UNSP not only reported 8% sales growth in the Prestige & Above (P&A) segment (mainly led by the return of mix improvement and despite a challenging base of 16% growth in Q3FY19), but also ended the quarter with healthy winter and Christmas/New Year eve sales. This is comforting, particularly when looked at the uncertain outlook on P&A at end-2QFY20. After facing RM cost pressure for a few quarters, management cited some relief on ENA costs over the last two months. Despite significant pressure on the gross margin from ENA costs, the company (contrary to expectations of Ebitda margin pressure for FY20) reported ~120bp y-o-y operating margin improvement in 9MFY20 (adjusted for bulk scotch), including 210bp y-o-y expansion in Q3FY20. Premiumisation trend returned with each sub-segment growing faster than the one beneath it.
Sales growth below expectations but significant beat on Ebitda
Standalone net sales grew 3.4% y-o-y to `25.8 bn (our estimate: `26.8 bn). Reported volumes declined 1.8% y-o-y (our estimate: +5%). P&A volumes grew 2.7% y-o-y, while Popular volumes were down sharply by 6.5% y-o-y. Ebitda grew 18.4% y-o-y to `4.2 bn (our estimate: `3.7 bn). Despite significant gross margin compression, the Ebitda margin expanded by 210bp y-o-y to 16.4% (our estimate: 13.8%), primarily led by savings in operating costs and to a lesser extent by the lower marketing reinvestment rate (other expenses were down 390bp y-o-y, staff costs were down 150bp y-o-y and ad spends were down 100bp y-o-y). PBT grew 7.9% y-o-y to `3.4 bn (our estimate: `3.2 bn). Adj. PAT was up 21.7% at `2.6 bn (our estimate: `2.4 bn), led by higher Ebitda and lower corporate tax rates. For 9MFY20, sales/ Ebitda/PAT growth stood at 5.4%/18.9%/18.3% y-o-y.
Highlights from management commentary
P&A is likely to grow in double-digits and Popular in low-single-digits. Liquidity in trade (a problem in Q2FY20) has improved sequentially. Reduction in debt and working capital continued in 9MFY20. ~`15 bn of assets are to be monetised, providing more opportunity for debt reduction.
Valuation and view
Despite (a) healthy earnings CAGR of 35.2% for the five years ending FY20 (since Diageo took control), (b) among the best-of-breed earnings outlook (~29.5% CAGR over the next two years) and (c) continued RoCE improvement, the stock trades in line with peers at 42.1x FY21e EPS. On our DCF calculations, we arrive at a target price of `801, implying a 22% upside (effective target multiple of 40x Mar’22e EPS).