Result Update January 24, 2017

Rating matrix Rating : Buy (UNISPI) | 2210 Target : | 2700 Target Period : 12 months Renovation & innovation strategy in sync… Potential Upside : 22% • Gross revenues grew 6% YoY (up 17% QoQ) to | 7072.4 crore vs. What’s changed? estimated | 6238 crore. Higher excise duty led net revenues to grow Target Unchanged 3% YoY (up 22% QoQ) to | 2494 crore vs. estimated | 2254 crore EPS FY17E Changed from | 21.9 to | 26.8 • Volumes for the quarter de-grew 5% YoY to 24.5 million cases vs. our EPS FY18E Changed from | 43.4 to | 38.8 estimate of 23.1 million cases. Volumes for prestige & above (P&A) EPS FY19E Introduced at | 49.2 segment grew 5% YoY to 10.1 million cases. The overall contribution Rating Unchanged of the same grew 400 bps to 41% vs. 37% in Q3FY16. Volumes for regular (popular) segment de-grew 11% YoY to 14.4 million cases and Quarterly performance now contribute 59% (vs. 63% in Q3FY16) to overall volumes. The | Crore Q3FY17 Q3FY16 YoY (%) Q2FY17 QoQ (%) renovation of , McDowell’s No.1 and Revenue 2,494.3 2,423.0 2.9 2,048.3 21.8 continue to provide momentum to overall volumes for prestige and EBITDA 293.6 267.3 9.8 207.7 41.3 EBITDA (%) 11.8 11.0 74 bps 10.1 163 bps above segment. Popular volumes in priority states grew 3% driven by PAT 147.7 37.2 296.7 82.5 78.9 McDowell’s No 1. Rum, , Director’s Special and Hayward’s • Gross margins for the quarter expanded 300 bps driven by positive Key financials price/mix fuelled by price increases in select states (Maharashtra & | Crore FY16 FY17E FY18E FY19E Karnataka), strong performance of prestige & above segment and Net Sales 9,379 8,952 9,846 10,548 productivity initiatives. However, the expansion was moderated by EBITDA 973 913 1,113 1,361 higher marketing spend and one-off impact in staff cost and other Net Profit 967.7 389.2 563.4 715.5 overheads (local body taxes in Maharashtra costs). Following this, EPS (|) 66.6 26.8 38.8 49.2 EBITDA margins expanded 70 bps YoY (160 bps QoQ) to 11.8% vs. our estimate of 9.1%. Subsequently, absolute EBITDA for the quarter Valuation summary grew by 10% YoY to | 293.6 crore vs. our estimate of | 203 crore FY16 FY17E FY18E FY19E • The robust operational improvement was further accelerated by higher P/E (x) 33.3 82.9 57.3 45.1 other income (| 34.6 crore vs. | 3.3 crore in Q3FY16) and lower Target P/E (x) 40.5 100.8 69.6 54.8 interest expenses (down 14% YoY). PAT optically quadrupled YoY to EV/EBITDA (x) 37.7 38.8 32.0 25.8 | 147.7 crore (vs. | 37 crore in Q3FY16). However, adjusting for P / BV (x) 18.0 17.6 10.6 8.8 exceptional expense of | 50 crore in Q3FY16 (due to provisions RONW (%) 54.1 21.3 18.6 19.6 created), PAT grew 76% ROCE (%) 14.4 15.6 15.5 17.4 Focus on premium brands; franchisees to safeguard gross margins… Stock data USL intends to achieve optimal footprint weeding out low productivity Particular Amount distilleries and prepare itself for a post-GST era. Retaining its strategy to Market Capitalization (| Crore) 32,263.3 focus on expansion and extensions of its premium “prestige and above” Total Debt (FY16) (| Crore) 3,731.3 brands, USL has entered into agreements with distilleries to franchise Cash (FY16) (| Crore) 157.4 EV (| Crore) 35,837.1 selected popular brands in Andhra Pradesh, Puducherry, , Andaman 52 week H/L 2865 / 1775 & Nicobar and Kerala effective from January. In turn, USL would provide Equity Capital (| Crore) 145.3 the intellectual property (IP) to manufacture its brands for three to five Face Value (|) 10.0 years and will securitise its gross margins, charging distilleries on fixed fee basis. We believe the change in strategy would optimise the operating Price Performance (%) model of its tail brands (popular) and enable it to focus on innovating and 1M 3M 6M 12M extending its head brands (prestige & above). Tilaknagar Inds. -0.6 -12.4 -10.2 -19.1 Brand leadership to weather sector uncertainty; maintain BUY... Radico Khaitan 5.0 -18.8 29.6 4.3 During the past year, the alcohol sector has been plagued by a number of United Spirits 18.9 -7.7 -8.3 -20.2 prohibitions announced by various state governments. The recent trend United Breweries 6.1 -11.8 3.7 2.5 on “ prohibition” as an election agenda has further toughened the already regulated alcoholic beverages (alcobev) sector. Furthermore, the Research Analysts recent order of Supreme Court to ban liquor shops operating within 500 Bharat Chhoda metre of highways would remain an overhang on alcobev sector volume [email protected] growth. USL’s leadership in brands and the management’s astute focus Ankit Panchmatia on leaner organisation and cost rationalisation affirms our rationale of [email protected] strong moat. However, we expect USL to remain in the sweet spot, reflecting a change in ’s consumption and cultural pattern. We

maintain our DCF based BUY rating on the stock with a target price of |

2700.

