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					                                            ICRA EQUITY RESEARCH SERVICE
                                                    UNITED SPIRITS LIMITED
                           Q3 FY 12 Results Update January 25, 2012 Industry: Alcoholic Beverages

Improved Whyte & Mackay performance mitigates the impact of                                 ICRA Online Grading Matrix
sharp moderations in volumes in India to an extent                                                         Valuation Assessment
In Q3 FY12, United Spirits Limited (USL) reported a disappointing volume
                                                                                                                                                                         A                                B                             C                            D                    E
growth of 0.7% on a standalone basis largely due to the impact of




                                                                                            Fundamental
                                                                                                                                    5




                                                                                                          Assessment
moderation in demand owing to increased taxes in West Bengal and strong                                                             4                                                                                                  4C
push in sales of local brands in Tamil Nadu by the Government’s distribution                                                        3
system. In terms of value growth, the company’s standalone revenues after                                                           2
adjusting for the impact of merger of Balaji Distilleries, grew by 13% on YoY                                                       1
basis, reflecting a ~12% growth due to price increases and improving
product mix. The sharp moderation in demand in India was mitigated to an                                           Fundamental Grading of ‘4’ indicates
extent by the strong operating performance in W&M business which                                                   “strong fundamentals”
witnessed a growth of 28.6% in top line and reported much improved
                                                                                                                   Valuation Grading of ‘C’ indicates “fairly
profitability metrics. Overall, the results have been weaker than our
                                                                                                                   valued” on a relative basis
expectations largely due to contraction in standalone volumes and margins,
increasing competitive intensity from global as well as domestic players,
                                                                                            Key Stock Statistics
higher tax out-go for the company and increasing debt levels.
                                                                                            Bloomberg Code                                                                                                                                                                       UNSP IN
                                                                                            Current Market Price* (Rs.)                                                                                                                                                             651.9
Increased interest expenses + higher tax out-go continue to put                             Shares Outstanding (crore)                                                                                                                                                               13.1
pressure on bottom line                                                                     Market Cap (Rs. crore)                                                                                                                                                                  8,527
In terms of profitability, USL’s EBITDA margins at 10.2% declined sharply by                52-Week High (Rs.)                                                                                                                                                                    1,318.4
430 bps on YoY basis driven largely driven by cost pressures on the raw                     52-Week Low (Rs.)                                                                                                                                                                       450.0
material and advertising and promotional front. During the quarter, the                     Free Float (%)                                                                                                                                                                           70%
spirit cost per case went up by 15% (or Rs. 21 per case) owing to sharp rise                Beta                                                                                                                                                                                       1.0
                                                                                            P/E on 2011-12 EPS Estimate (x)                                                                                                                                                          27.7
in ENA prices while the advertising and promotional expenses increased by
                                                                                            *As on January 24th, 2012
28.5% (on QoQ basis) to Rs. 267 crore owing to launch related expenses for
two premium brands. With almost flat volumes, and sharp contraction in                      Current Valuations
EBITDA margins, the company’s net profit declined to Rs. 47.1 crore in Q3                            30.0                                                                            27.7
FY12 on standalone basis. This coupled with higher tax out go also pulled                            25.0
down the net profit at consolidated level to Rs. 185.3 crore, reflecting a                           20.0
                                                                                                                                                                                                                           20.0

