united spirits - result...

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United Spirits’ (USL) Q2FY18 revenue (down 3.7% YoY) was in line, while EBITDA and PAT surpassed estimates. Management has clearly walked the talk in terms of improving proportion of P&A (48% volume share, up 700bps YoY). This, coupled with better productivity, mix improvement helped improve underlying gross and EBITDA margins – up 395bps and 396bps YoY. We expect volumes to recover as impact of highway ban has receded. On the back of mix improvement, operating model change, waning regulatory uncertainties and productivity improvements, we raise FY18/19E EPS by 7.9%/9.9% and upgrade to ‘BUY’ with a TP of INR3,307.

Product mix, operating model changes, a structural positive

Operating model change in Popular brands though resulted in sales decline of 22% YoY,

this move is margin accretive for USL (EBITDA margin >20% in this model). This,

coupled with management’s focus on improving its share in P&A segment – P&A

contributes 48% to USL’s volumes (41% in Q2FY17 and 33% as at FY15), is another shot

in the arm for USL. Structurally, margins are superior in P&A segment which is another

lever for overall margin improvement.

Q2FY18 conference call: Key takeaways

Approx. 15,000 outlets were closed post the highway ban, of which 5,000 are now open.

Of the 10,000 outlets which closed, half are expected to open by CY17. Price hike in

Andhra Pradesh has come by. USL believes it is gaining market share in P&A segment.

Franchising journey is not entirely complete, with 2‐3 more states set to come under the

model. Captain Morgan has the potential to become as big as the Smirn Off brand.

Outlook and valuations: Promising improvement; upgrade to ‘BUY’

USL’s efforts to enhance productivity, innovation and focus on high margins are

translating. With clarity on GST emerging, most regulatory headwinds are also now

behind. We expect 50.6% EPS CAGR over FY17‐19, aided by EBITDA margin

improvement by 410bps YoY and de‐leveraging of balance sheet. We have assigned

target multiple of 50x (10% higher than HUL’s and in‐line with global comparable

valuation difference between liquor and staple companies) and arrive at TP of

INR3,307 (INR2,528 earlier). At CMP, stock is trading at 45.7x FY19 EPS.

RESULT UPDATE

UNITED SPIRITS Uncertainties behind; brighter prospects ahead

EDELWEISS 4D RATINGS

Absolute Rating BUY

Rating Relative to Sector Performer

Risk Rating Relative to Sector High

Sector Relative to Market Underweight

MARKET DATA (R: UNSP.BO, B: UNSP IN)

CMP : INR 3,026

Target Price : INR 3,307

52‐week range (INR) : 2,774 / 1,773

Share in issue (mn) : 145.3

M cap (INR bn/USD mn) : 440 / 6,764

Avg. Daily Vol.BSE/NSE(‘000) : 489.5 SHARE HOLDING PATTERN (%)

Current Q1FY18 Q4FY17

Promoters *

58.5 58.5 58.5

MF's, FI's & BK’s 4.4 4.9 5.5

FII's 23.9 23.3 22.1

Others 13.2 13.4 14.0

* Promoters pledged shares (% of share in issue)

: 24.6

PRICE PERFORMANCE (%)

Stock Nifty

EW FMCG Index

1 month 4.4 4.8 3.7

3 months 0.1 3.2 0.3

12 months 10.6 20.1 21.5

Abneesh Roy +91 22 6620 3141

[email protected]

Alok Shah +91 22 6620 3040

[email protected]

Rajiv Berlia +91 22 6623 3377

[email protected]

India Equity Research| Consumer Goods

October 26, 2017

Financials (INR mn)

Year to March Q2FY18 Q2FY17 % change Q1FY18 % change FY17 FY18E FY19E

Net rev. 19,513 20,268 (3.7) 17,818 9.5 87,434 86,030 100,748

EBITDA 3,177 2,021 57.2 1,574 101.8 10,038 11,894 15,731

Adjusted profit 1,675 785 113.3 637 163.0 4,757 6,320 9,612

Dil. EPS (INR) 11.5 5.4 113.3 4.4 163.0 32.7 43.5 66.1

Diluted P/E (x) 103.4 69.6 45.7

EV/Sales (x) 5.4 5.4 4.6

ROAE (%) 24.9 30.1 33.2

Quarterly are standalone; Annual numbers are consolidated

Consumer Goods

2 Edelweiss Securities Limited

Table 1: Trends at a glance

Source: Company, Edelweiss research

Growth numbers are reported and not underlying

Deleveraging of balance sheet to continue

Net debt position of the company was another concern with the Street. USL has clearly

evinced its intent of exiting from non‐core investments (sale of properties) which is

evident from the reduction in net debt from INR41.1bn in FY16 to INR35.3bn as at

H1FY18. We expect the company’s net debt position to further improve to INR24.5bn by

FY19. This will lead to interest expense declining from INR3.7bn in FY17 to INR2.2bn by

FY19.

