Braveheart Series: United Spirits - Time to Pop The Bubbly :: Edelweiss

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Hic, Hic, Hurray! Strong market share and benefits ensuing from Diageo’s management control render the company one of the best plays on revival in discretionary consumption. With EBITDA margins hitting rock bottom and debt alleviation on the cards we believe the company is, without doubt, in a sweet spot amidst an improving discretionary spending scenario. Moreover, RoCE is likely to triple from high single digit to 27% over FY15-18 due to premiumisation push and an asset light model. In our view, USL has to be a core part of the India Consumer portfolio.

Diageo’s stir ‘n’ shake stroke creates perfect blend

Diageo’s new executive committee has largely cleaned USL’s balance sheet and is chalking out the road map to turn on the growth tap. We expect EBITDA margin to improve by 575bps over FY15-18 and further monetization plans of INR20bn to help reduce debt. We anticipate liquor volumes to recover spurred by: (i) GDP revival (volumes could surge 1.5x GDP); (ii) low per capita consumption (at 2.2 litre versus 4.5 world average); (iii) favourable demographics; and (iv) steady conversion from country liquor to IMFL.

Premium push, asset light model: Growth catalysts

We perceive the premiumisation pitch as a vital value unlocking catalyst (prestige and above share to catapult from current 27% to 37% by FY18E). This, in conjunction with adoption of asset light model will drive market share from current ~36% (Diageo inclusive) to ~40% versus Pernod Ricard’s 47% in the premium and above segment. This will expand EBITDA per case (one fourth of Pernod Ricard) from INR90 in FY13 to INR155 in FY18.

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https://www.edelweiss.in/research/Braveheart-Series-United-Spirits--Time-to-Pop-The-Bubbly/27808.html