POST CONFERENCE NOTES
UNITED SPIRITS Gradual recovery in challenging times
India Equity Research| Consumer Goods
COMPANYNAME Key takeaways EDELWEISS 4D RATINGS
Absolute Rating REDUCE During Q1FY21, business remained shut for more than a month and resumed only gradually thereafter, in line with varying state-level restrictions. The worst is Rating Relative to Sector Underperform behind now, according to management. Risk Rating Relative to Sector High Sector Relative to Market Underweight The company believes about 90% outlets are open as of mid-August. Revenue contribution from weddings, conference, banquets, is 5–7% and restaurant and bars is 20–22%. MARKET DATA (R: UNSP.BO, B: UNSP IN) CMP : INR 591 One positive on distribution is home delivery and online ordering of alcohol. This Target Price : INR 507 is still a nascent and evolving model. Management believes once states see 52-week range (INR) : 743 / 443 merit in the model, this model can sustain. Share in issue (mn) : 726.6 The company has received modest price increases over the past few months in 7– M cap (INR bn/USD mn) : 428 / 4,337 8 states. Started with Telangana. Price hikes ranged 4–5%. Avg. Daily Vol.BSE/NSE(‘000) : 1,865.6
The company has continued the roll out of renovated bundles of McDowell’s No. 1 SHARE HOLDING PATTERN (%) Whisky and Royal Challenge Whisky – everything has been changed, liquid, bottle, etc. Current Q4FY20 Q3FY20 Rolled out renovated McDowell’s No 1 in one-third of the country and it willl roll Promoters * 56.8 56.8 56.8 out to two–thirds of company’s market over the next few months. The response, MF's, FI's & BK’s 9.4 9.2 7.7 wherever the company has entered, has been encouraging at large. FII's 19.7 20.5 22.4 USL is doing its best to retain beer consumers that have tried spirits in terms of Others 14.2 13.5 13.1 new renovations in Royal Challenge and McDowell’s is helping. Scotch launched in * Promoters pledged shares : 0.7 (% of share in issue) Hipster has had good traction.
Duty free channel is affected the most by covid-19 outbreak. Duty paid could have PRICE PERFORMANCE (%) compensated some part of it. EW Consumer Stock Nifty Goods Index Investment conclusion 1 month (2.5) 2.7 (0.1) USL remains one of the best bets (in the listed space) on India’s liquor industry by 3 months 6.9 10.5 6.0 virtue of its robust market share and the benefits from Diageo’s management control. 12 months (1.6) (1.0) 4.0
The latter has initiated steps to turn around USL—changes at management and distribution levels, revamp of brand promotions strategy, enhanced supply chain efficiency, focus on lean portfolio, engaging with the government and improving work culture. Besides, Diageo’s strategy of focusing on the premium-end is bearing fruit. However, our ‘REDUCE’ call is based on overall soft discretionary demand, rich Abneesh Roy valuations and stressed state finances. +91 22 6620 3141 [email protected]
Financials
Year to March FY19 FY20E FY21E FY22E Tushar Sundrani +91 22 6620 3004 Revenues (INR mn) 93,408 93,254 79,113 90,178 [email protected] EBITDA (INR mn) 13,936 15,723 12,991 15,916 Alok Shah Adjusted Profit (INR mn) 6,818 5,868 6,863 9,070 +91 22 6620 3040 Diluted EPS (INR) 9.4 8.1 9.4 12.5 [email protected] EPS growth (%) (0.4) (13.9) 17.0 32.2
Diluted P/E (x) 62.8 72.9 62.4 47.2 ROAE (%) 24.7 17.3 17.1 19.0 August 19, 2020 Edelweiss Research is also available on www.edelresearch.com, Bloomberg EDEL
Consumer Goods
Takeaways Post covid-19 recovery and demand scenario Manufacturing and sale of alcobev was completely banned from 24 March to 4 May. By June, 80–85% of the off-trade segment had opened.
This resulted in a volume decline of 49% YoY and sales decline of 54% YoY. P&A volume plunged 52% YoY, whereas the same for Popular was 47% YoY.
By end-June, all units have started operating.
In July, with localised lockdowns, some states have seen retailers closing down again.
The on-premise channel continued to remain shut for the entire quarter. Some shift from on-trade to off-trade is bound to happen. Will like to capture maximum amount of on trade to off trade channel.
