organized liquor market that is growing at a rate of
~10-15% (driven by rising disposable incomes, favorable demographics and a shift
in consumption patterns). Pricing environment remains fairly healthy; which coupled
with management’s cost control initiatives - bodes well for profitability. We expect
commodity cost pressures to abate from 2HFY12, as UNSP achieves greater self
sufficiency in ENA production. Whyte & Mackay’s shift to branded products is a
long-term positive in our view. There have been concerns on account of high
leverage - we think the worst is behind us – UNSP's debt levels are likely to remain
stable at current levels, despite its aggressive capex plans.
Valuation
Our target price of Rs1,277 is based on a two-part EV/EBITDA methodology. We
value the domestic operations at 13.5x Sept12E EV/EBITDA. The multiple is at a
25% premium to international peers. We think this is merited, given that: a) volume
growth in India continues at mid teen levels vs. nominal growth in developed
markets, b) With >55% market share, UNSP's market positioning in a high growth
market is attractive, and c) India's demographic story is also attractive from a longer
term alcohol consumption story. We value the W&M EBITDA stream at 9x (which is
a ~20% discount to the global majors). We think this discount is merited, because of
W&M's status as a bulk scotch manufacturer. While over the longer term, we think
that W&M could re-rate, given management focus on building the branded
business; but it is still early days - thus we maintain the discount given the execution
risks. We also ascribe Rs40/share to value the Bangalore IPL cricket team franchise
at investment.
Risks
We rate United Spirits shares Medium Risk, instead of Low Risk as suggested by
our quantitative risk-rating system, which tracks 260-day historical share-price
volatility. We believe this is warranted as the capital structure of the company
remains a challenge vis-à-vis other peers in the India consumer space. The key
downside risks to our rating and target price include: 1) the liquor industry is highly
regulated and thus any change in policy (like increase in taxes, further control on
distribution or an outright ban on liquor sales in some states) could adversely impact
growth and profitability; 2) high interest expenses may impact earnings growth, if
United Spirits is unable to deleverage its balance sheet over the medium term; 3)
Concerns on group-related issues – promoter's pledged stake in UNSP and airline
business losses. Key upside risks to our target price stem from a) lower ENA costs
than our current estimates forecast and b) mgmt ability to pare discretionary costs
that may buttress operating margins.
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