Hold United Spirits; target of Rs 615: ICICI Direct

ICICI Direct's research report on United Spirits

United Spirits’ volumes for Q4FY19 grew mere 4% YoY, impacted mainly by a high base and excise related disruption in Maharashtra and Karnataka. Maharashtra, on the one hand, raised excise prices, leading to postponement of certain P&A products. On the other hand, Karnataka did not hike excise, leading to fewer opportunities of channel filling in the state (impacted popular segment). Subsequently, net sales grew 4% supported by price hikes taken in certain states in the last two to three month (that covered half the cost inflation). EBITDA margin was flat at 12.6% despite lower gross margins (higher raw material prices) and events like partial absorption of excise prices, change in product mix, signalling management focus on cost control measures. The management expects to communicate with Andhra Pradesh (contributes 3-4% to USLs’ topline, bottomline) against the need for a blanket ban on liquor products from 2024.

Outlook

The management expects to deal with higher input price inflation by managing its A&P, other expenses. They have maintained their guidance of double digit revenue growth and mid to high teen margin over the medium term. However, concerns remain like the recent intention of states like Andhra Pradesh to apply policies related to liquor ban. We value the stock at ~40x FY21 EPS to arrive at a target price of Rs 615 with a HOLD rating.

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