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United Spirits’ (USL) Q2FY18 revenue (down 3.7% YoY) was in line, while EBITDA and PAT surpassed estimates. Management has clearly walked the talk in terms of improving proportion of P&A (48% volume share, up 700bps YoY). This, coupled with better productivity, mix improvement helped improve underlying gross and EBITDA margins – up 395bps and 396bps YoY. We expect volumes to recover as impact of highway ban has receded. On the back of mix improvement, operating model change, waning regulatory uncertainties and productivity improvements, we raise FY18/19E EPS by 7.9%/9.9% and upgrade to ‘BUY’ with a TP of INR3,307.
Product mix, operating model changes, a structural positive
Operating model change in Popular brands though resulted in sales decline of 22% YoY,
this move is margin accretive for USL (EBITDA margin >20% in this model). This,
coupled with management’s focus on improving its share in P&A segment – P&A
contributes 48% to USL’s volumes (41% in Q2FY17 and 33% as at FY15), is another shot
in the arm for USL. Structurally, margins are superior in P&A segment which is another
lever for overall margin improvement.
Q2FY18 conference call: Key takeaways
Approx. 15,000 outlets were closed post the highway ban, of which 5,000 are now open.
Of the 10,000 outlets which closed, half are expected to open by CY17. Price hike in
Andhra Pradesh has come by. USL believes it is gaining market share in P&A segment.
Franchising journey is not entirely complete, with 2‐3 more states set to come under the
model. Captain Morgan has the potential to become as big as the Smirn Off brand.
Outlook and valuations: Promising improvement; upgrade to ‘BUY’
USL’s efforts to enhance productivity, innovation and focus on high margins are
translating. With clarity on GST emerging, most regulatory headwinds are also now
behind. We expect 50.6% EPS CAGR over FY17‐19, aided by EBITDA margin
improvement by 410bps YoY and de‐leveraging of balance sheet. We have assigned
target multiple of 50x (10% higher than HUL’s and in‐line with global comparable
valuation difference between liquor and staple companies) and arrive at TP of
INR3,307 (INR2,528 earlier). At CMP, stock is trading at 45.7x FY19 EPS.
RESULT UPDATE
UNITED SPIRITS Uncertainties behind; brighter prospects ahead
EDELWEISS 4D RATINGS
Absolute Rating BUY
Rating Relative to Sector Performer
Risk Rating Relative to Sector High
Sector Relative to Market Underweight
MARKET DATA (R: UNSP.BO, B: UNSP IN)
CMP : INR 3,026
Target Price : INR 3,307
52‐week range (INR) : 2,774 / 1,773
Share in issue (mn) : 145.3
M cap (INR bn/USD mn) : 440 / 6,764
Avg. Daily Vol.BSE/NSE(‘000) : 489.5 SHARE HOLDING PATTERN (%)
Current Q1FY18 Q4FY17
Promoters *
58.5 58.5 58.5
MF's, FI's & BK’s 4.4 4.9 5.5
FII's 23.9 23.3 22.1
Others 13.2 13.4 14.0
* Promoters pledged shares (% of share in issue)
: 24.6
PRICE PERFORMANCE (%)
Stock Nifty
EW FMCG Index
1 month 4.4 4.8 3.7
3 months 0.1 3.2 0.3
12 months 10.6 20.1 21.5
Abneesh Roy +91 22 6620 3141
Alok Shah +91 22 6620 3040
Rajiv Berlia +91 22 6623 3377
India Equity Research| Consumer Goods
October 26, 2017
Financials (INR mn)
Year to March Q2FY18 Q2FY17 % change Q1FY18 % change FY17 FY18E FY19E
Net rev. 19,513 20,268 (3.7) 17,818 9.5 87,434 86,030 100,748
EBITDA 3,177 2,021 57.2 1,574 101.8 10,038 11,894 15,731
Adjusted profit 1,675 785 113.3 637 163.0 4,757 6,320 9,612
Dil. EPS (INR) 11.5 5.4 113.3 4.4 163.0 32.7 43.5 66.1
Diluted P/E (x) 103.4 69.6 45.7
EV/Sales (x) 5.4 5.4 4.6
ROAE (%) 24.9 30.1 33.2
Quarterly are standalone; Annual numbers are consolidated
Consumer Goods
2 Edelweiss Securities Limited
Table 1: Trends at a glance
Source: Company, Edelweiss research
Growth numbers are reported and not underlying
Deleveraging of balance sheet to continue
Net debt position of the company was another concern with the Street. USL has clearly
evinced its intent of exiting from non‐core investments (sale of properties) which is
evident from the reduction in net debt from INR41.1bn in FY16 to INR35.3bn as at
H1FY18. We expect the company’s net debt position to further improve to INR24.5bn by
FY19. This will lead to interest expense declining from INR3.7bn in FY17 to INR2.2bn by
FY19.
