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India Equity Research Reports, IPO and Stock News
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Hangover to last for a while
Downgrade to Neutral on nearterm
overhangs; core business
valuation remains attractive
Action: Cutting estimates and downgrading to Neutral
We cut our FY12F and FY13F earnings estimates by ~30% and
downgrade the stock to Neutral to reflect our lowered expectations for
domestic business profitability. While we expect FY12F to be a year of
consolidation marked by stable EBITDA per case in the domestic
business, we expect marginal improvement into FY13F. We believe nearterm
overhangs, particularly the group company Kingfisher Airlines, will
hold back stock price performance; however, valuation at 15.3x FY13F
P/E remains attractive, in our view.
Catalysts: Softening raw material prices a positive catalyst for FY13F
As the company continues to build more in-house capacity post the
acquisitions of Pioneer and Sovereign distilleries, we believe it will be able
to capture more of the distillation margins over the next couple of years.
This should, in our view, help improve profitability of the domestic
business. However, we are not building in any material improvement in
profitability in our numbers as visibility on that remains low.
Valuation: Near-term concerns outweigh valuations
On our revised numbers, UNSP trades at 15.3x FY13F P/E, a steep 38%
discount to the FMCG sector average. While we expect UNSP to deliver
20% earnings growth in FY13F, we expect FY12F to be a year of
consolidation. While valuation at 15.3x FY13F looks attractive, near-term
concerns over the balance sheet and funding requirement at group
company Kingfisher Airlines will likely remain overhangs, in our view. We
prefer to remain on the sidelines in the near term.
Stock de-rating has been significant in the last year…
UNSP has by far been the worst-performing stock over the past few months in our
consumer coverage universe and has yielded a negative 47% return since the start of
the year. Consequently, the stock has underperformed the markets by 26% and the
consumer index by a remarkable 51%.
The company has witnessed a structural de-rating (see chart below) as the average P/E
has come down from 35x to 17x one-year forward earnings since the start of the year.
Even if we look at the long-term average, UNSP has traded at 25x one-year forward
earnings over the past eight years. The de-rating has been sharp and severe, especially
in the past year or so.
…and not without reason
However, the de-rating has not been without reason and there have been several issues,
such as corporate governance, quality of disclosures, mounting leverage and
performance of other group companies, that have taken a toll on the stock price. We
highlight those issues in detail in this report:
Domestic business profitability to remain constrained
UNSP, in our view, remains an attractive long-term story and a classic play on the
consumption-related theme in India. However, the key issue confronting the company, in
our view, is that for some reason volume growth has never translated into higher
profitability. What concerns us is that: 1) companies of much smaller size (both in terms
of market cap and revenues and with a much less premium portfolio make better
margins, and 2) despite a double-digit volume CAGR, EBITDA/case for UNSP is 12%
lower than 2008 levels. Moreover, in our view, we continue to see several headwinds for
its domestic business profitability and highlight three key factors: 1) strong Extra Neutral
Alcohol (ENA) prices, which have not corrected despite a bumper sugar cane crop,
2) steep rises in glass prices, and 3) a lack of pricing power.
Balance sheet to remain leveraged in the near term
One of the key issues investors have had with UNSP, in our view, is its high leverage
and we do not expect debt levels to come down in the next few years. Management has
highlighted that it would look to increase UNSP’s in-house production capacity. This is
likely to keep debt levels high in our view.
Furthermore, the company also plans to invest INR6bn over the next year or so in a
glass manufacturing unit, which, in our view, should help it have more control over
packaging costs. The company has spoken about liquidating treasury shares valued at
INR10bn to pare down its debt (USL seen readying to take next step to deleverage,
Business Standard, October 1, 2011). However, management may opt to wait for better
valuations than the current share price; hence, we believe in the near term the balance
sheet will continue to remain leveraged.
Concerns over group company Kingfisher Airlines
Although the group company Kingfisher Airlines has no direct link with UNSP, except for
both having the same promoters, Kingfisher Airlines has been in the news for all the
wrong reasons — mounting losses and the need for new fund infusion. Press reports
suggest Kingfisher Airlines has defaulted in its payments to oil marketing companies
(Kingfisher owes over INR2bn to AAI, Economic Times, August 25, 2011) as well as
delayed salaries to employees (Kingfisher delays salary payment, Business Standard,
August 14, 2011). Auditor comments in the Kingfisher Airlines annual report say that the
net worth of the company is completely eroded and the company will need to infuse
funds to keep the business going.
