Result Update November 1, 2016

Rating matrix Rating : Buy (UNISPI) | 2250 Target : | 2700 Target Period : 12 months One-offs continue to create hangover... Potential Upside : 19% • USL’s gross revenues for Q2FY17 grew 7% YoY (up 2% QoQ) to What’s changed? | 6028 crore (vs. estimated | 5918 crore). Post excise duty, net Target Changed from | 3000 to | 2700 revenues grew 7% YoY to | 2048 crore (vs. estimated | 2087 crore) EPS FY17E Changed from | 32.7 to | 21.9 • Total volumes continue to maintain their quarterly run rate of 22 EPS FY18E Changed from | 49.7 to | 43.4 million cases (Prestige & above/popular segment - 9 million/13 million Rating Unchanged cases). Prestige and above grew 10% YoY contributing 41% of overall

volumes vs. 37% in Q2FY16. The growth was completely negated by Quarterly performance de-growth of 5% in the popular segment, which now contributed 59% | Crore Q2FY17 Q2FY16 YoY (%) Q1FY17 QoQ (%) of total volumes vs. 62% in Q2FY16. In the prestige & above segment Revenue 2,048.3 1,915.6 6.9 2,040.5 0.4 EBITDA 207.7 313.6 -33.8 198.5 4.6 volumes for McDowell’s No 1 , and EBITDA (%) 10.1 16.4 -623 bps 9.7 41 bps grew 9%, 9% and 20%, respectively. However, the popular segment PAT 82.5 71.2 15.9 42.2 NA was impacted by de-growth in other variants of McDowell’s No.1 • Reported EBITDA de-grew 34% YoY to | 207.7 crore (vs. estimated Key financials | 313.6 crore). EBITDA margins were drastically down 6 percentage | Crore FY15 FY16 FY17E FY18E points (pps) to 10.2% compared to 16.6% in Q2FY16. EBITDA was Net Sales 9,335 9,379 9,800 11,730 severely impacted by one-offs during the quarter, which includes EBITDA 767 973 1,075 1,392 employee severance expenses to the extent of | 28 crore and higher Net Profit (1,917.6) 967.7 314.2 630.5 other expenses due to local body tax (LBT) issue in Maharashtra. EPS (|) -116.1 66.6 21.6 43.4 Excluding the one-offs, EBITDA de-grew 3% YoY • Despite a subdued operational performance, reduction in interest Valuation summary expenses by 20% YoY and lower taxation resulted in PAT growth of FY15 FY16 FY17E FY18E 16% YoY to | 82.5 crore (vs. estimated | 58.6 crore) P/E (x) NA 33.8 104.1 51.9 Target P/E (x) NA 40.5 124.9 62.2 Renovation driving strong growth; assertive on five point strategy EV/EBITDA (x) 49.5 38.2 33.8 26.3 USL has rejuvenated its growth strategy by identifying five priorities P / BV (x) 49.6 18.3 18.6 10.8 which include a) power brands – focusing on 15 key brands, b) brand RONW (%) NA 54.1 17.8 20.8 renovation – re-launch of key brands in prestige & above segment, cost ROCE (%) 9.7 14.4 16.5 18.5 rationalisation – challenging each cost item in P&L, corporate governance – maintaining high standards of ethics & transparency and efficient Stock data organisation – by making organisation leaner & productive. Subsequent to Particular Amount these pillars USL re-launched key prestige brands like Royal Challenge Market Capitalization (| Crore) 32,699.3 and McDowell’s No.1, Signature. The re-launch also enabled USL to Totak Debt (FY16) (| Crore) 3,731.3 continue successfully push its premiumisation strategy. However, re- Cash (FY16) (| Crore) 157.4 EV (| Crore) 36,273.1 alignment of distribution channel in Punjab coupled with issues over 52 week H/L 3645 / 2120 McDowell’s popular variants impacted Q2FY17 volumes. We continue to Equity Capital (| Crore) 145.3 believe that the five point strategy, albeit at a lower pace, would deliver Face Value (|) 10.0 desired results and position USL at a sustainable leadership position. Declining cost, reducing debt, franchisee business; key to profitability… Price Performance (%) Q2FY17 employee expense includes severance cost paid to employees 1M 3M 6M 12M that is expected to marginally continue in H2FY17. USL is also mulling the Tilaknagar Inds. -8.3 0.3 -32.1 -33.8 idea of franchising some of its popular brands for which it would charge a Radico Khaitan -6.7 -7.7 -26.2 -2.9 royalty fee. In addition to the same, it expects to monetise ~| 2000 crore United Spirits 5.0 -9.0 -21.7 -29.2 in next two years from divestment of non-core assets that would enable United Breweries -4.3 -9.6 -25.7 -24.8 USL to further reduce its debt. We believe these developments, once executed, would lead profitability to radically improve. Research Analysts Hiccups to remain; remain upbeat on sector, affirm BUY… Bharat Chhoda [email protected] The recent trend of prohibition as an election agenda has made the regulatory environment of the already regulated alcobev sector tougher. Ankit Panchmatia [email protected] Furthermore, GST implementation could inflate input costs for USL,

