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Worst priced in
United Spirits has been among the worst performing consumer stock over
the last 12 months, thanks to earnings downgrades led by high input
costs, interest costs and lower Ebitda from Whyte & Mackay. We believe
that the underperformance builds in a lot of negatives already and the
possibility of a positive surprise remains from 3QFY12 onwards as the
benefit of backward integration begins to kick-in. Additionally, we note
that the drag of Whyte & Mackay conceals the fact that the domestic
business RoCE is robust at 25%.
ENA prices continue to hover around Rs150/case
United Spirits’ key input, ENA, prices continue to harden and have increased
3-4% QoQ to Rs152/case. Every Re1/case increases, United Spirits, earnings
by 1.6%. Sugarcane crop for SY2010-11 is expected to up over 25% YoY and
will likely bring in benefits later in the year possibly in 4QFY12 for United
Spirits. We nonetheless raise FY12-13 ENA price assumption by 2-3ppt each
and are now building in 4.5% YoY increase in FY12CL.
Reported RoCEs impacted by investments; domestic RoCEs robust
United Spirits’ consolidated RoCE of 10-12% is below par, however, we note
that the same largely attributable to the various investments made by the
company in W&M and other entities. In the hindsight, this acquisition has
proved to be a costly acquisition with the company expected to make a pretax
RoCE of 5% on 2007 acquisition value. The domestic business, however,
enjoys a healthy RoCE of 25%+, a fact always masked by the W&M overhang.
Debt levels may stay high in United Spirits
United spirits carries a debt of Rs41bn in the standalone entity and Rs67bn on
consolidated basis. We note that the company is also contemplating setting
up a glass bottle plant in south at an outlay of Rs5bn to be spent over next
three years, not currently in our estimates which could keep debt at elevated
levels. The recent acquisitions (Pioneer, Sovereign) should result in Rs800m
of annual savings from FY13 (benefit to be visible in 2HFY12 as well).
Group concerns a sentimental negative, not fundamental
Financial worries of Kingfisher Airlines (a group entity) has been an overhang
on United Spirits but we note that aside from parent (UB Holding) pledging
shares in United Spirits to offer as an additional security for KFA debt, there’s
no direct cash assistance. On the other hand, we believe that the company is
nearing the end of earnings downgrade cycle as beneficial impact of backward
integration initiatives begin to kick-in from 3QFY12 onwards. Following the
earnings cut, we revise down our target price to Rs975/sh; maintain Opf.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Worst priced in
United Spirits has been among the worst performing consumer stock over
the last 12 months, thanks to earnings downgrades led by high input
costs, interest costs and lower Ebitda from Whyte & Mackay. We believe
that the underperformance builds in a lot of negatives already and the
possibility of a positive surprise remains from 3QFY12 onwards as the
benefit of backward integration begins to kick-in. Additionally, we note
that the drag of Whyte & Mackay conceals the fact that the domestic
business RoCE is robust at 25%.
ENA prices continue to hover around Rs150/case
United Spirits’ key input, ENA, prices continue to harden and have increased
3-4% QoQ to Rs152/case. Every Re1/case increases, United Spirits, earnings
by 1.6%. Sugarcane crop for SY2010-11 is expected to up over 25% YoY and
will likely bring in benefits later in the year possibly in 4QFY12 for United
Spirits. We nonetheless raise FY12-13 ENA price assumption by 2-3ppt each
and are now building in 4.5% YoY increase in FY12CL.
Reported RoCEs impacted by investments; domestic RoCEs robust
United Spirits’ consolidated RoCE of 10-12% is below par, however, we note
that the same largely attributable to the various investments made by the
company in W&M and other entities. In the hindsight, this acquisition has
proved to be a costly acquisition with the company expected to make a pretax
RoCE of 5% on 2007 acquisition value. The domestic business, however,
enjoys a healthy RoCE of 25%+, a fact always masked by the W&M overhang.
Debt levels may stay high in United Spirits
United spirits carries a debt of Rs41bn in the standalone entity and Rs67bn on
consolidated basis. We note that the company is also contemplating setting
up a glass bottle plant in south at an outlay of Rs5bn to be spent over next
three years, not currently in our estimates which could keep debt at elevated
levels. The recent acquisitions (Pioneer, Sovereign) should result in Rs800m
of annual savings from FY13 (benefit to be visible in 2HFY12 as well).
Group concerns a sentimental negative, not fundamental
Financial worries of Kingfisher Airlines (a group entity) has been an overhang
on United Spirits but we note that aside from parent (UB Holding) pledging
shares in United Spirits to offer as an additional security for KFA debt, there’s
no direct cash assistance. On the other hand, we believe that the company is
nearing the end of earnings downgrade cycle as beneficial impact of backward
integration initiatives begin to kick-in from 3QFY12 onwards. Following the
earnings cut, we revise down our target price to Rs975/sh; maintain Opf.
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