United Spirits’ (USL) second-quarter Ebitda (down 14%) came in line with estimate as lower advertisement spends and other expenses offset the sales miss (down 1%).
The reported Ebitda of the company was aided by the sale of bulk scotch inventory to Diageo (Rs 73.9 crore) and an overseas vendor (Rs 22.9 crore).
Prestige & Above saw flattish sales (volumes rose 3%), as liquidity issues hurt bottled-in-India scotch and temporary supply disruption weighed on bottled-in-origin scotch sales. Further, popular sales were flattish in priority markets (overall popular sales were down 1.4%, volumes down 0.4%) as state-mix weighed on realisations.
While West Bengal saw good sales growth in Dussehra, Diwali till date has been modest.
United Spirits remains hopeful of pick-up in the festive season.
Also, realisation should improve vs 2% drop in Q2, as supply chain issues in Prestige have been resolved and state mix improves.
Second-quarter gross margin was impacted by higher ENA costs (extra neutral alcohol, a key input). The third quarter saw some moderation in ENA prices and United Spirits remains hopeful of price reduction once the new harvest comes in. This, along with cost control, should offset higher ad spends in H2 (9% of sales guided in FY20 vs 8% in H1) and sustain Ebitda strength.
United Spirits intends to focus on profitable growth and will consider next steps to counter price cuts taken by Pernod in Maharashtra. Pressures from such competition in a weak demand environment remain a risk to our 23% FY19-22ii EPS CAGR (unchanged). We recommend ‘reduce’.