Maintain ADD on United Spirits - Gradual revenue recovery; resilient margins - HDFC Securities

Mr. Varun Lohchab, Head Institutional Research, HDFC Securities & Mr. Naveen Trivedi, Institutional Research Analyst, HDFC Securities

UNSP continued its recovery in 3QFY21, with revenue/EBITDA decline of 4/10% YoY (HSEI -5/-17%). Recovery in P&A was strong with value/volume decline of 1/0% YoY, despite the heavy base (strong new year demand in base quarter). Underlying growth in P&A (ex-AP impact) was strong at 4.5%. The reopening of pubs and bars and targeted marketing campaigns for in-home occasions supported the recovery. Popular continued to remain under pressure as excise-led price hikes (West Bengal) kept demand muted. IMFL industry volume was down by ~1%. Gross margin remained healthy on the back of improved product mix and benign RM inflation, which is expected to sustain. Cost control initiatives by UNSP also led to a healthy EBITDA margin of 15.4%. We expect the recovery trend to continue, led by improvement in sentiment and occupancy of bars. We maintain our EPS estimates for FY21/FY22/23. We value UNSP at 42x P/E on Mar-23E EPS to derive a target price of Rs 640. Maintain ADD.

Gradual revenue recovery: Net revenue declined by 4% YoY (+3% in 3QFY20 and -7% in 2QFY21), better than our estimated decline of 5% YoY. P&A/Popular revenue declined by 1/7% YoY as higher in-home consumption and opening of pubs and bars aided partial recovery. Popular segment was impacted by an adverse state mix. P&A volumes remained flat YoY (+3% in 3QFY20 and flat in 2QFY21) while Popular volumes declined by 2% YoY (-7% in 3QFY20 and -7% in 2QFY21). Revenue recovery was supported by focused marketing campaigns for in-home occasions and renovation of core brands.

Resilient margins: Gross margin expanded by 24bps YoY to 44.6% (-421bps in 3QFY20 and -283bps in 2QFY21), ahead of our expectation of 100bps YoY contraction. The expansion was driven by benign RM inflation. Employee costs grew by 23% YoY while A&P/Other expenses declined by 7/2% YoY. A&P improved 28% QoQ as the company resumed investing in its brands. A&P investment remained healthy at 9.4% of sales. EBITDA margin contracted by 100bps YoY (+207bps in 3QFY20 and -553bps in 2QFY21) to 15.4% (HSIE 14.3%). EBITDA declined by 10% YoY (HSIE 17% decline). PBT was down 12% YoY while PAT declined by 11% YoY. We expect both revenue and EBITDA margin recovery in FY22.

Call takeaways: (1) 85% of bars are now operational, but occupancy remains low; (2) home consumption growth has remained resilient; (3) excise hike in West Bengal has adversely impacted the hard liquor industry; (4) the company expects no RM inflation over the next few months; (5) if regulatory changes in Delhi go through, it will be a huge positive for the industry.

Shares of UNITED SPIRITS LTD. was last trading in BSE at Rs.578.55 as compared to the previous close of Rs. 593.95. The total number of shares traded during the day was 148487 in over 5577 trades.

The stock hit an intraday high of Rs. 608 and intraday low of 568.55. The net turnover during the day was Rs. 86256039.

Source : Equity Bulls

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