United Spirits (UNISPI) 3289

Transcription

1 Result Update Rating matrix Rating : Buy Target : 375 Target Period : 12 months Potential Upside : 14% What s changed? Target Unchanged EPS FY19E Changed from 48.5 to 5.4 EPS FY2E Changed from 67.7 to 68.4 Rating Unchanged Quarterly performance Crore Q4FY18 Q4FY17 YoY (%) Q3FY18 QoQ (%) Revenue 2, , , EBITDA EBITDA (%) bps bps PAT Key financials Crore FY17 FY18E FY19E FY2E Net Sales 8,892 8,667 9,792 11,361 EBITDA 1,63 1,277 1,376 1,75 Net Profit EPS ( ) Valuation summary FY17 FY18E FY19E FY2E P/E (x) Target P/E (x) EV/EBITDA (x) P / BV (x) RONW (%) ROCE (%) Stock data Particular Amount Market Capitalization ( Crore) 47,791.3 Total Debt (FY17) ( Crore) 3,64.1 Cash (FY17) ( Crore) EV ( Crore) 5, week H/L 45\1988 Equity Capital ( Crore) Face Value ( ) 1. Price Performance (%) 1M 3M 6M 1Y Radico Khaitan United Breweries United Spirits Research Analysts Bharat Chhoda bharat.chhoda@icicisecurities.com Premiumisation story continues May 29, 218 United Spirits (UNISPI) 3289 Net revenue for Q4FY18 grew 7% YoY to 2174 crore (I-direct estimate: 2127 crore) due to strong performance in the prestige and above segment as well as the benefit from lapping up the impact of demonetisation and the highway ban. Prestige & above segment reported volume growth of 14% YoY to 9.7 million cases while popular segment reported a volume decline of 14% to 11.1 million cases EBITDA margins declined 48 bps YoY to 12.6% (I-direct estimate: 13.5%) mainly due to higher employee and advertisement & promotion expenses. Resultant EBITDA grew 3% YoY to 274 crore (Idirect estimate: 288 crore) PAT was at 211 crore vs. a loss of 14 crore in Q4FY17 (I-direct estimate: 152 crore). PAT was higher than I-direct estimates mainly due to higher-than-expected other income ( 121 crore vs. 19 crore in Q4FY17) and an exceptional gain of 37 crore Route to market seen stabilising, further strengthening sales prospects Q4 was largely viewed as a stable quarter for liquor companies. The management expects the environment to continue, going ahead. The company is seeing one of the largest markets i.e. Uttar Pradesh (UP) distribution model slowly transitioning from a closed to a free market. Also, USL wants to remain cautious to control its credit period and focus on collections rather than generating new sales. The management believes that being prudent with receivables would yield them longer term results. USL would continue to invest, going ahead, while strengthening its investments in brand building (A&P). We believe the regulated distribution environment would govern issues around unreported and fake liquor. Given the experience to work across distribution models coupled with strong consumer patronage, we expect USL to benefit from formalisation of sector. Price hikes, premiumisation bode well The company has been able to get price hikes in 15 states and is expecting some other states to also allow price hikes in FY19E. The company s journey of premiumisation is on course with two-third of the revenues being contributed by the prestige and above segment. The cumulative benefit of above factors would accrue over FY19 and FY2 with a revenue CAGR of 15% to crore in FY2E Sustainable growth in revenue/margins over long term; maintain BUY USL has over the past two years sharpened its focus on the Prestige and above segment while at the same time maintaining its market leadership in popular brands. USL has entered into agreements with distilleries on a fixed fee basis to manufacture its popular brands for three to five years. The shift in business model has led to sustainability in gross margins. For FY18, the company was able to garner a revenue of 5 crore (net of sales) from the franchise sales of popular brands. Moreover, consecutive price across states has led margins to trend higher. The strategy would position USL to achieve its guidance of achieving double digit growth and high teen margins. We expect USL to follow the margin profile of Pernod Ricard (22-25%) over our DCF based model thereby arriving at a DCF based target price to 375 with a BUY recommendation. ICICI Securities Ltd Retail Equity Research