The company has received modest price increases over the past few months in 7–8 states. Started with Telangana. Range of price hikes is 4–5%.
Delhi and Orissa suffered maximum tax increases, which have been rolled back. AP has not yet corrected the taxes levied. A few other states where taxes have not been rolled back are seeing reduction in volumes; hence they may contemplate rollbacks– on its part, USL is sharing data with state governments. There are outlier states where tax increases have happened, but volumes have not dropped.
The positive aspects of distribution are home delivery and online ordering of alcohol. This is still a nascent and evolving model. Expects states will see merit in the model and hence stronger argument for this model to sustain.
If demand were to move back to pre-covid-19 level, the company has ample manufacturing capacity even after considering social distancing norms.
Absolute sales of larger SKUs are happening. This is a good attitude barrier, which seems to have bridged.
Can’t read on downtrading yet since data is erratic. But does not expect massive crash to bottom-of-pyramid.
Redeploying resources in business in emerging opportunities basis consumer insights.
Contribution of online delivery is relatively small and is picking up slowly. Home delivery in Mumbai is quite high.
Management believes online delivery can be the seeds of a sustainable change in the industry.
Orissa and WB doing well since Hip Bar, Swiggy, etc. Amazon and Flipkart are also entering online delivery.
Doing best to woo consumers that buy from duty-free. It is too early to read on the shift in sales. Nevertheless part of the demand will shift.
Also seeing demand shift from beer to spirits. While data is limited, but believe this will sustain going ahead. This is a positive surprise, which management did not expect earlier.
Impact on demand on higher state taxes will be known only after a few quarters.
2 Edelweiss Securities Limited United Spirits
70% sales are happening to corporations; hence credit is secured. Some states delays are seen but it improving.
The Prestige and above segment was disproportionately impacted by the closure of the on-premise channel and the drying up of social occasions for consumption. While it is too early to arrive at any conclusions, what the company has seen is a sequential improvement month on month, notwithstanding the second wave of localized lockdowns that had had impact on supply chain as well as retail outlets in July.
The company has continued the rollout of renovated bundles of McDowell’s No. 1 Whisky and Royal Challenge Whisky – everything has been changed, liquid, bottle, etc.
Rolled out renovated McDOwell’s No 1 in one-third of the country; over next few months, it will be rolled out to two-thirds of the market. Wherever the company has entered, the response has been largely encouraging.
Management believes companies with scale up and strong cash flows will be able to come out stronger. Management is pleased with the way operations has resumed.
While the company has been ruthless on discretionary costs, it has not shied away from investing and supporting customers, consumers and communities as needed.
In service of that, the company recently launched “Raising the Bar” programme, to support the revival and recovery of bars and restaurants that serve alcohol. The programme is aimed at providing necessary non-cash support to help them reopen and welcome back consumers in a safe environment.
Looking ahead, the company will have to navigate several unknowns over the course of this year, including state level lockdowns that are being reimposed as well as the real impact of recent tax-related price increases on demand.
Hence, the company will continue to evolve and dynamically manage the situation in the near term, while staying committed to investing for the success of business and staying true to longer-term strategy.
No plans to move McDowell to paper-based packs like what has been announced for Johnnie Walker. McDowell in Karnataka already sells in tetrapack. That said, it keeps on evaluating different pack types.
P&A in tetrapack is negligible. Of the overall business, 25% of business is in tetrapack – all popular in Karnataka and WB is through tetrapack.
CSD business have started operating. It is operating fine.
Popular Franchisee income was down by approximately INR400mn (INR100mn reported in absolute amount). Typical run rate pre-covid-19 was INR1,600mn. Going ahead franchisee income will be 40% lower than pre-covid-19 levels.
No franchisee has come back and said they can’’t do business with UNSP. However, in the current environment, the company may go for a joint business plan, so it is a win- win.
3 Edelweiss Securities Limited Consumer Goods
Raw materials and margins Gross margin was 41.7% YoY, down 567bps YoY on reported basis, primarily driven by lower franchise income, COGS inflation, one-off obsolete inventory write-offs during the quarter.
ENA prices have remained benign. The peak is behind and hopefully there should be a softer environment going ahead.
The glass industry is in shambles. Some inflation in glasses, but will not be as high as what was seen a year ago.
Has provided for slow-moving goods to the tune of INR210mn. Part of the provisions will reverse over the course of the year.