thereby impacting margins. How these issues play out would lead to a re- rating of our view on the company, as we continue to believe in ’s

consumption theme, which is at the cusp of a cultural change. Hence, we maintain BUY rating.

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Variance analysis Standalone Q2FY17 Q2FY16 YoY (%) Q1FY17 QoQ (%) Comments Revenue 2,048.3 1,915.6 6.9 2,040.5 0.4 Revenue growth remains supportive of premiumisation strategy wherein prestige & above grew 10%, partly negated by de-growth of 5% in popular

Consumption of RM 1,177.1 1,101.1 6.9 1,157.6 1.7 Employee Expenses 204.7 165.2 23.9 180.2 13.6 Higher expenses on account of | 30 crore of severance expenses Advertisment & Promo Expenses 130.8 88.9 47.1 167.3 -21.9 Other Expense 328.0 246.8 32.9 336.9 -2.6 Includes restropective impact of LBT implemented in Maharashtra Total Expense 1,840.6 1,602.0 14.9 1,842.1 -0.1 EBITDA 207.7 313.6 -33.8 198.5 4.6 EBITDA Margin (%) 10.1 16.4 -623 bps 9.7 41 bps Excluding one-off, margins stood at 11.3% Depreciation 33.2 24.1 37.8 26.1 27.1 Interest 88.5 110.0 -19.5 103.0 -14.0 Repayment of debt led to decline in interest costs Other Income 33.8 4.2 709.3 24.1 40.2 Exceptional Gain/Loss -1.6 -52.3 NA -24.5 NA PBT 118.3 131.4 -10.0 69.1 71.3 Total Tax 35.8 60.1 -40.6 25.3 41.5 PAT 82.5 71.2 15.9 42.2 NA

Key Metrics Q2FY17 Q2FY16 YoY (%) Q1FY17 QoQ (%) Prestige & above volume (Mln cases) 8.8 8.0 10.0 9.3 -5.6 Following renovation; Prestige & above segment growth remained upbeat Regular 13.1 13.8 -5.1 12.8 2.1 McDowell's other variants continue to struggle Total Volume (Mln Cases) 21.9 21.8 0.5 22.2 -1.2 Source: Company, ICICIdirect.com Research

Change in estimates FY17E FY18E (| Crore) FY16 Old New % Change Old New % Change Comments Gross Revenue 9,379.3 10,430.4 9,800.5 -6.0 12,616.7 11,730.2 -7.0 Following the impact of IND AS, revenue estimates have been revised and accordingly incorporated EBITDA 972.6 1,163.0 1,075.1 -7.6 1,375.2 1,392.4 1.3 EBITDA Margin (%) 10.4 11.2 11.0 -18 bps 10.9 11.9 97 bps EBITDA margins would improve on the back of increased contribution from premium products PAT 967.7 472.3 311.8 -34.0 612.8 630.5 2.9 Lower interest costs would accelerate PAT growth EPS (|) 66.6 32.8 21.6 -34.0 42.2 43.4 2.9

Source: Company, ICICIdirect.com Research

Assumptions Current Earlier Comments FY15 FY16 FY17E FY18E FY17E FY18E Volume (Standalone) Cr Cases 9.4 9.3 9.6 10.3 9.1 9.6 Decline in volumes for popular segment would be offset by increase in volumes for Prestige & above segment Volume Growth (%) -2.0 -1.3 3.7 6.5 -3.4 5.5 Realization (Standalone) |/case 827 1,009 1,016 1,142 1,138 1,311 The company has taken a price hike in Karnataka and Punjab, which will drive up realisation growth Realization Growth (%) -6.0 22.0 0.8 12.4 37.7 15.2

Source: Company, ICICIdirect.com Research

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Conference call key takeaways… • The management believes the renovation strategy would continue to realise better volumes. Post re-launch brands like Royal Challenge, McDowell’s (whisky variant) and Signature, there has been commendable growth in volumes

• In Maharashtra, the impact of implementation of local body tax (LBT) would be mitigated by a 10% price hike from October 1, 2016. However, due to its retrospective nature, the Q2FY17 impact of the same was approximately | 25 crore

• Severance costs during the quarter were ~| 30 crore. According to the management, majority of the cleansing is through. However, the balance would be completed during the year

• Advertising and promotional expenses for H1FY17 were lower at 6.4% of total revenues compared to earlier average of 8%. Ramp up in the same could be expected in H2FY17.