ICICI Securities Ltd | Retail Equity Research

Variance analysis Standalone Q3FY17 Q3FY17E Q3FY16 YoY (%) Q2FY17 QoQ (%) Comments Revenue 2,494.3 2,254.2 2,423.0 2.9 2,048.3 21.8 Price hike in states like Karnataka and Maharashtra supported revenue growth. In addition to the same, prestige & above grew 5% YoY

Consumption of RM 1,425.1 1,333.8 1,447.9 -1.6 1,177.1 21.1 Employee Expenses 161.5 187.1 172.8 -6.5 204.7 -21.1 Lower expenses on account of employee restructuring Advertisment & Promo Expenses 204.2 155.9 192.6 6.0 130.8 56.1 Other Expense 410.0 374.3 342.4 19.7 328.0 25.0 Includes impact of LBT implemented in Maharashtra Total Expense 2,200.7 2,051.1 2,155.7 2.1 1,840.6 19.6 EBITDA 293.6 203.1 267.3 9.8 207.7 41.3 EBITDA Margin (%) 11.8 9.0 11.0 74 bps 10.1 163 bps Depreciation 31.3 28.6 25.4 23.0 33.2 -5.8 Interest 92.2 96.8 107.7 -14.3 88.5 4.2 Repayment of debt led to decline in interest costs Other Income 34.6 20.9 3.3 936.5 33.8 2.3 Higher other income due to monetisation of non-core assets Exceptional Gain/Loss 1.0 -8.7 -49.7 NA -1.6 NA PBT 205.7 89.8 87.8 134.3 118.3 73.9 Total Tax 58.0 31.5 50.6 14.7 35.8 62.2 PAT 147.7 58.3 37.2 296.7 82.5 NA Adjusting for the exceptional loss of | 50 crore; PAT grew 76% YoY

Key Metrics Q3FY17 Q3FY17E Q3FY16 YoY (%) Q2FY17 QoQ (%) Prestige & above volume (Mln cases) 10.1 9.3 9.6 5.2 8.9 13.5 New variants of Prestige & brands led to growth Regular 14.4 13.8 16.1 -10.6 13.1 9.9 Impact of demonetisation resulted in higher de-growth Total Volume (Mln Cases) 24.5 23.1 25.7 -4.7 22.0 11.4

Source: Company, ICICIdirect.com Research

Change in estimates FY17E FY18E FY19E (| Crore) FY16 Old New % Change Old New % Change Introduced Comments Gross Revenue 9,379.3 9,800.5 8,951.9 -8.7 12,616.7 9,846.0 -22.0 10,547.9 Revenue estimates have been revised incorporating the impact of ban on highways and aligning the 9MFY17 performance EBITDA 972.6 1,075.1 913.1 -15.1 1,375.2 1,112.6 -19.1 1,360.7 EBITDA Margin (%) 10.4 11.0 10.2 -77 bps 10.9 11.3 40 bps 12.9 PAT 967.7 311.8 386.3 23.9 612.8 563.4 -8.1 715.5 Lower interest costs would accelerate PAT growth EPS (|) 66.6 21.6 26.8 23.9 42.2 38.8 -8.1 49.2

Source: Company, ICICIdirect.com Research

Assumptions Current Earlier Introduced Comments FY15 FY16 FY17E FY18E FY17E FY18E FY19E Volume (Standalone) Cr Cases 9.4 9.3 9.1 8.9 9.1 9.6 9.2 Decline in volumes for popular segment would be offset by increase in volumes of prestige & above segment Volume Growth (%) -2.0 -1.3 -1.7 -3.1 -2.2 5.0 3.9 Realization (Standalone) |/case 991 1,009 979 1,112 1,138 1,311 1,146 The company has taken a price hike in Karnataka and Punjab, which will drive up realisation growth Realization Growth (%) 12.7 1.8 -2.9 13.6 14.8 15.2 3.1

Source: Company, ICICIdirect.com Research

ICICI Securities Ltd | Retail Equity Research Page 2

Conference call key takeaways… • The management believes the impact of demonetisation was weathered by implementation of renovation strategy. Post re-launch brands like Royal Challenge, McDowell’s (whisky variant) and Signature, USL has launched variant of McDowell’s called Silk, a honey-flavoured drink under the McDowell's portfolio. Further, the company also launched collection, a gifting variant for men, which was well accepted in the market. Further, USL also launched Blackdog Rum variant in the West Bengal market

• Price hikes taken in Maharashtra and Karnataka were to the extent of the local body tax (LBT). Both markets account for 40% of overall volumes. Additional price hike in West Bengal is due in Q4FY17. West Bengal accounts for ~4-5% of overall volumes

• Higher advertising and promotional expenses for the quarter was on account of new launches in the prestige and above segment

• USL is through with employee restructuring. Severance costs during 9MFY17 was ~| 30 crore. According to the management, majority of cleansing is through. However, the balance would be completed over the year

