Sell United Spirits; target of Rs 551: Dolat Capital

Dolat Capital's research report on United Spirits

UNSP’s Q4FY20 was in-line but weak at operating level with volume decline of 13% YoY (P&A 20%). Adjusted for one-off bulk sales, Revenue/ EBITDA/APAT were -14.8/-10.6/-28.2% YoY. Reported revenue/EBITDA/PAT were -11.4/-12.4/-14.6% YoY. Yet, UNSP’s earnings print is impressive in backdrop of weak volume growth and decline in Gross margin of 433/220bps YoY/QoQ. Persistent cost controls in line-items below GP is enticing for second consecutive quarter. For perspective, below GP costs declined from Rs 7.6bn to Rs 5.7bn YoY, -25.3% YoY. This had led to sharp rally in stock price post Q3. UNSP’s story is attractive as a long-term consumption play in industry with high barriers to entry. But, for several quarters now UNSP has failed to deliver its guided high single-digit (8-10%) volume and low double-digit (10-12%) revenue growth. Management work on costs is appreciable. However, revival in revenue growth is inevitable for momentum to sustain. This look tough in prevailing conditions given Covid and steep taxation increase led risk of down-trading, impact on high-margin on premise sales (20-25% of revenues) and risk of increase in working capital.

Outlook

We marginally increase estimates and TP of Rs 551 @ 35x FY22E EPS viz. Rs 529 plus Rs 22 for treasury shares/RCB (vs. Rs 531 earlier). We downgrade UNSP to SELL from REDUCE posts the sharp ~20% run-up in trailing month. Sharper than expected recovery in demand and/or higher than expected savings on costs is the key upside risk. We would keenly watch for the same for upgrade in our ratings.

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