United Spirits (UNISPI) CMP: | 575 Target: | 710 (23%) Target Period: 12 months BUY May 25, 2021 Strong operational performance amid tough scenario United Spirits continued its strong momentum in Q4, reporting 8% YoY growth in volumes mainly led by resilience in off-trade channels and strong performance of prestige and above segment. Net revenues grew 12% YoY to | 2224 crore (I-direct estimate: | 1991 crore) in spite of softer on-trade Particulars channel. Prestige & above segment volumes grew 19% YoY to 10 million cases while popular segment reported largely flat volumes at 9.7 million Particular Amount cases. EBITDA margins expanded 490 bps YoY to 18.5% and came in above Market Capitalization (| cr) 44,316.5 I-direct estimate of 16%, due to better product mix and improved Total Debt (FY21) (| cr) 876.7 Result Update Result productivity (gross margins were at 43.9% vs. 42.2% in Q4FY20). EBITDA Cash (FY21) (| cr) 83.9 grew 52% YoY to | 412 crore. Subsequently, reported PAT grew 6x to | 167 EV (| cr) 45,109.3 crore on a weak base (I-direct estimate of | 177 crore), as strong operational 52 week H/L 661/494 Equity Capital (| cr) 145.3 performance was negated by an exceptional expense of | 76 crore. Face Value (|) 2.0 Product mix, lower ad spends aid EBITDA margin performance Price Performance Prestige and above segment revenues in Q4FY21 increased 26% YoY to 900 60000 | 1532 crore on the back of 19% volume growth. Strong performance of 800 50000 prestige and above segment enabled the company to report 490 bps YoY 700 improvement in EBITDA margins. USL also curtailed its advertisement 600 40000 500 30000 spends by ~15%, which further aided EBITDA margin expansion. The 400 company continues to focus on its premiumisation strategy. Even in the 300 20000 200 10000 current uncertain scenario the share of P&A segment in FY21 has increased 100 450 bps YoY to ~70%. The scotch segment continued to be fastest growing 0 0 segment among the prestige and above category indicating overall Jun-17 Jun-18 Jun-19 Jun-20 Dec-17 Dec-19 Dec-20 premiumisation of the prestige and above portfolio. Dec-18 Continued investment, renovation of core brands United Spirits BSE Sensex USL continued to reinvest and renovate its biggest core brands i.e. Research Equity Key risks to our call McDowell’s No. 1 and Royal Challenge with an innovative packaging and new blends, even during the pandemic. The management indicated that Higher than expected inflation in Retail Retail McDowell’s No 1 renovation received a good response from customers. The the raw material prices – management also focused its resources on capitalising newer trends such as consumption in home premises. Ad spends are expected to return to 8- Continued social distancing norms 9% of revenues as the situation normalises and the company will continue in restaurants, pubs and social to spend more on prestige and above segment to drive its premiumisation events strategy over the longer term. Research Analyst Valuation & Outlook Securities ICICI Bharat Chhoda USL reported a continued reduction in its debt by selling non-core assets [email protected] and improved WC management. While in the near term, uncertainty continues to remain over the evolving situation in on-trade channels, the Harshal Mehta longer term growth aspiration and continued premiumisation trends remain [email protected] key positives for the liquor sector. USL continues to invest in increasing its brand strength and propel its premium brands to higher share of its revenues (currently at 70%). We value the stock at ~43x FY23 EPS with an unchanged target price of | 710 and maintain BUY rating. Key Financial Summary | crore FY19 FY20 FY21E FY22E FY23E CAGR (%) Net Sales 9340.8 9325.4 8131.3 9662.5 11329.5 4.9 EBITDA 1393.6 1572.3 1052.7 1546.0 1869.4 7.6 EBITDA margin (%) 14.9 16.9 12.9 16.0 16.5 PAT 700.2 658.9 383.6 909.4 1194.4 14.3 P/E (x) 58.7 64.5 111.6 44.6 33.9 Market cap to Sales (x) 4.3 4.3 5.0 4.2 3.6 RoCE (%) 21.0 23.8 15.6 22.7 25.2 RoE (%) 22.3 16.9 8.8 18.1 19.2 Source: Company, ICICI Direct Research Result Update | United Spirits ICICI Direct Research Exhibit 1: Variance Analysis Standalone Q4FY21 Q4FY21E Q4FY20 YoY (%) Q3FY21 QoQ (%) Comments YoY strong pick-up due to improved consumer sentiments Revenue 2,224.4 1,991.2 1,993.8 11.6 2,488.7 -10.6 and focus on in-home consumption of brands Consumption of RM 1,246.8 1,105.1 1,153.0 8.1 1,378.5 -9.6 Higher gross margins due to better product mix Employee Expenses 