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United Spirits (UNSP)
Consumer products
Good quarter, marginally disappointing volumes. UNSP’s 2QFY12 numbers were
ahead of expectations, (1) like-to-like sales growth of 19% yoy with overall volume
growth of 8% yoy driven by strong 17% growth in premium brands, (2) higher material
costs (spirits, glass) impacted gross margins, however, EBITDA margin decline curtailed
through savings in promotional spends. The company expects adspends to increase in
2HFY12E as it invests in Signature Premier whisky and Vladivar vodka. ADD.
Good sales growth; margins under pressure
UNSP reported net sales of Rs17.9 bn (+32%, KIE Rs16.1 bn), EBITDA of Rs2.6 bn (+17%, KIE
Rs2.4 bn) and PAT of Rs861 mn (+4%, KIE Rs767 mn).
2QFY12 includes the impact of the merger of Balaji Distilleries; hence the reported financials are
not comparable on a yoy basis and with our estimates.
Adjusting for the impact of Balaji Distilleries and the introduction of first point VAT in
Maharashtra effective this fiscal, the company reported sales growth of 19%. Overall volume
growth during the quarter was 8% with premium brands reporting strong 17% yoy growth.
The IMFL segment consisting of whisky and brandy likely largely contributed to the growth.
Price hikes (managed through a mix of retail price increase and reduction in promotional spends)
and mix improvement helped curtail EBITDA margin decline to 188 bps to 14.3% despite
significant gross margin pressure (decline of 504 bps) due to inflationary spirits (+11% yoy ),
glass and paper price. Partial withdrawal of promotional spends led to decline in advertising
spends to 9.4% of sales. Average adspends in FY2011 was 10.5% of sales.
The company guides for higher adpro spends in the subsequent quarters to support its new
launches – Signature Premier, Vladivar Vodka and White Mischief Vodka. We model adspends
at 10.8% for FY2012E.
Extraordinary item includes (1) an income of Rs657 mn towards write-back of provision no
longer required further to the settlement of a legal matter in the company’s favor, (2) an
expense of Rs109 mn towards provision made for excise liability relating to prior years.
Standalone net debt position as of September 30, 2011 was Rs40 bn versus Rs37 bn as of
September 30, 2010. In July 2011, the company announced GBP370 mn refinance of the
debt taken for acquiring W&M. The total hedged cost of the new debt is 45 bps lower
than the earlier debt. The new loan has a seven-year repayment period.
Outlook for FY2012E
Sales growth will likely be led primarily through price hikes.
Margin management is the key. Glass (forms about 30% of input cost) has been
inflationary. While there may be some respite due to lower ENA cost, (~35% of
distillation constitutes primary distillation versus 10% earlier which will likely result in a
benefit of Rs3-4/litre), the company will likely focus on managing margins by passing off
any pressure on input costs with commensurate price hikes. Further increasing production
at Pioneer Distilleries and Sovereign Distilleries and the growing focus on using grain will
likely help reduce the impact of ENA cost on overall profitability. As guided by
management, adspends will likely remain at elevated levels over the next few quarters.
Excise hike in state budgets does not portend well. In addition to input cost inflation, hike
in excise duty on liquor products in key state budgets such as Maharashtra, Punjab,
Karnataka does not portend well.
Net debt position will likely move in line with capex requirements over the next couple of
years. The company has guided for capex of Rs11 bn for the period FY2010-13E.
