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  1. United Spirits profits to double, say analysts

United Spirits profits to double, say analysts

Despite prohibition in Bihar, one of the key markets for alcoholic beverages, industry leader United Spirits (USL) is likely to more than double its first quarter profit, compared with the R20 crore it reported in the same quarter last year.

By: | Published: July 26, 2016 6:30 AM

Despite prohibition in Bihar, one of the key markets for alcoholic beverages, industry leader United Spirits (USL) is likely to more than double its first quarter profit, compared with the R20 crore it reported in the same quarter last year. The company is set to announce its first quarter earnings on Tuesday.

A hike in liquor prices approved by the Karnataka government and an upward revision in excise duty in the state, which came into effect from April 1, will help the company see improved margins in its home state. Also, the cost reduction measures initiated by the company will result in better margins throughout the current financial year, analysts said.

The company is likely to see a strong double-digit growth in revenues during the quarter. Its revenues are expected to be in the range of R2,300 crore compared with R2,005 crore a year ago. USL is also banking on a relaunched brand portfolio that includes brands such as Royal Challenge, McDowell No.1 and Signature, as well as the Diageo portfolio. However, EBITDA margins are expected to contract in the range of 110 basis points year-on-year on account of lower gross margins and higher investments in advertising and sales promotion, analysts with Kotak Securities said.

“We expect overall volume growth of 2% driven by 11% growth in prestige segment and 3% decline in regular segment. Sale from Diageo brands is expected to contribute R220 crore,” Kotak Securities said.

As part of its five-point strategy to become among the best-performing and most trusted consumer products companies, United Spirits has embarked on improving margins through productivity improvement. It expects to gain higher margins during FY17 compared with the previous year. It has already made big cost savings in glass light weighting, procurement efficiency and network optimisation.

The company’s volumes are likely to be better from an almost reversal of prohibition measures in Kerala after the recent elections to the state legislative assembly. The company is also set to witness expansion of its margins in its home state Karnataka, where the government has approved a price hike recently. Karnataka is also one of the large consuming markets. Although the state government allowed the price hike with effect from July 1, the excise duty was hiked with effect from April 1. Slabs have been raised by R35 per case for all players.

“However, the question is how much of this will be retained by the manufacturer and how much will be passed on to trade is yet to be known,” an analyst from Motilal Oswal Securities said. USL’s shares closed the day’s trading session at R2,456 per share, a gain of 2.20% over the previous close on BSE.

Forecast
Despite prohibition in Bihar, one of the key markets for alcoholic beverages, industry leader United Spirits (USL) is likely to more than double its first quarter profits, compared with the R20 crore it reported in the same quarter last year, according to analysts.

The company is set to announce its first quarter earnings on Tuesday.

A hike in liquor prices approved by the Karnataka government and an upward revision in excise duty in the state, which came into effect from April 1, will help the company see improved margins in its home state.

The cost reduction measures initiated by the company will result in better margins throughout the current  financial year.

However, EBITDA margins are expected to contract in the range of 110 basis points year-on-year on account of lower gross margins and higher investments in advertising and sales promotion, analysts with Kotak Securities said.

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