• ENA prices for the quarter grew 3% YoY. However, the same grew 3% and 7% in Q1 and Q2, respectively

• The current quarter franchisee revenues was at | 100 crore. However, the nine month revenues from the same were at | 280 crore. In volumes terms, franchised brands accounted for 4 million cases in 9MF17

• The management plans to monetise its non-core assets to the extent of | 2000 crore and lower debt, which would further reduce interest expenses

• The higher other income includes tax reversal, higher interest income on account of monetisation of non-core assets, dividend income from subsidy

• The management believes the alcobev industry has been more rational in terms of taking price hikes. The increase in prices is to the extent of tax increases and levies

ICICI Securities Ltd | Retail Equity Research Page 3

Company Analysis Focused approach on Prestige & above segment… United Spirits continues to maintain its numero uno position in the Indian alcobev industry. Being positioned in the list of millionaire brands, USL targets the market across the segments from whisky to and covering multitude price points thereby, catering to a vast range of customers. Over the years (FY10-16) USL’s volumes grew at a CAGR of 7% vis-à-vis market CAGR of 10% thereby commanding a formidable position with ~40% market share in the industry. USL has 11 millionaire brands of whisky, which form nearly 40% of 179 million cases strong Indian IMFL whisky segment. This is followed by and rum segments where USL has four and two millionaire brands, which form nearly 36% and 38%, respectively, of the total brandy and rum market. Finally, even in the white spirits (gin & ) segment, USL has a significant presence with nearly four millionaire brands forming 28% of the total white spirits market of the country. Cumulatively, top 21 brands of USL have grown at a CAGR of 8% in FY10-16 thereby reasserting USL’s presence at various price points. However, going ahead, riding on strong brand positioning, USL is focusing on shifting towards premiumisation of brands thereby transiting from volume to value player. To steer USL to the next phase of growth, global behemoth PLC is putting in all efforts in management control and is well seated to guide the transition through de-leveraging of balance sheet and premiumisation of brands.

Exhibit 1: Major focus on SKUs of prestige & above segment…!!

Source: Company Presentation, ICICIdirect.com Research

As compared to earlier portfolio of 140 brands, Diageo has now charted a strategy to focus on 14 power brands. The revamped focus also includes three main brands of Diageo (, VAT 69 & ). Apart from the same, other USL brands include whisky, rum, brandy and vodka variants from the McDowell’s No 1 family, Royal Challenge, , Bagpiper, Director's Special Whisky and . Over the next three years, Diageo would adopt a focused approach to increase the overall realisation of these 14 power brands.

ICICI Securities Ltd | Retail Equity Research Page 4

Diageo brands augur well for premiumisation strategy… United Spirits’ (USL) popular segment represents 58% of total volumes and 43% of net sales. However, the prestige & above segment represents 42% of remaining volumes and 57% of net sales. Popular segments include power brands like McDowell’s rum and brandy, Bagpiper, Old Tavern and Director’s Special, which contribute 80% to popular revenues and has a price range of | 200-500. The prestige & above segment includes premium brands like Royal Challenge, McDowell’s No.1 whisky, Signature, Antiquity and Black Dog that has an average ASP of | 500- 1500. The portfolio also includes Diageo’s super premium brands like Smirnoff, VAT69, Johnnie walker and Black & White. With a variety of SKUs across price point and category, USL would continue to maintain its market share, going ahead. With the addition of Diageo brand in its portfolio, high growth of the same would shift the premiumisation bar for the company. Following this, going ahead, we expect USL’s total volumes to grow at a CAGR of 2% in FY16-18E; with prestige segment growth at 16% CAGR and popular de-growth of 8% CAGR over the same period.

Exhibit 2: Volumes for regular segment to slowly fade…!! Exhibit 3: Prestige & above segment to remain upbeat…!!!

Regular 40.0 Prestige & above 70.0 63.2 34.1 58.9 35.0 31.0 60.0 30.0 50.0 25.0 40.0 20.0 30.0 15.0 16.8 16.9 9.6 9.3 8.9 10.1 15.5 16.1 15.2 cases) (mn 7.9 8.4 8.4 8.0 8.1 (mn cases) (mn 20.0 14.0 13.8 13.8 12.8 13.1 14.4 10.0 7.3 7.4 10.0 5.0 0.0 0.0 FY15 FY16 FY15 FY16 Q1FY15 Q2FY15 Q3FY15 Q4FY15 Q1FY16 Q2FY16 Q3FY16 Q4FY16 Q1FY17 Q2FY17 Q3FY17 Q1FY15 Q2FY15 Q3FY15 Q4FY15 Q1FY16 Q2FY16 Q3FY16 Q4FY16 Q1FY17 Q2FY17 Q3FY17

Source: Images F&R Research, ICICIdirect.com Research Source: Images F&R Research, ICICIdirect.com Research