Regulatory headwinds largely behind

Liquor companies in India were faced with tumultuous headwinds – demonetisation,

highway liquor ban and implementation of GST. Ripple effects of demonetisation and

highway liquor ban are now clearly behind as evident from current results management

commentary. Ambiguity around GST and implementation of it has also been largely

cleared out. With all regulatory headwinds largely behind, we expect a smooth journey

ahead for the liquor stocks from here..

The ‘in’ thing: Low per capita consumption, rising social acceptance

India’s per capita consumption of liquor is one of the lowest in the world, implying

humungous headroom for growth for liquor companies, particularly for players with

stronghold in India underpinned by wide distribution network. The country’s per capita

consumption is estimated at 2.2 litres per annum (up from 1.6 litre per annum in 2003‐

2005), and given India’s rising middle class, young population and rising social acceptance

of drinking, it is well poised to grow.

Q3FY15 Q4FY15 Q1FY16 Q2FY16 Q3FY16 Q4FY16 Q1FY17 Q2FY17 Q3FY17 Q4FY17 Q1FY18 Q2FY18

Sales growth (%) 2.3 5.4 11.8 5.7 22.9 11.7 9.3 6.9 2.9 (0.9) (12.7) (3.7)

Volume growth (%) (1.8) (2.8) 4.0 (7.0) 2.0 (4.0) 0.6 1.0 (4.3) (8.2) (18.9) (16.0)

Prestige and above volume growth (%) 4.7 2.4 15.0 2.0 15.0 9.0 11.0 10.0 4.1 4.9 (9.0) 2.0

McDowell’s No 1 NA NA NA NA NA 18.0 26.0 8.0 NA 7.0 NA 5.0

Royal Challenge NA NA NA NA NA 61.0 48.0 9.0 10.0 15.0 NA 6.0

Signature NA NA NA NA NA (2.0) 6.0 20.0 44.0 26.0 NA 10.0

Popular volume growth (%) NA NA (1.0) (11.0) (5.0) (10.0) (7.0) (6.0) (10.6) (15.1) (26.0) (28.0)

Prestige and above net sales growth (%) NA NA 17.2 15.0 41.0 29.0 21.0 12.0 12.0 10.0 (8.0) 10.0

McDowell’s No 1 NA NA NA NA NA 23.0 20.0 13.0 NA 8.0 (1.0) 14.0

Royal Challenge NA NA NA NA NA 50.0 46.0 13.0 12.0 16.0 (11.0) 12.0

Signature NA NA NA NA NA (7.0) 7.0 26.0 51.0 29.0 14.0 13.0

Diageo net sales contribution to P&A (%) NA NA NA NA 27.0 22.0 12.0 NA NA NA NA NA

Gross margins (%) 40 47 42 43 40.2 40.8 43.3 42.5 42.9 44.2 46.0 47.6

COGS per case (INR) 422 374 420 428 563 522 521 535 578 533 534 553

A&P spends (% of sales) 9.9 9.6 8.2 4.6 7.9 8.8 8.2 6.4 8.2 8.1 9.1 7.4

EBITDA margins (%) 10.3 6.3 10.1 16.4 11.0 5.7 9.7 10.1 12.0 13.1 8.8 16.3

EBITDA per case (INR) 75 44 74 109 104 50 89 94 119 125 87 172

United Spirits


Chart 1: India’s per capita consumption of liquor, one of the lowest globally

Source: Industry, Edelweiss research

Catch them young: Favourable demographics

India is slated to become the youngest country in the world by 2020 with the median age

declining to 29 years and about 64% of its population in the working age group. Alcobev

companies will be key beneficiaries of a large population entering the legal drinking age in

India. The legal drinking age in the country varies from state to state—18 years in Goa,

Karnataka, Uttar Pradesh; 21 in Andhra Pradesh, Bihar, Kerala and Tamil Nadu; 25 in

Maharashtra, Punjab and Delhi. As per Census 2011, the total proportion of India’s

population in the 20‐59 age group is more than 50%. As per estimates, India’s middle class

population is expected to jump to 600mn by 2025 from current 120mn. Ergo, the total

universe for liquor companies will widen significantly. Also, drinking is gaining social

acceptance, which will further benefit liquor players.

