Please Share:: 
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
UNITED SPIRITS
Volumes robust; debt refinancing & glass prices key monitorables
�� Robust sales growth on the back of 14% volume increase
United Spirits’ (USL) Q3FY11 net sales increased 45.5% Y-o-Y, to INR 19.60 bn.
Adjusted for the impact of the Balaji merger, revenue growth of standalone
entity was 21.5% (in line with our expectations), on volume growth of 14%,
reflecting continued success of the company’s focus on premiumisation. USL’s
volume growth was broadly in line with industry growth of 14.4% Y-o-Y.
�� Margin pressure offset by lower ad spend; tax rate higher
USL’s (without Balaji) EBITDA grew 26.3% Y-o-Y, to ~INR 2.93 bn, as EBITDA
margin expanded 134bps Y-o-Y to 18.6%. COGS increase of 90bps was offset by
lower advertising and sales promotion (A&P) spending (~29bps) and lower other
expenditure (~195bps). Grains now account for 40% of volumes in terms of raw
material, whereas molasses 60% (two years back it was 10:90). The company is
in discussion stage with glass suppliers and expects glass prices to firm up and
molasses prices to slightly soften, going forward. USL has taken a weighted
average price increase of ~2.5% for the past several years and expects the
same in FY12 as well. Tax rate increase of 356bps resulted in moderate PAT
growth of 13.5% Y-o-Y to INR 1.09 bn.
�� Refinancing both Whyte & Mackay’s (W&M) and standalone debt
W&M debt is being refinanced so that the company can invest in building
branded business. There will be a three-year moratorium in debt repayments; it
will be balloon payment structure, with ~80% being repaid in sixth and seventh
years. USL plans to refinance standalone debt to focus on capex in glass and
distillation capacities.
�� Outlook and valuations: Positive; correction overdone – maintain ‘BUY’
Volume growth in Q3FY11 was impressive and we believe margins will expand
following product mix improvement. W&M brands are gaining recognition and are
on the right track of transforming from bulk scotch to branded player. Key risks
include: a) Higher debt levels; b) increasing cost of debt; c) increased working
capital; d) competition risk from multinational players and regional players; e)
execution risk in backward integration; and f) higher raw material prices. We
believe negatives are factored in the sharp stock correction and maintain ‘BUY/
Sector Performer’ recommendation/rating on the stock.
�� Conference call takeaways
Robust volume growth: On a like-to-like basis, USL’s volumes have grown 14% Y-o-Y;
2.5% price growth Y-o-Y and 2.5% mix improvement. The company is all set to become
the largest spirits player in the world in terms of volumes by FY11 end. USL, in Q3FY11,
vacated some segments at the lower end as a tactical and short-term ploy to achieve
better margins. It will re-enter those segments once it has capacity. The company
remains confident of demand, as ~100 mn people will enter the legal age for drinking in
the next few years in India. USL is investing in better shop experiences, flavoured vodka,
tequila etc.
Industry growth: Industry growth was at 14.4% Y-o-Y in Q3FY11; broadly in line with
USL growth of 14% Y-o-Y.
Price increase: The company from the past many years has seen a weighted average
price increase of ~2.5% every year and expects the same in FY12 as well. It is not
worried due to elections in some key states as elections happen every year.
Whyte & Mackay: The company expects to do an EBITDA of ~30 mn EBITDA in FY11
and has done ~22.5 mn in 9MFY11. The company did not give guidance for FY12 but is
investing in new geographies like Sweden, Venezuela, and Ecuador etc. Dalmore has got
good review and will have lot of marketing support as it was recently judged the best
whisky.
Value of W&M stock: 104 mn liters valued at GBP 430 mn.
Expansion in distillation capacity: Acquisition of Pioneer Distilleries has already been
done and USL will shortly add two more.
Glass prices: The company is in discussion with glass suppliers and expects glass prices
to firm up. It is also looking at setting up two facilities of glass over longer term.
Currently, this is in preliminary stage and the company needs to finalise on best
technology.
In house distillation capacity: In-house distillation capacity will yield margin
improvement Q3FY12 onwards. The company now has ~40% distillation in-house.
Debt position: Total net debt has increased by INR 9,255 mn in the past three quarters
and has been spent on capex and working capital.
Cost of debt: Cost of domestic debt is 11.5-11.75%, while for W&M, it is 8-8.2%. At the
end of Q3FY10, rupee debt in USL replaced the W&M acquisition debt in USL’s foreign
subsidiary. As a consequence, interest charges in Q3FY11 are up 38% YoY and are at
INR 1038 mn vis-à-vis INR 750 mn in Q3FY10. Higher working capital debt to finance the
business growth is also another reason for this increase.