2 Variance analysis Standalone Q4FY18 Q4FY18E Q4FY17 YoY (%) Q3FY18 QoQ (%) Comments Revenue 2, , , , YoY growth mainly due to strong growth in the Prestige and Above segment as well as the benefit from lowering of the impact of demonetisation and the highway ban Consumption of RM 1, , , , Lower raw material cost and higher gross margins, mainly due to one-off impact of operating model changes as well as price increases and productivity gains more than offsetting the adverse impact of GST Employee Expenses A&P Expenses Other Expense Total Expense 1, , , , EBITDA EBITDA Margin (%) bps bps Depreciation Interest Repayment of debt led to decline in interest costs Other Income Higher mainly due to 1) property sale of 65 crore 2) 33 crore of interest income reversal from subsidiaries (revived from loss making position) Exceptional Gain/Loss NA NA Selling of non-core assets led to exceptional gains PBT NA Total Tax NA PAT NA NA Key Metrics Q4FY18 Q4FY18E Q4FY17 YoY (%) Q3FY18 QoQ (%) P & above vol (Mn cases) Supported by the continued success of our brand renovations including McDowell s No.1 whiskey, Royal Challenge and Signature Regular De-focus in popular segment coupled with higher franchising impacted volumes. Net sales of popular segment in priority states grew by 1% Total vol (mn cases) Change in estimates FY19E ( Crore) FY17 FY18E Old New % Change Old New % Change Comments Revenue 8, , , , , , EBITDA 1,63.3 1, , , ,751. 1, EBITDA Margin (%) bps bps Margin expansion to remain robust FY2E PAT EPS ( ) Assumptions Comments FY17 FY18E FY19E FY2E FY19E FY2E Volume (Standalone) Cr Cases Growth in the Prestige and above segment to be negated by de-growth in the popular segment Volume Growth (%) Net Realization (Standalone) 953 1,39 1,22 1,418 1,237 1,47 Future price hikes to remain robust /case Realization Growth (%) Current Earlier ICICI Securities Ltd Retail Equity Research Page 2

3 Conference call key takeaways The management has indicated that Q4FY18 was a stable quarter for the liquor business. Prestige and above segment comprise nearly two-third (~63%) of overall net sales The management has guided for double digit revenue growth and mid to high teen EBITDA margins for FY19 The management expects the route to market (RTM) environment to be stable ahead. Uttar Pradesh (UP) is becoming more of an open market for liquor companies The management has indicated it will offer no more franchisees for the popular segment Molasses constitute 25% of the ENA requirement for the company. To that number, the company has benefitted from lowering sugar prices. However, on an overall basis, the cost per case was largely flattish Net of royalty the company earned 5 crore from sales via franchise For the year, 15 states have granted price hikes. The management was candid to accept they have not seen this scenario over the past many years The innovation efforts would now be on premiumising rum, like in the case of whiskey. The company had launched a new variant of dark rum under Captain Morgan in the last quarter. Post national rollout, the management is pleased with its acceptability in the market The management has guided for 2 +/- 5 crore per year, going forward For FY18, the subsidiaries have shown a revival in PAT growth and contributed 125 crore to the consolidated PAT ICICI Securities Ltd Retail Equity Research Page 3

4 Company Analysis Exhibit 1: Regular de-grows at CAGR of 16% over FY16-18 Exhibit 2: Prestige and above grows at CAGR of 4% over FY (mn cases) Q1FY16 Q2FY16 Q3FY16 Q4FY FY Q1FY17 Q2FY17 Q3FY17 Q4FY FY Q1FY Q2FY18 Q3FY18 Q4FY18 FY18 (mn cases) Q1FY16 Q2FY16 Q3FY16 Q4FY FY Q1FY Q2FY17 Q3FY17 Q4FY17 FY17 Q1FY18 Q2FY18 Q3FY18 Q4FY18 FY18 Exhibit 3: Revenue growth crore FY16 FY17 FY16E FY19E FY2E Revenue Revenue Growth Source: Company, ICICI Direct, Research % Exhibit 4: Key expenditure breakup 12 % FY16 FY17 FY18E FY19E FY2E RM Cost Employee Cost Advertisement Expenses Source: Company, ICICI Direct, Research Exhibit 5: EBITDA and EBITDA margins trajectory Cr FY16 FY17 FY18E FY19E FY2E EBITDA EBITDA Margin Source: Company, ICICI Direct, Research % Exhibit 6: PAT and PAT margin trajectory Cr FY16 FY17 FY18E FY19E FY2E PAT PAT Margin Source: Company, ICICI Direct, Research % ICICI Securities Ltd Retail Equity Research Page 4

