Q1FY24 Review: United Spirits: Low ad spends boost margins

24 Jul 2023 , 12:33 PM

UNSP’s sales growth of 17% was ahead of estimates aided by a favourable base due to constraints in BIO supplies. Prestige above (P&A) sales grew by 21% YoY on volume/realization growth of ~10%. Adj. Ebitda margin of 17% was significantly above estimates but is expected to normalise to company guidance of ~15% as staff/ad expenses normalise. Analysts of IIFL Capital Services upgrade FY24/25 EPS by 5%/2% on higher Ebitda margin. Valuations at 57x FY25 PE are rich and they see limited upside from these levels. Maintain ADD, TP of Rs.1050.

Beats estimates on all fronts: 

UNSP reported 17% sales growth aided by favourable base due to constrained supplies of BIO portfolio. P&A sales grew by 21% YoY (4% above IIFLe) with realisation growing by 10% beating analysts of IIFL Capital Services estimates by 5%. P&A volumes grew by 10% YoY and were in-line with IIFLe. Adj. Ebitda margin of 17% expanded by 437bps YoY beating their estimate due to higher GM and lower staff expenses. Staff expenses were lower than quarterly run-rate of ~Rs.1.4-1.5bn guided by the company but the company expects these to normalise in subsequent quarters.

Expect growth/margins to normalise: 

Healthy P&A sales/volume growth of 21%/10% in Q1 benefitted from low base and change in cyclicality of business. Going ahead as the base normalises, analysts of IIFL Capital Services expect growth to moderate to low-teens in H2 in-line with company’s guidance. Moreover, the demand stress in popular segment is expected to increase further owing to duty hikes in Karnataka and the resultant 14-17% increase in MRP. Similarly, Ebitda margin of 17% was ahead of company guidance of 15% and with normalisation of staff/ad expenses together with persistent inflation, margin is expected to be ~15% in H2.

FY24/25 EPS upgrade by 5%/2%: 

Analysts of IIFL Capital Services upgrades come on the back of higher Ebitda margin forecast post the beat in Q1. They are projecting Ebitda margin of 15.7% in FY24 building in gradual recovery to 16.3%/16.7% from there in FY25/26. Valuations at 57x FY25 PE are elevated and they see limited upside from these levels. Maintain ADD, TP of Rs.1050.