Regulatory headwinds largely behind
Liquor companies in India were faced with tumultuous headwinds – demonetisation,
highway liquor ban and implementation of GST. Ripple effects of demonetisation and
highway liquor ban are now clearly behind as evident from current results management
commentary. Ambiguity around GST and implementation of it has also been largely
cleared out. With all regulatory headwinds largely behind, we expect a smooth journey
ahead for the liquor stocks from here..
The ‘in’ thing: Low per capita consumption, rising social acceptance
India’s per capita consumption of liquor is one of the lowest in the world, implying
humungous headroom for growth for liquor companies, particularly for players with
stronghold in India underpinned by wide distribution network. The country’s per capita
consumption is estimated at 2.2 litres per annum (up from 1.6 litre per annum in 2003‐
2005), and given India’s rising middle class, young population and rising social acceptance
of drinking, it is well poised to grow.
Q3FY15 Q4FY15 Q1FY16 Q2FY16 Q3FY16 Q4FY16 Q1FY17 Q2FY17 Q3FY17 Q4FY17 Q1FY18 Q2FY18
Sales growth (%) 2.3 5.4 11.8 5.7 22.9 11.7 9.3 6.9 2.9 (0.9) (12.7) (3.7)
Volume growth (%) (1.8) (2.8) 4.0 (7.0) 2.0 (4.0) 0.6 1.0 (4.3) (8.2) (18.9) (16.0)
Prestige and above volume growth (%) 4.7 2.4 15.0 2.0 15.0 9.0 11.0 10.0 4.1 4.9 (9.0) 2.0
McDowell’s No 1 NA NA NA NA NA 18.0 26.0 8.0 NA 7.0 NA 5.0
Royal Challenge NA NA NA NA NA 61.0 48.0 9.0 10.0 15.0 NA 6.0
Signature NA NA NA NA NA (2.0) 6.0 20.0 44.0 26.0 NA 10.0
Popular volume growth (%) NA NA (1.0) (11.0) (5.0) (10.0) (7.0) (6.0) (10.6) (15.1) (26.0) (28.0)
Prestige and above net sales growth (%) NA NA 17.2 15.0 41.0 29.0 21.0 12.0 12.0 10.0 (8.0) 10.0
McDowell’s No 1 NA NA NA NA NA 23.0 20.0 13.0 NA 8.0 (1.0) 14.0
Royal Challenge NA NA NA NA NA 50.0 46.0 13.0 12.0 16.0 (11.0) 12.0
Signature NA NA NA NA NA (7.0) 7.0 26.0 51.0 29.0 14.0 13.0
Diageo net sales contribution to P&A (%) NA NA NA NA 27.0 22.0 12.0 NA NA NA NA NA
Gross margins (%) 40 47 42 43 40.2 40.8 43.3 42.5 42.9 44.2 46.0 47.6
COGS per case (INR) 422 374 420 428 563 522 521 535 578 533 534 553
A&P spends (% of sales) 9.9 9.6 8.2 4.6 7.9 8.8 8.2 6.4 8.2 8.1 9.1 7.4
EBITDA margins (%) 10.3 6.3 10.1 16.4 11.0 5.7 9.7 10.1 12.0 13.1 8.8 16.3
EBITDA per case (INR) 75 44 74 109 104 50 89 94 119 125 87 172
United Spirits
3 Edelweiss Securities Limited
Chart 1: India’s per capita consumption of liquor, one of the lowest globally
Source: Industry, Edelweiss research
Catch them young: Favourable demographics
India is slated to become the youngest country in the world by 2020 with the median age
declining to 29 years and about 64% of its population in the working age group. Alcobev
companies will be key beneficiaries of a large population entering the legal drinking age in
India. The legal drinking age in the country varies from state to state—18 years in Goa,
Karnataka, Uttar Pradesh; 21 in Andhra Pradesh, Bihar, Kerala and Tamil Nadu; 25 in
Maharashtra, Punjab and Delhi. As per Census 2011, the total proportion of India’s
population in the 20‐59 age group is more than 50%. As per estimates, India’s middle class
population is expected to jump to 600mn by 2025 from current 120mn. Ergo, the total
universe for liquor companies will widen significantly. Also, drinking is gaining social
acceptance, which will further benefit liquor players.
Chart 2: Per capita consumption in India
Source: Industry
0.0
2.4
4.8
7.2
9.6
12.0
Europe US Japan China Brazil India World avg
(lit/year/person)
0
20
40
60
80
100
2001 2011 2021E
(Nos)
0‐14 15‐59 60+
Consumer Goods
4 Edelweiss Securities Limited
Q2FY18 result concall: Key takeaways
Demand, environment and outlook
Net sales declined 4% YoY impacted by the highway ban and one off impact of
operating model changes. Underlying net sales moved up 4% YoY, excluding the one off
impact.
The company delivered strong underlying net sales growth of 4% YoY, driven by 12%
YoY growth in Prestige & Above segment, despite the impact of the highway ban.
Strong growth in Prestige & Above segment was fuelled by renovation and
premiumisation strategy. Brand renovations including McDowell’s No.1 whisky, Royal
Challenge and Signature delivered double digit net sales growth in Q2FY18. The
company expects Antiquity to gather momentum in subsequent quarters post the
national roll out. The Prestige & Above segment now represents 63% of net sales.
