United Spirits (UNSP) reiterated its medium-term goal of double-digit topline growth and mid-to-high teen operating margin; key enablers for this goal remain strengthening core (P&A), maximising value from popular (via franchising) and sustained focus on cost saving initiatives. We like the management’s execution and direction which has started to reflect in market share gains; however, at 41X FY2019E EPS, we believe the positives are priced in. Downgrade the stock to REDUCE (from ADD) noting limited margin of safety post the recent run up. Our TP stays unchanged at Rs 2,400/share. Primary among these are strengthen and accelerate core brands (focus on premiumisation through strengthening P&A brands and maximise value from popular brands), ) evolve route to consumer (focus on winning at point of purchase of consumption through programs like perfect stores), drive better margins via focus on cost saving initiatives (through better mix, savings in COGS and overheads/marketing efficiencies), lead UNSP and industry towards the highest ideals of corporate citizenship , focus on compliance and stay true to being an ethical marketer) and create a future-ready organisation. The company is focusing on four key levers to accelerate P&A growth, maintain a renovation rhythm in key P&A brands by ensuring the brands are in sync with evolving consumer preferences (renovation in RC, McDowell’s No1, Signature and more recently Antiquity has resulted in modest market share gains), support the renovations with compelling purpose-led marketing campaigns, participate in new occasions through special packs and leverage innovation to grow brands, recruit consumers through new propositions, extend brands into new occasions and access large/untapped categories through new spirits.
Given the varying levels of profitability (across states) in the popular segment, the company has created a fit-for-purpose model for its popular brands with three approaches to managing the brands – retain states like Maharashtra, Karnataka and West Bengal where the company can derive sustained growth in the long term, account for nearly 50-60% of total sales of popular segment, franchise those states where local parties are better equipped to maximize the value of popular brands – 13 states already franchised on a fixed fee model, 15-20% franchised, another 15-20% remaining and exit those states, ~5% of total popular sales where it can’t sustain a profitable business model either on its own or through the franchise route.