After decent Q4, United Spirits awaits demand engine to fire fully
PremiumUnited Spirits should easily turn into a net cash position in FY22, said analysts
Alcohol beverages company United Spirits Ltd’s March quarter profit margin was ahead of expectations. Reported standalone earnings before interest, tax, depreciation and amortization (Ebitda) margin expanded by 490 basis points year-on-year to 18.5%. One basis point is one-hundredth of a percentage point.
This was driven by gross margin expansion, lower advertising and promotional spends and a decline in other expenses.
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Of course, it remains to be seen if the margins can be sustained. United Spirits’ revenues were up 11.6% year-on-year to ₹2,224 crore.
However, excluding the previous year’s one-off sale of bulk Scotch, underlying net sales increased by 16.1%.
The prestige and above (P&A) segment’s revenues increased by almost 26%, helped by strong Scotch demand and a favourable base. The P&A segment contributed nearly 69% of United Spirits’ revenues for the quarter.
Most of the remaining revenue came from the popular segment, wherein revenues fell by 3%. In the popular segment, West Bengal sales declined steeply owing to higher taxes.
To be sure, its two-year compounded annual growth rate (CAGR) trends were not inspiring.
Analysts from ICICI Securities Ltd said in a report on 22 May: “P&A volumes were up 19% (two-year CAGR: -2%) and those of ‘popular’ were down 2% (two-year CAGR of -4%)."
Meanwhile, United Spirits has done well on the debt reduction front. The company ended the financial year 2021 with a net debt of ₹556 crore, down 73% compared to FY20. Debt reduction was primarily due to free cash flow generated from business and improvement in working capital.
“United Spirits should easily turn into a net cash position in FY22," said Emkay Global Financial Services Ltd analysts.
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For the near term, though, the pandemic-led restrictions are likely to weigh on demand and, this in turn, would hurt revenues of the company. As such, this can weigh on the sentiments for the stock.
“We cut FY22E earnings per share (EPS) due to lockdowns but largely retain FY23E EPS," said Emkay Global’s analysts in a report on 22 May.
“Though we await the strategic review of popular brands and its impact, we are of the view that United Spirits’ better overall performance offers comfort on growth and margins," they added.
To be sure, shares of United Spirits are around 20% lower than their pre-covid highs witnessed in February 2020. The company’s stock now trades at 44 times estimated earnings for financial year 2022, according to Bloomberg data.
“Key downside risks are significant downtrading due to tax hikes, continued weakness in on-trade due to operating restrictions and a potential ban of spirits in states," said ICICI Securities analysts.
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