Diverse preference in domestic market The Indian alcohol sector is highly diverse where customer preferences change significantly region to region (South India prefers rum & brandy whereas North India prefers whisky) and markets work in silos with each state acting independently in fixing prices and controlling demand. South India dominates the IMFL segment with over 60% volume derived from the region on account of the ban on country liquor and IMIL followed by North and East India having nearly 12% share. North India still has a significant share of country liquor and IMIL. Within South India, Tamil Nadu leads the pack with 17% share of IMFL market followed by Karnataka 16%, Andhra Pradesh 15% and Kerala 8%. Exhibit 4: Geographical break-up of IMFL industry (volume-wise) Exhibit 5: Key IMFL consumption states Maharashtra, CSD, 4% 5% Kerela, 10% AP CSD, North , 15% 8% 12%

East, 12% Others, 18% Karnataka, West, 8% 21% South, 60% TN 17%

Source: Euromonitor, ICICIdirect.com, Research Source: Euromonitor, ICICIdirect.com, Research

ICICI Securities Ltd | Retail Equity Research Page 5

Margin to improve following price hike, cost rationalisation USL’s management is on a cost rationalization spree which would involve line by line reduction in P&L costs. The historic EBITDA margins declined ~728 bps in FY11-15 owing to an increase in extra neutral alcohol (ENA) cost and other expenses. However, margins expanded 200 bps, following the increased proportion of traded goods. In addition to traded goods, USL also received a price hike, which would lead to increased realisation, going ahead. However, these margins would be invested in re-branding and positioning of brands. Following this, we expect USL’s EBITDA margin to improve 180 bps from 10.5% in FY16 to 13% in FY19E driven by stabilisation in raw material expenses with internal sourcing at 33%, cost rationalisation of packaging materials due to backward integration from glass plants in Andhra Pradesh and enhanced operational efficiencies. Consequently, we expect EBITDA to post CAGR of 12% over FY16-19E to | 1361 crore.

Exhibit 6: EBITDA margin to revive on cost stabilisation measures

1600 18 1400 16.1 1361 1118 1200 1189 1091 1113 15 986 973 1000 913

767 13.1 % 800 12.2 12

| Cr 11.5 600 10.3 10.5 10.4 9.4 400 9 8.4 200 0 6 FY11 FY12 FY13 FY14E FY15 FY16 FY17E FY18E FY19E EBITDA EBITDA Margin

Source: Company, ICICIdirect.com Research

Branding by Diageo – Value creation for USL The USL board has provided in-principle approval to hive off Malkajgiri, Andhra Pradesh and Palakkad, Kerala units. Further, the board has also approved monetisation of surplus assets in USL. USL with the hiving off of these units is essentially mulling entering franchise based models like in Tamil Nadu, which augurs well for both margins as well as earnings of USL. USL, like (PR), is moving towards a franchise based model, whereby PR’s EBITDA grew at a CAGR of ~41% in 2007-13 against USL’s EBITDA growth of 17% during the same period. Also, the average EBITDA margin was at 25% for PR whereas for USL it was ~16.5% during the same period. Consequently, with the shedding of low margin units, USL has enhanced the scope for earnings improvement. For FY16, USL started to distribute Diageo’s global brands in India. During the first year of operation, post entering into distribution agreement, license for manufacture and sale agreements and cost sharing agreement with certain subsidiaries of Diageo Plc, the revenue was at ~| 676 crore.

ICICI Securities Ltd | Retail Equity Research Page 6

Annual report key takeaways: From the desk of management: • Mahendra Sharma’s debut chairman’s message to shareholders reflected the confidence he had in the company’s success. He believes the company is on the right track to deliver on that promise on the basis on three factors. These include USL’s commitment to the highest standards of corporate governance with intense focus on compliance and ethical conduct, strengthen commercial and operational controls and make right investments in talent, brands and manufacturing facilities. He believes USL is well positioned to leverage the opportunity with full support and encouragement from its principal shareholder Diageo. • Anand Kripalu (MD & CEO) believes that USL is on the cusp of the next phase of journey for building of a new United Spirits. He believes USL is on its way to become one of the best performing, most trusted and respected consumer goods company’s in India. He affirmed the new agenda followed by the company, which included strengthening core brands, evolving route to the consumer, driving productivity gains, becoming a good corporate citizen and building and nurturing an organisation that is ready for the future. To strengthen and evolve route-to-consumer USL rolled out Sales Force Automation process across five key states in FY16, which would be further rolled out on a pan-India basis • Amrit Thomas (President and Chief Marketing Officer) believes great brands continuously evolve to stay relevant to their consumers. Hence, USL over the past year have refurbished its power brands in the prestige portfolio - Royal Challenge, McDowell’s No.1 and Signature. Key takeaways from management discussion & analysis • As per the data published by the Finance Commission, the annual tax revenues of the state governments are about | 303 lakh crore. Of this, alcobev industry’s share is close to | 106 lakh crore, which is more than a third of such tax revenues of the state governments • India is one of the fastest growing alcohol markets in the world. Four out of the top five and seven out of the top 25 highest selling are from India. Spirits, led by whisky, are the most popular alcohol, consumed by nearly 88% of alcohol consumers in India, with and contributing to the remaining 12% consumption • Analogous to western markets, India is witnessing a strong trend towards premiumisation. Subsequently, although total volumes for FY16 de-grew 1% to 93 million cases (vs. 94 mn cases in FY15), the volumes for ‘Prestige and above’ segment grew 10% YoY to 34 million cases (vs. 31 million cases in FY15) • The company continues to see strong share momentum on Diageo brands, which includes premium whisky like Black Dog, Black & White and Vat 69. Premium Vodka portfolio, led by Smirnoff is also gaining momentum. Core variants of Johnnie Walker Red, Black and Double Black have also shown positive share gains throughout year. • The debt reduction was led by divestment of non-core assets, which includes sale of shares of United Breweries and a subsidiary of Bouvet Ladubay. Also, for FY16, the ratings for the company got upgraded to A+ from BBB (long Term) and A1+ from A3 (short term). Subsequently, total interest costs are expected to be decline as repayment and lower interest rates would bring in financial flexibility

