United Spirits Rating: Hold, Edelweiss says the worst is over for the company

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March 20, 2021 1:15 AM

Home delivery is structurally positive; competition, taxes are concerns; ‘Hold’ retained

We look forward to any strategic changes by Hina Nagarajan, who will take over as CEO from 1st July, 2021.We look forward to any strategic changes by Hina Nagarajan, who will take over as CEO from 1st July, 2021.

We recently met Anand Kripalu, Managing Director – United Spirits (USL), to gain insights into the company’s growth plan, regulatory framework and strategy to counter competition, among others. Highlights:

(i) Proposed regulatory changes in Delhi could potentially benefit the company; (ii) home delivery will be an advantage and fuel category growth; (iii) the target is double-digit volume growth in Prestige and Above (P&A) segment.

All in all, although home delivery of alcohol is structurally positive and the worst is behind for out-of-home consumption, intensifying competition from Pernod and higher taxes remain the key concerns. Retain Hold with a TP of Rs 600.

Six key issues we delve into: (i) For the past few quarters, spirits has grown faster than beer. Now with confined living gradually ending, could this reverse?; (ii) can home delivery of liquor become big in the long run?; (iii) are government regulations changing for the better?; (iv) how do you see A&P spends? (v) how is the market share in the P&A segment?; (vi) what’s the take on the change in consumers’ in-home consumption habits?

Volume to recover; renovating core big brands to drive volumes: Socialising, central to company’s category, remains somewhat subdued. Despite this, on-trade channel is gradually picking up. During the period when on-trade struggled, off-trade was resilient. In terms of the regulatory environment, in West Bengal, taxes have been hiked; it is a very price-sensitive market. So the solution is to wait for data, and reason out with the government that higher taxes are a lose-all proposition. The company is pleased with the initial response to the rollout of renovated bundles of McDowell’s No. 1 whiskey and Royal Challenge whiskey.

Outlook and valuation: Worst behind
We look forward to any strategic changes by Hina Nagarajan, who will take over as CEO from 1st July, 2021. USL remains an interesting name in India’s liquor industry by virtue of its robust market share and benefits from Diageo’s management control. The latter has taken steps to turn the company around—changes at management and distribution levels, revamp of brand promotions strategy, enhanced supply chain efficiency, focus on a lean portfolio, engaging with the government and improving work culture. Diageo’s strategy to focus on the premium-end is also bearing fruit. We retain ‘HOLD/SN’. The stock is trading at 38.2x FY22e EPS.

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