Q4FY23 Review: United Spirits: Margin recovery will be gradual

22 May 2023 , 11:33 AM

UNSP’s sales growth of 16% YoY was above estimates, due to beat in volumes/realisation of prestige & above. Ebitda margin of 14% (ex one-off) improved QoQ; the company is targeting 15% margin in FY24 as ENA prices remain high (moderation in glass). Analysts of IIFL Capital Services change their estimates marginally as were already building 14.8% Ebitda margin in FY24 and recovery to 16-16.5% will be gradual.

Above estimates: 

UNSP’s net sales grew by 15.6% YoY (4% above IIFLe), driven largely by 5% beat in prestige & above (P&A) sales. P&G sales grew by 23.2% YoY on volume/realisation growth of 9.9%/12.1% YoY. Popular net sales declined 6.3% YoY, driven by 17.6% fall in volumes. Ebitda margin ex one-off related to tax credit and higher ad expenses stood at ~14% (reported – 13.6%), and was above IIFLe of 12.6%. Ad expenses increased by 163% YoY reflecting high spend on the BIO portfolio on normalised market supplies after 3 quarters.

Growth powered by mid & upper prestige: 

Market share gains in Signature and Royal Challenge American Pride and more than 40% growth Royal challenge, led to 33% YoY growth in both upper and mid prestige segments in FY23. Similarly, Luxury segment grew by 37% YoY, led by positive results from renovations in Black Dog and growth in Black and White. Demand from middle and high income consumers continued to be resilient; the company expects it to remain buoyant in FY24 as well. However, pressures in low income consumers will keep growth in popular and low-prestige (46% of FY23 revenue) in check.

Marginal changes to estimates: 

While inflation in glass has moderated to some extent, ENA prices are expected to be elevated. Further, due to operating deleverage, the company is targeting Ebitda margin of 15% in FY24, ~100bps expansion from exit margin in FY23. Analysts of IIFL Capital Services largely keep their FY24/25 margins unchanged at 14.8%/15.7% building ingradual recovery. Valuations at 47x FY25 PE are elevated and upside from here will be limited due to slow recovery in margins and demand headwinds in low-income consumers.