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UBS Investment Research
United Spirits Ltd
Downgrade due to Kingfisher Airlines
h angover [EXTRACT]
�� Downgrade from Buy to Neutral
We downgrade United Spirits (USL) to Neutral due to uncertainty surrounding
Kingfisher Airlines (KFA). USL’s share price is down 51% since 1 January 2011,
and we expect it to remain under pressure until the KFA issue is resolved. We also
cut our FY12-14 EPS estimates by 18-19% to take into account its higher debt as
of December 2011.
�� A raw material cost reduction is possible
USL has been investing in primary distillation capacity, which should help lower
its raw material costs. However, we will only incorporate these into our forecasts
once the benefits kick in fully. USL is facing high raw material costs, with high
energy prices boosting its system costs.
�� Business is intact; underlying debt and governance are concerns
Our underlying view on USL remains resilient growth in branded spirits. We think:
1) USL should remain a beneficiary of India’s growing, young population and
rising discretionary spending; and 2) USL has one of the widest and most dominant
distribution networks in India, which aids its 34 ‘millionaire brands’ (brands that
sells more than 1m cases annually) in the segment; and 3) USL will benefit from
investments made in primary distillation capacity.
�� Valuation: lower our price target from Rs850.00 to Rs780.00
We derive our price target from a DCF-based methodology and explicitly forecast
long-term valuation drivers using UBS’s VCAM tool. We assume a WACC of
11.4%. We lower our FY12/13/14 EPS estimates from Rs34.47/43.90/54.85 to
Rs28.25/35.22/44.31.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
UBS Investment Research
United Spirits Ltd
Downgrade due to Kingfisher Airlines
h angover [EXTRACT]
�� Downgrade from Buy to Neutral
We downgrade United Spirits (USL) to Neutral due to uncertainty surrounding
Kingfisher Airlines (KFA). USL’s share price is down 51% since 1 January 2011,
and we expect it to remain under pressure until the KFA issue is resolved. We also
cut our FY12-14 EPS estimates by 18-19% to take into account its higher debt as
of December 2011.
�� A raw material cost reduction is possible
USL has been investing in primary distillation capacity, which should help lower
its raw material costs. However, we will only incorporate these into our forecasts
once the benefits kick in fully. USL is facing high raw material costs, with high
energy prices boosting its system costs.
�� Business is intact; underlying debt and governance are concerns
Our underlying view on USL remains resilient growth in branded spirits. We think:
1) USL should remain a beneficiary of India’s growing, young population and
rising discretionary spending; and 2) USL has one of the widest and most dominant
distribution networks in India, which aids its 34 ‘millionaire brands’ (brands that
sells more than 1m cases annually) in the segment; and 3) USL will benefit from
investments made in primary distillation capacity.
�� Valuation: lower our price target from Rs850.00 to Rs780.00
We derive our price target from a DCF-based methodology and explicitly forecast
long-term valuation drivers using UBS’s VCAM tool. We assume a WACC of
11.4%. We lower our FY12/13/14 EPS estimates from Rs34.47/43.90/54.85 to
Rs28.25/35.22/44.31.
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