Provisions are not on account of bad debts, but more as a prudent measure towards ageing of inventory. The quantum is INR440mn.
Will continue to move more digital. Diageo will not advertise on global digital platforms. And UNSP will also follow the same.
Has put complete breaks on all discretionary cost.
Other expenditure would have been much lower had the company not adopted prudent accounting policies.
There has been a significant cut in A&P spends.
With 47 manufacturing locations, manufacturing fixed overheads don’t get absorbed. This should be taken care of once normalcy resumes.
Distribution Sales force have remained virtually connected with trade pipeline and customers.
No supply disruption to undertake business.
Balance sheet Seen overall reduction in working capital and debt levels. UNSP has reduced receivables and hence the risk is much lower. Health of receivables has also improved.
4 Edelweiss Securities Limited United Spirits
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. It has manufacturing and bottling presence in majority of the states in India supported by a vast distribution and marketing network across the country.
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 (recently appointed new CFO) 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. Management's strategy of franchising of popular segments is also bearing fruits in terms of release of working capital and improving margins. These brands are being defocused to concentrate on core brand. Also, Diageo’s focus on improving marketing spend and controlling promotional spends will give better returns by way of brand visibility. GST remains a key monitorable as the final output is out of the GST ambit, thus any inclusion of raw materials within GST ambit would be potential negative.
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.
5 Edelweiss Securities Limited Consumer Goods
Financial Statements Key Assumptions Income statement (INR mn) Year to March FY19 FY20 FY21E FY22E Year to March FY19 FY20 FY21E FY22E Macro Total operating income 93,408 93,254 79,113 90,178 GDP(Y-o-Y %) 6.8 4.8 (4.0) 7.0 Materials costs 46,034 50,289 42,948 48,052 Inflation (Avg) 3.4 4.3 3.5 4.0 Gross profit 47,374 42,965 36,166 42,126 Repo rate (exit rate) 6.3 4.4 3.0 4.0 Employee costs 6,898 5,300 5,378 5,527 USD/INR (Avg) 70.0 70.7 75.0 73.0 Ad. & sales costs 8,591 7,173 4,350 7,399 Company Other Expenses 17,949 14,769 13,446 13,283 Volume growth (std) 4 (2) (10) 12 EBITDA 13,936 15,723 12,991 15,916 Price change (std) 5.5 4.2 (1.1) 1.8 Depreciation 2,147 2,853 2,874 2,987 Excise (% Gr Sales) std 70.0 69.8 70.0 70.0 EBIT 11,789 12,870 10,117 12,929 COGS as % of sales (std) 51.2 55.2 54.3 53.9 Less: Interest Expense 2,372 2,120 1,321 1,174 Std Staff cost (% sales) 7.5 5.7 6.8 6.2 Add: Other income 692.00 220.00 477.75 501.64 Std A&P (% of sales) 9.6 7.9 5.5 8.3 Profit Before Tax 10,109 10,970 9,274 12,257 Financial assumptions 3.0 3.0 3.0 3.0 Less: Provision for Tax 3,281 5,397 2,216 3,187 Tax rate (standalone) 33.6 37.9 33.0 33.0 Add: Exceptional items 26 666 (750) - Capex (INR mn) 2,539 880 2,500 2,500 Associate profit share (18) (33) - - Debtor days 34 31 33 33 Reported Profit 6,836 6,206 6,308 9,070 Inventory days 153 140 147 147 Exceptional Items 18 338 (555) - Payable days 114 95 110 110 Adjusted Profit 6,818 5,868 6,863 9,070 Cash conversion cycle 74 77 70 70 Shares o /s (mn) 727 727 727 727 Adjusted Basic EPS 9.4 8.1 9.4 12.5 Diluted shares o/s (mn) 727 727 727 727 Adjusted Diluted EPS 9.4 8.1 9.4 12.5 Adjusted Cash EPS 12.3 12.0 13.4 16.6
