United Spirits: Year of transition (ARA)

India Infoline News Service | Mumbai |

United Spirits has had a mixed FY13 with improvement in working capital and robust premium brands growth but leverage and RoE failed to budge materially from FY12 levels.

CMP Rs2,507, Target Rs2,350, Downside 6.3%

FY13 turned out to be a watershed year for United Spirits as Diageo bought a 25% stake and stock rerated from ~20x 1-yr fwd EV/EBIDTA to ~28x. Operational performance too improved as working capital delta narrowed by ~48% yoy, which restricted the operating cash flow loss during the year. Portfolio premiumization continued its upward trajectory as prestige and above brands grew 21%; FY13 consolidated EBIDTA rose ~18% while overall volume growth was ~3%. Prestige and above brands now account for ~26% of portfolio, having gained ~300bps in FY13. Return ratios (RoE, RoCE) remained largely flat weighed down by high interest burden and tepid EBIT margin; net debt at 1.7x was unchanged though with the Diageo transaction and we expect leverage to be under control in current fiscal. We expect operating improvement to gain momentum as margin and cash flows improve over FY14-15; however, current stock valuation factors in most of the operational upside and we retain our Market Performer rating with revised 9-12mth target of Rs2,350.  


Robust premium brand growth, easing in working cap delta

United Spirits’ persistent focus on portfolio premiumization showed benefits as premium brands grew 21% yoy to ~29mn cases and now account for 26% of the portfolio. On the operational front, working capital requirement reduced ~48% yoy which mitigated operating CF loss.


Key metrics to improve but valuations leave little room for upside; retain MP

We expect much improved leverage, margin and return profile over next two years driven by gains in working capital along with sustained premium brand growth; however, current valuations probably do factor in such improvements which prompt us to retain Market Performer rating with revised 9-12mth target of Rs2,350 (earlier Rs2,200). 


Financial summary
Y/e 31 March  (Rs m)
FY12
FY13
FY14E
FY15E
Revenues
92,444
106,950
120,327
130,124
yoy growth (%)
25.3
15.7
12.5
8.1
Operating profit
11,181
13,169
15,248
17,717
OPM (%)
12.1
12.3
12.7
13.6
Reported PAT
1,879
(1,012)
5,362
7,120
yoy growth (%)
(67.0)
-
-
32.8





EPS (Rs)
14.9
(8.0)
36.9
49.0
P/E (x)
  167.9
  - 
  67.9
  51.2
P/BV (x)
  6.8
  6.6
  4.2
  3.9
EV/EBITDA (x)
  35.2
  30.1
  27.1
  23.3
Debt/Equity (x)
1.8
1.7
0.6
0.6
ROE (%)
1.6
2.6
8.0
8.0
ROCE (%)
9.1
9.7
10.7
11.9
Source: Company, India Infoline Research
 

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