By Nuvama Research
We anticipate that United Spirits (UNSP) will experience a gradual recovery in FY24 driven by strong consumer demand that is likely to hold up, given that liquor is not a daily purchase item, and is associated with celebration and experience. Furthermore, the company’s ability to tap into the latest trends through faster innovation is expected to boost its growth prospects. In addition, United Spirits is actively collaborating with states on pricing and implementing sustained revenue growth management initiatives, which are expected to help the company gradually recoup its margins. The supply chain agility programme, which involves a cost of Rs 5 billion, is also expected to eliminate legacy costs, while the slump sale is likely to lead to operating deleverage for 12–18 months. Overall, we remain optimistic about United Spirits’ long-term growth prospects.
Our decision to take an anti-consensus underweight stance on United Spirits has proven to be correct. Looking ahead, there are several medium-term catalysts that could drive the stock higher, such as the UK FTA and price hikes by a few states. We recommend a ‘HOLD’ rating on the stock, with a target price of Rs 855.
Outlook and valuation: UNSP is shifting its focus towards a premium portfolio in order to improve its product mix, but this strategy may lead to margin pressure in the near term. The company’s non-whiskey offerings, particularly gin and vodka, have performed well in the market, driven by the growing popularity of the cocktail culture.
In addition, UNSP recently acquired a Bengaluru women’s IPL team for Rs 9 bn, which we believe is a sound reinvestment in a year when the profitability of the men’s IPL is on the rise. While there will be a cost associated with this acquisition, it will be amortised over a period of ten years.
Our anti-consensus underweight view on UNSP has played out well; the stock has corrected 20% from its peak with most of the negatives factored in.