decline of 42% on YoY basis. While in the near term, we expect profitability                         15.0
                                                                                                                                       14.4
                                                                                                                                                                                                  12.4                                                              13.6
                                                                                                                                           11.7
indicators to improve with moderation in spirits prices, the company’s                               10.0
                                                                                                                                                                                                                                       10.0
                                                                                                                                                                                                                                                                                  8.3
strategy of backward integration and focus on increasing share of premium                                   5.0
brands is likely to support margin improvement in the long-run.                                                -
                                                                                                                                               FY11                                  FY12e                                   FY13e                                    FY14e
Considering the steady growth prospects for the alcoholic beverages                                                                                            P/E                                                           EV/EBITDA
industry and company’s strong brand position, wide product portfolio and
                                                                                            Shareholding Pattern (31 December 2011)
pan-India manufacturing and distribution footprint, we retain the
                                                                                                                                                            Others
fundamental grade of “4/5” assigned to USL. Additionally, the company’s                                                                                      16%
                                                                                                                                                                                                                                                   Promoters
                                                                                                                                                                                                                                                     28%
strategy to strengthen backward integration and enhance share of more                                                                                       DIIs
profitable premium segment brands both in India and in Whyte & Mackay                                                                                       3%
(W&M) also supports a favourable long term view. However, while we have
retained our fundamental grade, we have revised the company’s valuation
grade to ‘C’ from ‘B’ largely reflecting the downward revision in volumes and                                                                          FIIs
earnings estimates despite the sharp correction in share price. The grading                                                                            53%
however assumes that USL would not extend any financial support to any of                   Source: BSE Website
its group companies. Any change in this however would lead a review of the
grades.                                                                                     Share Price Movement (24 months)
Table 1: Key Financials (Consolidated)                                                        6500.0                                                                                                                                                                                   1,800.0
                                                                                                                                                                                                                                                                                       1,600.0
                                              FY11A          FY12E     FY13E      FY14E       6000.0
                                                                                                                                                                                                                                                                                       1,400.0
                                                                                              5500.0
 Operating Income (Rs. crore)                7,420.8        9,164.7   10,610.6   12,306.5                                                                                                                                                                                              1,200.0
                                                                                                                                                                                                                                                                                       1,000.0
                                                                                              5000.0
 EBITDA Margin (%)                            16.1%          14.3%      15.9%      16.6%                                                                                                                                                                                               800.0
                                                                                              4500.0
 PAT Margin (%)                                7.6%           3.2%       3.9%       4.9%                                                                                                                                                                                               600.0
                                                                                              4000.0                                                                                                                                                                                   400.0
 Fully Diluted EPS (Rs.)                        45.3           23.6       32.5       48.0
                                                                                                                                   28-Feb-10




                                                                                                                                                                                                               28-Feb-11
                                                                                                                       31-Dec-09




                                                                                                                                                                                                   31-Dec-10




                                                                                                                                                                                                                                                                           31-Dec-11
                                                                                                                                                             30-Jun-10




                                                                                                                                                                                                                                       30-Jun-11
                                                                                                                                                                         31-Aug-10




                                                                                                                                                                                                                                                   31-Aug-11
                                                                                                                                                                                      31-Oct-10




                                                                                                                                                                                                                                                               31-Oct-11
                                                                                                                                                30-Apr-10




                                                                                                                                                                                                                           30-Apr-11




 EPS Growth (%)                                             -47.9%      38.0%      47.7%
 P/E (x)*                                       14.4           27.7       20.0       13.6
 P/BV (x)*                                       2.0            1.8        1.6        1.5                                                            CNX Nifty                                                                    United Spirits - RHS
 RoE                                          14.4%           6.7%       8.4%      11.4%    Source: Bloomberg
 RoCE                                         14.1%          10.7%      11.4%      13.0%
 EV/EBITDA*                                     11.7           12.4       10.0        8.3
 Source: Company, ICRA Online estimates *on fully diluted basis
                                                                                                                                                                                                                                                                                              1
ICRA Equity Research Service                                                                         United Spirits Limited