• The impact of the price hike in Telangana and Andhra Pradesh is much awaited by the management. Both these markets continue to remain key as they are among the top five liquor consuming states in India, accounting for a fifth of total sales volume. For Popular brands, Maharashtra and Karnataka remains key market. However, , Telangana and, to an extent, Maharashtra remain key markets for Prestige & above

• Capex for H1FY17 was at ~| 119 crore. However, the company roughly spends ~| 300-400 crore for the year. Approximately 60% of the capex is directed towards productivity related efforts, which include streamlining capacity and enhancing productivity. The remaining 40% is directed at enhancing the safety and environmental norms and scaling plants to international norms

• The management has affirmed its guidance of maintaining mid-teen margins. They believe costs savings were incrementally higher YoY, with FY17 the highest, post which costs to the extent of 100-200 bps would be pulled down every year. Input costs would remain in the lower end of the range. The expected re-pricing norms for extra nutrient alcohol (ENA) would be beneficial for the company. However, over H1FY17 there has been a hardening in prices of ENA. The costs of other input material like glass and paper continues to remain lower than anticipated by the management

• The management has affirmed its view of monetising its non-core assets to the extent of | 2000 crore and lowering the debt. The outstanding debt as on September 30, 2016 was lower by | 240 crore to | 3460 crore compared to |3700 crore as on March 31, 2016. Subsequently, interest costs were down 20% YoY

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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 segments from whisky to and covering a multitude of 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 through 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 SKU’s 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 No 1 family, Royal Challenge, , , Director's Special Whisky and Black Dog . Over the next three years, Diageo would adopt and focussed approach to increase the overall realization of these 14-power brands.

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Diageo brands augur well for premiumisation strategy… United Spirits’ (USL) popular segment represents 58% of the total volumes and 43% of net sales. However the Prestige & above segment represents 42% of the remaining volumes and 57% of the total 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 to | 500. The prestige & above segment includes premium brands like Royal Challenge, McDowell’s No.1 whisky, Signature, Antiquity and Black Dog, which has an average ASP of | 500 to | 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

(mn cases) 9.6 (mn cases) (mn 15.5 16.8 16.9 16.1 8.4 8.4 8.1 9.3 9.0 20.0 14.0 13.8 13.8 15.2 12.8 13.0 10.0 7.3 7.9 7.4 8.0 10.0 5.0 0.0 0.0 FY15 FY16 FY15 FY16 Q1FY15 Q2FY15 Q3FY15 Q4FY15 Q1FY16 Q2FY16 Q3FY16 Q4FY16 Q1FY17 Q2FY17 Q1FY15 Q2FY15 Q3FY15 Q4FY15 Q1FY16 Q2FY16 Q3FY16 Q4FY16 Q1FY17 Q2FY17

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 from 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

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Margin to improve following price hike and cost rationalisation USL’s management has been on a cost rationalisation spree, which would involve line by line reduction in P&L costs. 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 12.3% in FY18E 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 25% over FY16-18E to | 1534 crore.

Exhibit 6: EBITDA margin to revive on cost stabilisation measures

1600 18 1392 1400 16.1 1118 1200 1189 1091 1075 15 986 973 1000

767 % 800 12.2 12.0 12

| Cr 11.1 600 10.3 10.5 9.4 400 9 8.4 200 0 6 FY11 FY12 FY13 FY14E FY15 FY16 FY17E FY18E 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% over 2007-13 against USL’s EBITDA growth of 17% during the same period. Also, the average EBITDA margin stood 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.

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Annual report key takeaways: From the desk of management: • Mahendra Sharma’s debut Chairman’s message to the 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 of three things. These includes USL’s commitment to the highest standards of corporate governance with intense focus on compliance and ethical conduct, strengthening commercial and operational controls and making right investments in talent, brands and manufacturing facilities. He believes that USL is well positioned to leverage the opportunity with full support and encouragement from its principal shareholder Diageo. • Anand Kripalu (MD & CEO) believes USL is on the cusp of the next phase of journey for building of a new United Spirits. He believes that 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 has 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, is 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 by 1% to 93 million cases (vs. 94m cases in FY15), the volumes for ‘Prestige and above’ segment grew by 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 Vat69. 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, the total interest costs are expected to be decline as repayment and lower interest rates would bring in financial flexibility

