United Spirits rating: ‘Neutral’; Performance was below par in Q4FY20

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Published: June 6, 2020 4:15 AM

Outlook bleak for FY21 and FY22, with RoE likely to be well below 20% seen in past; ‘Neutral’ retained as valuations are fair

Standalone net sales declined 11.4% y-o-y to Rs 19.9 bn. Underlying net sales, excl. the one-off sale of bulk Scotch, declined 14.8%.

UNSP’s Q4FY20 results were worse than expectations. If bulk scotch sales (that could be lumpy but not extraordinary) are excluded, then results would be even weaker. While UNSP’s PAT CAGR for 5 years ending FY20 stood at 33%, FY21 and FY22e are likely to be the lost years for UNSP and other alcohol companies with negligible earnings growth. Impact of extremely sharp excise increases across states would only exacerbate the pressure on FY21 profitability.

Further, we believe profitability is already sharply impacted by (a) the absence of any sales until 3rd May; and (b) absence of sales from on-trade channel (20-25% of sales), which is expected to last for a significantly large part of the year after the latest MHA guidelines. Maintain Neutral on UNSP on account of fair valuations.

COVID-19 impacts volumes
Standalone net sales declined 11.4% y-o-y to Rs 19.9 bn. Underlying net sales, excl. the one-off sale of bulk Scotch, declined 14.8%. Overall reported volumes declined 13.3%. P&A/Popular volumes declined 20%/6.6% y-o-y.

Reported gross margin contracted by 430bp to 42.2%, primarily due to COGS inflation as well as the dilutive impact of the last tranche of bulk Scotch sales. Underlying gross margin, excluding the one-off sale of bulk Scotch, was down 364bp to 42.9%. Despite significant gross margin compression, reported Ebitda margin expanded 100bp y-o-y to 13.6%, primarily delivered through savings in operating costs.

Adjusted for one-off impact of bulk Scotch sales and restructuring costs, underlying Ebitda declined 16.2% y-o-y and underlying Ebitda margin was down 21bp y-o-y to 13.2%. Reported Ebitda declined 4.3% y-o-y to Rs 2.7 bn. Adjusted PAT declined 16.9% to Rs 1.1 bn. Reported PAT declined 81.1% to Rs 239 m on account of higher taxes.

FY20 performance: FY20 sales/ Ebitda/Adj. PAT growth stood at 1.2%/ 17.1%/16.9% y-o-y. The company repaid debt amounting to Rs 4.9 bn. Net debt as of Mar’20 stood at Rs 20.7 bn, down 20% y-o-y.

Valuation and view
As highlighted earlier, outlook is weak for alcohol companies, leading to a significant slowdown in earnings growth (from >30% growth in the 5 years ending FY20). Weak results have led to further EPS cuts of 6.4%/4.0% for FY21/FY22e. RoE for FY21/FY22e is likely to be well below the 20% range witnessed over past 4 years. Our DCF-based TP leads to an 8% downside to CMP (effective target multiple of 41x Mar’22e EPS). Maintain Neutral.

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