Flow of funds from UNSP to Kingfisher Airlines (although indirectly, elaborated in detail
inside) is a cause of concern for us.
Downgrade to Neutral on near-term overhangs
We have also cut our target multiple significantly to account for the issues highlighted
above. We now value the domestic business at 11x FY13F EBITDA and the W&M
business at 8x FY13F EBITDA. Our target price goes down from INR1,800 to INR850 to
account for both the >30% earnings cut as well as cut in target multiples.
We believe there remain a number of short-term headwinds that can rein in the stock
price performance. The stock has seen a sharp de-rating in the past few months, and
with many issues still unresolved as highlighted in this note, we believe a re-rating back
to historical averages will be a slow and gradual process.
As investors get more clarity on some of the issues we highlight in this note and the
company starts to reap some of the benefits of the investments it has made in the last
year or so, we see scope for a re-rating back to its historical levels. However, we believe
that until there is clarity on these issues the stock price performance will remain muted.
We downgrade to Neutral and look for these issues to be resolved before taking a fresh
look at the company. Our reduced TP of INR850 provides potential upside of 12.4% from
current levels.
Our key concerns on UNSP
Distribution structure limits pricing power
The distribution structure in India varies by state, and three basic types of systems are in
place across the country. The basic principle behind each system is outlined below:
Government controlled – Pricing controlled by the state government
Auction states – Licences for distribution are auctioned by the government
Open market – Pricing is market determined
Companies lack pricing power in government-controlled states
Almost 75-80% of industry volumes come from states where pricing and distribution is
controlled by the government. Key controlled markets are Karnataka, Andhra Pradesh,
Tamil Nadu and Kerala (together these states account for ~60% of industry volumes).
Pricing in these states is dependent on the government, which makes it difficult to
achieve consistent pricing (the company is not able to increase prices consistently like
other consumer companies) over a period of time. As an example, a recent news article
(Brewers in Kerala to stop liquor production on pricing issue, Hospitality Biz, August 23,
2011) suggested that the issue of pricing has created a significant rift between the
government and manufacturers. There are suggestions that liquor manufacturers may
even stop production if the government does not approve price increases to cover the
increased cost of materials. This is one of the key reasons why pricing power is limited in
India, as government-controlled states are reluctant to increase prices.
Surprisingly no pricing power even in open market
There are some important free priced markets such as Maharashtra, Goa, Pondicherry,
where pricing is market determined. India is a highly consolidated market with the top 4-5
players having an ~80% market share; United Spirits has a ~55% share of the Indian
market. In other consolidated markets around the world, the price/mix benefit has been
much greater, especially for a product where the elasticity of demand is not high.
However, the reported numbers for UNSP clearly show that the price/mix benefit has not
been a big contributor to the revenue growth numbers over the past six years or so.
If we look at the realisation numbers over the past few years, the actual delivered
price/mix improvement has not been significant. The chart below indicates the realisation
improvement on a y-y basis over the past four years. The company has seen an average
realisation improvement of ~6%. Remember this also includes mix improvement, which
we estimate at 2-3%, making the pricing impact only to the tune of 3% or so.
This lack of one single pricing mechanism across the whole country has been and will
continue to be an issue for companies in the Indian made foreign liquor (IMFL) space, in
our view. Pricing structure is also different for different brands across the country and
pricing is also not entirely dependent on the manufacturer across the country. In case of
a sharp rise in input prices of materials or packaging material, the company has the
option to pass on the increase in costs to consumers in only a few states. This means in
the event of a sharp increase in commodity costs it will be difficult for manufacturers to
pass on the increase to consumers in time to protect profitability.
In the absence of significant changes in the market structure for distribution and pricing,
we see this trend as continuing and for price/mix benefit to only contribute mid single
digits to revenue growth over the near to medium term.
Unlike expectations, input prices have not softened
At the start of FY11, the company and the market expected a significant softening of
ENA prices which would have helped company profitability. ENA prices have not
corrected by any significant amount and are largely flat vs the start of the year. So far in
FY12, ENA prices have not really changed by much with the average price hovering
around the INR147 mark vs. the INR144-145 range in the same period last year.
