RESULTS REVIEW 2QFY20 26 OCT 2019 United Spirits BUY ‘Walking’ in the right direction UNSP’s 2Q was weaker than expected. Liquor industry was impacted by slowdown, high base, flooding, liquidity stress in wholesale channel and stiff input costs. UNSP’s restructuring drive is visible, supporting margins despite several headwinds. We believe UNSP will continue to tighten the screws on overheads and benefit from premiumisation. We cut EPS estimates by 4-5% to factor miss in 2Q and value UNSP on Sep-21E EPS, arriving at a TP of Rs 737. Maintain BUY. HIGHLIGHTS OF THE QUARTER Net rev. grew by 3% (exp of 5%) aided by one-time bulk sales of scotch (adj. growth was flat vs. 14% in 2QFY19). Pernod clocked 3% value growth. Volumes grew by 1% (P&A 3%, popular -1%) on a high base of 12%. Price/mix was negative owing to inferior mix, strategic pricing actions in Maharashtra (McDowells) and adverse state mix. Inferior mix was led by disruption in supply chain of BIO scotch portfolio. Mgt. believes consumer sentiments have turned positive in Oct-19 but remains on a wait and watch mode before calling out a recovery. Amidst liquidity stress, co is providing additional credit to the trade in a calibrated way without compromising on quality sales. We believe premiumisation will resume in 3Q. ENA inflation spiked in 2Q vs. 1Q which led to steep GM decline of 494bps (underlying) vs. exp of -300bps. UNSP has received price hikes from 16 states over the last 12 months. ENA costs have moderated in Oct-19 from its peak in 2Q. Management guides for further moderation post upcoming harvest. Co is actively working with more states for price hikes. Restructuring drive (employee/other expenses) and tight lid on A&P spend led to modest EBITDAM decline of - 181bps to 18.1% margin (vs. exp of 20.3%). Employee/ASP/Other expenses grew by 3/-14/-18%. Margin expansion hereon is uphill (low-hanging fruits behind) but still on the cards. We model 360bps expansion over FY19-22E. Near term outlook: Positive driven by uptick in consumption, moderation in ENA costs and restocking benefits of BIO scotch portfolio. STANCE Diageo’s global market leadership (17/40% share in spirits/scotch) and its dominance in premium segment drives our confidence on UNSP. India is a critical market for Diageo, given the scale (largest Whisky market), leadership position and opportunity to premiumise. UNSP’s premiumisation journey is on track (P&A revenue mix up 800bps vs. FY17) supported by aggressive A&P spends and de-focus on popular brands (franchise model). Restructuring drive, richer product mix, WC efficiencies (80 days vs. 120 days in FY17) have led to strong FCF generation over the last 3 years (cumulative Rs 32bn). Thereby, co has been able to deleverage balance sheet (net debt is at Rs 25bn vs. 40bn in FY17). We expect more of the same over FY19-22E (Rs 33bn FCF generation and Rs 17bn debt repayment). Financial Summary (Standalone) (Rs mn) 2QFY20 2QFY19 YoY (%) 1QFY20 QoQ (%) FY18 FY19 FY20E FY21E FY22E Net Sales 22,962 22,249 3.2 22,184 3.5 81,701 89,877 96,813 105,628 114,049 EBITDA 4,156 4,429 (6.2) 3,971 4.7 10,215 13,579 16,265 18,850 21,299 APAT 2,246 2,587 (13.2) 1,987 13.0 5,527 7,436 9,154 11,891 14,027 Diluted EPS (Rs) 3.1 3.6 (13.2) 2.7 13.0 7.6 10.2 12.6 16.4 19.3 P/E (x) 82.4 61.3 49.8 38.3 32.5 EV / EBITDA (x) 47.7 35.4 29.1 24.6 21.3 RoIC (%) 10.8 15.8 18.4 21.6 23.5 Source: Company, HDFC sec Inst Research INDUSTRY ALCO-BEV CMP (as on 25 Oct 2019) Rs 627 Target Price Rs 737 Nifty 11,384 Sensex 39,058 KEY STOCK DATA Bloomberg UNSP IN No. of Shares (mn) 727 MCap (Rs bn) / ($ mn) 456/6,222 6m avg traded value (Rs mn) 1,007 STOCK PERFORMANCE (%) 52 Week high / low Rs 680/497 3M 6M 12M Absolute (%) 7.6 14.5 17.1 Relative (%) 4.4 13.7 1.2 SHAREHOLDING PATTERN (%) Jun-19 Sep-19 Promoters 56.8 56.8 FIs & Local MFs 5.3 6.2 FPIs 22.3 22.4 Public & Others 15.6 14.6 Pledged Shares* 2.0 1.4 Source : BSE, * % of total Siddhant Chhabria [email protected]+91-22-6171-7336 Naveen Trivedi [email protected]+91-22-6171-7324 HDFC securities Institutional Research is also available on Bloomberg HSLB <GO> & Thomson Reuters
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BUY ‘Walking’ in the right direction INDUSTRY ALCO-BEV (as ... Spirits - 2QFY20 - HDFC se… · way without compromising on quality sales. We believe premiumisation will resume
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RESULTS REVIEW 2QFY20 26 OCT 2019
United Spirits BUY
‘Walking’ in the right direction UNSP’s 2Q was weaker than expected. Liquor industry was impacted by slowdown, high base, flooding, liquidity stress in wholesale channel and stiff input costs. UNSP’s restructuring drive is visible, supporting margins despite several headwinds. We believe UNSP will continue to tighten the screws on overheads and benefit from premiumisation. We cut EPS estimates by 4-5% to factor miss in 2Q and value UNSP on Sep-21E EPS, arriving at a TP of Rs 737. Maintain BUY. HIGHLIGHTS OF THE QUARTER Net rev. grew by 3% (exp of 5%) aided by one-time bulk
sales of scotch (adj. growth was flat vs. 14% in 2QFY19). Pernod clocked 3% value growth. Volumes grew by 1% (P&A 3%, popular -1%) on a high base of 12%. Price/mix was negative owing to inferior mix, strategic pricing actions in Maharashtra (McDowells) and adverse state mix. Inferior mix was led by disruption in supply chain of BIO scotch portfolio.
