United Spirits on a 5 pc high, expect more from this well-spirited stock

Source :Sify
Author :Finance Desk
Last Updated: Fri, Nov 6th, 2020, 04:51:16hrs

Bengaluru: Investors seem to be thronging the counters of United Spirits. This time, its not the liquor but prospects of a good investment strategy.  

On Thursday, a day after United Spirits announced its results for the September quarter, the volume on the United Spirits counter on the Bombay Stock Exchange was nothing short of a euphoria. 3.13 lakh trade orders were placed. The numbers stacked pretty decent for a stock that read an average two week quantity of just 63,000.  

In two sessions the stock has sizzled by 5 percent. On Tuesday, the stock closed at 509.85 and it closed on 534.65 on Thursday.  

The momentum on this stock started since the day the company announced quarterly results. It also impressed analysts on the street.

Diageo, the parent company of United Spirits in a note reported profit after tax for USPL at Rs 128 crores despite net sales declining by 6.6 percent. EBITDA stood at 12.6 percent at Rs 270 crores.  

United Spirits also reported:  

1. Net Sales decline of 6.6 percent: It is a sequential improvement from Q1 driven by strong off-trade resilience, offset by the on-trade remaining largely shut and the contraction of owned and franchise business in Andhra Pradesh (AP). Underlying net sales declined 3.4% after adjusting for the one-off benefit of bulk Scotch sales last year.

2. Popular segment net sales declined 12.5% versus last year with priority states declining at 10%. Increased consumer prices impacted demand in this price conscious segment and unfavourable State mix further contributed to the decline

3. Reported net sales in the first six months of the financial year declined 29.7%, impacted by initial nation-wide lockdown and slowing sales growth thereafter due to confinement and physical distancing measures adopted in most States and on-premise establishments remaining shut in most markets. Excluding the one-off benefit from sale of bulk Scotch inventory in the prior year, underlying net sales declined 26.9%. Net Sales of Prestige & Above segment declined 24.9% while net sales of Popular segment declined 31.0%.

4. Reported staff cost declined 6% and overheads reduced by 1%. A&P reinvestment was 7.4% in the half. Inital reduction in A&P spend due to complete initial lockdown and prolonged closure of on-premise was offset by strong reinvestment rate in the second quarter as we launched our renovation bundles.

5. EBITDA margin for first six months was 6%, driven by the impact of lockdown in Q1 and lower fixed cost absorbtion. While reported EBITDA margin during the same period last year was 18%, underlying EBITDA margin last year net of one time bulk Scotch sale and adjusted for one-off restructuring costs was 16.8%.

Analysts at Emkay initiated a buy call on the stock with a Target Price of Rs 640 in 12 months -- a nearly 20 percent upside. The street remained largely impressed with the net sales decline expectations and recovery in P&A segment. An EBITDA decline of nearly 20 percent to Rs 3 billion was also largely on anticipated lines.  

In a note, Emkay analyst Ashit Desai said, "Stronger-than-expected recovery is encouraging and improves earnings visibility ahead. Tax reversals in a few states, on-premise reopening and increase in off-trade timings are positive for volume recovery. After recent correction, valuations at 31x FY23E EPS offer a good entry point. Maintain Buy with a revised TP of Rs640, based on 40x Dec-22E EPS."

Emkay's analysis also suggests a FY21 estimated Price to equity of 64.9 on this stock, higher than ITC which has a P/E of 16.1 but lower than United Brewereies (a TP of Rs 1,225).

Meanwhile, the leadership commentary from United Spirits is optimistic. CEO Anand Kripalu in a note said, "The underlying revenue decline of 3.4% in the second quarter is ahead of expectations and reflects the resilience of our category, notwithstanding prolonged on-trade closures, the route to market change in Andhra Pradesh and high taxation led price increases post Covid-19. The agility of our supply chain team provided a fast start post lockdown and the renovation of our two core brands supported the top-line recovery.

He added, "Looking ahead, we remain cautiously optimistic with the gradual re-opening of on-premise and the ensuing festive season, recognising that safety and social distancing norms could impact demand versus prior years."

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