United Spirits - Diageo Gives Diwali Gift; Result Update Q1FY15 :: Edelweiss, PDF link

Please Share::

�� India Equity Research Reports, IPO and Stock News Visit http://indiaer.blogspot.com/ for complete details ��

��

-->

United Spirits’ (USL) Q1FY15 revenue and profits were lower than our estimates, largely owing to de-stocking of inventory. The agreement by USL to manufacture and distribute Diageo’s products in India was a positive surprise. Management has decided to hive off its non-core assets and move over to an asset-light model in states like Andhra Pradesh, Kerala similar to Tamil Nadu. We believe such corporate moves will be the main driver for the stock over the medium term, as its quarterly results are expected to remain volatile. Following sharp reduction in write-offs, we maintain that one-offs are largely behind us. Going ahead, we expect a hockey stick increase in the company’s margins after 2 years. Maintain ‘BUY’ from long term perspective.

USL-Diageo agreement a key trigger; margins to remain subdued

The agreement with Diageo to manufacture and distribute Diageo’s brands in India will augment USL’s FY16E sales by 7-8% along with EBIT margin of 10%. Based on our recent interactions with Allied Blenders, Pernod Ricard and Diageo (details below), we expect USL’s margins to remain subdued and be in the range of 8-10% due to heightened A&P spends. Sales growth will normalise to ~6% (versus decline in this quarter) on destocking (inventory days reduced to 22 from 17) and export sales integration (earlier were routed through UBHL).

Non - core asset monetization to fund capex

Non-core asset sale by USL can potentially add ~INR20bn in 2-3 years time. These include sale of 3.2% stake in UBL worth ~INR5.7bn and treasury stocks worth ~INR8.5bn. Other assets include residential properties and factories located in prime locations, which are expected to garner INR4-5bn over 2-3 years. We expect USL to move towards a franchise model in Andhra and Kerala. In our view, USL might also monetize its stake in IPL as it doesn’t require a cricket team to advertise its brands.

LINK
https://www.edelweiss.in/research/United-Spirits--Diageo-Gives-Diwali-Gift;-Result-Update-Q1FY15/27319.html