ICICI Securities Ltd | Retail Equity Research Page 7

Valuation We believe post Diageo taking over the reins of USL it would undergo a series of transformations over the long term, which we have tried to capture through our DCF methodology. Key risks to our assumptions remain implementation of GST, coupled with certain policy headwinds to the likes of implementation of ban on alcohol or any other regulatory changes. However, we continue to believe the per capita consumption which is currently <2 litre would marginally scale up, which would be supported by a cultural change in the modernisation of India.

We have employed the three phase free cash flow to the firm (FCFF) model over FY15-26 for our discounted cash flow methodology. We believe USL will mainly undergo three phases of transformation. The first phase will be the transient period (FY16-18E) where gross revenues are expected to grow at a CAGR of 11%. In the next phase, we have anticipated high growth period (FY18-22) where premiumisation strategy applied over the past years comes into effect, thereby significantly boosting the revenue (CAGR of 28%). Finally, there will be a stable growth period (FY22-26) wherein we believe the company will achieve a normalised growth rate of ~24% CAGR. Thereafter, it will grow at a terminal growth rate of ~5%. Finally, with a risk free rate of 8% and beta of 0.8 together with a market risk premium of 4.5% we arrive at a cost of equity of 11.5%. For FCFF valuation, we have assumed a post tax WACC of 11.5%. Consequently, we arrive at a fair price of | 2700 for USL and maintain our BUY recommendation.

Exhibit 7: DCF valuation Valuation | Cr PV of Transient period 1980.9 PV of High growth period 4225.6 PV of Stable growth period 8032.5 PV of Terminal value 25000.2 Target Price (|) 2700 Source: Company, ICICIdirect.com Research

Exhibit 8: Valuations Sales Sales EPS EPS PE EV/EBITDA RoNW RoCE (| cr) Growth (%) (|) Growth (%) (x) (x) (%) (%) FY15 9335.0 -12.1 -116.1 NA NA 72.9 NA 9.7 FY16 9379.3 0.5 66.6 -157.3 33.3 37.7 54.1 14.4 FY17E 8951.9 -4.6 26.8 -59.8 82.9 38.8 21.3 15.6 FY18E 9846.0 10.0 38.8 44.7 57.3 32.0 18.6 15.5 FY19E 10547.9 7.1 49.2 27.0 45.1 25.8 19.6 17.4

Source: Company, ICICIdirect.com Research

ICICI Securities Ltd | Retail Equity Research Page 8

Recommendation history vs. consensus estimate

5,000 70.0

60.0 4,000 50.0

3,000

(|) 40.0 (%)

30.0 2,000

20.0 1,000 10.0

0 0.0 Jun-15 Aug-15 Nov-15 Jan-16 Apr-16 Jun-16 Aug-16 Nov-16 Jan-17

Price Idirect target Consensus Target Mean % Consensus with BUY

Source: Bloomberg, Company, ICICIdirect.com Research

Key events Date Event Sep-10 Announces acquisition of 54.7% stake in Pioneer Distillery for | 196.8 crore. Acqusition completed on May 26, 2011 Jul-11 Acquires 20% stake in Sovereign Distillery Ltd Sep-12 Diageo said to be in advanced talks for stake in United Spirits Apr-14 Diageo offers to buy 26% stake in United Spirits for | 11450 crore May-14 United Spirits agrees to sell Whyte & Mackay unit to Emperador Sep-14 United Spirits declares Q4FY14 result reporting a loss of | 5380.1 crore Apr-15 Appoints Vinod Rao as the Head of Finance and V Ramachandran as the company secretary and compliance officer May-15 United Spirits declares Q4FY14 result reporting a loss of | 1799.3 crore Jul-15 Reports Q1FY16; volume growth for Prestige & above segment come in at 5.7% Nov-15 Reports Q2FY16; prestige and above segment grew by 7%; EBITDA margins highest since 2013 at 15% Jan-16 Reports Q3FY16; prestige and above grew by 11% and regular de-grew by 6%. Diageo agreement sales at | 298 crore May-16 Reports Q4FY16; prestige and above grew 9%; popular de-grew 10%. Guided for mid-teen margins for FY17 Jul-16 Reports Q1FY17; prestige and above grew 11%; popular de-grew 7%. Focus to grow double digit in terms of total revenue Oct-16 Reports Q2FY17; prestige and above grew 10%; popular de-grew 5%. EBITDA margins impacted by severance costs and LBT in Maharashtra. Affirms guidance of mid-teens margins. Jan-17 Reported Q3FY17 results. Volumes de-grew by 5% YoY, however net income grew by 3% YoY. EBITDA margins stood at 11.8% with PAT of | 147.7 crore

