Spirited premium segment growth to aid USL • United Spirit :: ICICI Securities, report

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Spirited premium segment growth to aid USL • United Spirit’s (USL) Q3FY15 gross revenues stood at | 5906 crore, up ~7.3% YoY vs. | 5502.8 crore in Q3FY14. Net revenues for Q3FY15 stood at | 2318.2 crore, remaining mostly flattish YoY against | 2308.6 crore in Q3FY14 • EBITDA in the quarter stood at | 238.2 crore, posting growth of ~7% YoY vs. | 222.1 crore. On EBITDA margin front, margins expanded nearly 66 bps YoY to 10.3% vs. 9.6% in Q3FY14. The EBITDA margin expansion was largely due to changes in route to market along with trade spends cut and other cost optimisations undertaken • USL reported a net profit of | 78.8 crore in Q3FY15 vs. profit of | 64.9 crore in Q3FY14 and loss of | 27.8 crore in Q2FY15 • Volumes for Q3FY15 stood at 30.9 million cases vs. 31.5 million cases in Q3FY14. For YTD FY15, volumes stood at 87.7 million cases vs. 90.9 million cases in YTD FY14. The upper end of the portfolio comprising the prestige and above segment stood at 9.4 million cases vs. 8.9 million cases in Q3FY14. The contribution of the premium segment in this quarter stood at 30%; posting growth of ~5.5% YoY. This bodes well for USL as the premium segment push is more earnings accretive than the regular segment. Going ahead, as USL receives manufacturing and distribution rights of some of the iconic brands of Diageo, it would provide a significant push to the premiumisation programme of USL Monetisation of assets, agreement with Diageo to open new avenues USL under Diageo plans to make major realignments in its structure starting with the hiving off of the lower margin and underutilised units in Kerala and Andhra Pradesh. Further, the board has also provided inprinciple approval to monetise the surplus assets of the company. Also, USL entered into an agreement with certain related parties of the company to distil and distribute products in India. Going ahead, the agreement with Diageo Brands BV to manufacture & distribute premium Diageo products in India will catapult USL into a new growth phase. Premiumisation to take centre-stage with Diageo in firm seat 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 like McDowell’s No 1 & Royal Challenge that have shown robust volume growth of 23% & 49% YoY, respectively, are being focused upon. Further, methods of brand extensions and brand related investments are being employed to drive growth in profitable markets. Also, combinations of price hike and trade spend cuts along with efficiency improvement at the back end are being utilised to improve realisations. Growth traction in premium segment and better realisation key With the prestige and above segment posting growth of nearly 6% YoY; USL with Diageo’s tutelage is well poised to embark upon the premiumisation path. Further, with shareholder approval to distribute premium Diageo’s brands through USL, it is expected to provide a further fillip to the premiumisation programme of USL. Consequently, we believe revenue growth in the near term (in our three phase DCF model) will be higher at 26% CAGR with gross revenue per case CAGR to be 15% over FY15-17. Subsequently, we revise our target price to | 4000 and maintain BUY recommendation on the stock.

LINK
 http://content.icicidirect.com/mailimages/IDirect_UnitedSpirits_Q3FY15.pdf