Dolat Capital recommended reduce rating on United Spirits with a target price of Rs 580 in its research report dated July 28, 2020.
Dolat Capital's research report on United Spirits
UNSP’s Q4FY21 was in-line but weak at operating level with volume decline of 49% YoY and adverse price/mix of -5.2%. UNSP’s peer Radico reported relatively strong performance. It has been outperforming UNSP for several quarters now. Revenue/ EBITDA/APAT were -51/-123/-199% YoY. 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 and impact on high-margin on premise sales (20-25% of revenues).
Outlook
We reduce our FY21/22E EPS by 33/4%. Sharp reduction in our FY21 EPS is owing to weak Q1FY21, extended lockdowns and weak recovery. We increase our target multiple to 40x from 35x in-line with broader market recovery and reversal of steep tax increases in certain states. Reiterate Reduce with revised TP of Rs 580 @ 40x FY22E EPS (vs. Rs 551 @ 35x earlier). Our TP includes Rs 22 for treasury shares/RCB. Sharper than expected recovery in demand and/or higher than expected savings on costs is the key upside risk. Potential Increase in stake by Diageo and/or potential de-listing is another catalyst though we believe the probability is lower.
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