United Spirits (USL) posted superior revenue and EBITDA growth of 2.9% and 9.8% y-o-y, respectively, as impact of demonetisation was lower than our expectation. Overall, volumes dipped 4.3% y-o-y on the 10.6% y-o-y decline in popular segment volumes. Reported EBITDA margin jumped 74bps y-o-y to 11.8% (though underlying margin stood at 12.3% ex one-off impact).
Strategic areas of focus continue to show results as the re-launched brand Signature recorded 44% and 51% y-o-y volume and sales growth, respectively. Growth in other re-launched brands, McDowell’s No1 and Royal Challenge, was strong at 11% and 23% y-o-y, respectively, in 9mFY17.
USL gained market share in Q3FY17 as competition has become more rational. Price increase in Maharashtra and West Bengal was more than required (total price increase for consumer is in 15-20% range). Annualised income from franchisee brands is expected to be R1 bn on a fixed fee model – USL intends to achieve gross profit neutral fees for the franchised brands.
The company’s efforts to enhance productivity, innovation and focus on high margin – better growth states is panning out well for both margins and growth. However, GST (alcohol is outside its purview) and likely impact of ban on liquor sales on highways remain key monitorables. We maintain ‘hold/SP’ with a target price of R2,403.