A&P spends: Likely to remain in 8-10% going forward. McDowell’s No.1 Platinum
Whisky is well on its way to becoming a ‘Millionaire’ brand in its year of launch – a first
for any alcohol brand in this segment. McDowell’s VSOP Brandy, a niche offering, is also
being rolled out to various states. Black Dog Scotch Whisky’s premium 18-Year Old
offering is also being taken national by the Company. The promotional expenses of ~
INR 200 mn on these brands are included under the A&SP head in Q3FY11
Exceptional item: Exceptional item of INR 370 mn to reversal of an earlier sales tax
provision in Tamil Nadu.
Refinancing both Whyte & Mackay’s (W&M) and standalone debt: W&M debt is
being refinanced so that debt repayments get delayed so that Company can invest in
building branded business. There will be a 3 year moratorium in debt repayments. Also it
will be back ended with ~80% being repaid in years 6 and years 7. USL standalone debt
will also be refinanced so that company can do Capex in glass and distillation capacities.
One time refinancing cost: One-time refinancing cost will depend on time of
refinancing. There could be GBP 5-6 mn onetime cost. Also interest rates could go up by
50-100 bps, but company will get more freedom and flexibility in terms of operations.
PET/Tetra packs: Usage of PET/ Tetra packs in packaging helps in overcoming pressure
from glass. These have been growing faster than glass segment. PET accounts for 20%
of volumes while Tetra packs are 10% of volumes.
Grains vs. Molasses: Grains now account for 40% of volumes in terms of raw material
while molasses is 60%. 2 years back it was 10:90 in terms of grain: molasses. In the
past 18 months, the company has increased its grain distillation by 100%. This gives
USL more flexibility to face RM pressure.
TMU accounting adjustments (adjustment of toll manufacturing unit): Q3FY11 is the
last quarter of this adjustment as Q4FY10 already had this adjustment.
Spirit costs: Spirit costs in Q3FY11 were down 6% Y-o-Y; however, they were up 3.5%
Q-o-Q. These costs are expected to come down marginally in Q4FY11. The company
remains positive that in FY12 it will see lower prices (however, need to wait for one more
months to quantify this reduction). However, a big drop looks unlikely.
�� Company Description
USL is the largest spirits company in the branded spirits market in India and is the third
largest spirits group in the world. It has leading brands across all categories and price
segments. It has 20 millionaire brands of the nearly 140 brands that company owns. It
enjoys a market share of ~55% with over 100 mn cases of liquor sold in India. It has
manufacturing and bottling presence in every state in India supported by a vast
distribution and marketing network across the country. It has an aggressive acquisition
strategy. It acquired the second largest Indian liquor manufacturer Shaw Wallace,
French winemaker Bouvet Ladubay, and, the fourth largest Scotch whisky player in the
world, Whyte & Mackay.
�� Investment Theme
We believe USL is a secular play on improving consumer sentiments, backed by
favorable demographics. It has achieved unparalleled dominance in the IMFL industry,
holding ~55% market share in terms of volume. It is present across all five segments,
viz. whisky, rum, gin, brandy and vodka and has also entered the fast growing wine
segment. Pan-India manufacturing presence and robust distribution network confer high
bargaining power to the company in negotiating with vendors. We expect consumer
uptrading and USL’s focus on main-line brands (~ 93% currently versus 72% in 2002) to
help it register one of the highest volume growth (~14% in Q3FY11) in the Edelweiss
FMCG pack. Its nearest competitor is one-fifth of USL, in sales and market share.
Product portfolio spanning all segments of IMFL, presence across price segments, 20
millionaire brands (sales greater than 1 mn cases per annum) and pan-Indian
manufacturing facilities lend unmatched leadership to USL and high bargaining power
with vendors, suppliers and distributors.
�� Key Risks
USL is exposed to changes in pricing by state governments. Nearly 70% of sales volumes
are generated from regions where state governments control prices. Increase in taxes,
changes in the distribution structure, prohibition of liquor in any state could hit USL.
Prices of molasses and ENA have already stabilized while glass prices are expected to
firm up. Any further increase in prices of molasses, ENA and glass prices can impact
profit margins.