Source: Company, ICICIdirect.com Research

Top 10 Shareholders Shareholding Pattern Rank Name Latest Filing Date % O/S Position (m) Change (m) (in %) Dec-15 Mar-16 Jun-16 Sep-16 Dec-16 1 Diageo PLC 30-Sep-16 0.55 79.6 0.0 Promoter 58.8 58.5 58.5 58.5 58.5 2 UB Group 30-Sep-16 0.04 5.3 0.0 FII 23.6 23.3 23.6 22.3 22.6 3 USL Benefit Trust 30-Sep-16 0.02 3.5 0.0 DII 4.6 5.3 5.3 5.0 5.0 4 Carmignac Gestion 30-Sep-16 0.02 3.3 0.2 Others 13.0 13.0 12.6 14.2 14.0 5 CLSA Capital Partners 30-Sep-16 0.02 2.4 0.0 6 Reliance Nippon Life Asset Management Limited 31-Dec-16 0.02 2.3 0.0 7 The Vanguard Group, Inc. 31-Dec-16 0.01 1.8 0.0 8 Kotak Mahindra (UK) Ltd 30-Sep-16 0.01 1.6 0.0 9 BlackRock Institutional Trust Company, N.A. 31-Dec-16 0.01 1.5 0.0 10 UTI Asset Management Co. Ltd. 31-Dec-16 0.01 0.9 0.0

Source: Reuters, ICICIdirect.com Research

Recent Activity Buys Sells Investor name Value Shares Investor name Value Shares HSBC Global Asset Management (Hong Kong) Limited 22.61 0.61 FIL Investment Management (Singapore) Ltd. -19.23 -0.56 Carmignac Gestion 6.14 0.17 J.P. Morgan Asset Management (Hong Kong) Ltd. -9.55 -0.28 Motilal Oswal Asset Management Company Ltd. 2.44 0.09 Axis Asset Management Company Limited -7.22 -0.21 Sundaram Asset Management Company Limited 1.96 0.07 Amundi Hong Kong Limited -3.50 -0.13 BNP Paribas Investment Partners Asia Ltd. 2.38 0.07 Jupiter Asset Management Ltd. -4.25 -0.12

Source: Reuters ICICIdirect com Research

ICICI Securities Ltd | Retail Equity Research Page 9

Financial summary

Profit and loss statement | Crore Cash flow statement | Crore (Year-end March) FY16 FY17E FY18E FY19E (Year-end March) FY16 FY17E FY18E FY19E Revenue 9,379.3 8,951.9 9,846.0 10,547.9 Profit after Tax 967.7 389.2 563.4 715.5 Growth (%) 0.5 -4.6 10.0 7.1 Add: Depreciation 157.7 123.8 145.5 161.2 Cost of materials consumed 3,993.7 4,386.4 4,824.6 4,430.1 Cash Profit 1,125.5 513.0 708.9 876.6 Purchase of Traded goods 1,432.2 447.6 787.7 1,529.4 Increase/(Decrease) in CL 645.0 -388.1 225.3 -208.4 Change in Inventories -177.5 -17.9 -9.8 -121.3 (Increase)/Decrease in CA -843.1 1,409.0 -547.8 398.2 Employee benefit expense 698.7 895.2 669.5 712.0 CF from Operating Activities 927.3 1,533.9 386.4 1,066.4 Advertisment&Promo 981.2 895.2 984.6 1,054.8 Purchase of Fixed Assets -60.2 -359.0 -543.0 -329.6 Other Expenses 1,478.4 1,432.3 1,476.9 1,582.2 (Inc)/Dec in Investments 143.5 -122.1 -75.8 -61.7 EBITDA 972.6 913.1 1,112.6 1,360.7 Others 240.2 368.0 -146.2 -26.8 Growth (%) 26.8 -6.1 21.8 22.3 CF from Investing Activities 323.4 -113.0 -765.0 -418.2 Depreciation 157.7 123.8 145.5 161.2 Inc/(Dec) in Loan Funds -1,038.0 -618.6 -34.0 34.3 EBIT 814.9 789.3 967.1 1,199.5 Inc/(Dec) in Sh. Cap. & Res. 0.0 0.0 0.0 0.0 Finance Cost 455.8 390.5 296.0 267.0 Others -415.8 -809.6 634.3 -537.5 Other Income 44.9 151.8 176.2 143.5 CF from financing activities -1,453.9 -1,428.2 600.3 -503.2 Exceptional Item 775.2 -15.5 0.0 0.0 Op. Cash and cash Eq. 360.5 157.4 150.1 371.9 PBT 1,179.2 535.1 847.3 1,076.0 Cl. Cash and cash Eq. 157.4 150.1 371.9 516.9

Tax 210.2 148.8 288.1 365.8 Source: Company, ICICIdirect.com Research Reported PAT 968.9 386.3 559.2 710.1 Adjustments -1.2 2.9 4.2 5.3 Adj. Net Profit 967.7 389.2 563.4 715.5

