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

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United Spirits: Significant savings possible on RMs; upgrading margin estimates :: Kotak Securities

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Significant savings possible on RMs; upgrading margin estimates. Our analysis of
UNSP’s RM costs reveals significant ‘inefficiencies’. As per our estimates, gains of
`70-80 per case are possible on the margins front as Diageo goes about rationalizing
the cost structure. Margins would take time to recover as (1) some of the RMs could be
tied through long-term contracts and (2) execution of rationalization measures could
take time. We bake in full efficiency gains in our FY2017E numbers. We have raised our
earning estimates led by higher (`170 versus `135 earlier) margins in FY2017E. Retain
BUY with a revised TP of `4,000.

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UB (Holdings) :: Business Line

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United Spirits: Further inputs lend comfort on Diageo-UNSP deal :: Kotak Sec, report link

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Heineken brews heady growth!!! United Breweries ::ICICI Securities, link

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

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

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

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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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BUY United Spirits:: ICICI Securities

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Change in guard to bolster growth……
• Net revenue for Q4FY14 stood at | 1943.3 crore, posting growth of
~4% YoY against | 1871.4 crore in Q4FY13. Volume for FY14 stood
at 120.7 million cases vs. 123.7 million cases in FY13. Sales for the
company’s Prestige & above segment grew 15% YoY to 33 million
cases vs. 28.7 million cases in FY13
• EBITDA for the quarter stood at | 116.6 crore registering de-growth
of 46% YoY. The decline in EBITDA was on account of a contraction
in the EBITDA margin by ~548 bps YoY to 6.1%
• United Spirits (USL) reported a net loss of | 5380.1 crore in Q4FY14
vs. profit of | 56 crore in Q4FY13. The loss of ~| 4321.6 crore was
due to discontinuing of operations of Whyte & Mackay along with
provisions for doubtful debts/advances to the tune of | 1012.8 crore
Clean-up of balance sheet major step by Diageo
Diageo accounted for provisions to the tune of | 1123.2 crore to
encompass doubtful receivables and advances made to the holding
company UBHL. Further, with the sale of W&M, Diageo accounted for
impairment in goodwill to the extent of | 3235.7 crore resulting into loss
on account of discontinued operations to the tune of | 3047.8 crore.
Premiumisation to take centre stage with Diageo in firm seat
Diageo through its indirect wholly-owned subsidiary Relay BV acquired
14,532,775 equity shares of | 10 each at a price of | 1440 by way of
preferential allotment on November 9, 2012. Further, it acquired 58,668
shares through an open offer (phase 1) and 21,767,749 shares from UBHL,
Kingfisher Finvest, SWEW, Palmer group and UB Sports Management
taking the total number of shares to 36,359,192 or 25.02% as on July 4,
2013. Next, Relay BV acquired nearly 3.76% by way of market purchases
on November 28, 2013 and finally acquired 37,785,214 shares constituting
26% through the second round of open offer to take the total share to
54.78%. Diageo, now with a firm grip over USL can drive the
premiumisation programme and churn USL’s product portfolio towards
value by culling unprofitable products. Further, we believe there will be a
higher adherence to international laws and better corporate governance
on part of USL.
Gearing up to drive into next growth phase; opportune time to join
With Diageo at the helm, we believe USL will go through a significant
transformation and shift from volume to value growth at a more rapid
pace. Also, its strategy of premiumisation and de-leveraging of the
balance sheet remains firmly in place. Consequently, we have segregated
DCF into three phases to capture the transformation and subsequent
accrued benefits of transition. We arrive at a fair price of | 2950 for USL
and maintain BUY recommendation on the stock.


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United Spirits :Diageo launches open offer to hike stake… : ICICI Securities

Diageo launches open offer to hike stake…
Diageo PLC has launched an open offer for acquisition of up to
3,77,85,214 (26%) fully paid equity shares of | 10 each of United Spirits
(USL). Diageo currently hold 28.8% in United Spirits and full acceptance
of the open offer would take Diageo’s stake to 54.8%. The open offer
aggregates to total consideration of | 11,448.9 crore with an open offer
price of | 3030 per share. The non-promoter holding of USL stands at
~61%, of which institutional holding is ~45%.
Long term perspective remains intact
We believe Diageo’s open offer at | 3030 reiterates the long term value
unlocking that can be achieved through de-leveraging and
premiumisation strategy. Also, Diageo’s endeavour to significantly
increase the stake in USL provides confidence towards it’s commitment
to turn around USL in India. With Diageo having better control of USL, we
believe the structural changes will get implemented at a more rapid pace,
thereby providing scope for further upside

Sizzling Stocks - Info Edge India, United Breweries :: Business Line

United Spirits on a short-term downtrend :: Business Line

United Spirits Ltd Diageo Estimates >24% EBITDA CAGR for UNSP Over the Next Five Years :: Morgan Stanley Research