Despite implementation of GST which has resulted in stranded taxes, the company
delivered robust underlying gross margin improvement in both the second quarter and
first half, led by accelerated productivity initiatives, price increases in select states, and
continued focus on premiumisation.
Productivity improvement was led by attacking all line items of P&L. There is a plan to
improve productivity at sales as well as cost levels. Productivity improvement has been
higher than inflation increase in H1FY18 on YoY basis.
Marketing investments were focused on Prestige and Above segment resulting in 11%
YoY increase in A&P in Q2FY18.
With the recent SC clarification on the highway ban, the company has seen outlets re‐
opening in September and expects the impact of the ban to continue to decelerate and
business to normalise by end of the third quarter. Based on the company’s
expectations and continued focus on productivity initiatives coupled with price
increases in select states, the company expects the net adverse impact of GST to
moderate. Outlets that have started are largely restaurants where premium & above is
sold more.
Around 15,000 outlets closed post issue of the highway ban – of this 5,000 have now
opened. Of the 10,000 outlets that shut down, half are in Maharashtra. Of the overall
stores closed, the company expects half to re‐open shortly. The balance may actually
be on the highways and hence may not open or take longer before they open away
from highway.
Diwali was little earlier in Q2FY18, but overall market during Diwali remained subdued.
The company believes the worst is behind, but considering the heavily regulated
industry, one cannot anticipate what may come next.
Route to market changes are also being implemented. But, the company is unsure on
how much cost and EBITDA margins could be impacted. However, structurally EBITDA
margins will improve.
Price rise, though not in line with the increase in inflation, has been a bit more
consistent across states.
The journey to receive price hikes in states is well on way. Price increase in Andhra
Pradesh has come.
Received INR860mn of price increase (positively impacted gross margin by 160bpsYoY)
and availed INR1,400mn benefit from volume increase.
United Spirits
5 Edelweiss Securities Limited
The company will continue to focus on strategic priorities to capture long term
opportunity in the spirits market and achieve its medium term target of achieving
double‐digit top line and improve margins to mid‐high teens.
The company believes that with industry largely governed by foreign companies,
structurally many things will improve for industry.
Prestige and Above segment
Reported net sales grew 10% YoY with 8ppts positive price/mix. Underlying net sales
was up 12% YoY, excluding the one off impact. The company believes it is delivering
superior performance and gaining market share.
The segment represents 48% of total volumes and 63% of total net sales, which moved
up 7ppts and 6ppts, respectively, compared to previous year.
McDowell’s No. 1 whisky (excluding Platinum) grew volumes by 5% YoY and net sales by
14% YoY in the second quarter, volume was flat and net sales grew 6% YoY in the first
half.
Royal Challenge grew volumes by 6% YoY and net sales by 12% YoY in Q2FY18, while
volume/ net sales declined 5%/ 1% in the first half.
Signature continued to record positive momentum supported by successful renovation
and grew volumes/net sales by 10%/13% YoY. Signature Premier is growing at faster
pace than Signature Rare.
Re‐launch of Antiquity started towards end of first quarter in select states and the
company expects to gather momentum in subsequent quarters post the national roll
out.
Scotch portfolio in premium and luxury segment grew volume by 5% YoY and net sales
by 8% YoY. VAT69 has just been relaunched in select geographies as yet. Black & White
– 12 years old was relaunched 3 years back.
Premium range Captain Morgan is sold at 2/3rd India. Wherever it has been launched,
the response has been good. Main rum season starts now. Captain Morgan has the
potential to become as big as Smirn Off.
The company believes Diageo brands bottled in India will grow faster than P&A brands
which will grow faster than Popular brands.
Popular segment
Segment net sales declined 22% YoY impacted by the one off impact of operating
model changes. Underlying net sales declined 9% YoY excluding the one off impact.
The Popular segment represents 52% of total volumes and 35% of total net sales.
Franchisee agreement
Franchising journey is not fully complete. The company is waiting for proper
commercial terms in the left out states.
2‐3 more states will get onto franchising agreement.
Net sales from franchise stood at INR6.5bn and EBITDA at INR1.6bn in H1FY18. In the
base period, sales stood at INR2.59bn and EBITDA at INR0.56bn.
Consumer Goods
6 Edelweiss Securities Limited
Margins
Gross margin of 47,6%, up 559bps was driven mainly by price increases, productivity
initiatives and operating model changes. Underlying gross margin improved by 395bps.
EBITDA, up 57%, EBITDA margin of 16.3%, up 631bps both primarily driven by higher
gross margin and lower staff costs, though partially offset by marketing investment
increasing 11% YoY. Underlying EBITDA moved up 37% YoY and EBITDA margin of
16.3% was up 396bps, excluding the one off impact.
Underlying EBITDA margin improved by ~188bps (from 631bps YoY expansion, one
would need to deduct expansion owing to franchisee agreement to the tune of 75bps,
base year one off adjustment of 148bps and one‐time positive impact of change in
commercial terms amounting to ~220bps). This underlying margin improvement does
not include tax benefits received.