Glass, the key packaging material for spirits companies, has seen a significant rise in
price over the last year or so (+17% in FY11 on a y-y basis). This has also ensured that
domestic business profitability has not improved as companies have not been able to
pass on the full impact of the rise in glass costs to consumers.
Indications from Industry players are that ENA prices may start to rise again. If that
comes through, then domestic business profitability would be under pressure in the
absence of significant price increases. As we have highlighted above, price increases
are difficult to come by and hence any sharp increase in input prices will be negative for
domestic business profitability.
Domestic business profitability has remained constrained
With the price/mix benefit offset by stable ENA prices and rising glass prices, domestic
business profitability has remained constrained over the last few quarters. This situation
was expected by both the market and company to be much different at the start of
FY2011, but that has not played out as expected. If we look at the EBITDA per case on a
quarterly basis, it has been volatile, but has largely remained within a narrow band.
Unless there is a significant correction in ENA and glass prices, we expect this to
continue with pricing action difficult to come. The company has had some benefit from
improving mix, with consumers trading up to more premium brands, but this has only
resulted in 2-3% net sales growth over the past few years. While we expect this to
continue, we do not expect this to be a game changer in the medium term. The company
does spend a significant amount of money on promotions, which nullifies partially the mix
benefits.
Potential catalysts to help improve profitability in the medium
term in place
We highlight below a number of potential catalysts that could help improve profitability
into FY13F, but the timing on when this improvement will come through remains
uncertain. Some of the key trends we would watch for are as below:
Acquisitions to help improve profitability from 3QFY12
United Spirits expects benefits from its recent acquisitions (FY11) of distilleries to start
accruing from 3QFY12 as it takes some time to get the distilling capacity to work, as per
UNSP standards. The company estimates that the benefit of savings from third-party
distillation margins on a per-case basis will be ~INR30 and this should flow through to
40% of the company’s total volumes. This, in theory, could mean EBITDA per case
improves to INR100 at the overall company level. Our numbers do not capture this
improvement in FY12F, but start to capture it only in FY13.
Premiumisation trends sustainable
The company is looking to increase premiumisation trends by continuing to invest in
brands over the longer term. This, in our view, has already started to show benefits with
mix improvement accounting for 2-3% of net sales growth on average over the last few
years. The company has given up competing at some of the lower price points across
segments, which has helped improve profitability by focusing on value growth vs. volume
growth. However, we do not expect a marked shift upwards in the near term.
Price hike negotiations continuing
The company continues to be in negotiations with state governments with regard to price
hikes and is hopeful of seeing some price hikes being granted over the next few months,
according to industry sources. This should aid net sales growth over the medium term.
With demand continuing to be robust, the company sees price increases as being
acceptable for the consumer, especially in a discretionary segment such as alcoholic
drinks. However, as highlighted above, negotiations with governments on pricing is a
tough and time-consuming exercise.
Mix of molasses and grains account gives some protection on input costs
Within the raw material mix, molasses now accounts for 60% and grains account for 40%
of overall raw materials. This has changed significantly from a 90/10 mix a couple of
years ago. In addition, the company has decided to invest in a glass manufacturing unit,
which should give it further control over input costs in the medium term. Reports (USL to
invest 600cr in glass plants, Times of India, March 21, 2011) indicate that in a bid to
integrate backwards, United Spirits is looking to invest INR5-6bn to set up a glass
manufacturing unit. This is another step USL is taking towards having more control over
input costs (the company has invested in ENA manufacturing units over the past six
months). These investments will mean near-term debt and interest costs will be high, but
EBITDA per case improves over the medium term.
However some key overhangs remain on the stock
Although there are potential catalysts that could help improve profitability over the near
to medium term, UNSP also faces some overhangs which may keep the share price
performance muted in the near term. We highlight two key overhangs on the stock
Kingfisher Airlines’ woes keep piling up
As shown below, losses at group company Kingfisher Airlines continue, with the
company reporting losses of INR10.3bn for the year ending March 2011. Although this
has come down versus the past couple of years, it is still a significant loss. Although
there is no direct link between United Spirits and Kingfisher Airlines, except for both
having the same promoter group, this may remain as an overhang on the shares in the
near term, in our view.
There has been negative news flow in the press regarding non-payment of dues to
airport authorities (Kingfisher owes over INR2bn to AAI, Economic Times, August 25
2011). There have also been reports of the firm being unable to pay employee salaries
on time (Kingfisher delays salary payment, Business Standard, August 14, 2011).
