Three cheers for United Spirits!

Last Updated: Tue, Oct 09, 2012 19:40 hrs

Lately, the going has been good for the shareholders of Vijay Mallya-controlled United Spirits and United Breweries Holdings — at least, the market is indicating that. Since April 1, United Spirits has gained a massive 86 per cent (30 per cent since September 1), while United Breweries Holdings has rallied 80 per cent (49 per cent since September).

The rise comes on the back of reports that the promoters have resumed talks with British spirits giant, Diageo, for a possible stake sale.

In another important development, reports suggest that the two decade-old legal battle between liquor barons Vijay Mallya and Kishore Chhabria is likely to come to an end, as both parties are likely to file an application requesting withdrawal of several cases against each other.

At the centre of the issue is the ownership dispute of Officer’s Choice whisky, that Mallya claims to be his instead of Chhabria’s, whose company Allied Blenders and Distillers currently sells the whisky under this brand.

The markets have cheered the development and United Spirits soared over six per cent on the National Stock Exchange (NSE), while United Breweries Holdings rallied 1.7 per cent. The latter holds about 18 per cent in United Spirits.

But, why this move all of a sudden?
“This is a positive move for Vijay Mallya, as he has to set his house in order before he can get a deal for McDowell / United Spirits,” said AK Prabhakar, senior vice-president-equity research, Anand Rathi.

“Given this compromise, Vijay Mallya is likely to get cash benefit that can be deployed towards Kingfisher Airlines, which has put him in a big mess. Corporate comprise is nothing new and it is perhaps a new way forward for McDowell/United Spirits and Vijay Mallya who awaits a major deal,” Prabhakar added.

With regard to the likely deal with Diageo, Edelweiss Research analysts said last month-end that they believe the deal, if inked, will be positive for United Spirits as it will strengthen the company’s presence in the premium portfolio (Diageo owns brands like Johnnie Walker whisky and Smirnoff vodka), where it has been losing out to key competitor Pernod Ricard. The funds infused via the deal will also help the company deleverage the balance sheet.

That apart, the foreign management could help improve operational efficiency and thereby boost margins. “United Spirits will also enjoy benefits of scale by setting up bigger manufacturing plants. Further, it could gain access to some international (emerging) markets,” Edelweiss analysts added.

So, what should investors do with these stocks then?
Pending the outcome of the deal with Diageo, some analysts have a ‘hold’ view, but from the near-term perspective, many expect more gains from the current levels amid the risk of the stock falling if the deal falls through. “Given the low EV/sales at 2.2 times FY13 estimates (cigarette major ITC trades at 6.5 times), the stock could further re-rate despite a sharp movement in the past two months. However, the deal going through is the key trigger,” note Edelweiss analysts. The research house maintains a ‘hold’ rating on the stock.

“The stock is highly speculative and it can move up to Rs 1,400–1,500. I am negative on the prospects given the fundamentals and suggest that investors use any upside to exit this counter,” said Kishore Ostwal, CMD, CNI Research.

Technically, though, analysts suggest the stock looks poised for an upmove.

“From a trading perspective, one can buy on dips with a short-term upside of two-four per cent. United Spirits could be bought at Rs 1,200 levels for a target of Rs 1,250-1,260 and a stop-loss at Rs 1,180,” says Kunal Bothra, technical analyst, LKP Securities.

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