Net adverse impact of GST on margins would be limited.
Property sale, debt and balance sheet items
Closing net debt was INR35,310mn in H1FY18 and the company utilised cash from
operations to repay its loans amounting to INR5,370mn.
Annual capex would be INR1,500 – 2,000mn.
Plans to sell ~INR20bn of non‐core assets, including disputed treasury shares and
properties.
Outlook and valuations: Promising improvement; upgrade to ‘BUY’
USL remains the best play on India’s liquor industry (in the listed space) by virtue of robust
market share and benefits from management control of Diageo. Diageo has initiated steps
to turnaround the company—changes at management &distribution levels, revamp of
brand promotions strategy, enhanced supply chain efficiency, focusing on lean portfolio,
engaging with the government and improving work culture. Also, Diageo’s strategy to focus
on the premium end has started bearing fruits, reflected in market share gains by
McDowell’s. The Signature brand also recorded strong performance despite highway ban
post relaunch. USL has recently relaunched Antiquity, which should start to show results in
terms of strong growth.
We also like USL’s strategy of launching brand extensions like McDowell’s Silk, McDowell’s
Luxury, Royal Challenge Bolt, etc., which helps create a buzz in the brand. Recovery in urban
growth will enhance disposable incomes, further aided by GDP revival (IMFL volumes surge
1.5x GDP when GDP growth revives), low per capita consumption (at 2.2 litre/year/person
versus 4.5 world average), favourable demographics (64% population in working age group
by 2020 from 50% now) and steady conversion from country liquor to IMFL, of which USL
will be a prime beneficiary over the long term. The company is moving towards the
franchisee model in the Popular segment (already implemented in 13 states) which will
ensure margin stability in the segment (royalty income of INR1.4‐1.6bn in FY18), reduce
working capital requirement for these brands and increase focus on the management to the
higher margin P&A segment, thereby improving market share in P&A segment.
GST which was an overhang is also largely behind with implementation remaining smooth.
Though liquor companies will not be able to take the credit of GST paid inputs—which is
likely to impact margin (extent of impact not clear) the productivity improvement,
favourable mix change and some price hikes will more than offset any dent. We expect USL
United Spirits
7 Edelweiss Securities Limited
to clock 50.6% EPS CAGR over FY17‐19 and upgrade to ‘BUY/SP’ from ‘HOLD/SP’. We have
also raised our FY18/19 EPS by 7.9%/9.9% and assign target multiple of 50x (earlier 42x) to
arrive at TP of INR3,307 (earlier INR2,528). Our target multiple of 50x (10% premium to
HUL’s) is in‐line with global comparables of assigning higher multiple to liquor stocks than
staple companies (refer table below).
Table 2: Global Valuation comparison
Source:
Chart 3: EBITDA margins
Source: Company, Edelweiss research
Company Valuation metrics FY18E FY19E
Diageo
PE 22.0 20.4
EV/Sales 5.9 5.7
EV/EBITDA 17.1 16.0
Pernod Ricard
PE 22.1 20.4
EV/Sales 4.6 4.4
EV/EBITDA 15.8 15.0
Unilever Plc
PE 19.7 17.5
EV/Sales 2.9 2.7
EV/EBITDA 13.9 12.8
3.0
6.5
10.0
13.5
17.0
20.5
Q2FY12
Q3FY12
Q4FY12
Q1FY13
Q2FY13
Q3FY13
Q4FY13
Q1FY14
Q2FY14
Q3FY14
Q4FY14
Q1FY15
Q2FY15
Q3FY15
Q4FY15
Q1FY16
Q2FY16
Q3FY16
Q4FY16
Q1FY17
Q2FY17
Q3FY17
Q4FY17
Q1FY18
Q2FY18
(%)
Consumer Goods
8 Edelweiss Securities Limited
Chart 4: COGS as a % of sales
Chart 5: A&P spends
Chart 6: Prestige and above volume growth
Source: Company, Edelweiss research
30.0
38.0
46.0
54.0
62.0
70.0
Q2FY12
Q3FY12
Q4FY12
Q1FY13
Q2FY13
Q3FY13
Q4FY13
Q1FY14
Q2FY14
Q3FY14
Q4FY14
Q1FY15
Q2FY15
Q3FY15
Q4FY15
Q1FY16
Q2FY16
Q3FY16
Q4FY16
Q1FY17
Q2FY17
Q3FY17
Q4FY17
Q1FY18
Q2FY18
(%)
3.0
4.8
6.6
8.4
10.2
12.0
Q2FY12
Q3FY12
Q4FY12
Q1FY13
Q2FY13
Q3FY13
Q4FY13
Q1FY14
Q2FY14
Q3FY14
Q4FY14
Q1FY15
Q2FY15
Q3FY15
Q4FY15
Q1FY16
Q2FY16
Q3FY16
Q4FY16
Q1FY17
Q2FY17
Q3FY17
Q4FY17
Q1FY18
Q2FY18
(%)
(10.0)
(1.0)
8.0
17.0
26.0
35.0
Q2FY12
Q3FY12
Q4FY12
Q1FY13
Q2FY13
Q3FY13
Q4FY13
Q1FY14
Q2FY14
Q3FY14
