First step in premiumisation drive!!! • United Spirit :: ICICI Securities, link

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First step in premiumisation drive!!!
• United Spirit’s (USL) Q2FY15 gross revenues stood at | 5496 crore,
growth of ~15% YoY vs. |4765 crore in Q2FY14. Net revenue for
Q2FY15 stood at | 2178.6 crore, posting growth of ~6% YoY vs. |
2057.6 crore in Q2FY14. The excise duty for the quarter stood at 61%
of gross revenue, up ~345 bps YoY
• EBITDA for the quarter was at | 233.3 crore, up ~4% YoY. On the
EBITDA margin front, the margin contracted nearly 19 bps YoY to
10.7% vs. 10.9% in Q2FY14. Contraction in EBITDA margin was
largely due to increased ENA expenses to the tune of | 37 crore YoY
• USL reported a net loss of | 27.8 crore in Q2FY15 against profit of
| 94.3 crore in Q2FY14. For the quarter, USL made additional
provision of | 63 crore towards the investment and loans given to
Whyte & Mackay. Also, USL sold 11.35% of Pioneer Distilleries Ltd to
bring the promoter shareholding to 75%, thereby resulting in a loss
of | 10.8 crore, which has been accounted as exceptional item
• Volume for Q2FY15 stood at 29.7 million cases against 28.1 million
cases in Q2FY14. For H1FY15, volume stood at 56.8 million cases
against 59.3 million cases in H1FY14. The upper end of the portfolio
comprising the prestige and above segment stood at 9.2 million
cases as against 7.7 million cases in Q2FY14. The contribution of the
premium segment was highest in this quarter at 31% (highest in the
past 10 quarters). Further, the half yearly volumes declined as a
result of USL’s strategy pertaining to low priced popular range of
brands. USL in its bid to push premiumisation is realigning its route
to market strategy in some states where profitability is low
Monetisation of assets, agreement with Diageo to open new avenues
USL under Diageo plans to make a major realignment in its structure
starting with hiving off lower margin and underutilised units in Kerala and
Andhra Pradesh. Further, the board has also provided in-principle
approval to monetise surplus assets of the company. Also, USL entered
into an agreement with certain related parties of the company to distil as
well as distribute products in India. Going ahead, the agreement with
Diageo Brands BV to manufacture and distribute premium Diageo
products in India will catapult USL into a new growth phase.
Premiumisation makes nascent mark
Diageo post acquiring 54.8% of USL through its wholly-owned subsidiary
is driving the premiumisation strategy. Diageo is realigning the route to
market strategy for some low profitable states. Also, critical brands such
as McDowell’s No 1 and Royal Challenge, which have shown robust
volume growth of 23% and 49% YoY, respectively, are focused upon.
Also, methods of brand extensions and brand related investments are
employed to drive growth in profitable markets. Further, combinations of
price hike and trade spend cuts together with efficiency improvement at
the back end are utilised to improve realisations.
Diageo’s association to boost innovation and push premiumisation
Diageo’s push for asset light and franchised model together with change
in marketing strategy and rationalisation of low priced brands is expected
to improve realisation. Further, approval to manufacture premium Scotch
whiskey for Diageo and distribution of recognised Diageo brands in India
would provide additional revenue growth for USL. Consequently, based
on our DCF methodology, we revise our target price to | 3100 and
maintain BUY recommendation on the stock.

LINK
http://content.icicidirect.com/mailimages/IDirect_UnitedSpirits_Q2FY15.pdf