USL promoters own and operate Kingfisher Airlines. With the unfavourable demandsupply
situation in the Indian aviation sector, price wars have made a comeback. The
losses, coupled with stretched balance sheets, remain an overhang.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
UNITED SPIRITS
Volumes robust; debt refinancing & glass prices key monitorables
�� Robust sales growth on the back of 14% volume increase
United Spirits’ (USL) Q3FY11 net sales increased 45.5% Y-o-Y, to INR 19.60 bn.
Adjusted for the impact of the Balaji merger, revenue growth of standalone
entity was 21.5% (in line with our expectations), on volume growth of 14%,
reflecting continued success of the company’s focus on premiumisation. USL’s
volume growth was broadly in line with industry growth of 14.4% Y-o-Y.
�� Margin pressure offset by lower ad spend; tax rate higher
USL’s (without Balaji) EBITDA grew 26.3% Y-o-Y, to ~INR 2.93 bn, as EBITDA
margin expanded 134bps Y-o-Y to 18.6%. COGS increase of 90bps was offset by
lower advertising and sales promotion (A&P) spending (~29bps) and lower other
expenditure (~195bps). Grains now account for 40% of volumes in terms of raw
material, whereas molasses 60% (two years back it was 10:90). The company is
in discussion stage with glass suppliers and expects glass prices to firm up and
molasses prices to slightly soften, going forward. USL has taken a weighted
average price increase of ~2.5% for the past several years and expects the
same in FY12 as well. Tax rate increase of 356bps resulted in moderate PAT
growth of 13.5% Y-o-Y to INR 1.09 bn.
�� Refinancing both Whyte & Mackay’s (W&M) and standalone debt
W&M debt is being refinanced so that the company can invest in building
branded business. There will be a three-year moratorium in debt repayments; it
will be balloon payment structure, with ~80% being repaid in sixth and seventh
years. USL plans to refinance standalone debt to focus on capex in glass and
distillation capacities.
�� Outlook and valuations: Positive; correction overdone – maintain ‘BUY’
Volume growth in Q3FY11 was impressive and we believe margins will expand
following product mix improvement. W&M brands are gaining recognition and are
on the right track of transforming from bulk scotch to branded player. Key risks
include: a) Higher debt levels; b) increasing cost of debt; c) increased working
capital; d) competition risk from multinational players and regional players; e)
execution risk in backward integration; and f) higher raw material prices. We
believe negatives are factored in the sharp stock correction and maintain ‘BUY/
Sector Performer’ recommendation/rating on the stock.
�� Conference call takeaways
Robust volume growth: On a like-to-like basis, USL’s volumes have grown 14% Y-o-Y;
2.5% price growth Y-o-Y and 2.5% mix improvement. The company is all set to become
the largest spirits player in the world in terms of volumes by FY11 end. USL, in Q3FY11,
vacated some segments at the lower end as a tactical and short-term ploy to achieve
better margins. It will re-enter those segments once it has capacity. The company
remains confident of demand, as ~100 mn people will enter the legal age for drinking in
the next few years in India. USL is investing in better shop experiences, flavoured vodka,
tequila etc.
Industry growth: Industry growth was at 14.4% Y-o-Y in Q3FY11; broadly in line with
USL growth of 14% Y-o-Y.
Price increase: The company from the past many years has seen a weighted average
price increase of ~2.5% every year and expects the same in FY12 as well. It is not
worried due to elections in some key states as elections happen every year.
Whyte & Mackay: The company expects to do an EBITDA of ~30 mn EBITDA in FY11
and has done ~22.5 mn in 9MFY11. The company did not give guidance for FY12 but is
investing in new geographies like Sweden, Venezuela, and Ecuador etc. Dalmore has got
good review and will have lot of marketing support as it was recently judged the best
whisky.
Value of W&M stock: 104 mn liters valued at GBP 430 mn.
Expansion in distillation capacity: Acquisition of Pioneer Distilleries has already been
done and USL will shortly add two more.
Glass prices: The company is in discussion with glass suppliers and expects glass prices
to firm up. It is also looking at setting up two facilities of glass over longer term.
Currently, this is in preliminary stage and the company needs to finalise on best
technology.
In house distillation capacity: In-house distillation capacity will yield margin
improvement Q3FY12 onwards. The company now has ~40% distillation in-house.
Debt position: Total net debt has increased by INR 9,255 mn in the past three quarters
and has been spent on capex and working capital.
Cost of debt: Cost of domestic debt is 11.5-11.75%, while for W&M, it is 8-8.2%. At the
end of Q3FY10, rupee debt in USL replaced the W&M acquisition debt in USL’s foreign
subsidiary. As a consequence, interest charges in Q3FY11 are up 38% YoY and are at
INR 1038 mn vis-à-vis INR 750 mn in Q3FY10. Higher working capital debt to finance the
business growth is also another reason for this increase.