Q1FY15
Q2FY15
Q3FY15
Q4FY15
Q1FY16
Q2FY16
Q3FY16
Q4FY16
Q1FY17
Q2FY17
Q3FY17
Q4FY17
Q1FY18
Q2FY18
(%)
Prestige & Above volume growth
United Spirits
9 Edelweiss Securities Limited
Chart 7: Overall volumes growth
Source: Company, Edelweiss research
(27.0)
(18.0)
(9.0)
0.0
9.0
18.0
Q2FY11
Q3FY11
Q4FY11
Q1FY12
Q2FY12
Q3FY12
Q4FY12
Q1FY13
Q2FY13
Q3FY13
Q4FY13
Q1FY14
Q2FY14
Q3FY14
Q4FY14
Q1FY15
Q2FY15
Q3FY15
Q4FY15
Q1FY16
Q2FY16
Q3FY16
Q4FY16
Q1FY17
Q2FY17
Q3FY17
Q4FY17
Q1FY18
Q2FY18
(Volumes %)
Consumer Goods
10 Edelweiss Securities Limited
Financial snapshot (INR mn) Year to March Q2FY18 Q2FY17 % change Q1FY18 % change YTD18 FY18E FY19E
Net revenues 19,513 20,268 (3.7) 17,818 9.5 37,331 86,030 100,748 Other operating income ‐ ‐ ‐ ‐ 872 1,003
Total operating Income 19,513 20,268 (3.7) 17,818 9.5 37,331 86,901 101,750
Staff costs 1,594 2,047 (22.1) 1,658 (3.9) 3,252 6,896 7,493
Cost of goods sold 10,224 11,752 (13.0) 9,619 6.3 19,843 46,656 54,549
Gross profit 9,289 8,516 9.1 8,199 13.3 17,488 40,245 47,202
Advt. sales & promotions 1,449 1,308 10.8 1,627 (10.9) 3,076 7,322 7,992
Other expenses 3,069 3,140 (2.3) 3,340 (8.1) 6,409 14,133 15,985
Total exp. (excl. cogs) 6,112 6,495 (5.9) 6,625 (7.7) 12,737 28,351 31,470
EBITDA 3,177 2,021 57.2 1,574 101.8 4,751 11,894 15,731
Depreciation 326 332 (1.7) 321 1.6 647 1,288 1,198
EBIT 2,851 1,689 68.8 1,253 127.5 4,104 10,606 14,533
Other income 305 339 (10.0) 309 (1.3) 614 1,389 1,597
Interest 659 885 (25.5) 703 (6.3) 1,362 2,835 2,200
Add: Exceptional items (144) 40 NA (8) NA (152) ‐ ‐
Profit before tax 2,497 1,143 118.5 859 190.7 3,356 9,160 13,930
Provision for taxes 822 358 129.9 222 270.3 1,044 2,839 4,318
Reported net profit 1,531 825 85.5 629 143.4 2,160 6,320 9,612
Adjusted Profit 1,675 785 113.3 637 163.0 2,262 6,320 9,612
Diluted shares (mn) 145 145 145 145 145 145
Adjusted Diluted EPS 11.5 5.4 113.3 4.4 163.0 15.6 43.5 66.1
Diluted P/E (x) 69.6 45.7
EV/EBITDA (x) 39.3 29.5
ROAE (%) 30.1 33.2
As % of net revenues
COGS 52.4 58.0 54.0 53.2 53.7 53.6
Employee cost 8.2 10.1 9.3 8.7 7.9 7.4
Adv. & sales promotions 7.4 6.5 9.1 8.2 8.4 7.9
Other expenditure 15.7 15.5 18.7 17.2 16.3 15.7
EBITDA 16.3 10.0 8.8 12.7 13.7 15.5
EBIT 14.6 8.3 7.0 11.0 12.2 14.3
PBT 12.8 5.6 4.8 9.0 10.5 13.7
Adjusted net profit 8.6 3.9 3.6 6.1 7.3 9.4
Tax rate 32.9 31.3 25.8 31.1 31.0 31.0
Change in Estimates FY18E FY19E
New Old % change New Old % change Comments
Net Revenue 86,030 91,977 (6.5) 100,748 106,940 (5.8) Factoring change in operating
model towards franchise agreement
EBITDA 11,894 11,691 1.7 15,731 14,894 5.6
EBITDA Margin 13.7 12.6 15.5 13.8
Adjusted Profit
After Tax
6,320 5,857 7.9 9,612 8,748 9.9 Factoring better than expected
margin improvement and de‐
leveraging strategy
Net Profit Margin 7.3 6.3 9.4 8.1
Capex 2,500 2,500 0.0 2,500 2,500 0.0
United Spirits
11 Edelweiss Securities Limited
Company Description
USL is the largest spirits company in the branded spirits market in India. It has leading
brands across all categories and price segments. It has 18 millionaire brands of the nearly
140 brands that company owns. The company sold ~90mn cases in FY17. It has
manufacturing and bottling presence in majority of the states in India supported by a vast
distribution and marketing network across the country. It has an aggressive acquisition
strategy. It acquired the second largest Indian liquor manufacturer Shaw Wallace, French
winemaker Bouvet Ladubay, and, the fourth largest Scotch whisky player in the world,
Whyte & Mackay. Diageo increased its stake in the company via open offer to 54.78% which
mandated USL to sell off Whyte and Mackay to Emperador (for GBP430mn). Investment Theme
USL remains the best play on India’s liquor industry (in the listed space) by virtue of robust
market share and benefits ensuing from management control of Diageo. Diageo has started
taking steps to turnaround the company, which includes changes at management and
distribution levels, change in brand promotions strategy, enhancing efficiency in supply
chain, focus on lean portfolio, engaging with the government and improving work culture.