Common size metrics Year to March FY19 FY20 FY21E FY22E Materials costs 49.3 53.9 54.3 53.3 Staff costs 7.4 5.7 6.8 6.1 Ad. & sales costs 9.2 7.7 5.5 8.2 Other expenses 19.2 15.8 17.0 14.7 Interest Expense 2.5 2.3 1.7 1.3 EBITDA margins 14.9 16.9 16.4 17.6 Net Profit margins 7.3 6.3 8.7 10.1
Growth ratios (%) Year to March FY19 FY20 FY21E FY22E Revenues 8.7 (0.2) (15.2) 14.0 EBITDA 16.1 12.8 (17.4) 22.5 Adjusted Profit (0.4) (13.9) 17.0 32.2 EPS (0.4) (13.9) 17.0 32.2
6 Edelweiss Securities Limited United Spirits
Balance sheet (INR mn) Cash flow metrics As on 31st March FY19 FY20 FY21E FY22E Year to March FY19 FY20 FY21E FY22E Share capital 1,453 1,453 1,453 1,453 Operating cash flow 9,483 7,832 14,195 9,592 Reserves & Surplus 29,450 35,827 42,135 51,205 Financing cash flow (8,083) (7,399) (5,071) (4,174) Shareholders' funds 30,903 37,280 43,588 52,658 Investing cash flow (655) (1,936) (2,500) (2,500) Minority Interest (31) (413) (413) (413) Net cash Flow 745 (1,503) 6,624 2,918 Long term borrowings 7,804 147 3,077 2,378 Capex 2,539 880 2,500 2,500 Short term borrowings 24,480 16,060 10,130 7,829
Total Borrowings 32,284 16,207 13,207 10,207 Profitability and efficiency ratios Long Term Liabilities 535 2,247 2,247 2,247 Year to March FY19 FY20 FY21E FY22E Def. Tax Liability (net) (2,900) (1,514) (1,514) (1,514) ROAE (%) 24.7 17.3 17.1 19.0 Sources of funds 60,791 53,807 57,115 63,185 ROACE (%) 20.5 22.5 19.4 22.6 Gross Block 25,243 26,123 28,623 31,123 Inventory Days 153 140 147 147 Net Block 14,182 15,583 15,209 14,722 Debtors Days 34 31 33 33 Capital work in progress 1,184 1,211 1,211 1,211 Payable Days 114 95 110 110 Intangible Assets 4,230 4,046 4,046 4,046 Cash Conversion Cycle 74 77 70 70 Total Fixed Assets 19,596 20,840 20,466 19,979 Current Ratio 2.5 2.0 2.1 2.2 Non current investments 252 219 219 219 Gross Debt/EBITDA 2.3 1.0 1.0 0.6 Cash and Equivalents 2,829 735 7,359 10,277 Gross Debt/Equity 1.0 0.4 0.3 0.2 Inventories 19,343 19,275 17,297 19,352 Adjusted Debt/Equity 1.0 0.4 0.3 0.2 Sundry Debtors 25,425 22,835 22,820 25,942 Net Debt/Equity 1.0 0.4 0.1 - Loans & Advances 14,260 17,231 17,231 17,231 Interest Coverage Ratio 5.0 6.1 7.7 11.0 Other Current Assets 6,484 5,788 5,788 5,788
Current Assets (ex cash) 65,512 65,129 63,136 68,313 Operating ratios Trade payable 14,083 11,994 12,943 14,481 Year to March FY19 FY20 FY21E FY22E Other Current Liab 13,315 21,122 21,122 21,122 Total Asset Turnover 1.6 1.6 1.4 1.5 Total Current Liab 27,398 33,116 34,065 35,603 Fixed Asset Turnover 4.9 4.9 4.1 4.7 Net Curr Assets-ex cash 38,114 32,013 29,071 32,710 Equity Turnover 3.4 2.8 2.0 1.9 Uses of funds 60,791 53,807 57,115 63,185
BVPS (INR) 42.5 51.3 60.0 72.5 Valuation parameters Year to March FY19 FY20 FY21E FY22E
Free cash flow (INR mn) Adj. Diluted EPS (INR) 9.4 8.1 9.4 12.5 Year to March FY19 FY20 FY21E FY22E Y-o-Y growth (%) (0.4) (13.9) 17.0 32.2 Reported Profit 6,836 6,206 6,308 9,070 Adjusted Cash EPS (INR) 12.3 12.0 13.4 16.6 Add: Depreciation 2,147 2,853 2,874 2,987 Diluted P/E (x) 62.8 72.9 62.4 47.2 Interest (Net of Tax) 1,602 1,077 1,005 869 P/B (x) 13.8 11.5 9.8 8.1 Others (2,175) (2,873) 1,066 305 EV / Sales (x) 4.9 4.8 5.5 4.7 Less: Changes in WC (1,073) (569) (2,942) 3,639 EV / EBITDA (x) 32.8 28.2 33.4 26.9
Operating cash flow 9,483 7,832 14,195 9,592 Less: Capex 2,539 880 2,500 2,500 Free Cash Flow 6,944 6,952 11,695 7,092