Retain ADD
We retain ADD with a revised target price of Rs1,000 (valued at 11X FY2013E EBITDA for
India business and 8X EBITDA for W&M). We have reduced our earnings estimates for
FY2012E and FY2013E by 4% and 7% as we model lower EBITDA (higher material cost and
adspends). Our EPS estimates for FY2012E and FY2013E are Rs 37.5 and Rs47. Few worries
remain (1) higher-than-expected input costs, (2) potential impact of higher interest rates, (3)
higher net debt position as of 1QFY12.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
United Spirits (UNSP)
Consumer products
Good quarter, marginally disappointing volumes. UNSP’s 2QFY12 numbers were
ahead of expectations, (1) like-to-like sales growth of 19% yoy with overall volume
growth of 8% yoy driven by strong 17% growth in premium brands, (2) higher material
costs (spirits, glass) impacted gross margins, however, EBITDA margin decline curtailed
through savings in promotional spends. The company expects adspends to increase in
2HFY12E as it invests in Signature Premier whisky and Vladivar vodka. ADD.
Good sales growth; margins under pressure
UNSP reported net sales of Rs17.9 bn (+32%, KIE Rs16.1 bn), EBITDA of Rs2.6 bn (+17%, KIE
Rs2.4 bn) and PAT of Rs861 mn (+4%, KIE Rs767 mn).
2QFY12 includes the impact of the merger of Balaji Distilleries; hence the reported financials are
not comparable on a yoy basis and with our estimates.
Adjusting for the impact of Balaji Distilleries and the introduction of first point VAT in
Maharashtra effective this fiscal, the company reported sales growth of 19%. Overall volume
growth during the quarter was 8% with premium brands reporting strong 17% yoy growth.
The IMFL segment consisting of whisky and brandy likely largely contributed to the growth.
Price hikes (managed through a mix of retail price increase and reduction in promotional spends)
and mix improvement helped curtail EBITDA margin decline to 188 bps to 14.3% despite
significant gross margin pressure (decline of 504 bps) due to inflationary spirits (+11% yoy ),
glass and paper price. Partial withdrawal of promotional spends led to decline in advertising
spends to 9.4% of sales. Average adspends in FY2011 was 10.5% of sales.
The company guides for higher adpro spends in the subsequent quarters to support its new
launches – Signature Premier, Vladivar Vodka and White Mischief Vodka. We model adspends
at 10.8% for FY2012E.
Extraordinary item includes (1) an income of Rs657 mn towards write-back of provision no
longer required further to the settlement of a legal matter in the company’s favor, (2) an
expense of Rs109 mn towards provision made for excise liability relating to prior years.
Standalone net debt position as of September 30, 2011 was Rs40 bn versus Rs37 bn as of
September 30, 2010. In July 2011, the company announced GBP370 mn refinance of the
debt taken for acquiring W&M. The total hedged cost of the new debt is 45 bps lower
than the earlier debt. The new loan has a seven-year repayment period.
Outlook for FY2012E
Sales growth will likely be led primarily through price hikes.
Margin management is the key. Glass (forms about 30% of input cost) has been
inflationary. While there may be some respite due to lower ENA cost, (~35% of
distillation constitutes primary distillation versus 10% earlier which will likely result in a
benefit of Rs3-4/litre), the company will likely focus on managing margins by passing off
any pressure on input costs with commensurate price hikes. Further increasing production
at Pioneer Distilleries and Sovereign Distilleries and the growing focus on using grain will
likely help reduce the impact of ENA cost on overall profitability. As guided by
management, adspends will likely remain at elevated levels over the next few quarters.
Excise hike in state budgets does not portend well. In addition to input cost inflation, hike
in excise duty on liquor products in key state budgets such as Maharashtra, Punjab,
Karnataka does not portend well.
Net debt position will likely move in line with capex requirements over the next couple of
years. The company has guided for capex of Rs11 bn for the period FY2010-13E.
Retain ADD
We retain ADD with a revised target price of Rs1,000 (valued at 11X FY2013E EBITDA for
India business and 8X EBITDA for W&M). We have reduced our earnings estimates for
FY2012E and FY2013E by 4% and 7% as we model lower EBITDA (higher material cost and
adspends). Our EPS estimates for FY2012E and FY2013E are Rs 37.5 and Rs47. Few worries
remain (1) higher-than-expected input costs, (2) potential impact of higher interest rates, (3)
higher net debt position as of 1QFY12.
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