United Spirits --Good growth, but rise in debt a worry :: Macquarie Research,

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United Spirits
Good growth, but rise in debt a worry
Event
 United Spirits reported 1QFY12 results with net sales of Rs19bn (+32%YoY)
and PAT of Rs1.4bn (+14%YoY). Top line and PAT were ~10% and 4% ahead
of our estimates, respectively. Sales growth was boosted by consolidation of
Balaji Distilleries (like-to-like sales grew 22% YoY). Volumes were up 15.4%
YoY to 30.8mn cases in 1Q. Maintain Outperform recommendation.
Impact
 Strong sales growth led by volume growth. UNSP reported 1Q net sales of
Rs19bn, led by 15.4% volume growth and impact of consolidation of Balaji
Distilleries. Premiumisation and price hikes also helped sales growth. Volume
of prestige and premium brands grew 22% and regular brands grew 12%.
 EBITDA margin improved 303bp QoQ. UNSP reported EBITDA of Rs3.4bn
(up 18% YoY) with a margin of 17.5%, up 303bp QoQ and down 218bp YoY.
Higher packaging and bottling costs (up ~18% YoY) and integration of Balaji
(~100bp margin dip) have impacted margins. Spirits cost was down 2.3%
QoQ in 1Q and was up 2.6% YoY. Backward integration strategy to improve
margin is expected to pay off in 2HFY12E as UNSP ramps up production at
Pioneer and Sovereign distilleries and increases grain-based distillation.
 Mixed quarter for W&M. W&M (Whyte and Mackay) sales grew 34% YoY to
GBP38mn. However, we feel marketing and packaging costs impacted
EBITDA, which declined ~30% YoY to GBP4.2mn. W&M PBT declined to
GBP0.1mn in 1QFY12 compared to GBP2.5mn in 1QFY11.
 PAT grew 14% in 1Q. UNSP reported stand-alone PAT growth of ~14% to
Rs1.4bn. However, consolidated PAT grew 5% YoY due to weak performance
at W&M. Higher interest costs due to growing debt (Rs4bn increase QoQ to
Rs6.8bn) and rising interest rates also suppressed consolidated PAT growth.
 Gearing still remains a key challenge. UNSP’s consolidated debt/equity
ratio has increased to 1.6x from 1.5x QoQ, largely on account of higher
working capital loans. We believe these will be on account of recent primary
distillation acquisitions. The company has recently refinanced its GBP370mn
debt associated with W&M with three-year repayment moratorium.
Earnings and target price revision
 No change.
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 further due to higher
primary distillation and dual substrate capacities. Regarding gearing and
W&M, we will come back once we speak with UNSP management.