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Hangover to last for a while
Downgrade to Neutral on nearterm
overhangs; core business
valuation remains attractive
Action: Cutting estimates and downgrading to Neutral
We cut our FY12F and FY13F earnings estimates by ~30% and
downgrade the stock to Neutral to reflect our lowered expectations for
domestic business profitability. While we expect FY12F to be a year of
consolidation marked by stable EBITDA per case in the domestic
business, we expect marginal improvement into FY13F. We believe nearterm
overhangs, particularly the group company Kingfisher Airlines, will
hold back stock price performance; however, valuation at 15.3x FY13F
P/E remains attractive, in our view.
Catalysts: Softening raw material prices a positive catalyst for FY13F
As the company continues to build more in-house capacity post the
acquisitions of Pioneer and Sovereign distilleries, we believe it will be able
to capture more of the distillation margins over the next couple of years.
This should, in our view, help improve profitability of the domestic
business. However, we are not building in any material improvement in
profitability in our numbers as visibility on that remains low.
Valuation: Near-term concerns outweigh valuations
On our revised numbers, UNSP trades at 15.3x FY13F P/E, a steep 38%
discount to the FMCG sector average. While we expect UNSP to deliver
20% earnings growth in FY13F, we expect FY12F to be a year of
consolidation. While valuation at 15.3x FY13F looks attractive, near-term
concerns over the balance sheet and funding requirement at group
company Kingfisher Airlines will likely remain overhangs, in our view. We
prefer to remain on the sidelines in the near term.
Stock de-rating has been significant in the last year…
UNSP has by far been the worst-performing stock over the past few months in our
consumer coverage universe and has yielded a negative 47% return since the start of
the year. Consequently, the stock has underperformed the markets by 26% and the
consumer index by a remarkable 51%.
The company has witnessed a structural de-rating (see chart below) as the average P/E
has come down from 35x to 17x one-year forward earnings since the start of the year.
Even if we look at the long-term average, UNSP has traded at 25x one-year forward
earnings over the past eight years. The de-rating has been sharp and severe, especially
in the past year or so.
…and not without reason
However, the de-rating has not been without reason and there have been several issues,
such as corporate governance, quality of disclosures, mounting leverage and
performance of other group companies, that have taken a toll on the stock price. We
highlight those issues in detail in this report:
Domestic business profitability to remain constrained
UNSP, in our view, remains an attractive long-term story and a classic play on the
consumption-related theme in India. However, the key issue confronting the company, in
our view, is that for some reason volume growth has never translated into higher
profitability. What concerns us is that: 1) companies of much smaller size (both in terms
of market cap and revenues and with a much less premium portfolio make better
margins, and 2) despite a double-digit volume CAGR, EBITDA/case for UNSP is 12%
lower than 2008 levels. Moreover, in our view, we continue to see several headwinds for
its domestic business profitability and highlight three key factors: 1) strong Extra Neutral
Alcohol (ENA) prices, which have not corrected despite a bumper sugar cane crop,
2) steep rises in glass prices, and 3) a lack of pricing power.
Balance sheet to remain leveraged in the near term
One of the key issues investors have had with UNSP, in our view, is its high leverage
and we do not expect debt levels to come down in the next few years. Management has
highlighted that it would look to increase UNSP’s in-house production capacity. This is
likely to keep debt levels high in our view.
Furthermore, the company also plans to invest INR6bn over the next year or so in a
glass manufacturing unit, which, in our view, should help it have more control over
packaging costs. The company has spoken about liquidating treasury shares valued at
INR10bn to pare down its debt (USL seen readying to take next step to deleverage,
Business Standard, October 1, 2011). However, management may opt to wait for better
valuations than the current share price; hence, we believe in the near term the balance
sheet will continue to remain leveraged.
Concerns over group company Kingfisher Airlines
Although the group company Kingfisher Airlines has no direct link with UNSP, except for
both having the same promoters, Kingfisher Airlines has been in the news for all the
wrong reasons — mounting losses and the need for new fund infusion. Press reports
suggest Kingfisher Airlines has defaulted in its payments to oil marketing companies
(Kingfisher owes over INR2bn to AAI, Economic Times, August 25, 2011) as well as
delayed salaries to employees (Kingfisher delays salary payment, Business Standard,
August 14, 2011). Auditor comments in the Kingfisher Airlines annual report say that the
net worth of the company is completely eroded and the company will need to infuse
funds to keep the business going.