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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 like implementation of ban on alcohol or any other regulatory changes. However, we continue to believe that 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 1869.4 PV of High growth period 5858.5 PV of Stable growth period 8255.5 PV of Terminal value 23256.1 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 33.8 38.2 54.1 14.4 FY17E 9800.5 4.5 22.5 -66.2 100.0 33.3 18.4 16.8 FY18E 11730.2 19.7 45.0 100.0 50.0 25.7 21.4 18.9

Source: Company, ICICIdirect.com Research

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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 Dec-14 Feb-15 Apr-15 Jul-15 Sep-15 Dec-15 Feb-16 May-16 Jul-16

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.

Source: Company, ICICIdirect.com Research

Top 10 Shareholders Shareholding Pattern Rank Name Latest Filing Date % O/S Position (m) Change (m) (in %) Sep-15 Dec-15 Mar-16 Jun-16 Sep-16 1 Diageo PLC 30-Sep-16 0.55 79.6 0.0 Promoter 58.9 58.8 58.5 58.5 56.9 2 UB Group 30-Sep-16 0.04 5.3 0.0 FII 24.0 23.6 23.3 23.6 22.3 3 USL Benefit Trust 30-Sep-16 0.02 3.5 0.0 DII 4.5 4.6 5.3 5.3 5.0 4 Carmignac Gestion 30-Sep-16 0.02 3.3 0.2 Others 12.5 13.0 13.0 12.6 15.9 5 CLSA Capital Partners 30-Sep-16 0.02 2.4 0.0 6 Reliance Nippon Life Asset Management Limited 30-Sep-16 0.02 2.3 0.1 7 The Vanguard Group, Inc. 30-Sep-16 0.01 1.7 0.0 8 Kotak Mahindra (UK) Ltd 30-Sep-16 0.01 1.6 0.0 9 BlackRock Institutional Trust Company, N.A. 30-Sep-16 0.01 1.6 0.0 10 ICICI Prudential Asset Management Co. Ltd. 30-Sep-16 0.01 1.0 0.0

Source: Reuters, ICICIdirect.com Research

Recent Activity Buys Sells Investor name Value Shares Investor name Value Shares Carmignac Gestion 6.14 0.17 Axis Asset Management Company Limited -7.22 -0.21 Edmond de Rothschild Asset Management 3.40 0.09 Jupiter Asset Management Ltd. -4.25 -0.12 Reliance Nippon Life Asset Management Limited 2.06 0.06 Amundi Hong Kong Limited -2.76 -0.08 Mirae Asset Global Investments Co., Ltd. 1.29 0.03 Mirae Asset Global Investments (Hong Kong) Limited -1.95 -0.05 HDFC Asset Management Co., Ltd. 1.17 0.03 Motilal Oswal Asset Management Company Ltd. -1.46 -0.04

Source: Reuters, ICICIdirect.com Research

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Financial summary

Profit and loss statement | Crore Cash flow statement | Crore (Year-end March) FY15 FY16 FY17E FY18E (Year-end March) FY15 FY16 FY17E FY18E Revenue 9,335.0 9,379.3 9,800.5 11,730.2 Profit after Tax -1,687.7 967.7 314.2 630.5 Growth (%) -12.1 0.5 4.5 19.7 Add: Depreciation 222.9 157.7 123.8 145.5 Cost of materials consumed 4,333.9 3,993.7 4,173.0 4,994.7 Cash Profit -1,464.8 1,125.5 437.9 776.0 Purchase of Traded goods 1,235.5 1,432.2 1,496.5 1,759.5 Increase/(Decrease) in CL -1,117.5 645.0 -148.6 512.4 Change in Inventories -350.4 -177.5 -147.0 -146.6 (Increase)/Decrease in CA 1,781.5 -843.1 765.3 -845.5 Employee benefit expense 777.9 698.7 703.7 797.7 CF from Operating Activities -800.8 927.3 1,054.7 442.9 Advertisment&Promo 1,056.3 981.2 980.0 1,173.0 Purchase of Fixed Assets 934.3 -60.2 -359.0 -543.0 Other Expenses 1,514.5 1,478.4 1,519.1 1,759.5 (Inc)/Dec in Investments 1,061.8 143.5 -206.9 -176.7 EBITDA 767.3 972.6 1,075.1 1,392.4 Others -540.9 240.2 368.0 -146.2 Growth (%) -22.2 26.8 10.5 29.5 CF from Investing Activities 1,455.2 323.4 -197.9 -865.9 Depreciation 222.9 157.7 123.8 145.5 Inc/(Dec) in Loan Funds -3,266.5 -1,038.0 150.9 -287.3 EBIT 544.4 814.9 951.4 1,246.9 Inc/(Dec) in Sh. Cap. & Res. 0.0 0.0 0.0 0.0 Finance Cost 687.3 455.8 402.4 337.3 Others 2,267.9 -415.8 -809.6 634.3 Other Income 81.1 44.9 37.9 38.6 CF from financing activities -998.6 -1,453.9 -658.7 347.0 Exceptional Item -1,573.5 775.2 -155.0 0.0 Op. Cash and cash Eq. 704.7 360.5 157.4 355.5 PBT -1,635.3 1,179.2 431.9 948.3 Cl. Cash and cash Eq. 360.5 157.4 355.5 279.5