Chart 2: Per capita consumption in India

Source: Industry

0.0

2.4

4.8

7.2

9.6

12.0

Europe US Japan China Brazil India World avg

(lit/year/person)

0

20

40

60

80

100

2001 2011 2021E

(Nos)

0‐14 15‐59 60+

Consumer Goods


Q2FY18 result concall: Key takeaways

Demand, environment and outlook

Net sales declined 4% YoY impacted by the highway ban and one off impact of

operating model changes. Underlying net sales moved up 4% YoY, excluding the one off

impact.

The company delivered strong underlying net sales growth of 4% YoY, driven by 12%

YoY growth in Prestige & Above segment, despite the impact of the highway ban.

Strong growth in Prestige & Above segment was fuelled by renovation and

premiumisation strategy. Brand renovations including McDowell’s No.1 whisky, Royal

Challenge and Signature delivered double digit net sales growth in Q2FY18. The

company expects Antiquity to gather momentum in subsequent quarters post the

national roll out. The Prestige & Above segment now represents 63% of net sales.

Despite implementation of GST which has resulted in stranded taxes, the company

delivered robust underlying gross margin improvement in both the second quarter and

first half, led by accelerated productivity initiatives, price increases in select states, and

continued focus on premiumisation.

Productivity improvement was led by attacking all line items of P&L. There is a plan to

improve productivity at sales as well as cost levels. Productivity improvement has been

higher than inflation increase in H1FY18 on YoY basis.

Marketing investments were focused on Prestige and Above segment resulting in 11%

YoY increase in A&P in Q2FY18.

With the recent SC clarification on the highway ban, the company has seen outlets re‐

opening in September and expects the impact of the ban to continue to decelerate and

business to normalise by end of the third quarter. Based on the company’s

expectations and continued focus on productivity initiatives coupled with price

increases in select states, the company expects the net adverse impact of GST to

moderate. Outlets that have started are largely restaurants where premium & above is

sold more.

Around 15,000 outlets closed post issue of the highway ban – of this 5,000 have now

opened. Of the 10,000 outlets that shut down, half are in Maharashtra. Of the overall

stores closed, the company expects half to re‐open shortly. The balance may actually

be on the highways and hence may not open or take longer before they open away

from highway.

Diwali was little earlier in Q2FY18, but overall market during Diwali remained subdued.

The company believes the worst is behind, but considering the heavily regulated

industry, one cannot anticipate what may come next.

Route to market changes are also being implemented. But, the company is unsure on

how much cost and EBITDA margins could be impacted. However, structurally EBITDA

margins will improve.

Price rise, though not in line with the increase in inflation, has been a bit more

consistent across states.

The journey to receive price hikes in states is well on way. Price increase in Andhra

Pradesh has come.

Received INR860mn of price increase (positively impacted gross margin by 160bpsYoY)

and availed INR1,400mn benefit from volume increase.

United Spirits


The company will continue to focus on strategic priorities to capture long term

opportunity in the spirits market and achieve its medium term target of achieving

double‐digit top line and improve margins to mid‐high teens.

The company believes that with industry largely governed by foreign companies,

structurally many things will improve for industry.

Prestige and Above segment

Reported net sales grew 10% YoY with 8ppts positive price/mix. Underlying net sales

was up 12% YoY, excluding the one off impact. The company believes it is delivering

superior performance and gaining market share.

The segment represents 48% of total volumes and 63% of total net sales, which moved

up 7ppts and 6ppts, respectively, compared to previous year.

McDowell’s No. 1 whisky (excluding Platinum) grew volumes by 5% YoY and net sales by

14% YoY in the second quarter, volume was flat and net sales grew 6% YoY in the first

half.

Royal Challenge grew volumes by 6% YoY and net sales by 12% YoY in Q2FY18, while

volume/ net sales declined 5%/ 1% in the first half.

Signature continued to record positive momentum supported by successful renovation

and grew volumes/net sales by 10%/13% YoY. Signature Premier is growing at faster

pace than Signature Rare.

Re‐launch of Antiquity started towards end of first quarter in select states and the

company expects to gather momentum in subsequent quarters post the national roll

out.

Scotch portfolio in premium and luxury segment grew volume by 5% YoY and net sales

by 8% YoY. VAT69 has just been relaunched in select geographies as yet. Black & White

– 12 years old was relaunched 3 years back.

Premium range Captain Morgan is sold at 2/3rd India. Wherever it has been launched,

the response has been good. Main rum season starts now. Captain Morgan has the

potential to become as big as Smirn Off.

The company believes Diageo brands bottled in India will grow faster than P&A brands

which will grow faster than Popular brands.

Popular segment

Segment net sales declined 22% YoY impacted by the one off impact of operating

model changes. Underlying net sales declined 9% YoY excluding the one off impact.

The Popular segment represents 52% of total volumes and 35% of total net sales.

