United Spirits (USL) reported strong 12% yoy net revenue growth in Q1 driven by prestige and above brand volume growth of 5.7% y-o-y and value growth of 17.2%. Excluding Tamil Nadu, prestige brands grew at an impressive ~13.4% y-o-y; overall volumes remained virtually flat at +0.4% y-o-y to 2.7cr cases. Direct distribution of Diageo brand added R42 crore to net sales and added 1% to volume growth. Prestige and above brands now account for 33% of volumes, an increase of 200bps y-o-y. Positive geographic and product mix offset continued pricing challenges and drove 240bps (despite GM up just 57bps y-o-y) jump in Q1 margin to 10.1%. Staff cost increased by 80bps y-o-y and included provision of R34crore for employee incentive scheme. Reduction of debt post W&M sale led to lower interest costs which is likely to continue on the back of better debt pricing based on Diageo’s relationships with global banks. USL posted turnaround at pre tax level despite lower other income aided by improved operating performance and lower interest costs.
A robust growth in prestige and above brands and margin expansion have been the key performance highlights in Q1 FY16 coming on the back of gross margin expansion in Q4 FY15; we believe such improvements would need to continue for several more quarters to justify the elevated ~39x FY17e EV/Ebitda valuations. We revise our FY17e estimates upwards and assign 9-12mth target price of R3,500. Our ‘reduce’ rating stays.