Annual Report Analysis - United Spirits: Edelweiss PDF link

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United Spirit’s (USL) FY14 annual report analysis highlights significant cleaning up of balance sheet leading to erosion in net worth, due to goodwill impairment pertaining to the Whyte & Mackay group (WMG) of INR32.4bn and provision for doubtful debts/advances of INR10.3bn. Post balance sheet cleanup, outstanding investments and loans & advances stood at INR23.4bn, 77% of net worth (FY13: INR24.8bn, 52%). Of this, INR10.1bn loans are due from erstwhile promoter group entity, United Breweries Holdings (UBHL), which management believes is recoverable. Balance advances include INR5.0bn towards prepaid expenses (of which INR2.8bn was towards trademark license fee), INR1.9bn for tie-up units and INR6.4bn to others. Intangibles stood at INR35.1bn, 116% of net worth (FY13: INR58.4bn, 122%), primarily comprising goodwill of INR29bn (FY13: INR52bn) and IPL franchisee rights of INR5.9bn (FY13: INR6.2bn). We estimate almost entire goodwill of INR28.7bn pertains to WMG and will be adjusted against sale of WMG, subject to receipt of net proceeds. Expenses paid/payable to erstwhile promoter group entities (non-related parties) in FY14 stood at INR1.2bn, of which INR1.0bn comprised advertisement and sales promotion expenses (7.8% of total advertisement expenses).

What’s on track?

Balance sheet cleaned up to the extent of goodwill impairment and bad loans/advances write off. Further, WMG sale proceeds could reduce debt and interest cost by 49%.

The board approved sale of WMG in May 2014 for enterprise value of GBP430mn (net proceeds GBP408mn) to Emperador, UK, and entered into a share purchase agreement. Management highlighted that net proceeds from the sale will be insufficient to repay intra-group loans, which led to impairment/write-off of goodwill and loans.

WMG sale will entail removal of assets and liabilities including debt, pension and other liabilities from USL’s balance sheet in FY15.

What needs tracking?

Post impairment of goodwill and provisions/write offs, balance assets aggregating INR58.5bn (INR23.4bn loans and INR35.1bn intangibles), 193% of net worth include:

• Investments, loans and advances of INR23.4bn: Includes INR10.1bn due from UBHL, INR5.0bn towards prepaid expenses (including trademark licensee fee to UBHL), INR1.9bn due from tie-up units and INR6.4bn to others.
• Intangibles of INR35.1bn: Predominantly includes goodwill (post WMG related impairment) of INR29bn, 96% of net worth, and franchisee rights (Bengaluru franchise of BCCI – IPL) of INR5.9bn, 20% of net worth. Franchisee rights are amortised over a period of 50 years.

Investment in subsidiaries: Standalone level

• Subsidiaries posted huge losses and net worth eroded significantly, primarily owing to impairment of investments, advances and intra-group loans.
• Exposure to subsidiaries (including guarantees of INR2.2bn (FY13: INR41.7bn)) at standalone level (largely non-WMG related) stood at INR30.1bn, 81% of standalone net worth (FY13: INR110bn, 172%).
• Market value of Pioneer Distilleries (86% listed subsidiary) declined 44% (INR565.8mn) of the book value of investment of INR1.3bn (at standalone level). Management believes that diminution in investment value is temporary.
• Tern Distilleries, Pioneer Distilleries and Sovereign Distilleries were referred to the BIFR in FY14. Investments in the 3 companies stood at INR1.7bn, 4.5% of standalone net worth.

USL has arrangements with certain distilleries and bottling units (tie-up units) for manufacturing and marketing its brands and are responsible for ensuring adequate finance to these units. Outstanding loans and advances to tie-up units stood at INR2.5bn (FY13: INR2.3bn), of which INR671mn was provided in FY14. Contingent liabilities included co-accepted bills of tie-up units of INR349.8mn (FY13: INR509.8mn); 16% of consolidated net sales are from tie-up units.

Total debt stood at INR83.1bn and adjusted D/E (adjusted for acceptances of INR3.3bn) increased to 2.7x in FY14 from 1.7x in FY13 due to decline in net worth. Average borrowing cost rose to 13.3% in FY14 from 12.0% in FY13.

85% of debt is short term and will have to be repaid/re-financed in FY15. WMG sale proceed of INR40.7bn, if used to repay debt, may reduce debt and interest cost by 49%.

Operating cash flow, post interest and adjusted for acceptances, declined to INR(15.1)bn impacted by the significant increase in receivables and inventories. Cash conversion cycle continued to increase from 134 days in FY12 to 144 in FY13 and 164 in FY14. Acceptance days stood at 20.

In FY14, transactions with certain promoter group entities (that may not be classified as related party under AS-18) stood at INR1.2bn and largely comprised advertisement expenses (7.8% of total advertisement expenses), aircraft charges, etc.

Outstanding receivables (net) from these entities stood at INR939.8mn, 3.1% of net worth, of which advance for racing season 2014-15 to Watson Ltd; stood at INR478.8mn.

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https://www.edelweiss.in/research/Annual-Report-Analysis--United-Spirits/27173.html