Neutral on United Spirits Ltd - Motilal Oswal

United Spirits (UNSP IN; Mkt Cap USD3.3b, CMP Rs1,137, Neutral)

Although USL is a compelling play on volume growth in the IMFL space, limited pricing power, volatility in input costs and high leverage drag its performance.

Continuous earnings disappointments over the past few years due to the below-average performance of its subsidiaries, high interest burden and input costs.

Stock needs to trade at a discount to FMCG majors as (1) RoE of 8%, (2) dividend payout of 9.7%, (3) negative cash flow from operations and (4) Rs60b debt.

USL acquired Pioneer Distilleries, which will enable it to increase its proportion of in-house production of ENA.

However we are negative about USL's planned entry in the container glass business as (1) it is a capital intense business, with a 300tpd unit costing Rs3b, (2) there is need to set up multiple units due to transportation difficulties and (3) it has poor free cash flow generation. The stock trades at 29.4x FY12E EPS of Rs38.7 and 21.6x FY13E EPS of Rs52.7. Neutral.

Source : Equity Bulls

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