United Spirits: Recurring 'one-offs'?; CMP Rs.2275, TP Rs.2800; Buy (CLSA)
Reported performance weak
USL's 2QFY17 reported Ebitda declined 32% YoY and yet again missed
estimates. One-off factors continued, which impacted the performance,
but the recurring nature of these almost every quarter is a concern to us
now. Some of the one-offs (LBT impact, severance costs) are, however,
largely behind, which prompts us to keep faith, and hence, we retain BUY.
We, however, cut FY17-19CL EPS by 19-24% and revise down our target
to Rs2,800 (from Rs3,100). While GST is an important event to watch out
for, USL expects the outcome to be better than its past expectation.
2Q results below our estimates
United Spirits' reported Ebitda declined 32% YoY to Rs2bn, which was 20%
below estimates – adjusting for one-offs, Ebitda came to Rs2.3bn (-22% YoY)
which was also below. Other items were broadly in line and USL reported
~37% YoY decline in net earnings to Rs786m which was also 20% below.
Premiumisation continued but no respite in margins
While overall volumes remained almost flat YoY, Prestige & Above (P&A) grew
10% and formed 41% of overall volumes – revenue growth was even higher
at 12% YoY. Popular segment volume continued to decline (-6% YoY), with
revenues down 3%, partially impacted by the Bihar prohibition. Reported
Ebitda margins were down 9.7% albeit off a high base – there have been
Rs300m of severance costs, adjusting for which margins were at 11.2%.
Impact of LBT in Maharashtra further impacted reported margins, as product
price hikes were delayed, which further compressed reported margins.
Management hopeful but uncertainties prevail
USL is pleased with growth rates of the recently re-launched brands, like
McDowell No.1 whisky core variant, Royal Challenge and even Signature.
There has been some uptick in input prices but the Maharashtra price hike
(offsetting LBT) along with hope of hikes in other states should help. The key
issue in USL remains the continuation of one-off expenses quarter after
quarter – for example, these aggregate to Rs550m in 1HFY17. There are still
some more incremental liabilities (no details provided) as well as severance
costs ahead, though management continues to guide for mid-teen margins in
the medium term.
Cut earnings but retain BUY
We cut EPS by 19-24% for FY17-19CL but retain BUY as we expect better
quarters ahead led by better realisations and gradual volume stabilisation.
Revised TP at Rs2,800 from Rs3,100.
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