5 Valuation We believe post Diageo taking over the reins of USL it would undergo a series of transformations over the long term, which we have tried to capture through our DCF methodology. Key risks to our assumptions are certain policy headwinds to the likes of implementation of ban on alcohol or any other regulatory changes. However, we continue to believe the per capita consumption, which is currently <2 litre would marginally scale up, which would be supported by a cultural change in the modernisation of India. We have employed the three phase free cash flow to the firm (FCFF) model over FY17-26 for our discounted cash flow methodology. We believe USL will mainly undergo three phases of transformation. We reduce our three phase DCF model to a two phase model, broadly bifurcating our first phase as a high growth phase wherein the sector would undergo a structural change. We expect the earnings to grow at a CAGR of 15% (FY18-2E). In the next phase we expect the mindset to change and expect business as usual scenario. We model the best case scenario for the company as we believe the real potential growth for USL is yet to be realised. We maintain our terminal growth rate of 4%. Given the normalisation of interest rate, we revise our risk free rate of 7.5% and beta of.9 together with a market risk premium of 4%, we arrive at a cost of equity of 11.2%. Consequently, we arrive at a target price of 375 for USL with a BUY recommendation. Exhibit 7: DCF valuation Valuation Cr PV of High growth period 57.9 PV of Stable growth period PV of Terminal value Target Price ( ) 375 Exhibit 8: Valuations Sales Sales EPS EPS PE EV/EBITDA RoNW RoCE ( cr) Growth (%) ( ) Growth (%) (x) (x) (%) (%) FY FY FY18E FY19E FY2E ICICI Securities Ltd Retail Equity Research Page 5

6 Recommendation history vs. consensus estimate 5, 7. 4, ( ) 3, 4. (%) 2, 3. 1, May-15 Jul-15 Oct-15 Dec-15 Mar-16 May-16 Aug-16 Oct-16 Dec-16 Mar-17 May-17 Aug-17 Oct-17 Dec-17 Mar-18. May-18 Source: Bloomberg, Company, ICICI Direct Research Price Idirect target Consensus Target Mean % Consensus with BUY Key events Date Event Sep-12 Diageo said to be in advanced talks for stake in United Spirits Apr-14 Diageo offers to buy 26% stake in United Spirits for 1145 crore May-14 United Spirits agrees to sell Whyte & Mackay unit to Emperador Sep-14 United Spirits declares Q4FY14 result reporting a loss of crore Apr-15 Appoints Vinod Rao as the Head of Finance and V Ramachandran as the company secretary and compliance officer May-15 United Spirits declares Q4FY14 result reporting a loss of crore Jul-15 Reports Q1FY16; volume growth for Prestige & above segment come in at 5.7% Nov-15 Reports Q2FY16; prestige and above segment grew by 7%; EBITDA margins highest since 213 at 15% Jan-16 Reports Q3FY16; prestige and above grew by 11% and regular de-grew by 6%. Diageo agreement sales at 298 crore May-16 Reports Q4FY16; prestige and above grew 9%; popular de-grew 1%. Guided for mid-teen margins for FY17 Jul-16 Reports Q1FY17; prestige and above grew 11%; popular de-grew 7%. Focus to grow double digit in terms of total revenue Oct-16 Reports Q2FY17; prestige and above grew 1%; popular de-grew 5%. EBITDA margins impacted by severance costs and LBT in Maharashtra. Affirms guidance of midteens margins. Jan-17 Reports Q3FY17 results. Volumes de-grow 5% YoY but net income grows 3% YoY. EBITDA margins were at 11.8% with PAT of crore May-17 Reports Q4FY17 results. Total volumes de-grow 8% YoY but net income de-grows 1% YoY. PAT was at loss of 14.2 crore, including exceptional loss of 29.8 crore Jul-17 Reports Q1FY17 results. Volumes de-grew by 19% YoY. Net income de-grew by 13% YoY. PAT stood ar 63 crore Top 1 Shareholders Rank Investor Name Latest Filing Date % O/S Position (m) Change (m) 1 Diageo PLC 31-Mar-18 55% UB Group 31-Mar-18 4% Carmignac Gestion 31-Mar-18 2% USL Benefit Trust 31-Mar-18 2% CLSA Capital Partners 31-Mar-18 2% The Vanguard Group, Inc. 3-Apr-18 1% Motilal Oswal Asset Management Company Ltd. 31-Mar-18 1% BlackRock Institutional Trust Company, N.A. 3-Apr-18 1% Matthews International Capital Management, L.L.C. 31-Dec-17 1% Franklin Advisers, Inc. 31-Mar-18 1% 1.1. Source: Reuters, ICICI Direct Research Shareholding Pattern (in %) Mar-17 Jun-17 Sep-17 Dec-17 Mar-18 Promoter FII DII Others Recent Activity Buys Sells Investor Name Value Shares Investor Name Value Shares BlackRock Asset Management Ireland Limited Carmignac Gestion JM Financial Asset Management Pvt. Ltd Capital International Investors Indus Capital Partners, LLC Waddell & Reed Investment Management Company Motilal Oswal Asset Management Company Ltd ARISAIG Partners (Asia) Pte. Ltd Neuberger Berman, LLC Robeco Institutional Asset Management B.V Source: Reuters, ICICI Direct Research ICICI Securities Ltd Retail Equity Research Page 6

