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Robust sales growth on back of 12% volume increase
United Spirits’ (USL) Q4FY11 net sales jumped 27.5% Y-o-Y to INR 15.97 bn, in
line with our estimate of INR 16.28 bn. Adjusted for the impact of the Balaji
merger, the effective revenue growth would be 19% on volume growth of 12%,
reflecting continued success of the company’s focus on premiumisation.
Margin pressure on back of higher COGS; tax rate soars
The company’s EBITDA grew 17.5% Y-o-Y to ~INR 2.13 bn, as EBITDA margin
contracted 114bps Y-o-Y to 13.3% (Balaji Distilleries impacted the EBIDTA
margin by 100bps). COGS increase of 268bps was offset by lower advertising
and sales promotion (A&P) spending (~91bps), reduced staff cost (~34bps), and
lower other expenditure (~28bps). In Q4FY11, glass prices firmed up and to
offset this USL effected a price hike, which will be effective in Q1FY12. Despite
344bps jump in the tax rate, core PAT grew 28.6% Y-o-Y to INR 800 mn.
Interest expense stable; debt continues to rise
It was successful in keeping interest cost stable in Q4FY11 (2% increase Y-o-Y)
primarily due to refinancing of higher cost overseas debt. Also, interest expense
dipped to INR 5,051 mn in FY11 from INR 6,069 mn in FY10. However, rising
debt (FY11: INR 63,400 mn, FY10: INR 55,062 mn) remains a key concern.
Outlook and valuations: Correction overdone; maintain ‘BUY’
Volume growth in Q4FY11 was good. The company was successful in keeping
interest expense stable during the quarter and also the company has kept A&P
(90bps reduction Y-o-Y) in check as opposed to constant rise over the past few
quarters, which is a positive step in cost reduction. Key risks include: (a) higher
debt level; (b) rising 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. Also,
in view of ongoing elections in three key states, the price hike has been delayed
to FY12; this could impact Q1FY12 margins. To cope with increasing excise duty
USL was forced to effect record price hike in the important state of Maharashtra,
which could negatively impact volumes or may lead to down trading. We believe
negatives are factored in the sharp stock correction and maintain ‘BUY/ Sector
Performer’ recommendation/rating on the stock
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 21 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 to help it register very high volume
growth. Its nearest competitor is one-fifth of USL, in sales and market share. Product
portfolio spanning all segments of IMFL, presence across price segments, 21 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 �� ��
Robust sales growth on back of 12% volume increase
United Spirits’ (USL) Q4FY11 net sales jumped 27.5% Y-o-Y to INR 15.97 bn, in
line with our estimate of INR 16.28 bn. Adjusted for the impact of the Balaji
merger, the effective revenue growth would be 19% on volume growth of 12%,
reflecting continued success of the company’s focus on premiumisation.
Margin pressure on back of higher COGS; tax rate soars
The company’s EBITDA grew 17.5% Y-o-Y to ~INR 2.13 bn, as EBITDA margin
contracted 114bps Y-o-Y to 13.3% (Balaji Distilleries impacted the EBIDTA
margin by 100bps). COGS increase of 268bps was offset by lower advertising
and sales promotion (A&P) spending (~91bps), reduced staff cost (~34bps), and
lower other expenditure (~28bps). In Q4FY11, glass prices firmed up and to
offset this USL effected a price hike, which will be effective in Q1FY12. Despite
344bps jump in the tax rate, core PAT grew 28.6% Y-o-Y to INR 800 mn.
Interest expense stable; debt continues to rise
It was successful in keeping interest cost stable in Q4FY11 (2% increase Y-o-Y)
primarily due to refinancing of higher cost overseas debt. Also, interest expense
dipped to INR 5,051 mn in FY11 from INR 6,069 mn in FY10. However, rising
debt (FY11: INR 63,400 mn, FY10: INR 55,062 mn) remains a key concern.
Outlook and valuations: Correction overdone; maintain ‘BUY’
Volume growth in Q4FY11 was good. The company was successful in keeping
interest expense stable during the quarter and also the company has kept A&P
(90bps reduction Y-o-Y) in check as opposed to constant rise over the past few
quarters, which is a positive step in cost reduction. Key risks include: (a) higher
debt level; (b) rising 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. Also,
in view of ongoing elections in three key states, the price hike has been delayed
to FY12; this could impact Q1FY12 margins. To cope with increasing excise duty
USL was forced to effect record price hike in the important state of Maharashtra,
which could negatively impact volumes or may lead to down trading. We believe
negatives are factored in the sharp stock correction and maintain ‘BUY/ Sector
Performer’ recommendation/rating on the stock
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 21 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 to help it register very high volume
growth. Its nearest competitor is one-fifth of USL, in sales and market share. Product
portfolio spanning all segments of IMFL, presence across price segments, 21 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.
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