Though there’s forward movement, valuations are not factoring in moderate pace and regulatory risks; ‘Reduce’ maintained
UNited Spirits management reiterated at the analyst meet its medium-term guidance of double-digit revenue CAGR and mid-to-high teen Ebitda margins; key drivers are continued mix improvement (premiumisation) and cost-saving initiatives. Even as we appreciate the progress (execution is trending in the right direction) and potential opportunity, we believe valuations are not pricing in the moderate pace of progress (vis-à-vis expectations) and regulatory risks. Maintain Reduce with
FV unchanged at Rs 550.
Five strategic priorities
The company detailed its five strategic priorities:
Strengthen and accelerate core brands through focused and purpose-led marketing and innovation. Among new launches/innovations, the management highlighted the launch of Mcdowell’s No.1 Platinum whiskey (available in 8-9 states as of now) and Pocket Scotch (available in Chandigarh as of now) supported by its ‘Scotch Just Got Hip’ campaign.
Evolved route-to-consumer: United Spirits has separate dedicated sales teams and different strategies/ approaches to cater to the three segments of India (affluent India, middle India and aspiring India). United Spirits believes that alcobev sales/distribution is shifting from relationship-based selling to data-based selling. The company is leveraging technology and tools effectively.
Driving productivity to invest in growth: The company highlighted a virtuous productivity-investment-growth cycle and emphasised efficiency across all line items of P&L such as revenue management, COGS, marketing, overheads and interest costs.
Corporate citizenship: A concerted effort to shape the regulatory environment and improve the reputation of the industry and company is yet another priority area. The company expressed satisfaction with the progress on this front notwithstanding the recent excise duty increase in the state of Maharashtra and rhetoric around prohibition in the state of Andhra Pradesh.
Winning organisation: The company highlighted employee-friendly policies that have augmented its ability to attract talent from FMCG companies and improved its gender ratio.
FY2019 reviewed and guidance reiterated by company
United Spirits expressed happiness over FY2019— revenues grew 10% led by 15% growth in P&A segment and an underlying growth of 1.4% in the popular segment. Underlying volumes grew 5.4% and price/mix contributed 5%. Ebitda margin expanded 175 bps aided by 20 bps expansion in GM and cost savings/operating leverage. Net profit growth of 17% was aided by lower interest cost. Working capital cycle and leverage ratios improved further. Employee costs adjusted for one-offs were flat over the past 3 years. Other income from sale of non-core assets was muted in FY2019 but can pick up in FY2020.
The management expressed confidence on achieving double-digit revenue growth and modest margin expansion in FY2020. Medium-term goal of double-digit revenue CAGR and mid-to-high teen Ebitda margin remains unchanged.