7 Financial summary Profit and loss statement Crore (Year-end March) FY17 FY18E FY19E FY2E Total operating Income 8, , , ,361.1 Growth (%) Cost of materials consumed 4, , ,91.6 5,851. Purchase of Traded goods Change in Inventories Employee benefit expense Advertisment&Promo Other Expenses 1,537. 1, , ,1.9 EBITDA 1,63.3 1, , ,749.6 Growth (%) Depreciation EBIT ,84.4 1,26.7 1,62.4 Interest Other Income Exceptional Item PBT ,11.1 1,495.6 Tax Reported PAT Adjustments Adjusted PAT EPS Cash flow statement Crore (Year-end March) FY17 FY18E FY19E FY2E Profit after Tax Add: Depreciation Cash Profit ,123.7 Increase/(Decrease) in CL (Increase)/Decrease in CA , CF from Operating Activities ,16.6 1, ,686. Purchase of Fixed Assets (Inc)/Dec in Investments Others CF from Investing Activities ,462.9 Inc/(Dec) in Loan Funds Inc/(Dec) in Sh. Cap. & Res..... Others CF from financing activities Op. Cash and cash Eq Cl. Cash and cash Eq Balance sheet Crore (Year-end March) FY17 FY18E FY19E FY2E Source of Funds Equity Capital Reserves & Surplus 1,64.3 2, , ,547.9 Shareholder's Fund 1, , , ,693.2 Minority Interest Loan Funds 3, ,64.1 2,912. 2,663.7 Provisions Other Liabilities.... Total Current Liabilities 3,292. 3,46.9 3,53.4 3,176.2 Source of Funds 8, ,94.2 8, ,583.3 Application of Funds Gross Block 3, , , ,248.5 Less: Acc. Depreciation 1, , , ,739.5 Net Block 1, , ,235. 2,59. Capital WIP Goodwill Non-Current Investments Deferred Tax Assets (net) Long term loans & advances ,544.1 Other Non current assets Current Investments Inventories 1, , , ,12.5 Debtor 2, , , ,4.7 Cash Loan & Advance, Other CA ,37.6 1,351.4 Total Current assets 5, ,72.1 4, ,7.5 Application of Funds 8, ,94.2 8, ,583.3 Key ratios (Year-end March) FY17 FY18E FY19E FY2E Per share data ( ) Book Value Cash per share EPS Cash EPS DPS Profitability & Operating Ratios EBITDA Margin (%) PAT Margin (%) Fixed Asset Turnover (x) Inventory Turnover (Days) Debtor (Days) Creditors (Days) Return Ratios (%) RoE RoCE RoIC Valuation Ratios (x) P/E Price to Book Value EV/EBITDA EV/Sales Leverage & Solvency Ratios Debt to equity (x) Interest Coverage (x) Debt to EBITDA (x) Current Ratio Quick ratio ICICI Securities Ltd Retail Equity Research Page 7

8 RATING RATIONALE ICICI Direct endeavours to provide objective opinions and recommendations. ICICI Direct assigns ratings to its stocks according to their notional target price vs. current market price and then categorises them as Strong Buy, Buy, Hold and Sell. The performance horizon is two years unless specified and the notional target price is defined as the analysts' valuation for a stock. Strong Buy: >15%/2% for large caps/midcaps, respectively, with high conviction; Buy: >1%/15% for large caps/midcaps, respectively; Hold: Up to +/-1%; Sell: -1% or more; Pankaj Pandey Head Research pankaj.pandey@icicisecurities.com ICICI Direct Research Desk, ICICI Securities Limited, 1st Floor, Akruti Trade Centre, Road No 7, MIDC, Andheri (East) Mumbai 4 93 research@icicidirect.com ICICI Securities Ltd Retail Equity Research Page 8

9 ANALYST CERTIFICATION We /I, Bharat Chhoda, MBA Research Analysts, authors and the names subscribed to this report, hereby certify that all of the views expressed in this research report accurately reflect our views about the subject issuer(s) or securities. We also certify that no part of our compensation was, is, or will be directly or indirectly related to the specific recommendation(s) or view(s) in this report. Terms & conditions and other disclosures: ICICI Securities Limited (ICICI Securities) is a full-service, integrated investment banking and is, inter alia, engaged in the business of stock brokering and distribution of financial products. ICICI Securities Limited is a Sebi registered Research Analyst with Sebi Registration Number INH99. 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