Management’s strategy of re‐launch and focus on key brands remains in the right direction.
These brands are being de‐focused to concentrate on core brand, which though a better
strategy will drag volumes in P&A segment. Also, Diageo’s focus on improving marketing,
spending and controlling promotional spends will give better returns by way of brand
visibility, but it will hit margins. GST also remains a key monitorable as the sector is out of
the GST ambit.
Key Risks
Any further increase in prices of molasses, ENA and glass prices can impact profit margins.
USL is exposed to changes in pricing by state governments. Nearly 50% of sales volumes are
generated from regions where state governments control prices. This could impact
profitability.
Increase in taxes, changes in the distribution structure, prohibition of liquor in any state
could hit USL.
12 Edelweiss Securities Limited
Consumer Goods
Financial Statements
Income statement (INR mn)
Year to March FY16 FY17 FY18E FY19E
Net revenue 83,737 87,434 86,030 100,748
Other Operating Income 1,212 741 872 1,003
Total operating income 84,949 88,175 86,901 101,750
Materials costs 47,572 49,297 46,656 54,549
Gross profit 37,377 38,878 40,245 47,202
Employee costs 6,800 6,882 6,896 7,493
Other Expenses 14,620 15,224 14,133 15,985
Ad. & sales costs 6,154 6,734 7,322 7,992
EBITDA 9,803 10,038 11,894 15,731
Depreciation 1,572 1,886 1,288 1,198
EBIT 8,231 8,152 10,606 14,533
Add: Other income 436.00 1,053.00 1,388.75 1,597.06
Less: Interest Expense 4,574 3,751 2,835 2,200
Add: Exceptional items (431) (3,827) ‐ ‐
Profit Before Tax 4,093 5,454 9,160 13,930
Less: Provision for Tax 2,228 697 2,839 4,318
Reported Profit 1,434 930 6,320 9,612
Exceptional Items (289) (3,324) ‐ ‐
Adjusted Profit 1,723 4,254 6,320 9,612
Shares o /s (mn) 145 145 145 145
Adjusted Basic EPS 11.9 29.3 43.5 66.1
Diluted shares o/s (mn) 145 145 145 145
Adjusted Diluted EPS 11.9 29.3 43.5 66.1
Adjusted Cash EPS 22.7 42.3 52.3 74.4
Common size metrics
Year to March FY16 FY17 FY18E FY19E
Materials costs 56.0 55.9 53.7 53.6
Staff costs 8.0 7.8 7.9 7.4
Ad. & sales costs 7.2 7.6 8.4 7.9
Other expenses 17.2 17.3 16.3 15.7
Interest Expense 5.4 4.3 3.3 2.2
EBITDA margins 11.5 11.4 13.7 15.5
Net Profit margins 2.0 4.8 7.3 9.4
Growth ratios (%)
Year to March FY16 FY17 FY18E FY19E
Revenues 0.5 3.8 (1.4) 17.1
EBITDA 48.4 2.4 18.5 32.3
Adjusted Profit (162.2) 147.0 48.6 52.1
EPS (162.2) 147.0 48.6 52.1
Key Assumptions
Year to March FY16 FY17 FY18E FY19E
Macro
GDP(Y‐o‐Y %) 7.2 6.5 7.1 7.7
Inflation (Avg) 4.9 4.5 4.0 4.5
Repo rate (exit rate) 6.8 6.3 5.8 5.8
USD/INR (Avg) 65.0 67.5 66.0 66.0
Company
Volume growth (std) (3) (4) (8) 7
Price change (std) 8.4 7.4 8.7 10.0
Excise (% Gr Sales) std 62.7 70.0 69.0 69.0
COGS as % of sales (std) 58.4 57.1 54.8 54.6
Std Staff cost (% sales) 7.2 7.8 8.1 7.5
Std A&P (% of sales) 10.6 7.8 8.6 8.0
Financial assumptions 1 2 3 3
Tax rate (standalone) 16.4 33.3 33.0 33.0
Capex (INR mn) (8,271) 1,812 2,500 2,500
Debtor days 39 40 35 35
Inventory days 144 144 123 123
Payable days 68 83 59 60
Cash conversion cycle 115 100 99 98
13 Edelweiss Securities Limited
United Spirits
Peer comparison valuation
Market cap Diluted P/E (X) EV / EBITDA (X) ROAE (%)
Name (USD mn) FY18E FY19E FY18E FY19E FY18E FY19E
United Spirits 6,764 69.6 45.7 39.3 29.5 30.1 33.2
Godrej Consumer 9,700 42.6 34.1 30.5 24.7 23.5 25.5
Hindustan Unilever 42,524 51.8 44.4 35.5 30.3 75.7 81.1
ITC 50,426 28.1 24.7 18.4 16.2 28.9 29.6
Nestle Ltd 10,626 57.1 45.7 32.1 26.2 38.4 44.1
Source: Edelweiss research
Cash flow metrics
Year to March FY16 FY17 FY18E FY19E
Operating cash flow 2,827 6,468 16,873 7,890
