Buy United Spirits; target of Rs 3307: Edelweiss

Edelweiss' research report on United Spirits

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.

Outlook
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.

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