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United Spirits (UNSP)
Consumer products
In the balance. In light of the recent crisis at Kingfisher airlines, we look at its
connection with UNSP, if any. We highlight that loans and advances in UNSP’s
consolidated balance sheet have been increasing over the years; it has seen an increase
of Rs8 bn to Rs16 bn in FY2011 (with very low interest income). Our Aviation analyst
Jasdeep Walia highlights that Kingfisher Airlines has received a sum of Rs7 bn as money
procured from associates by UBHL.
The UNSP-Kingfisher Airlines connection, if any
In our view, the recent crisis (high costs and debt levels) at Kingfisher airlines (KFA) could
potentially have some impact on UNSP:
Total promoter holding in UNSP is 28% of which ~90% is pledged most of which is probably as
collateral for Kingfisher’s debt. As of September 30, 2011, Kingfisher has debt of Rs75 bn
(according to our Aviation analyst Jasdeep Walia, the real debt/liabilities of KFA is probably close
to Rs100 bn). In the event of default by KFA, if any, there is a likelihood of these shares
potentially getting liquidated.
Loans and advances in UNSP’s consolidated balance sheet have been increasing over the years;
it has seen an increase of Rs8 bn to Rs16 bn in FY2011. We are unable to comment about the
requirement of such high loans and advances for UNSP’s core business. Moreover, the interest
income received by UNSP is surprisingly low (Rs590 mn in FY2011, Rs118 mn in FY2010).
In a letter to shareholders (dated September 28, 2011), KFA has disclosed a sum of Rs7 bn as
money procured from associates by UBHL. These are optionally convertible debentures and the
letter states that the holders have agreed to convert this into equity.
UNSP stock trades at 9X FY2013 EV/EBITDA. We have ADD rating with TP of Rs950 (Rs1,000
previously). While such external events may have bearing on the stock price till the matter is resolved,
it is difficult to build in any such eventuality at this stage. We would closely watch for any potential
fund infusion requirement in KFA and its impact on UNSP, if any.
Few other red flags
In addition to the above, few other continuing concerns are:
UNSP’s net debt stands at Rs71 bn as of September 30, 2011 (Rs65 bn as of June 30,
2011 and Rs57 bn as of March 31, 2011). In July 2011, it announced GBP370 mn
refinance of the debt taken for acquiring W&M. The total hedged cost of the new debt is
45 bps lower than the earlier debt. The new loan has a seven-year repayment period.
Company has planned capex of Rs11 bn over next couple of years which in addition to
setting up primary distillation capacity also includes glass manufacturing facility – while
we do not generally have a view on capex plans of a company as it is a function of
business requirement, a company operating in consumer business investing in backward
integration is surprising (which is not a normal industry practice).
Increasing losses in ‘other subsidiaries’ (other than Whyte & Mackay) to Rs1,237 mn in
FY2011 from Rs261 mn in FY2009.
Outlook for 2HFY12E
Sales growth will likely be led primarily through price hikes.
Margin management is the key. Glass (forms about 30% of input cost) has been
inflationary. While there may be some respite due to lower ENA cost, (~35% of
distillation constitutes primary distillation versus 10% earlier which will likely result in a
benefit of Rs3-4/litre), the company will likely focus on managing margins by passing off
any pressure on input costs with commensurate price hikes. Further increasing production
at Pioneer Distilleries and Sovereign Distilleries and the growing focus on using grain will
likely help reduce the impact of ENA cost on overall profitability.
As guided by management, adspends will likely remain at elevated levels over the next
few quarters.
Excise hike in state budgets does not portend well. In addition to input cost inflation, hike
in excise duty on liquor products in key state budgets such as Maharashtra, Punjab,
Karnataka does not portend well.
