USL unfazed by June quarter hiccups, Street not so sure

ET INTELLIGENCE GROUP: The June quarter performance of United Spirits, India’s largest liquor company, was below expectations on most fronts. But the management, as in the past, maintained its aggressive guidance of double-digit sales volume growth and high- teen margins in the medium term, the road map for which remains unclear.

The company has claimed that momentum is returning and operating leverage will play out over a period of time. But the market thought otherwise. Despite a steep 17% correction in its stock price in the past one month, the stock closed only marginally higher on Tuesday. At the current price of ₹582, its shares remain fairly valued on estimated FY20 numbers – price to earnings multiple of 40. With no immediate trigger and uncertainty over growth and margin expansion in the near term, the upside is likely to remain capped.

In the June quarter, the company raised its marketing spends 30% year on year, but that did not translate meaningfully into sales. Its overall volumes increased only 1.1% year on year (against 12% decline over the last five quarters).

Net sales for the quarter jumped 13%, albeit on a lower base. This was mainly driven by higher growth of the prestige and above category - Royal Challenge, McDowell’s No. 1, Antiquity, Johnnie Walker, Smirnoff and Black Dog. The underlying volume in the popular category, which has brands such as ‘Bagpiper’, ‘Haywards’ and ‘Director Special’, declined by 4% year on year. Higher share of prestige and above category (65% of sales as compared with 61% last year) did not reflect in the margins as expected.

EBIDTA margin, at 9.6%, was up 22% year on year but lower than expectations of 12%. Higher marketing spends (up 30% and 10% of sales) and staff cost (up 24%) affected margins. At the same time, the company also benefitted from lower raw material prices. The management has guided that it will maintain its ad to sales ratio of 9% to 10% in the coming quarters. As a result, adjusted net profit at ₹81 crore was much lower than expected (more than ₹100 crore).