Flow of funds from UNSP to Kingfisher Airlines (although indirectly, elaborated in detail
inside) is a cause of concern for us.
Downgrade to Neutral on near-term overhangs
We have also cut our target multiple significantly to account for the issues highlighted
above. We now value the domestic business at 11x FY13F EBITDA and the W&M
business at 8x FY13F EBITDA. Our target price goes down from INR1,800 to INR850 to
account for both the >30% earnings cut as well as cut in target multiples.
We believe there remain a number of short-term headwinds that can rein in the stock
price performance. The stock has seen a sharp de-rating in the past few months, and
with many issues still unresolved as highlighted in this note, we believe a re-rating back
to historical averages will be a slow and gradual process.
As investors get more clarity on some of the issues we highlight in this note and the
company starts to reap some of the benefits of the investments it has made in the last
year or so, we see scope for a re-rating back to its historical levels. However, we believe
that until there is clarity on these issues the stock price performance will remain muted.
We downgrade to Neutral and look for these issues to be resolved before taking a fresh
look at the company. Our reduced TP of INR850 provides potential upside of 12.4% from
current levels.
Our key concerns on UNSP
Distribution structure limits pricing power
The distribution structure in India varies by state, and three basic types of systems are in
place across the country. The basic principle behind each system is outlined below:
Government controlled – Pricing controlled by the state government
Auction states – Licences for distribution are auctioned by the government
Open market – Pricing is market determined
Companies lack pricing power in government-controlled states
Almost 75-80% of industry volumes come from states where pricing and distribution is
controlled by the government. Key controlled markets are Karnataka, Andhra Pradesh,
Tamil Nadu and Kerala (together these states account for ~60% of industry volumes).
Pricing in these states is dependent on the government, which makes it difficult to
achieve consistent pricing (the company is not able to increase prices consistently like
other consumer companies) over a period of time. As an example, a recent news article
(Brewers in Kerala to stop liquor production on pricing issue, Hospitality Biz, August 23,
2011) suggested that the issue of pricing has created a significant rift between the
government and manufacturers. There are suggestions that liquor manufacturers may
even stop production if the government does not approve price increases to cover the
increased cost of materials. This is one of the key reasons why pricing power is limited in
India, as government-controlled states are reluctant to increase prices.
Surprisingly no pricing power even in open market
There are some important free priced markets such as Maharashtra, Goa, Pondicherry,
where pricing is market determined. India is a highly consolidated market with the top 4-5
players having an ~80% market share; United Spirits has a ~55% share of the Indian
market. In other consolidated markets around the world, the price/mix benefit has been
much greater, especially for a product where the elasticity of demand is not high.
However, the reported numbers for UNSP clearly show that the price/mix benefit has not
been a big contributor to the revenue growth numbers over the past six years or so.
If we look at the realisation numbers over the past few years, the actual delivered
price/mix improvement has not been significant. The chart below indicates the realisation
improvement on a y-y basis over the past four years. The company has seen an average
realisation improvement of ~6%. Remember this also includes mix improvement, which
we estimate at 2-3%, making the pricing impact only to the tune of 3% or so.
This lack of one single pricing mechanism across the whole country has been and will
continue to be an issue for companies in the Indian made foreign liquor (IMFL) space, in
our view. Pricing structure is also different for different brands across the country and
pricing is also not entirely dependent on the manufacturer across the country. In case of
a sharp rise in input prices of materials or packaging material, the company has the
option to pass on the increase in costs to consumers in only a few states. This means in
the event of a sharp increase in commodity costs it will be difficult for manufacturers to
pass on the increase to consumers in time to protect profitability.
In the absence of significant changes in the market structure for distribution and pricing,
we see this trend as continuing and for price/mix benefit to only contribute mid single
digits to revenue growth over the near to medium term.
Unlike expectations, input prices have not softened
At the start of FY11, the company and the market expected a significant softening of
ENA prices which would have helped company profitability. ENA prices have not
corrected by any significant amount and are largely flat vs the start of the year. So far in
FY12, ENA prices have not really changed by much with the average price hovering
around the INR147 mark vs. the INR144-145 range in the same period last year.
Glass, the key packaging material for spirits companies, has seen a significant rise in
price over the last year or so (+17% in FY11 on a y-y basis). This has also ensured that
domestic business profitability has not improved as companies have not been able to
pass on the full impact of the rise in glass costs to consumers.