Franchisee agreement

Franchising journey is not fully complete. The company is waiting for proper

commercial terms in the left out states.

2‐3 more states will get onto franchising agreement.

Net sales from franchise stood at INR6.5bn and EBITDA at INR1.6bn in H1FY18. In the

base period, sales stood at INR2.59bn and EBITDA at INR0.56bn.

Consumer Goods


Margins

Gross margin of 47,6%, up 559bps was driven mainly by price increases, productivity

initiatives and operating model changes. Underlying gross margin improved by 395bps.

EBITDA, up 57%, EBITDA margin of 16.3%, up 631bps both primarily driven by higher

gross margin and lower staff costs, though partially offset by marketing investment

increasing 11% YoY. Underlying EBITDA moved up 37% YoY and EBITDA margin of

16.3% was up 396bps, excluding the one off impact.

Underlying EBITDA margin improved by ~188bps (from 631bps YoY expansion, one

would need to deduct expansion owing to franchisee agreement to the tune of 75bps,

base year one off adjustment of 148bps and one‐time positive impact of change in

commercial terms amounting to ~220bps). This underlying margin improvement does

not include tax benefits received.

Net adverse impact of GST on margins would be limited.

Property sale, debt and balance sheet items

Closing net debt was INR35,310mn in H1FY18 and the company utilised cash from

operations to repay its loans amounting to INR5,370mn.

Annual capex would be INR1,500 – 2,000mn.

Plans to sell ~INR20bn of non‐core assets, including disputed treasury shares and

properties.

Outlook and valuations: Promising improvement; upgrade to ‘BUY’

USL remains the best play on India’s liquor industry (in the listed space) by virtue of robust

market share and benefits from management control of Diageo. Diageo has initiated steps

to turnaround the company—changes at management &distribution levels, revamp of

brand promotions strategy, enhanced supply chain efficiency, focusing on lean portfolio,

engaging with the government and improving work culture. Also, Diageo’s strategy to focus

on the premium end has started bearing fruits, reflected in market share gains by

McDowell’s. The Signature brand also recorded strong performance despite highway ban

post relaunch. USL has recently relaunched Antiquity, which should start to show results in

terms of strong growth.

We also like USL’s strategy of launching brand extensions like McDowell’s Silk, McDowell’s

Luxury, Royal Challenge Bolt, etc., which helps create a buzz in the brand. Recovery in urban

growth will enhance disposable incomes, further aided by GDP revival (IMFL volumes surge

1.5x GDP when GDP growth revives), low per capita consumption (at 2.2 litre/year/person

versus 4.5 world average), favourable demographics (64% population in working age group

by 2020 from 50% now) and steady conversion from country liquor to IMFL, of which USL

will be a prime beneficiary over the long term. The company is moving towards the

franchisee model in the Popular segment (already implemented in 13 states) which will

ensure margin stability in the segment (royalty income of INR1.4‐1.6bn in FY18), reduce

working capital requirement for these brands and increase focus on the management to the

higher margin P&A segment, thereby improving market share in P&A segment.

GST which was an overhang is also largely behind with implementation remaining smooth.

Though liquor companies will not be able to take the credit of GST paid inputs—which is

likely to impact margin (extent of impact not clear) the productivity improvement,

favourable mix change and some price hikes will more than offset any dent. We expect USL

United Spirits


to clock 50.6% EPS CAGR over FY17‐19 and upgrade to ‘BUY/SP’ from ‘HOLD/SP’. We have

also raised our FY18/19 EPS by 7.9%/9.9% and assign target multiple of 50x (earlier 42x) to

arrive at TP of INR3,307 (earlier INR2,528). Our target multiple of 50x (10% premium to

HUL’s) is in‐line with global comparables of assigning higher multiple to liquor stocks than

staple companies (refer table below).

Table 2: Global Valuation comparison

Source:

Chart 3: EBITDA margins


Company Valuation metrics FY18E FY19E

Diageo

PE 22.0 20.4

EV/Sales 5.9 5.7

EV/EBITDA 17.1 16.0

Pernod Ricard

PE 22.1 20.4

EV/Sales 4.6 4.4

EV/EBITDA 15.8 15.0

Unilever Plc

PE 19.7 17.5

EV/Sales 2.9 2.7

EV/EBITDA 13.9 12.8

3.0

6.5

10.0

13.5

17.0

20.5

Q2FY12

Q3FY12

Q4FY12

Q1FY13

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Q1FY14

Q2FY14

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Q1FY16

Q2FY16

Q3FY16

Q4FY16

Q1FY17

Q2FY17

Q3FY17

Q4FY17

Q1FY18

Q2FY18

(%)