Mgt. believes consumer sentiments have turned positive in Oct-19 but remains on a wait and watch mode before calling out a recovery. Amidst liquidity stress, co is providing additional credit to the trade in a calibrated way without compromising on quality sales. We believe premiumisation will resume in 3Q.
ENA inflation spiked in 2Q vs. 1Q which led to steep GM decline of 494bps (underlying) vs. exp of -300bps. UNSP has received price hikes from 16 states over the last 12 months. ENA costs have moderated in Oct-19 from its peak in 2Q. Management guides for further moderation
post upcoming harvest. Co is actively working with more states for price hikes.
Restructuring drive (employee/other expenses) and tight lid on A&P spend led to modest EBITDAM decline of -181bps to 18.1% margin (vs. exp of 20.3%). Employee/ASP/Other expenses grew by 3/-14/-18%. Margin expansion hereon is uphill (low-hanging fruits behind) but still on the cards. We model 360bps expansion over FY19-22E.
Near term outlook: Positive driven by uptick in consumption, moderation in ENA costs and restocking benefits of BIO scotch portfolio.
STANCE Diageo’s global market leadership (17/40% share in spirits/scotch) and its dominance in premium segment drives our confidence on UNSP. India is a critical market for Diageo, given the scale (largest Whisky market), leadership position and opportunity to premiumise. UNSP’s premiumisation journey is on track (P&A revenue mix up 800bps vs. FY17) supported by aggressive A&P spends and de-focus on popular brands (franchise model). Restructuring drive, richer product mix, WC efficiencies (80 days vs. 120 days in FY17) have led to strong FCF generation over the last 3 years (cumulative Rs 32bn). Thereby, co has been able to deleverage balance sheet (net debt is at Rs 25bn vs. 40bn in FY17). We expect more of the same over FY19-22E (Rs 33bn FCF generation and Rs 17bn debt repayment).
Net rev. grew by 3% (exp of 5%) aided by one-time bulk sales of scotch (adj. growth was flat vs. 14% in 2QFY19). Pernod clocked 3% value growth in Sep-19 quarter on a high base of 34% ENA inflation spiked in 2Q vs. 1Q which led to steep GM decline of 494bps (underlying) vs. exp of -300bps Restructuring drive (employee/other expenses) and tight lid on A&P spend led to modest EBITDAM decline of -181bps to 18.1% margin (vs. exp of 20.3%). Employee/ASP/Other expenses grew by 3/-14/-18% IND-AS 116 positively impacted EBITDAM by ~40bps Tax rates were negatively impacted owing one-time write off in DTA APAT degrew by 13% vs. our exp of +7%
P&A rev growth was flat on a high base of 19% Popular degrew by 1% (underlying) on a high base of 10% P&A revenue mix expanded to 68.2% in 2QFY20 vs. 65.8% in 2QFY18.
