United Spirits rating: Retain ‘add’ with target price of Rs 650

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Published: July 31, 2020 8:35 AM

Gross margin declined 570 bps to 41.7% due to lower franchise income, input cost inflation and one-off obsolete inventory write off.

Reported Ebitda margin declined 2540 bps to -7.5% as EBITDA came in at a loss.Reported Ebitda margin declined 2540 bps to -7.5% as EBITDA came in at a loss.

1Q has been marred with one-offs and we caution against reading too much into it. Volume halved with
operations (manufacturing and sales) being closed for over a month and then witnessing only a gradual reopening. Profitability was impacted by provisioning for ageing of inventory (mostly will be recovered – management view), lower franchisee incomes (likely to be a drag in FY21) and negative operating leverage.

We believe that USL could potentially benefit from (relative) easing of competitive intensity – Pernod Ricard gets more impacted (only premium, greater on-trade contribution). New distribution model (online ordering and home delivery), if sustained, can be a structural positive for the industry – improve accessibility, help premiumise and remove in-home consumption stigma. Retain ‘add’.

Revenue declined 54% while Ebitda came in at a loss of Rs 780 million. Underlying sales (ex-bulk Scotch sale in base) declined 51% with 49% volume decline as operations were shut for over a month and then too witnessed only a gradual reopening. Prestige & Above volumes and sales both declined 52%. Popular segment sales declined 51% overall (volumes down 47%) and 46% in priority states.

Gross margin declined 570 bps to 41.7% due to lower franchise income, input cost inflation and one-off obsolete inventory write off. Adjusting for bulk Scotch sale in base quarter, GM declined 508ps to 42.2%. Reported Ebitda margin declined 2540 bps to -7.5% as EBITDA came in at a loss. This was driven by negative operating leverage and Covid-driven ageing related provisions. Staff costs was up +550 bps (-13% YoY on absolute basis) and other opex was up +1690 bps (includes Rs  440 million ageing related provisions).

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