Consumer Goods


Chart 4: COGS as a % of sales

Chart 5: A&P spends

Chart 6: Prestige and above volume growth


30.0

38.0

46.0

54.0

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70.0

Q2FY12

Q3FY12

Q4FY12

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Q2FY13

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(%)

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Q2FY12

Q3FY12

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Q3FY17

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(%)

(10.0)

(1.0)

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17.0

26.0

35.0

Q2FY12

Q3FY12

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(%)

Prestige & Above volume growth

United Spirits


Chart 7: Overall volumes growth


(27.0)

(18.0)

(9.0)

0.0

9.0

18.0

Q2FY11

Q3FY11

Q4FY11

Q1FY12

Q2FY12

Q3FY12

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(Volumes %)

Consumer Goods


Financial snapshot (INR mn) Year to March Q2FY18 Q2FY17 % change Q1FY18 % change YTD18 FY18E FY19E

Net revenues 19,513 20,268 (3.7) 17,818 9.5 37,331 86,030 100,748 Other operating income ‐ ‐ ‐ ‐ 872 1,003

Total operating Income 19,513 20,268 (3.7) 17,818 9.5 37,331 86,901 101,750

Staff costs 1,594 2,047 (22.1) 1,658 (3.9) 3,252 6,896 7,493

Cost of goods sold 10,224 11,752 (13.0) 9,619 6.3 19,843 46,656 54,549

Gross profit 9,289 8,516 9.1 8,199 13.3 17,488 40,245 47,202

Advt. sales & promotions 1,449 1,308 10.8 1,627 (10.9) 3,076 7,322 7,992

Other expenses 3,069 3,140 (2.3) 3,340 (8.1) 6,409 14,133 15,985

Total exp. (excl. cogs) 6,112 6,495 (5.9) 6,625 (7.7) 12,737 28,351 31,470

EBITDA 3,177 2,021 57.2 1,574 101.8 4,751 11,894 15,731

Depreciation 326 332 (1.7) 321 1.6 647 1,288 1,198

EBIT 2,851 1,689 68.8 1,253 127.5 4,104 10,606 14,533

Other income 305 339 (10.0) 309 (1.3) 614 1,389 1,597

Interest 659 885 (25.5) 703 (6.3) 1,362 2,835 2,200

Add: Exceptional items (144) 40 NA (8) NA (152) ‐ ‐

Profit before tax 2,497 1,143 118.5 859 190.7 3,356 9,160 13,930

Provision for taxes 822 358 129.9 222 270.3 1,044 2,839 4,318

Reported net profit 1,531 825 85.5 629 143.4 2,160 6,320 9,612

Adjusted Profit 1,675 785 113.3 637 163.0 2,262 6,320 9,612

Diluted shares (mn) 145 145 145 145 145 145

Adjusted Diluted EPS 11.5 5.4 113.3 4.4 163.0 15.6 43.5 66.1

Diluted P/E (x) 69.6 45.7

EV/EBITDA (x) 39.3 29.5

ROAE (%) 30.1 33.2

As % of net revenues

COGS 52.4 58.0 54.0 53.2 53.7 53.6

Employee cost 8.2 10.1 9.3 8.7 7.9 7.4

Adv. & sales promotions 7.4 6.5 9.1 8.2 8.4 7.9

Other expenditure 15.7 15.5 18.7 17.2 16.3 15.7

EBITDA 16.3 10.0 8.8 12.7 13.7 15.5

EBIT 14.6 8.3 7.0 11.0 12.2 14.3

PBT 12.8 5.6 4.8 9.0 10.5 13.7

Adjusted net profit 8.6 3.9 3.6 6.1 7.3 9.4

Tax rate 32.9 31.3 25.8 31.1 31.0 31.0

Change in Estimates FY18E FY19E

New Old % change New Old % change Comments

Net Revenue 86,030 91,977 (6.5) 100,748 106,940 (5.8) Factoring change in operating

model towards franchise agreement

EBITDA 11,894 11,691 1.7 15,731 14,894 5.6

EBITDA Margin 13.7 12.6 15.5 13.8

Adjusted Profit

After Tax

6,320 5,857 7.9 9,612 8,748 9.9 Factoring better than expected

margin improvement and de‐

leveraging strategy

Net Profit Margin 7.3 6.3 9.4 8.1

Capex 2,500 2,500 0.0 2,500 2,500 0.0

United Spirits


Company Description

USL is the largest spirits company in the branded spirits market in India. It has leading

brands across all categories and price segments. It has 18 millionaire brands of the nearly

140 brands that company owns. The company sold ~90mn cases in FY17. It has

manufacturing and bottling presence in majority of the states 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. Diageo increased its stake in the company via open offer to 54.78% which

mandated USL to sell off Whyte and Mackay to Emperador (for GBP430mn). Investment Theme

USL remains the best play on India’s liquor industry (in the listed space) by virtue of robust

market share and benefits ensuing from management control of Diageo. Diageo has started

taking steps to turnaround the company, which includes changes at management and

distribution levels, change in brand promotions strategy, enhancing efficiency in supply

chain, focus on lean portfolio, engaging with the government and improving work culture.

