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UBS Investment Research
United Spirits Ltd
Negatives priced in, acquisition is key risk
All negatives priced in
We maintain our Buy rating on United Spirits (USL) as we believe USL will: 1) remain
a beneficiary of India’s growing young population and rising discretionary spending; 2)
benefit from investments in primary capacity; and 3) benefit from its focus on the
premium segment. We think the debt issues and the perception of poor corporate
governance have been factored into the share price and view the current level as a good
buying opportunity.
Low return on equity
USL’s return on equity has been low compared to our consumer coverage universe due
to its international acquisition—White & Mackay (W&M). W&M has not been able to
generate financial returns, which has lowered returns for USL. Any additional debt
taken on for international acquisitions would result in further deterioration of the
already low ROE if the acquisitions did not generate returns for USL.
International acquisitions remain biggest risk
While the W&M acquisition has weighed down the share price, additional international
acquisitions financed through debt remain the biggest potential risk for the company.
Management has indicated there are niches within the alcohol product portfolio that it
believes need to be bridged by brand acquisitions. Any additional debt taken to finance
an international acquisition could increase the company’s financial risk, in our view.
Valuation: maintain Buy rating and price target of Rs1,250.00
We derive our price target from a DCF-based methodology and explicitly forecast longterm
valuation drivers using UBS’s VCAM tool. We assume a WACC of 10.4% and an
intermediate growth rate of 8%.
United Spirits Ltd
United Spirits is 38.7% owned by Vijay Mallaya and the amalgamated company
of the former McDowells, Shaw Wallace and other companies. It holds about
48% of the IMFL (liquor) market by volume and is the market leader. It is a
driver of sector consolidation. The company has 19 'millionaire' brands (each
sells more than one million cases per year) and has 64 manufacturing facilities
across India.
Statement of Risk
We believe the key risks that could affect the sector include continued upward
movement of higher agri-commodity based raw material costs and the inability
of branded consumer companies to pass on price increases in an increasingly
competitive market.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
UBS Investment Research
United Spirits Ltd
Negatives priced in, acquisition is key risk
All negatives priced in
We maintain our Buy rating on United Spirits (USL) as we believe USL will: 1) remain
a beneficiary of India’s growing young population and rising discretionary spending; 2)
benefit from investments in primary capacity; and 3) benefit from its focus on the
premium segment. We think the debt issues and the perception of poor corporate
governance have been factored into the share price and view the current level as a good
buying opportunity.
Low return on equity
USL’s return on equity has been low compared to our consumer coverage universe due
to its international acquisition—White & Mackay (W&M). W&M has not been able to
generate financial returns, which has lowered returns for USL. Any additional debt
taken on for international acquisitions would result in further deterioration of the
already low ROE if the acquisitions did not generate returns for USL.
International acquisitions remain biggest risk
While the W&M acquisition has weighed down the share price, additional international
acquisitions financed through debt remain the biggest potential risk for the company.
Management has indicated there are niches within the alcohol product portfolio that it
believes need to be bridged by brand acquisitions. Any additional debt taken to finance
an international acquisition could increase the company’s financial risk, in our view.
Valuation: maintain Buy rating and price target of Rs1,250.00
We derive our price target from a DCF-based methodology and explicitly forecast longterm
valuation drivers using UBS’s VCAM tool. We assume a WACC of 10.4% and an
intermediate growth rate of 8%.
United Spirits Ltd
United Spirits is 38.7% owned by Vijay Mallaya and the amalgamated company
of the former McDowells, Shaw Wallace and other companies. It holds about
48% of the IMFL (liquor) market by volume and is the market leader. It is a
driver of sector consolidation. The company has 19 'millionaire' brands (each
sells more than one million cases per year) and has 64 manufacturing facilities
across India.
Statement of Risk
We believe the key risks that could affect the sector include continued upward
movement of higher agri-commodity based raw material costs and the inability
of branded consumer companies to pass on price increases in an increasingly
competitive market.
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