Tax 52.0 210.2 120.1 322.4 Source: Company, ICICIdirect.com Research Reported PAT -1,687.3 968.9 311.8 625.9 Adjustments -0.4 -1.2 2.3 4.7 Adj. Net Profit -1,687.7 967.7 314.2 630.5

Source: Company, ICICIdirect.com Research

Balance sheet | Crore Key ratios (Year-end March) FY15 FY16 FY17E FY18E (Year-end March) FY15 FY16 FY17E FY18E Source of Funds Per share data (|) Book Value 45.4 123.0 121.3 208.2 Equity Capital 145.3 145.3 145.3 145.3 Cash per share 24.8 10.8 24.5 19.2 Reserves & Surplus 514.2 1,642.6 1,616.9 2,880.8 Shareholder's Fund 659.5 1,787.9 1,762.2 3,026.1 EPS -116.1 66.6 21.6 43.4 Cash EPS -100.8 77.5 30.1 53.4 Minority Interest 0.8 1.7 1.7 1.7 Loan Funds 4,769.3 3,731.3 3,882.1 3,594.9 DPS 0.2 6.7 2.2 4.3 Profitability & Operating Ratios Provisions 66.1 68.2 68.2 68.2 Other Liabilities 122.3 52.3 56.9 56.9 EBITDA Margin (%) 8.4 10.5 11.1 12.0

Total Current Liabilities 2,269.3 2,914.2 2,765.6 3,278.0 PAT Margin (%) -18.1 10.3 3.2 5.4

Source of Funds 7,887.3 8,555.6 8,536.7 10,025.8 Fixed Asset Turnover (x) 2.7 2.6 2.4 2.5 Inventory Turnover (Days) 68.7 65.0 68.0 65.0

Application of Funds Debtor (Days) 68.5 65.0 68.0 65.0 Gross Block 3,418.7 3,646.2 4,062.7 4,766.7 Creditors (Days) 31.3 30.0 38.0 55.0 Less: Acc. Depreciation 1,550.9 1,708.6 1,773.3 1,918.8 Return Ratios (%) Net Block 1,867.8 1,937.5 2,289.4 2,847.9 RoE NA 54.1 17.8 20.8 Capital WIP 106.0 121.9 103.6 88.1 RoCE 9.7 14.4 16.5 18.5 Goodwill 62.0 112.5 112.5 112.5 RoIC 10.9 15.4 18.6 20.3 Non-Current Investments 91.5 78.1 172.0 190.4 Valuation Ratios (x) Deferred Tax Assets (net) 87.8 123.5 123.5 123.5 PE NA 33.8 104.1 51.9 Long term loans & advances 810.8 680.7 793.8 952.1 Price to Book Value 49.6 18.3 18.6 10.8 Other Non current assets 0.1 0.1 0.1 0.1 EV/EBITDA 49.5 38.2 33.8 26.3 Current Investments 124.9 120.8 120.8 120.8 EV/Sales 4.1 4.0 3.7 3.1 Inventories 1,758.1 1,795.4 1,825.8 2,088.9 Leverage & Solvency Ratios Debtor 1,751.5 2,453.2 1,825.8 2,088.9 Debt to equity (x) 8.6 2.6 2.3 1.4 Cash 360.5 157.4 355.5 279.5 Interest Coverage (x) 0.8 1.8 2.4 3.7 Loan & Advance, Other CA 865.9 974.1 805.7 1,124.9 Debt to EBITDA (x) 10.8 5.8 4.3 2.9 Total Current assets 4,860.9 5,500.9 4,933.6 5,703.2 Current Ratio 2.1 1.9 1.8 1.7 Application of Funds 7,887.3 8,555.6 8,536.7 10,025.8 Quick ratio 1.4 1.3 1.1 1.1

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

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