Indications from Industry players are that ENA prices may start to rise again. If that
comes through, then domestic business profitability would be under pressure in the
absence of significant price increases. As we have highlighted above, price increases
are difficult to come by and hence any sharp increase in input prices will be negative for
domestic business profitability.
Domestic business profitability has remained constrained
With the price/mix benefit offset by stable ENA prices and rising glass prices, domestic
business profitability has remained constrained over the last few quarters. This situation
was expected by both the market and company to be much different at the start of
FY2011, but that has not played out as expected. If we look at the EBITDA per case on a
quarterly basis, it has been volatile, but has largely remained within a narrow band.
Unless there is a significant correction in ENA and glass prices, we expect this to
continue with pricing action difficult to come. The company has had some benefit from
improving mix, with consumers trading up to more premium brands, but this has only
resulted in 2-3% net sales growth over the past few years. While we expect this to
continue, we do not expect this to be a game changer in the medium term. The company
does spend a significant amount of money on promotions, which nullifies partially the mix
benefits.
Potential catalysts to help improve profitability in the medium
term in place
We highlight below a number of potential catalysts that could help improve profitability
into FY13F, but the timing on when this improvement will come through remains
uncertain. Some of the key trends we would watch for are as below:
Acquisitions to help improve profitability from 3QFY12
United Spirits expects benefits from its recent acquisitions (FY11) of distilleries to start
accruing from 3QFY12 as it takes some time to get the distilling capacity to work, as per
UNSP standards. The company estimates that the benefit of savings from third-party
distillation margins on a per-case basis will be ~INR30 and this should flow through to
40% of the company’s total volumes. This, in theory, could mean EBITDA per case
improves to INR100 at the overall company level. Our numbers do not capture this
improvement in FY12F, but start to capture it only in FY13.
Premiumisation trends sustainable
The company is looking to increase premiumisation trends by continuing to invest in
brands over the longer term. This, in our view, has already started to show benefits with
mix improvement accounting for 2-3% of net sales growth on average over the last few
years. The company has given up competing at some of the lower price points across
segments, which has helped improve profitability by focusing on value growth vs. volume
growth. However, we do not expect a marked shift upwards in the near term.
Price hike negotiations continuing
The company continues to be in negotiations with state governments with regard to price
hikes and is hopeful of seeing some price hikes being granted over the next few months,
according to industry sources. This should aid net sales growth over the medium term.
With demand continuing to be robust, the company sees price increases as being
acceptable for the consumer, especially in a discretionary segment such as alcoholic
drinks. However, as highlighted above, negotiations with governments on pricing is a
tough and time-consuming exercise.
Mix of molasses and grains account gives some protection on input costs
Within the raw material mix, molasses now accounts for 60% and grains account for 40%
of overall raw materials. This has changed significantly from a 90/10 mix a couple of
years ago. In addition, the company has decided to invest in a glass manufacturing unit,
which should give it further control over input costs in the medium term. Reports (USL to
invest 600cr in glass plants, Times of India, March 21, 2011) indicate that in a bid to
integrate backwards, United Spirits is looking to invest INR5-6bn to set up a glass
manufacturing unit. This is another step USL is taking towards having more control over
input costs (the company has invested in ENA manufacturing units over the past six
months). These investments will mean near-term debt and interest costs will be high, but
EBITDA per case improves over the medium term.
However some key overhangs remain on the stock
Although there are potential catalysts that could help improve profitability over the near
to medium term, UNSP also faces some overhangs which may keep the share price
performance muted in the near term. We highlight two key overhangs on the stock
Kingfisher Airlines’ woes keep piling up
As shown below, losses at group company Kingfisher Airlines continue, with the
company reporting losses of INR10.3bn for the year ending March 2011. Although this
has come down versus the past couple of years, it is still a significant loss. Although
there is no direct link between United Spirits and Kingfisher Airlines, except for both
having the same promoter group, this may remain as an overhang on the shares in the
near term, in our view.
There has been negative news flow in the press regarding non-payment of dues to
airport authorities (Kingfisher owes over INR2bn to AAI, Economic Times, August 25
2011). There have also been reports of the firm being unable to pay employee salaries
on time (Kingfisher delays salary payment, Business Standard, August 14, 2011).
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