Table 2: USL’ Q3 FY12 Standalone Results
                                                     Q2 FY12     Q3 FY11     Q3 FY12    Change (%) YoY    Change (%) QoQ
    Volumes (in Million Cases)                           28.7        30.3        30.5             0.7%              6.3%
    Net Sales                                         1,790.6     1,960.1     1,953.9             -0.3%             9.1%
    Operating Income                                  1,866.3     1,969.4     1,967.3            -0.1%              5.4%
    OPBDIT                                              331.7       285.4       200.3           -29.8%            -39.6%
    Less:
      Depreciation                                        15.2       12.6        15.5
      Interest Expenses                                  124.1      103.8      139.2
    Exchange Diff. - Gain/(Loss)                          39.4     (13.0)        23.4
    Exceptional Items                                   (10.9)       36.8       (2.0)
    PBT                                                  220.9      194.9        70.6
    PAT                                                 148.0      130.0        47.1            -63.8%             -68.2%

 Key Ratios
 Raw Material Cost/Sales (%)                           35.9%      34.3%       37.6%
 Consumables Cost/Sales (%)                            22.4%      24.8%       23.2%
 Advertising & Promotions Cost/Sales (%)                9.4%       9.9%       11.1%
 Other Expenditure/Sales (%)                           12.1%      11.5%       12.4%
 OPBDIT Margin (%)                                     17.8%      14.5%       10.2%
 PAT Margin (%)                                         7.9%       6.6%        2.4%
Source: Company, ICRA Online Estimates

Revenue Growth – During the quarter, USL’ reported a disappointing volume growth of just 0.7% on YoY basis
largely due to decline in demand in Tamil Nadu and West Bengal. While in Tamil Nadu, strong push for local brands by
the Government’s distribution model impacted volumes for branded players such as USL, the impact of increased in
taxation in West Bengal pulled down demand quite sharply. In West Bengal, increase in excise duty and sales tax
pushed up end consumer prices by almost 45%, resulting in industry volumes declining by ~48% during Q3 FY12. In
terms of value growth, the company’s revenues after adjusting for the impact of Balaji Distilleries’1merger, grew by
13% on YoY basis, reflecting a ~12% growth due to price increases and improving product mix. According to the
management, with revision in the ordering pattern, the impact of local brands being promoted in Tamil Nadu is
gradually changing and there has been an uptick in orders since January 2012. We believe that increasing competitive
intensity in the Indian alcoholic beverage market from both domestic as well as global players is likely to pose
heightened challenge for USL in the future.

Table 3: Trend in USL’ segment-wise volume growth
 Units (in Million Cases)                                                                           Growth (%)
 Segments                                   Q3 FY 11              Q3 FY12    Growth (%)         w/o TN       w/o TN + WB
 Scotch                                         0.07                  0.08        14.3%          22.0%             20.0%
 Premium Whisky                                 0.94                  1.09        16.0%          19.0%             18.0%
 Other Premium Brands                           0.25                  0.16       -36.0%          87.0%             87.0%
 Prestige                                       5.26                  5.62         6.8%           9.0%             15.0%
 Prestige & Above                               6.52                  6.95         6.6%          12.0%            16.0%
 Regular                                       21.36                 20.62        -3.5%           2.0%              6.0%
 2nd Line Brands                                1.93                  2.40        24.4%          33.0%             37.0%
 Franchise                                      0.49                  0.53         8.2%           8.0%              8.0%
 Total                                         30.30                30.50          0.7%           6.0%            10.0%
Source: Company, ICRA Online Estimates; TN – Tamil Nadu; WB – West Bengal



1
    Q3 FY11 included 9m FY11 revenues of Balaji’s distilleries
                                                                                                                         2
ICRA Equity Research Service                                                                    United Spirits Limited



Nevertheless, the company’s strategy of promoting premium-line brands continues to play out as reflected by higher
than overall growth of segments including scotch, premium whiskies as well as other premium brands.