124.1 129.4 110.6 12.2 156.0 -20.4 A&P Expenses 101.7 149.3 120.0 -15.3 234.6 -56.6 Other Expense 340.0 288.7 338.8 0.4 335.8 1.3 Total Expense 1,812.6 1,672.6 1,722.4 5.2 2,104.9 -13.9 EBITDA 411.8 318.6 271.4 51.7 383.8 7.3 EBITDA Margin (%) 18.5 16.0 13.6 490 bps 15.4 309 bps Higher-than-expected margins due to better product mix Depreciation 67.0 59.3 67.8 -1.2 61.4 9.1 Interest cost lower than estimated due to reduction in debt Interest 27.5 39.5 48.0 -42.7 37.7 -27.1 and lower interest rates Other Income 6.1 16.1 4.1 48.8 19.4 -68.6 Exceptional Gain/Loss -76.4 0.0 1.3 NA 0.0 NA PBT 247.0 236.0 161.0 53.4 304.1 -18.8 Total Tax 79.7 59.4 137.1 -41.9 74.2 7.4 PAT 167.3 176.6 23.9 600.0 229.9 -27.2 Key Metrics Q4FY21 Q4FY21E Q4FY20 YoY (%) Q3FY21 QoQ (%) P & above vol (Mn cases) 10.0 8.8 8.4 19.0 11.4 -12.3 Strong YoY growth due to continued off-trade resilience Excise hikes in states like West Bengal impacted volume Regular 9.7 9.4 9.9 -2.0 9.9 -2.0 growth Total volume (mn cases) 19.7 18.2 18.3 7.7 21.3 -7.5 Source: ICICI Direct Research Exhibit 2: Change in estimates FY22E FY23E Comments (| Crore) FY21 Old New % Change Old Introduced % Change Topline reduced due to softness in overall Revenue 8,131.3 10,592.5 9,662.5 -8.8 11,895.1 11,329.5 -4.8 volumes EBITDA 1,052.7 1,737.2 1,546.0 -11.0 2,034.1 1,869.4 -8.1 Margins kept largely rangebound at 16- EBITDA Margin (%) 12.9 16.4 16.0 -40 bps 17.1 16.5 -60 bps 17% levels PAT 363.4 1,075.4 909.4 -15.4 1,334.6 1,194.2 -10.5 EPS (|) 5.0 14.8 12.5 -15.4 18.4 16.4 -10.5 Source: Company, ICICI Direct Research Exhibit 3: Assumptions Current Earlier Introduced Comments FY19 FY20 FY21E FY22E FY21E FY22E FY23E Volumes estimates kept largely intact, Volume (Standalone) Cr Cases 8.2 8.0 6.9 8.1 7.3 8.8 9.2 introduced FY23 estimates Volume Growth (%) 3.9 1.5 -15.2 16.7 -11.0 21.5 4.4 Net Realisation (standalone) 1,070 1,090 1,088 1,136 1,091 1,120 1,172 |/case Realisation Growth (%) 2.9 4.9 1.7 4.4 2.0 2.7 4.6 Source: ICICI Direct Research, Company ICICI Securities |Retail Research 2 Result Update | United Spirits ICICI Direct Research Key Metrics Exhibit 4: P&A expected to grow at 11% CAGR (FY21-23) Exhibit 5: Popular expected to grow at 8% CAGR (FY21-23) Source: ICICI Direct Research, Company Source: ICICI Direct Research, Company Exhibit 6: Revenues to grow at 18% CAGR over FY21-23E Exhibit 7: Expense composition Source: ICICI Direct Research, Company Source: ICICI Direct Research, Company Exhibit 8: EBITDA expected to grow at 33% CAGR (FY21-23) Exhibit 9: PAT expected to grow at 77% CAGR in FY21-23 Source: Company, ICICI Direct Research Source: Company, ICICI Direct Research Exhibit 10: Valuation ratios Sales Sales EPS EPS PE EV/EBITDA RoNW RoCE (| cr) Growth (%) (|) Growth (%) (x) (x) (%) (%) FY19 9340.8 8.7 9.5 9.0 58.7 32.1 22.7 21.0 FY20 9325.4 -0.2 8.7 -9.0 64.5 27.8 17.7 23.8 FY21E 8131.3 -12.8 5.0 -42.2 111.6 40.8 9.3 15.6 FY22E 9662.5 18.8 12.5 150.3 44.6 27.3 18.1 22.7 FY23E 11329.5 17.3 16.4 31.3 33.9 22.4 19.2 25.2 Source: Company, ICICI Direct Research ICICI Securities |Retail Research 3 Result Update | United Spirits ICICI Direct Research Financial summary Exhibit 11: Profit & Loss Statement | crore Exhibit 12: Cash flow Statement | crore (Year-end March) FY20 FY21E FY22E FY23E (Year-end March) FY20 FY21E FY22E FY23E Total operating Income 9,325.4 8,131.3 9,662.5 11,329.5 Profit after Tax 658.9 383.6 909.4 1,194.2 Growth (%) -0.2 -12.8 18.8 17.3 Add: Depreciation 285.3 299.1 309.5 327.5 Cost of materials consumed 5,028.9 4,455.6 5,217.7 6,117.9 Add: Interest paid 212.0 187.6 62.0 -3.0 Employee benefit expense 530.0 556.4 579.7 679.8 Cash Profit 944.2 682.7 1,218.9 1,521.7 Advertisment&Promo 717.3 574.7 821.3 963.0 Increase/(Decrease) in CL 240.8 94.8 -247.4 123.4 Other Expenses 1,476.9 1,491.9 1,497.7 1,699.4 (Increase)/Decrease in CA 184.1 77.7 -152.9 -778.8 EBITDA 1,572.3 1,052.7 1,546.0 1,869.4 Others -797.9 -11.4 0 0 Growth (%) 12.8 -33.0 46.9 20.9 CF from Operating Activities 783.2 1,031.4 880.6 863.3 Depreciation 285.3 299.1 309.5 327.5 Purchase of Fixed Assets -211.6 -237.5 -154.8 -155.1 EBIT 1,287.0 753.6 1,236.5 1,541.9 (Inc)/Dec in Investments -149.8 70.4 -154.1 -356.8 Interest 212.0 187.6 62.0 -3.0 Others 85.0 77.7 219.8 48.8 Other Income 22.0 39.6 40.8 51.2 CF from Investing Activities -276.4 -89.4 -89.2 -463.1 Exceptional Item 66.6 -64.3 0.0 0.0 Inc/(Dec) in Loan Funds -1,249.1 -744.0 -400.0 -500.0 PBT 1,163.6 541.3 1,215.3 1,596.1 Inc/(Dec) in Sh.