Source: Company, ICICIdirect.com Research

Balance sheet | Crore Key ratios (Year-end March) FY16 FY17E FY18E FY19E (Year-end March) FY16 FY17E FY18E FY19E Source of Funds Per share data (|) Equity Capital 145.3 145.3 145.3 145.3 Book Value 123.0 125.8 208.7 251.1 Cash per share 10.810.325.635.6 Reserves & Surplus 1,642.6 1,683.2 2,887.8 3,503.7 EPS 66.6 26.8 38.8 49.2 Shareholder's Fund 1,787.9 1,828.5 3,033.1 3,649.0 Cash EPS 77.535.348.860.3 Minority Interest 1.7 1.7 1.7 1.7 DPS 6.7 2.7 3.9 5.9 Loan Funds 3,731.3 3,112.6 3,078.7 3,113.0 Provisions 68.2 68.2 68.2 68.2 Profitability & Operating Ratios EBITDA Margin (%) 10.510.411.513.1 Other Liabilities 52.3 56.9 56.9 56.9 Total Current Liabilities 2,914.2 2,526.2 2,751.5 2,543.1 PAT Margin (%) 10.3 4.3 5.7 6.8

Source of Funds 8,555.6 7,594.1 8,990.0 9,431.8 Fixed Asset Turnover (x) 2.6 2.2 2.1 2.0 Inventory Turnover (Days) 65.0 65.0 60.0 55.0

Application of Funds Debtor (Days) 65.0 60.0 65.0 55.0

Gross Block 3,646.2 4,062.7 4,766.7 5,270.7 Creditors (Days) 30.0 38.0 55.0 40.0 Less: Acc. Depreciation 1,708.6 1,773.3 1,918.8 2,080.0 Return Ratios (%) Net Block 1,937.5 2,289.4 2,847.9 3,190.8 RoE 54.121.318.619.6 Capital WIP 121.9 103.6 88.1 74.9 RoCE 14.4 15.6 15.5 17.4 Goodwill 112.5 112.5 112.5 112.5 RoIC 15.4 17.0 17.3 19.7 Non-Current Investments 78.1 156.9 159.4 163.8 Valuation Ratios (x) Deferred Tax Assets (net) 153.8 123.0 130.6 434.2 PE 33.3 82.9 57.3 45.1 Long term loans & advances 680.7 724.0 797.2 854.6 Price to Book Value 18.017.610.68.8 Other Non current assets 0.1 0.1 0.1 0.1 EV/EBITDA 37.738.832.025.8 Current Investments 120.8 132.9 166.1 182.7 EV/Sales 3.9 4.0 3.6 3.3 Inventories 1,795.4 1,594.2 1,618.5 1,589.4 Leverage & Solvency Ratios Debtor 2,453.2 1,471.5 1,753.4 1,589.4 Debt to equity (x) 2.6 1.8 1.2 0.9 Cash 157.4 150.1 371.9 516.9 Interest Coverage (x) 1.8 2.0 3.3 4.5 Loan & Advance, Other CA 974.1 735.9 944.3 722.6 Debt to EBITDA (x) 5.8 5.0 2.9 2.7 Total Current assets 5,500.9 4,084.6 4,854.2 4,601.0 Current Ratio 1.9 1.6 1.8 1.8 Application of Funds 8,555.6 7,594.1 8,990.0 9,431.8 Quick ratio 1.3 1.0 1.2 1.2

Source: Company, ICICIdirect.com Research . Source: Company, ICICIdirect.com Research

ICICI Securities Ltd | Retail Equity Research Page 10

RATING RATIONALE ICICIdirect.com endeavours to provide objective opinions and recommendations. ICICIdirect.com assigns ratings to its stocks according to their notional target price vs. current market price and then categorises them as Strong Buy, Buy, Hold and Sell. The performance horizon is two years unless specified and the notional target price is defined as the analysts' valuation for a stock.

Strong Buy: >15%/20% for large caps/midca ps, respectively, with high conviction; Buy: >10%/15% for large caps/midcaps, respectively; Hold: Up to +/-10%; Sell: -10% or more;

Pankaj Pandey Head – Research [email protected]

ICICIdirect.com Research Desk, ICICI Securities Limited, 1st Floor, Akruti Trade Centre, Road No 7, MIDC, Andheri (East)

Mumbai – 400 093

[email protected]

ICICI Securities Ltd | Retail Equity Research Page 11

ANALYST CERTIFICATION We /I, Bharat Chhoda, MBA and Ankit Panchmatia, MBA, Research Analysts, authors and the names subscribed to this report, hereby certify that all of the views expressed in this research report accurately reflect our views about the subject issuer(s) or securities. We also certify that no part of our compensation was, is, or will be directly or indirectly related to the specific recommendation(s) or view(s) in this report.

Terms & conditions and other disclosures:

ICICI Securities Limited is a Sebi registered Research Analyst having registration no. INH000000990. ICICI Securities Limited (ICICI Securities) is a full-service, integrated investment banking and is, inter alia, engaged in the business of stock brokering and distribution of financial products. ICICI Securities is a wholly-owned subsidiary of ICICI Bank which is India’s largest private sector bank and has its various subsidiaries engaged in businesses of housing finance, asset management, life insurance, general insurance, venture capital fund management, etc. (“associates”), the details in respect of which are available on www.icicibank.com.