Investing cash flow 7,514 (2,273) (2,500) (2,500)
Financing cash flow (11,549) (4,749) (7,835) (6,200)
Net cash Flow (1,208) (554) 6,538 (810)
Capex (8,271) 1,812 2,500 2,500
Profitability and efficiency ratios
Year to March FY16 FY17 FY18E FY19E
ROAE (%) 15.0 24.9 30.1 33.2
ROACE (%) 15.0 15.6 20.0 25.5
Inventory Days 144 144 123 123
Debtors Days 39 40 35 35
Payable Days 68 83 59 60
Cash Conversion Cycle 115 100 99 98
Current Ratio 2.5 2.3 2.5 2.6
Gross Debt/EBITDA 4.4 4.1 3.1 2.1
Gross Debt/Equity 2.6 2.3 1.5 1.0
Adjusted Debt/Equity 2.6 2.3 1.5 1.0
Net Debt/Equity 2.5 2.2 1.1 0.7
Interest Coverage Ratio 1.8 2.2 3.7 6.6
Operating ratios
Year to March FY16 FY17 FY18E FY19E
Total Asset Turnover 1.5 1.5 1.5 1.6
Fixed Asset Turnover 4.4 4.6 4.4 4.8
Equity Turnover 7.4 5.2 4.1 3.5
Valuation parameters
Year to March FY16 FY17 FY18E FY19E
Adj. Diluted EPS (INR) 11.9 29.3 43.5 66.1
Y‐o‐Y growth (%) (162.2) 147.0 48.6 52.1
Adjusted Cash EPS (INR) 22.7 42.3 52.3 74.4
Diluted P/E (x) 255.2 103.4 69.6 45.7
P/B (x) 26.9 24.6 18.2 13.0
EV / Sales (x) 5.7 5.4 5.4 4.6
EV / EBITDA (x) 49.1 47.7 39.3 29.5
Balance sheet (INR mn)
As on 31st March FY16 FY17 FY18E FY19E
Share capital 1,453 1,453 1,453 1,453
Reserves & Surplus 14,894 16,403 22,723 32,335
Shareholders' funds 16,347 17,856 24,176 33,788
Minority Interest 56 (25) (25) (25)
Short term borrowings 35,065 32,655 27,882 24,814
Long term borrowings 7,697 8,697 8,470 7,538
Total Borrowings 42,762 41,352 36,352 32,352
Long Term Liabilities 683 442 442 442
Def. Tax Liability (net) (1,900) (1,781) (1,781) (1,781)
Sources of funds 57,948 57,844 59,164 64,776
Gross Block 19,932 21,744 24,244 26,744
Net Block 14,440 14,554 15,766 17,068
Capital work in progress 2,821 1,993 1,993 1,993
Intangible Assets 5,100 4,612 4,612 4,612
Total Fixed Assets 22,361 21,159 22,371 23,673
Non current investments 82 ‐ ‐ ‐
Cash and Equivalents 1,683 2,112 8,650 7,840
Inventories 19,519 19,276 15,723 18,382
Sundry Debtors 23,032 29,534 21,952 25,838
Loans & Advances 8,761 9,575 9,575 9,575
Other Current Assets 5,955 5,522 5,522 5,522
Current Assets (ex cash) 57,267 63,907 52,772 59,317
Trade payable 10,189 12,247 7,542 8,967
Other Current Liab 13,256 17,087 17,087 17,087
Total Current Liab 23,445 29,334 24,629 26,054
Net Curr Assets‐ex cash 33,822 34,573 28,143 33,263
Uses of funds 57,948 57,844 59,164 64,776
BVPS (INR) 112.5 122.9 166.4 232.5
Free cash flow (INR mn)
Year to March FY16 FY17 FY18E FY19E
Reported Profit 1,434 930 6,320 9,612
Add: Depreciation 1,572 1,886 1,288 1,198
Interest (Net of Tax) 2,084 3,272 1,956 1,518
Others (4,980) 4,581 879 682
Less: Changes in WC (2,717) 4,201 (6,430) 5,120
Operating cash flow 2,827 6,468 16,873 7,890
Less: Capex (8,271) 1,812 2,500 2,500
Free Cash Flow 11,098 4,656 14,373 5,390
14 Edelweiss Securities Limited
Consumer Goods
Holding ‐ Top 10
Perc. Holding Perc. Holding
Carmignac Gestion 2.26 Vanguard Group 2.03
Clsa Global Markets 1.65 Blackrock Fund Advisors 1.4
Reliance Capital Trustee 1.06 Kotak Mahindra 1.05
Motilal Oswal Asset Management 0.82 Uti Asset Management Co 0.58
Hdfc Asset Management Co 0.42 Jupiter Investment Management 0.4
*as per last available data
Insider Trades Reporting Data Acquired / Seller B/S Qty Traded
No Data Available
*in last one year
Bulk Deals Data Acquired / Seller B/S Qty Traded Price
No Data Available
*in last one year
Additional Data
Directors Data M K Sharma Chairman Anand Kripalu MD & CEO
D Sivanandhan Director Vinod Rao Director
Mrs Indu Sahani Director Rajeev Gupta Director
John Thomas Kennedy Director Dr Nicholas Bodo Blazquez Director
Auditors ‐ Price Waterhouse & Co.
