Q3FY23 Review: United Spirits: Gradual recovery in margins

  • 27 Jan, 2023 |
  • 5:57 PM
  • Recommendation: Add; Target price: Rs 860

United Spirits Q3FY23 results were below the estimates of IIFL analysts, driven by lower gross margin and higher ad-spends/employee costs and operating deleverage, due to sale of popular brands. While net sales declined by 3.4% and was 2% above IIFL analysts estimates, Ebitda/PAT declined by 25%/29% and were 13%/19% below their estimates. On a 3yr Cagr basis, sales/volumes in Prestige & Above segment grew 10%/3.8% vs 14.5%/6.3% in the previous quarter, with management attributing the moderation to one-off factors such as change in Delhi route to market and higher salience of BIO in the base. Ebitda margin miss was driven by gross margin miss (continued inflation in ENA and glass) and higher-than-expected ad-spends and employee costs.

Margin recovery would depend on price increases, input cost reduction, supply chain savings and operating leverage. UNSP continues to work with state governments for price hikes and remains hopeful of a recovery in margins — though unsure of the duration. The operating de-leverage impact (~1% of sales) from divestment of popular portfolio to InBrew would be recouped in the next 12-18 months through sales growth and flattish corporate overheads. UNSP has also announced a 3yr supply chain agility programme, which is expected to deliver annualised savings of Rs1.3-1.5bn.

Analysts at IIFL Securities downgrade EPS estimates by 10%/6% for FY24/25 and maintain ADD rating with a target price of Rs860.

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