Management’s strategy of re‐launch and focus on key brands remains in the right direction.

These brands are being de‐focused to concentrate on core brand, which though a better

strategy will drag volumes in P&A segment. Also, Diageo’s focus on improving marketing,

spending and controlling promotional spends will give better returns by way of brand

visibility, but it will hit margins. GST also remains a key monitorable as the sector is out of

the GST ambit.

Key Risks

Any further increase in prices of molasses, ENA and glass prices can impact profit margins.

USL is exposed to changes in pricing by state governments. Nearly 50% of sales volumes are

generated from regions where state governments control prices. This could impact

profitability.

Increase in taxes, changes in the distribution structure, prohibition of liquor in any state

could hit USL.


Consumer Goods

Financial Statements

Income statement (INR mn)

Year to March FY16 FY17 FY18E FY19E

Net revenue 83,737 87,434 86,030 100,748

Other Operating Income 1,212 741 872 1,003

Total operating income 84,949 88,175 86,901 101,750

Materials costs 47,572 49,297 46,656 54,549

Gross profit 37,377 38,878 40,245 47,202

Employee costs 6,800 6,882 6,896 7,493

Other Expenses 14,620 15,224 14,133 15,985

Ad. & sales costs 6,154 6,734 7,322 7,992

EBITDA 9,803 10,038 11,894 15,731

Depreciation 1,572 1,886 1,288 1,198

EBIT 8,231 8,152 10,606 14,533

Add: Other income 436.00 1,053.00 1,388.75 1,597.06

Less: Interest Expense 4,574 3,751 2,835 2,200

Add: Exceptional items (431) (3,827) ‐ ‐

Profit Before Tax 4,093 5,454 9,160 13,930

Less: Provision for Tax 2,228 697 2,839 4,318

Reported Profit 1,434 930 6,320 9,612

Exceptional Items (289) (3,324) ‐ ‐

Adjusted Profit 1,723 4,254 6,320 9,612

Shares o /s (mn) 145 145 145 145

Adjusted Basic EPS 11.9 29.3 43.5 66.1

Diluted shares o/s (mn) 145 145 145 145

Adjusted Diluted EPS 11.9 29.3 43.5 66.1

Adjusted Cash EPS 22.7 42.3 52.3 74.4

Common size metrics


Materials costs 56.0 55.9 53.7 53.6

Staff costs 8.0 7.8 7.9 7.4

Ad. & sales costs 7.2 7.6 8.4 7.9

Other expenses 17.2 17.3 16.3 15.7

Interest Expense 5.4 4.3 3.3 2.2

EBITDA margins 11.5 11.4 13.7 15.5

Net Profit margins 2.0 4.8 7.3 9.4

Growth ratios (%)


Revenues 0.5 3.8 (1.4) 17.1

EBITDA 48.4 2.4 18.5 32.3

Adjusted Profit (162.2) 147.0 48.6 52.1

EPS (162.2) 147.0 48.6 52.1

Key Assumptions


Macro

GDP(Y‐o‐Y %) 7.2 6.5 7.1 7.7

Inflation (Avg) 4.9 4.5 4.0 4.5

Repo rate (exit rate) 6.8 6.3 5.8 5.8

USD/INR (Avg) 65.0 67.5 66.0 66.0

Company

Volume growth (std) (3) (4) (8) 7

Price change (std) 8.4 7.4 8.7 10.0

Excise (% Gr Sales) std 62.7 70.0 69.0 69.0

COGS as % of sales (std) 58.4 57.1 54.8 54.6

Std Staff cost (% sales) 7.2 7.8 8.1 7.5

Std A&P (% of sales) 10.6 7.8 8.6 8.0

Financial assumptions 1 2 3 3

Tax rate (standalone) 16.4 33.3 33.0 33.0

Capex (INR mn) (8,271) 1,812 2,500 2,500

Debtor days 39 40 35 35

Inventory days 144 144 123 123

Payable days 68 83 59 60

Cash conversion cycle 115 100 99 98


United Spirits

Peer comparison valuation

Market cap Diluted P/E (X) EV / EBITDA (X) ROAE (%)