UNSP is the top pick in our coverage universe:
Bears on this stock believe that UNSP’s long-term
earnings visibility is low. We disagree – our in-depth
work and conviction on profit pool growth for the Indian
liquor industry aside (refer to our report of 21 May 2013,
Structural Rise in Liquor Profit Pool in India; OW),
Diageo itself estimates >24% EBITDA CAGR for UNSP
over the next five years.
After the initial tailwinds following the change in
management control, we expect the next leg of stock
outperformance to be catalyzed by increased
confidence in higher long-term earnings growth.
What does “economic profit positive in year 5”
mean? In its 4 July press release, following the
completion of the share purchase agreement with
United Breweries (Holdings) Ltd, Diageo reiterated that
‘the transaction is expected to be… economic profit
positive in year 5 assuming a 12% WACC.”
Economic profit is the amount remaining after
subtracting from total income the total monetary cost of
all business activities, as well as the opportunity cost of
profits. Here, we assume the opportunity cost for Diageo
to be its capital employed to acquire the UNSP stake
times its Weighted Average Cost of Capital (WACC).
Diageo holds 25.02% of the enlarged UNSP share
capital at an aggregate cost of Rs52.36bn. Hence, to be
economic profit positive in year 5, UNSP would likely
have to generate over Rs25.1bn of NOPAT in F18. At
the current tax rate and based on our estimate of F18
depreciation, EBITDA should be over Rs40.7bn.
Further, with 12-16% F13-F18 revenue CAGR, we
estimate F18 EBITDA margin of 18.0-21.5%.
In our base case, we estimate F18 EBITDA of Rs44.3bn
and margin of 19.5%.

JBF Ind, Allahabad Bank, Reliance Capital, Mahindra Satyam, United Spirits, jindal poly films, :: Business Line

 

Sizzling Stocks - United Sprits , Bharti Airtel :: Business Line

United Spirits:: Big re-rating on the cards; maintain BUY, TP Rs 2,100 :: Religare research

Big re-rating on the cards; maintain BUY, TP Rs 2,100
Diageo PLC has acquired a controlling stake (27.4%) in UNSP for Rs 1,440/sh, which is a significant positive for minority shareholders. UNSP is likely to receive a cash infusion of Rs 33bn, which would improve its capital structure as well as margin profile in the medium to long term through premiumisation and operational efficiencies. We upgrade FY14/FY15 earnings by ~50% each and maintain BUY with a revised Septeber’13 TP of Rs 2,100 (30x Sep’14 EPS, 54% upside) from Rs 750 earlier.

United Spirits - Possible stake sale to Diageo to bring cheer:: EDEL

As per media reports, Diageo is likely to acquire up to 25% in United Spirits (USL)- 12% promoter stake, 3% treasury stock and 10% through preferential allotment. We believe the deal, if inked, will be positive for USL as it will strengthen the company’s presence in the premium portfolio, where it has been losing out to key competitor Pernod Ricard. Funds infused via the deal will also help deleverage the balance sheet. Foreign management could improve operational efficiency and boost margins, since current promoters are focusing more on other stressed group companies. USL will also enjoy benefits of scale by setting up bigger manufacturing plants. Further, it could gain access to some international (emerging) markets. Inspite of a sharp appreciation in share price over the past two months, we expect a re-rating whenever the deal is inked (USL valued at 2.2x FY13E EV/Sales currently, significantly lower than peers). Maintain ‘HOLD’.

technicals: M & M, Chennai Petro, United Spirits, Dishman Pharma, Wire & Wireless, NHPC, :: Business Line

United Spirits Ltd - Downgrade due to Kingfisher Airlines hangover UBS Research

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UBS Investment Research
United Spirits Ltd
Downgrade due to Kingfisher Airlines
h angover [EXTRACT]
�� Downgrade from Buy to Neutral
We downgrade United Spirits (USL) to Neutral due to uncertainty surrounding
Kingfisher Airlines (KFA). USL’s share price is down 51% since 1 January 2011,
and we expect it to remain under pressure until the KFA issue is resolved. We also
cut our FY12-14 EPS estimates by 18-19% to take into account its higher debt as
of December 2011.
�� A raw material cost reduction is possible
USL has been investing in primary distillation capacity, which should help lower
its raw material costs. However, we will only incorporate these into our forecasts
once the benefits kick in fully. USL is facing high raw material costs, with high
energy prices boosting its system costs.
�� Business is intact; underlying debt and governance are concerns
Our underlying view on USL remains resilient growth in branded spirits. We think:
1) USL should remain a beneficiary of India’s growing, young population and
rising discretionary spending; and 2) USL has one of the widest and most dominant
distribution networks in India, which aids its 34 ‘millionaire brands’ (brands that
sells more than 1m cases annually) in the segment; and 3) USL will benefit from
investments made in primary distillation capacity.
�� Valuation: lower our price target from Rs850.00 to Rs780.00
We derive our price target from a DCF-based methodology and explicitly forecast
long-term valuation drivers using UBS’s VCAM tool. We assume a WACC of
11.4%. We lower our FY12/13/14 EPS estimates from Rs34.47/43.90/54.85 to
Rs28.25/35.22/44.31.