Price/mix was negative owing to inferior mix, strategic pricing actions in Maharashtra (McDowells) and adverse state mix. Inferior mix was led by disruption in supply chain of BIO scotch portfolio. Co is strategically holding prices for a few brands in Maharashtra (growth and margin accretive to UNSP) to remain competitive GP/case declined YoY owing to higher RM prices
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UNITED SPIRITS : RESULTS REVIEW 2QFY20
Performance in charts
Cash Conversion Cycle FCF Generation
Source: Company, HDFC sec Inst Research Source: Company, HDFC sec Inst Research
Net Debt RoIC
Source: Company, HDFC sec Inst Research Source: Company, HDFC sec Inst Research
UNSP has successfully improved their WC cycle led by better trade collections, lower inventory days and higher payable days Robust FCF generation over FY19-22E will be deployed to reduce debt (Rs 33bn FCF generation and Rs 17bn debt repayment)
93 105
127 120
104
80 80 80 80
-
20
40
60
80
100
120
140
FY14
FY15
FY16
FY17
FY18
FY19
FY20
E
FY21
E
FY22
E
(Days)
(11.0)
3.4
(0.4)
8.1
12.8 11.0
9.2 11.1
12.9
(16.0)
(8.0)
-
8.0
16.0
FY14
FY15
FY16
FY17
FY18
FY19
FY20
E
FY21
E
FY22
E
(Rs bn)
40.4 46.4
41.9 39.8
31.5 25.3
18.2
8.8
(2.8)
(20.0)
-
20.0
40.0
60.0
FY14
FY15
FY16
FY17
FY18
FY19
FY20
E
FY21
E
FY22
E
Expect UNSP to be net cash by FY22E(Rs bn)
5 6
9
12 11
16 18
22 24
-
6
12
18
24
FY14
FY15
FY16
FY17
FY18
FY19
FY20
E
FY21
E
FY22
E
(%)
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UNITED SPIRITS : RESULTS REVIEW 2QFY20
Global Alcohol Market Top 10 Fastest Growing Alcohol Markets
Countries Alcohol Volume (9mn ltr. cases) (% of Global Volume)
2018 2020 2023 CAGR 2018 2020 2023 India 662 755 941 7.3% 2.4% 2.7% 3.3% Mexico 1,021 1,118 1,283 4.7% 3.7% 4.0% 4.5% Vietnam 469 475 542 2.9% 1.7% 1.7% 1.9% Philippines 304 335 399 5.6% 1.1% 1.2% 1.4% Nigeria 221 252 257 3.0% 0.8% 0.9% 0.9% Poland 469 475 513 1.8% 1.7% 1.7% 1.8% Ethiopia 110 112 114 0.6% 0.4% 0.4% 0.4% Myanmar 55 56 86 9.1% 0.2% 0.2% 0.3% Sri Lanka 28 28 29 0.6% 0.1% 0.1% 0.1% Turkey 138 112 114 -3.7% 0.5% 0.4% 0.4% Total Leading Markets 3,478 3,718 4,275 4.2% 12.6% 13.5% 15.1% Global Total 27,600 27,957 28,500 0.6% 100% 100% 100% Source: IWSR, Company, HDFC sec Inst Research Alcohol Consumption vs. Per Capita Income Premiumization in spirits in India: Premium is
growing ~2x of Prestige
Source: David Turtle Model, Company, HDFC sec Inst Research Source: IWSR, Company, HDFC sec Inst Research
India is the fastest growing alcohol market in terms of volume growth (7% CAGR over 2018-2023). Premium segment is expected to outpace popular segment India is the largest Whisky market in the world (volume terms), still we rank low in terms of per capita consumption of alcohol UNSP is riding on the premiumization theme in alcobev with disproportionate A&P spends on P&A and de-focus on popular (franchised in 13 states)
Volume growth and price/mix improvement is key for UNSP In FY20E, we expect gross margin pressure owing to limited price hikes to pass on hardening of ENA costs We believe in the longer run UNSP has the opportunity to reduce A&P spends (extract higher ROI) as well as other expenses We expect EBITDA margins to expand over FY19-22E driven by restructuring drive and premiumization NPM is expected to expand over FY19-22E driven by deleveraging
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UNITED SPIRITS : RESULTS REVIEW 2QFY20
Revision In Estimates
New Old Change FY20E FY21E FY20E FY21E FY20E FY21E
Net Debt* - Flats/factories etc (Rs Mn) 6,000 CMP (Rs) 127 Interest - Non core assets value (Rs Mn) 16,844 Mcap (Rs Mn) 1,700
PBT 1,250 (-) discount owing to legal disputes and timing uncertainity 50% UNSP holding (%) 75%
PAT 813 Non core assets value (Rs Mn) 8,422 Implied value for UNSP (Rs Mn) 1,275 Tgt Multiple (x) 20 UNSP O/s shares (Mn) 727 (-) Holdco discount 50% RCB Value 16,250 Value per share (Rs) 12 Value considered for UNSP (Rs Mn) 850 (-) Hold Co discount 50% UNSP O/s shares (Mn) 727 RCB Value 8,125 Value per share (Rs) 1 UNSP O/s shares (Mn) 727 Value per share (Rs) 11 * Entire debt is from UNSP and thus not considered
Rating Definitions BUY : Where the stock is expected to deliver more than 10% returns over the next 12 month period NEUTRAL : Where the stock is expected to deliver (-)10% to 10% returns over the next 12 month period SELL : Where the stock is expected to deliver less than (-)10% returns over the next 12 month period
Date CMP Reco Target 10-Oct-18 463 BUY 565 1-Nov-18 620 NEU 627 9-Jan-19 600 NEU 615
HDFC securities Institutional Equities Unit No. 1602, 16th Floor, Tower A, Peninsula Business Park, Senapati Bapat Marg, Lower Parel, Mumbai - 400 013 Board : +91-22-6171-7330 www.hdfcsec.com
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UNITED SPIRITS : RESULTS REVIEW 2QFY20
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