*as per last annual report
15 Edelweiss Securities Limited
Company Absolute
reco Relative
reco Relative
risk
Company Absolute
reco
Relative
reco
Relative
Risk
Asian Paints BUY SO M Bajaj Corp HOLD SU H
Berger Paints BUY SO L Britannia Industries BUY SO L
Colgate HOLD SP M Dabur BUY SO M
Emami BUY SO H GlaxoSmithKline Consumer
Healthcare
HOLD SU M
Godrej Consumer BUY SO H Hindustan Unilever HOLD SP L
ITC HOLD SP M Marico BUY SO M
Nestle Ltd HOLD SP L Pidilite Industries BUY SO M
United Spirits HOLD SP H
RATING & INTERPRETATION
ABSOLUTE RATING
Ratings Expected absolute returns over 12 months
Buy More than 15%
Hold Between 15% and - 5%
Reduce Less than -5%
RELATIVE RETURNS RATING
Ratings Criteria
Sector Outperformer (SO) Stock return > 1.25 x Sector return
Sector Performer (SP) Stock return > 0.75 x Sector return
Stock return < 1.25 x Sector return
Sector Underperformer (SU) Stock return < 0.75 x Sector return
Sector return is market cap weighted average return for the coverage universe within the sector
RELATIVE RISK RATING
Ratings Criteria
Low (L) Bottom 1/3rd percentile in the sector
Medium (M) Middle 1/3rd percentile in the sector
High (H) Top 1/3rd percentile in the sector
Risk ratings are based on Edelweiss risk model
SECTOR RATING
Ratings Criteria
Overweight (OW) Sector return > 1.25 x Nifty return
Equalweight (EW) Sector return > 0.75 x Nifty return
Sector return < 1.25 x Nifty return
Underweight (UW) Sector return < 0.75 x Nifty return
16 Edelweiss Securities Limited
Consumer Goods
Edelweiss Securities Limited, Edelweiss House, off C.S.T. Road, Kalina, Mumbai – 400 098.
Board: (91‐22) 4009 4400, Email: [email protected]
Aditya Narain
Head of Research
Coverage group(s) of stocks by primary analyst(s): Consumer Goods
Asian Paints, Bajaj Corp, Berger Paints, Britannia Industries, Colgate, Dabur, Godrej Consumer, Emami, Hindustan Unilever, ITC, Marico, Nestle Ltd, Pidilite Industries, GlaxoSmithKline Consumer Healthcare, United Spirits
Distribution of Ratings / Market Cap
Edelweiss Research Coverage Universe
Rating Distribution* 161 67 11 240* 1stocks under review
Market Cap (INR) 156 62 11
Date Company Title Price (INR) Recos
Recent Research
26‐Oct‐17 Emami Volumes recover; outlook promising; Result Update
1,171 Buy
25‐Oct‐17 Hindustan Unilever
Volumes recover; sustained cost cuts boost margins; Result Update
1,272 Hold
24‐Oct‐17 Asian Paints Volume looks up; inflationary input cost a drag ; Result Update
1,223 Buy
> 50bn Between 10bn and 50 bn < 10bn
Buy Hold Reduce Total
Rating Interpretation
Buy appreciate more than 15% over a 12‐month period
Hold appreciate up to 15% over a 12‐month period
Reduce depreciate more than 5% over a 12‐month period
Rating Expected to
One year price chart
1,500
1,800
2,100
2,400
2,700
3,000
Oct‐16
Nov‐16
Dec‐16
Jan‐17
Feb‐17
Mar‐17
Apr‐17
May‐17
Jun‐17
Jul‐17
Aug‐17
Sep‐17
Oct‐17
(INR)
United Spirits
17 Edelweiss Securities Limited
United Spirits
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18 Edelweiss Securities Limited
Consumer Goods
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19 Edelweiss Securities Limited
United Spirits
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