Neutral on United Spirits, target Rs 3435: Motilal Oswal Financial Services

Motilal Oswal Financial Services has a neutral call on United Spirits Ltd. with a target price of Rs 3435.0 . The current market price of United Spirits Ltd. is Rs 3430. Time period given by the brokerage is a year when United Spirits Ltd. price can reach defined target. United Spirits Ltd., incorporated in 1999, is a large-cap company with a market cap of Rs 49205.07 crore.

Investment rationale by United Spirits

Good results on stable regulatory environment; Outlook uncertain
 UNSP’s standalone net sales grew 7.3% YoY to INR21.7b (est. of INR20.1b), with a 2% YoY decline in volumes (est. of -9%) on a base of an 8.2% decline.


 Prestige & Above volumes grew 15.3% YoY, while Popular volumes declined 13.3% YoY. Underlying* net sales grew 9% YoY. Underlying* net sales of Prestige & Above were up 14% and of Popular rose 2% YoY in 4QFY18.  Gross margin expanded 460bp YoY (+140bp QoQ) to 48.8%, led by price increases, productivity initiatives, a favorable mix and operating model changes, offsetting the adverse impact of GST. Underlying* gross margin expanded 260bp YoY. High operating costs as % of sales – advertising expenses up 200bp YoY to 10.2%, staff costs up 250bp YoY to 8.5% and other expenses up 30bp YoY to 17.5% – led to EBITDA margin contraction of 30bp YoY. Underlying* EBITDA margin shrank 280bp YoY.

 EBITDA grew 5.1% YoY to INR2.7b (in-line). Adj. PAT rose 83.6% YoY to INR1.9b (est. of INR1.3b).

 Concall highlights: (1) Capex will be INR2b every year going forward. (2) Tax rate in FY19 is likely to be around 33-34%.

 Valuation view: As expected, the impact of highway ban has subsided, while the impact of route-to-market changes is expected to normalize in 3-4 months. Volumes were, thus, healthy in P&A segment (aided by a weak base). Margins came in lower than expected due to higher A&P costs. Price increases granted in key states like AP and Telangana in recent quarters augur well. In our view, management appears far more confident about mediumterm margin improvement than any time in the past 2-3 years. Valuations, however, remain fair. In addition, there is uncertainty around inclusion of ENA under GST, which could impact EBITDA by 10-15%. We, thus, maintain Neutral with a DCF-based target price of INR3,435.