Retain ADD
We retain ADD with a target price of Rs950 (valued at 11X FY2013E EBITDA for India
business and 8X EBITDA for W&M). We have reduced our EPS estimates for FY2013E by 4%
as we model higher glass prices and adspends. Our EPS estimates for FY2012E and FY2013E
are Rs37.5 and Rs45.2. Few worries remain (1) higher-than-expected input costs,
(2) potential impact of higher interest rates, (3) higher net debt position as of 2QFY12.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
United Spirits (UNSP)
Consumer products
In the balance. In light of the recent crisis at Kingfisher airlines, we look at its
connection with UNSP, if any. We highlight that loans and advances in UNSP’s
consolidated balance sheet have been increasing over the years; it has seen an increase
of Rs8 bn to Rs16 bn in FY2011 (with very low interest income). Our Aviation analyst
Jasdeep Walia highlights that Kingfisher Airlines has received a sum of Rs7 bn as money
procured from associates by UBHL.
The UNSP-Kingfisher Airlines connection, if any
In our view, the recent crisis (high costs and debt levels) at Kingfisher airlines (KFA) could
potentially have some impact on UNSP:
Total promoter holding in UNSP is 28% of which ~90% is pledged most of which is probably as
collateral for Kingfisher’s debt. As of September 30, 2011, Kingfisher has debt of Rs75 bn
(according to our Aviation analyst Jasdeep Walia, the real debt/liabilities of KFA is probably close
to Rs100 bn). In the event of default by KFA, if any, there is a likelihood of these shares
potentially getting liquidated.
Loans and advances in UNSP’s consolidated balance sheet have been increasing over the years;
it has seen an increase of Rs8 bn to Rs16 bn in FY2011. We are unable to comment about the
requirement of such high loans and advances for UNSP’s core business. Moreover, the interest
income received by UNSP is surprisingly low (Rs590 mn in FY2011, Rs118 mn in FY2010).
In a letter to shareholders (dated September 28, 2011), KFA has disclosed a sum of Rs7 bn as
money procured from associates by UBHL. These are optionally convertible debentures and the
letter states that the holders have agreed to convert this into equity.
UNSP stock trades at 9X FY2013 EV/EBITDA. We have ADD rating with TP of Rs950 (Rs1,000
previously). While such external events may have bearing on the stock price till the matter is resolved,
it is difficult to build in any such eventuality at this stage. We would closely watch for any potential
fund infusion requirement in KFA and its impact on UNSP, if any.
Few other red flags
In addition to the above, few other continuing concerns are:
UNSP’s net debt stands at Rs71 bn as of September 30, 2011 (Rs65 bn as of June 30,
2011 and Rs57 bn as of March 31, 2011). In July 2011, it announced GBP370 mn
refinance of the debt taken for acquiring W&M. The total hedged cost of the new debt is
45 bps lower than the earlier debt. The new loan has a seven-year repayment period.
Company has planned capex of Rs11 bn over next couple of years which in addition to
setting up primary distillation capacity also includes glass manufacturing facility – while
we do not generally have a view on capex plans of a company as it is a function of
business requirement, a company operating in consumer business investing in backward
integration is surprising (which is not a normal industry practice).
Increasing losses in ‘other subsidiaries’ (other than Whyte & Mackay) to Rs1,237 mn in
FY2011 from Rs261 mn in FY2009.
Outlook for 2HFY12E
Sales growth will likely be led primarily through price hikes.
Margin management is the key. Glass (forms about 30% of input cost) has been
inflationary. While there may be some respite due to lower ENA cost, (~35% of
distillation constitutes primary distillation versus 10% earlier which will likely result in a
benefit of Rs3-4/litre), the company will likely focus on managing margins by passing off
any pressure on input costs with commensurate price hikes. Further increasing production
at Pioneer Distilleries and Sovereign Distilleries and the growing focus on using grain will
likely help reduce the impact of ENA cost on overall profitability.
As guided by management, adspends will likely remain at elevated levels over the next
few quarters.
Excise hike in state budgets does not portend well. In addition to input cost inflation, hike
in excise duty on liquor products in key state budgets such as Maharashtra, Punjab,
Karnataka does not portend well.
Retain ADD
We retain ADD with a target price of Rs950 (valued at 11X FY2013E EBITDA for India
business and 8X EBITDA for W&M). We have reduced our EPS estimates for FY2013E by 4%
as we model higher glass prices and adspends. Our EPS estimates for FY2012E and FY2013E
are Rs37.5 and Rs45.2. Few worries remain (1) higher-than-expected input costs,
(2) potential impact of higher interest rates, (3) higher net debt position as of 2QFY12.
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