Analyst estimates on United Spirits margin aggressive: Diageo management

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As of September 2013, the gross debt of United Spirits stood at Rs 7,400 crore. As of September 2013, the gross debt of United Spirits stood at Rs 7,400 crore.
SummarySeveral USL brands, including McDowell, would require a lot of brand investment, says Diageo.

Key management executives of Diageo — the controlling shareholder in United Spirits Ltd (USPL) — have deemed analyst estimates on the earnings and operating margins of the Indian alcoholic beverage maker to be aggressive.

According to a report by Espirato Santo Securities, Diageo’s chief executive officer Ivan Menezes told analysts in London that earnings estimates of Indian brokerages for United Spirits after the London-based company’s stake purchase are “way ahead of reality”. Menzens said the slowdown in emerging markets is a reality and India is not immune to it.

The USL shares closed the session flat at Rs 2,470.85 on the BSE.

Gilbert Ghostine, president of Asia-pacific operations of Diageo, said several USL brands, including McDowell and Director Special, would require a lot of brand investment going ahead and, hence, the assumptions of Ebitda or operating margin expansion are aggressive.

These comments refer to the recent run-up in the USL stock, which has nearly doubled after the global spirits giant announced its plan to increase its stake to 53.4% in November last year. Analysts were quick to upgrade the USL stock on expectations that once Diageo manages to acquire a controlling stake in the company, the operating margin expansion would be as strong as 20% over several years from close to 11.5% in the fiscal 2012-13.

As a result, nearly two-third of the the total recommendations on the stock turned to a “buy” in November 2012 itself and peaked at 81% in April 2013. Subsequently, the euphoria around the stock moderated as the announced deal faced several glitches. These included difficulty in acquiring USL promoter Vijay Mallya’s shares that were offered as collateral against loans taken to fund group company Kingfisher Airline, and a partly unsuccessful open offer.

United Spirit’s latest quarterly results have also toned down the outlook on margins as it reported an 8% decline in y-o-y sales to Rs 2,039 crore on the back of a more than 1% fall in volume growth. Both topline and net profit numbers failed to meet analyst estimates for a third consecutive quarter, showed a compilation of consensus estimates by Bloomberg. As a result, brokerages like JPMorgan and Credit Suisse, which had an overweight and outperform rating on the stock, respectively, have brought down their Ebitda estimates.

As per Nikhil Vora of IDFC Securities, the Diageo management comments indicate that they do not want the market to build up unrealistic expectations on

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