ICICI Securities is one of the leading merchant bankers/ underwriters of securities and participate in virtually all securities trading markets in India. We and our associates might have investment banking and other business relationship with a significant percentage of companies covered by our Investment Research Department. ICICI Securities generally prohibits its analysts, persons reporting to analysts and their relatives from maintaining a financial interest in the securities or derivatives of any companies that the analysts cover.

The information and opinions in this report have been prepared by ICICI Securities and are subject to change without any notice. The report and information contained herein is strictly confidential and meant solely for the selected recipient and may not be altered in any way, transmitted to, copied or distributed, in part or in whole, to any other person or to the media or reproduced in any form, without prior written consent of ICICI Securities. While we would endeavour to update the information herein on a reasonable basis, ICICI Securitiesis is under no obligation to update or keep the information current. Also, there may be regulatory, compliance or other reasons that may prevent ICICI Securities from doing so. Non-rated securities indicate that rating on a particular security has been suspended temporarily and such suspension is in compliance with applicable regulations and/or ICICI Securities policies, in circumstances where ICICI Securities might be acting in an advisory capacity to this company, or in certain other circumstances.

This report is based on information obtained from public sources and sources believed to be reliable, but no independent verification has been made nor is its accuracy or completeness guaranteed. This report and information herein is solely for informational purpose and shall not be used or considered as an offer document or solicitation of offer to buy or sell or subscribe for securities or other financial instruments. Though disseminated to all the customers simultaneously, not all customers may receive this report at the same time. ICICI Securities will not treat recipients as customers by virtue of their receiving this report. Nothing in this report constitutes investment, legal, accounting and tax advice or a representation that any investment or strategy is suitable or appropriate to your specific circumstances. The securities discussed and opinions expressed in this report may not be suitable for all investors, who must make their own investment decisions, based on their own investment objectives, financial positions and needs of specific recipient. This may not be taken in substitution for the exercise of independent judgment by any recipient. The recipient should independently evaluate the investment risks. The value and return on investment may vary because of changes in interest rates, foreign exchange rates or any other reason. ICICI Securities accepts no liabilities whatsoever for any loss or damage of any kind arising out of the use of this report. Past performance is not necessarily a guide to future performance. Investors are advised to see Risk Disclosure Document to understand the risks associated before investing in the securities markets. Actual results may differ materially from those set forth in projections. Forward-looking statements are not predictions and may be subject to change without notice.

ICICI Securities or its associates might have managed or co-managed public offering of securities for the subject company or might have been mandated by the subject company for any other assignment in the past twelve months.

ICICI Securities or its associates might have received any compensation from the companies mentioned in the report during the period preceding twelve months from the date of this report for services in respect of managing or co-managing public offerings, corporate finance, investment banking or merchant banking, brokerage services or other advisory service in a merger or specific transaction.

ICICI Securities or its associates might have received any compensation for products or services other than investment banking or merchant banking or brokerage services from the companies mentioned in the report in the past twelve months.

ICICI Securities encourages independence in research report preparation and strives to minimize conflict in preparation of research report. ICICI Securities or its analysts did not receive any compensation or other benefits from the companies mentioned in the report or third party in connection with preparation of the research report. Accordingly, neither ICICI Securities nor Research Analysts have any material conflict of interest at the time of publication of this report.

It is confirmed that Chhoda, MBA and Ankit Panchmatia, MBA, Research Analysts of this report have not received any compensation from the companies mentioned in the report in the preceding twelve months.

Compensation of our Research Analyst is not based on any specific merchant banking, investment banking or brokerage service transactions.

ICICI Securities or its subsidiaries collectively or Research Analysts do not own 1% or more of the equity securities of the Company mentioned in the report as of the last day of the month preceding the publication of the research report.

Since associates of ICICI Securities are engaged in various financial service businesses, they might have financial interests or beneficial ownership in various companies including the subject company/companies mentioned in this report.

It is confirmed that Chhoda, MBA and Ankit Panchmatia, MBA, Research Analysts do not serve as an officer, director or employee of the companies mentioned in the report.

ICICI Securities may have issued other reports that are inconsistent with and reach different conclusion from the information presented in this report.

Neither the Research Analyst nor ICICI Securities have been engaged in market making activity for the companies mentioned in the report.

We submit that no material disciplinary action has been taken on ICICI Securities by any Regulatory Authority impacting Equity Research Analysis activities.

This report is not directed or intended for distribution to, or use by, any person or entity who is a citizen or resident of or located in any locality, state, country or other jurisdiction, where such distribution, publication, availability or use would be contrary to law, regulation or which would subject ICICI Securities and affiliates to any registration or licensing requirement within such jurisdiction. The securities described herein may or may not be eligible for sale in all jurisdictions or to certain category of investors. Persons in whose possession this document may come are required to inform themselves of and to observe such restriction.

ICICI Securities Ltd | Retail Equity Research Page 12