A&P spends: Likely to remain in 8-10% going forward. McDowell’s No.1 Platinum
Whisky is well on its way to becoming a ‘Millionaire’ brand in its year of launch – a first
for any alcohol brand in this segment. McDowell’s VSOP Brandy, a niche offering, is also
being rolled out to various states. Black Dog Scotch Whisky’s premium 18-Year Old
offering is also being taken national by the Company. The promotional expenses of ~
INR 200 mn on these brands are included under the A&SP head in Q3FY11
Exceptional item: Exceptional item of INR 370 mn to reversal of an earlier sales tax
provision in Tamil Nadu.
Refinancing both Whyte & Mackay’s (W&M) and standalone debt: W&M debt is
being refinanced so that debt repayments get delayed so that Company can invest in
building branded business. There will be a 3 year moratorium in debt repayments. Also it
will be back ended with ~80% being repaid in years 6 and years 7. USL standalone debt
will also be refinanced so that company can do Capex in glass and distillation capacities.
One time refinancing cost: One-time refinancing cost will depend on time of
refinancing. There could be GBP 5-6 mn onetime cost. Also interest rates could go up by
50-100 bps, but company will get more freedom and flexibility in terms of operations.
PET/Tetra packs: Usage of PET/ Tetra packs in packaging helps in overcoming pressure
from glass. These have been growing faster than glass segment. PET accounts for 20%
of volumes while Tetra packs are 10% of volumes.
Grains vs. Molasses: Grains now account for 40% of volumes in terms of raw material
while molasses is 60%. 2 years back it was 10:90 in terms of grain: molasses. In the
past 18 months, the company has increased its grain distillation by 100%. This gives
USL more flexibility to face RM pressure.
TMU accounting adjustments (adjustment of toll manufacturing unit): Q3FY11 is the
last quarter of this adjustment as Q4FY10 already had this adjustment.
Spirit costs: Spirit costs in Q3FY11 were down 6% Y-o-Y; however, they were up 3.5%
Q-o-Q. These costs are expected to come down marginally in Q4FY11. The company
remains positive that in FY12 it will see lower prices (however, need to wait for one more
months to quantify this reduction). However, a big drop looks unlikely.
�� Company Description
USL is the largest spirits company in the branded spirits market in India and is the third
largest spirits group in the world. It has leading brands across all categories and price
segments. It has 20 millionaire brands of the nearly 140 brands that company owns. It
enjoys a market share of ~55% with over 100 mn cases of liquor sold in India. It has
manufacturing and bottling presence in every state in India supported by a vast
distribution and marketing network across the country. It has an aggressive acquisition
strategy. It acquired the second largest Indian liquor manufacturer Shaw Wallace,
French winemaker Bouvet Ladubay, and, the fourth largest Scotch whisky player in the
world, Whyte & Mackay.
�� Investment Theme
We believe USL is a secular play on improving consumer sentiments, backed by
favorable demographics. It has achieved unparalleled dominance in the IMFL industry,
holding ~55% market share in terms of volume. It is present across all five segments,
viz. whisky, rum, gin, brandy and vodka and has also entered the fast growing wine
segment. Pan-India manufacturing presence and robust distribution network confer high
bargaining power to the company in negotiating with vendors. We expect consumer
uptrading and USL’s focus on main-line brands (~ 93% currently versus 72% in 2002) to
help it register one of the highest volume growth (~14% in Q3FY11) in the Edelweiss
FMCG pack. Its nearest competitor is one-fifth of USL, in sales and market share.
Product portfolio spanning all segments of IMFL, presence across price segments, 20
millionaire brands (sales greater than 1 mn cases per annum) and pan-Indian
manufacturing facilities lend unmatched leadership to USL and high bargaining power
with vendors, suppliers and distributors.
�� Key Risks
USL is exposed to changes in pricing by state governments. Nearly 70% of sales volumes
are generated from regions where state governments control prices. Increase in taxes,
changes in the distribution structure, prohibition of liquor in any state could hit USL.
Prices of molasses and ENA have already stabilized while glass prices are expected to
firm up. Any further increase in prices of molasses, ENA and glass prices can impact
profit margins.
USL promoters own and operate Kingfisher Airlines. With the unfavourable demandsupply
situation in the Indian aviation sector, price wars have made a comeback. The
losses, coupled with stretched balance sheets, remain an overhang.
No comments:
Post a Comment