Name (USD mn) FY18E FY19E FY18E FY19E FY18E FY19E

United Spirits 6,764 69.6 45.7 39.3 29.5 30.1 33.2

Godrej Consumer 9,700 42.6 34.1 30.5 24.7 23.5 25.5

Hindustan Unilever 42,524 51.8 44.4 35.5 30.3 75.7 81.1

ITC 50,426 28.1 24.7 18.4 16.2 28.9 29.6

Nestle Ltd 10,626 57.1 45.7 32.1 26.2 38.4 44.1

Source: Edelweiss research

Cash flow metrics


Operating cash flow 2,827 6,468 16,873 7,890

Investing cash flow 7,514 (2,273) (2,500) (2,500)

Financing cash flow (11,549) (4,749) (7,835) (6,200)

Net cash Flow (1,208) (554) 6,538 (810)

Capex (8,271) 1,812 2,500 2,500

Profitability and efficiency ratios


ROAE (%) 15.0 24.9 30.1 33.2

ROACE (%) 15.0 15.6 20.0 25.5

Inventory Days 144 144 123 123

Debtors Days 39 40 35 35

Payable Days 68 83 59 60

Cash Conversion Cycle 115 100 99 98

Current Ratio 2.5 2.3 2.5 2.6

Gross Debt/EBITDA 4.4 4.1 3.1 2.1

Gross Debt/Equity 2.6 2.3 1.5 1.0

Adjusted Debt/Equity 2.6 2.3 1.5 1.0

Net Debt/Equity 2.5 2.2 1.1 0.7

Interest Coverage Ratio 1.8 2.2 3.7 6.6

Operating ratios


Total Asset Turnover 1.5 1.5 1.5 1.6

Fixed Asset Turnover 4.4 4.6 4.4 4.8

Equity Turnover 7.4 5.2 4.1 3.5

Valuation parameters


Adj. Diluted EPS (INR) 11.9 29.3 43.5 66.1

Y‐o‐Y growth (%) (162.2) 147.0 48.6 52.1

Adjusted Cash EPS (INR) 22.7 42.3 52.3 74.4

Diluted P/E (x) 255.2 103.4 69.6 45.7

P/B (x) 26.9 24.6 18.2 13.0

EV / Sales (x) 5.7 5.4 5.4 4.6

EV / EBITDA (x) 49.1 47.7 39.3 29.5

Balance sheet (INR mn)

As on 31st March FY16 FY17 FY18E FY19E

Share capital 1,453 1,453 1,453 1,453

Reserves & Surplus 14,894 16,403 22,723 32,335

Shareholders' funds 16,347 17,856 24,176 33,788

Minority Interest 56 (25) (25) (25)

Short term borrowings 35,065 32,655 27,882 24,814

Long term borrowings 7,697 8,697 8,470 7,538

Total Borrowings 42,762 41,352 36,352 32,352

Long Term Liabilities 683 442 442 442

Def. Tax Liability (net) (1,900) (1,781) (1,781) (1,781)

Sources of funds 57,948 57,844 59,164 64,776

Gross Block 19,932 21,744 24,244 26,744

Net Block 14,440 14,554 15,766 17,068

Capital work in progress 2,821 1,993 1,993 1,993

Intangible Assets 5,100 4,612 4,612 4,612

Total Fixed Assets 22,361 21,159 22,371 23,673

Non current investments 82 ‐ ‐ ‐

Cash and Equivalents 1,683 2,112 8,650 7,840

Inventories 19,519 19,276 15,723 18,382

Sundry Debtors 23,032 29,534 21,952 25,838

Loans & Advances 8,761 9,575 9,575 9,575

Other Current Assets 5,955 5,522 5,522 5,522

Current Assets (ex cash) 57,267 63,907 52,772 59,317

Trade payable 10,189 12,247 7,542 8,967

Other Current Liab 13,256 17,087 17,087 17,087

Total Current Liab 23,445 29,334 24,629 26,054

Net Curr Assets‐ex cash 33,822 34,573 28,143 33,263

Uses of funds 57,948 57,844 59,164 64,776

BVPS (INR) 112.5 122.9 166.4 232.5

Free cash flow (INR mn)