Peer comparison valuation Diluted P/E (X) EV / EBITDA (X) ROAE (%) Name FY21E FY22E FY21E FY22E FY21E FY22E United Spirits 62.4 47.2 33.4 26.9 17.1 19.0 Britannia Industries 52.6 51.4 38.0 36.9 35.6 30.9 Hindustan Unilever 65.4 56.5 45.8 40.0 33.8 23.1 ITC 16.9 15.1 12.3 10.9 23.1 26.6 Nestle Ltd 73.2 62.3 50.5 43.3 103.9 98.9 Median 62.4 51.4 38.0 36.9 33.8 26.6 AVERAGE 54.1 46.5 36.0 31.6 42.7 39.7 Source: Edelweiss research
7 Edelweiss Securities Limited Consumer Goods
Additional Data Directors Data M K Sharma Chairman Anand Kripalu MD & CEO D Sivanandhan Independent Director Vinod Rao Independent Director Mrs Indu Sahani Independent Director V K Viswanathan Independent Director Rajeev Gupta Independent Director John Thomas Kennedy Non-executive Director Sanjeev Churiwala Executive Director Randall Ingber General Counsel | Asia Pacific (incl. India), Supply & Procurement and Global Litigation
Auditors - Price Waterhouse & Co. *as per last annual report
Holding - Top 10 Perc. Holding Perc. Holding Carmignac Gestion 2.4 Republic Of India 1.5 Capital Group 1.7 Motilal Oswal Asset Management 1.4 Vanguard Group 0.6 Blackrock 1.4 Franklin Resources Inc 1.1 Matthews International Capital 1.0 Tata Asset Management 0.9 T Rowe Price Group 0.6 *as per last available data
Bulk Deals Data Acquired / Seller B/S Qty Traded Price
No Data Available
*in last one year
Insider Trades Reporting Data Acquired / Seller B/S Qty Traded
No Data Available
*in last one year
8 Edelweiss Securities Limited RATING & INTERPRETATION
Company Absolute Relative Relative Company Absolute Relative Relative reco reco risk reco reco Risk Asian Paints BUY SO M Bajaj Consumer Care HOLD SP H Berger Paints BUY SP L Britannia Industries BUY SO L Colgate HOLD SP M Dabur BUY SO M Emami BUY SP H Future Consumer HOLD SP M GlaxoSmithKline Consumer Healthcare BUY SP M Godrej Consumer BUY SO H Hindustan Unilever BUY SO L ITC HOLD SU M Marico HOLD SP M Nestle Ltd BUY SO L Pidilite Industries BUY SP M United Spirits REDUCE SU H
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
9 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 [email protected]
Coverage group(s) of stocks by primary analyst(s): Consumer Goods Asian Paints, Bajaj Consumer Care, Berger Paints, Britannia Industries, Colgate, Dabur, Future Consumer, Godrej Consumer, Emami, Hindustan Unilever, ITC, Marico, Nestle Ltd, Pidilite Industries, GlaxoSmithKline Consumer Healthcare, United Spirits
Recent Research
Date Company Title Price (INR) Recos
18 -Aug-20 Emami Health and rural focus to bear 340 Buy fruit; Post Conference Notes 18-Aug-20 Asian Paints Bright hue; 1,875 Buy Post Conference Notes 17-Aug-20 Berger Paints Lockdown discolours 542 Buy numbers; recovery hues back; Result Update
Distribution of Ratings / Market Cap Edelweiss Research Coverage Universe Rating Interpretation
Buy Hold Reduce Total Rating Expected to
Rating Distribution* 161 67 11 240 Buy appreciate more than 15% over a 12-month period * 1stocks under review Hold appreciate up to 15% over a 12-month period > 50bn Between 10bn and 50 bn < 10bn 743 Reduce depreciate more than 5% over a 12-month period Market Cap (INR) 156 62 11 594
One year price chart 446 800
(INR) 297 720 149 640
(INR)
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United Spirits
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11 Edelweiss Securities Limited
Consumer Goods
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United Spirits
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