Reported Profit 1,434 930 6,320 9,612

Add: Depreciation 1,572 1,886 1,288 1,198

Interest (Net of Tax) 2,084 3,272 1,956 1,518

Others (4,980) 4,581 879 682

Less: Changes in WC (2,717) 4,201 (6,430) 5,120

Operating cash flow 2,827 6,468 16,873 7,890

Less: Capex (8,271) 1,812 2,500 2,500

Free Cash Flow 11,098 4,656 14,373 5,390


Consumer Goods

Holding ‐ Top 10

Perc. Holding Perc. Holding

Carmignac Gestion 2.26 Vanguard Group 2.03

Clsa Global Markets 1.65 Blackrock Fund Advisors 1.4

Reliance Capital Trustee 1.06 Kotak Mahindra 1.05

Motilal Oswal Asset Management 0.82 Uti Asset Management Co 0.58

Hdfc Asset Management Co 0.42 Jupiter Investment Management 0.4

*as per last available data

Insider Trades Reporting Data Acquired / Seller B/S Qty Traded

No Data Available

*in last one year

Bulk Deals Data Acquired / Seller B/S Qty Traded Price

No Data Available

*in last one year

Additional Data

Directors Data M K Sharma Chairman Anand Kripalu MD & CEO

D Sivanandhan Director Vinod Rao Director

Mrs Indu Sahani Director Rajeev Gupta Director

John Thomas Kennedy Director Dr Nicholas Bodo Blazquez Director

Auditors ‐ Price Waterhouse & Co.

*as per last annual report


Company Absolute

reco Relative

reco Relative

risk

Company Absolute

reco

Relative

reco

Relative

Risk

Asian Paints BUY SO M Bajaj Corp HOLD SU H

Berger Paints BUY SO L Britannia Industries BUY SO L

Colgate HOLD SP M Dabur BUY SO M

Emami BUY SO H GlaxoSmithKline Consumer

Healthcare

HOLD SU M

Godrej Consumer BUY SO H Hindustan Unilever HOLD SP L

ITC HOLD SP M Marico BUY SO M

Nestle Ltd HOLD SP L Pidilite Industries BUY SO M

United Spirits HOLD SP H

RATING & INTERPRETATION

ABSOLUTE RATING

Ratings Expected absolute returns over 12 months

Buy More than 15%

Hold Between 15% and - 5%

Reduce Less than -5%

RELATIVE RETURNS RATING

Ratings Criteria

Sector Outperformer (SO) Stock return > 1.25 x Sector return

Sector Performer (SP) Stock return > 0.75 x Sector return

Stock return < 1.25 x Sector return

Sector Underperformer (SU) Stock return < 0.75 x Sector return

Sector return is market cap weighted average return for the coverage universe within the sector

RELATIVE RISK RATING

Ratings Criteria

Low (L) Bottom 1/3rd percentile in the sector

Medium (M) Middle 1/3rd percentile in the sector

High (H) Top 1/3rd percentile in the sector

Risk ratings are based on Edelweiss risk model

SECTOR RATING

Ratings Criteria

Overweight (OW) Sector return > 1.25 x Nifty return

Equalweight (EW) Sector return > 0.75 x Nifty return

Sector return < 1.25 x Nifty return

Underweight (UW) Sector return < 0.75 x Nifty return


Consumer Goods

Edelweiss Securities Limited, Edelweiss House, off C.S.T. Road, Kalina, Mumbai – 400 098.

Board: (91‐22) 4009 4400, Email: [email protected]

Aditya Narain

Head of Research

[email protected]

Coverage group(s) of stocks by primary analyst(s): Consumer Goods

Asian Paints, Bajaj Corp, Berger Paints, Britannia Industries, Colgate, Dabur, Godrej Consumer, Emami, Hindustan Unilever, ITC, Marico, Nestle Ltd, Pidilite Industries, GlaxoSmithKline Consumer Healthcare, United Spirits

Distribution of Ratings / Market Cap

Edelweiss Research Coverage Universe

Rating Distribution* 161 67 11 240* 1stocks under review

Market Cap (INR) 156 62 11

Date Company Title Price (INR) Recos

Recent Research

26‐Oct‐17 Emami Volumes recover; outlook promising; Result Update

1,171 Buy

25‐Oct‐17 Hindustan Unilever

Volumes recover; sustained cost cuts boost margins; Result Update

1,272 Hold

24‐Oct‐17 Asian Paints Volume looks up; inflationary input cost a drag ; Result Update

1,223 Buy

> 50bn Between 10bn and 50 bn < 10bn

Buy Hold Reduce Total

Rating Interpretation

Buy appreciate more than 15% over a 12‐month period

Hold appreciate up to 15% over a 12‐month period

Reduce depreciate more than 5% over a 12‐month period

Rating Expected to

One year price chart

1,500

1,800

2,100

2,400

2,700

3,000

Oct‐16

Nov‐16

Dec‐16

Jan‐17

Feb‐17

Mar‐17

Apr‐17

May‐17

Jun‐17

Jul‐17

Aug‐17

Sep‐17

Oct‐17

(INR)

United Spirits


United Spirits

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Consumer Goods

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United Spirits

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