Profitability – During the quarter, USL’ EBITDA margins at 10.2% declined sharply by 430 bps on YoY basis driven
largely driven by cost pressures on the raw material and advertising and promotional front. During the quarter, the
spirit cost per case went up by 15% (or Rs. 21 per case) owing to sharp rise in ENA prices which have been impacted
by a confluence of factors including delayed crushing season in Uttar Pradesh, supply disruption in Karnataka,
sanctions given in some states for export of spirits and increasing supplies to the OMCs at profitable prices by
distilleries. The company’s advertising and promotional expenses also increased by 28.5% (on QoQ basis) to Rs. 267
crore which included the impact of the introduction of two premium brands – Signature Premier Whisky and Vladivar
Vodka.

Chart 1: Trend in USL quarterly volumes & Margins         Going forward, with spirit prices moving downwards and
                                                               increasing share of backward integration, company’s
35.0                                                     25.0%
                                                               EBITDA margins are likely to improve. This coupled
30.0
                                                         20.0% with the strategy to enhance the sales of premium
                                                         30.7




                                                                       30.5
                                           30.3

                                                  28.8




                                                                28.7



25.0                                                           brands is likely to support margin improvement. At
                             26.7

                                    26.6
               26.4

                      25.7




                                                         15.0%
20.0                                                           net level, the company reported a profit after tax
        22.9




15.0                                                     10.0% (PAT) of Rs. 47.1 crore, down by 64% on YoY basis
10.0                                                           and 68% on QoQ basis. Gain on forex transactions
 5.0
                                                         5.0%  helped moderate the impact of higher interest
                                                               expenses, which increased by almost Rs. 33 crore on
  -                                                      0.0%
        Q2   Q3   Q4   Q1 Q2     Q3   Q4   Q1   Q2   Q3        YoY basis on account of higher debt levels to
       FY10 FY10 FY10 FY11 FY11 FY11 FY11 FY12 FY12 FY12       support capex and working capital requirements.
       Volumes (Mn Case)             OPBDIT Margin (%)             Net Margin (%)

Key Developments –
   - After concluding the refinancing of W&M acquisition related borrowings during the previous quarter, the
       company has taken a board approval (in Q3FY12) to further raise US$ 175 million through an FCCB issue
       with an option to raise an additional $50 million.
   - On the brand building front, the company continued with its strategy to extend the brand franchise in the
       premium segment by introducing two new brands in the premium segment. These include the launch of
       Signature Premier Whisky (a blend of eight-year old scotch and Indian malts) and Vladivar Vodka (from Whyte
       & Mackay’s portfolio) in key markets.
   - In line with its strategy of enhancing its ENA capacities, the company increased its shareholding in Sovereign
       Distilleries, a company with 180 klpd dual (molasses and grain) input substrate facility.

Whyte & Mackay reported a sharp turnaround in operating performance
After a dismal performance in H1FY12, Whyte & Mackay reported a strong turnaround in operating performance in
Q3 FY12 especially on the profitability front. W&M’s net sales at GBP 49.2 million rose sharply by 28.6% in Q3 FY12
on YoY while EBITDA more than doubled to 17.4 million, implying EBITDA margins of 35.4% in Q3 FY12 as against
22.2% (in Q3 FY11) and 15.6% (in Q2 FY12).

Consolidated Performance – USL’ consolidated operating income grew by 26.1% to Rs. 7,050.4 crore in 9m FY12
driven by 31.4% increase in net sales of Whyte & Mackay. However, in comparison to the standalone business, the
operating margins on consolidated basis remained largely stable at 15.4% in 9m FY12 primarily on account of
significant improvement in W&M’s operating performance which mitigated the impact of cost pressures in the
standalone business. At net level, USL’s consolidated profit after tax has declined by 41.7% in 9m FY12 on a YoY basis
owing to a foreign exchange loss Rs. 41.5 crore, increase in interest expenditure by Rs. 202.7 crore and considerably
                                                                                                                    3
ICRA Equity Research Service                                                                       United Spirits Limited



higher tax outgo. The consolidated debt has moved up by Rs. 2,023.2 crore to Rs. 8,404.3 crore during 9m FY12.
Considering a significantly weak performance with decline in standalone volumes, increasing competitive intensity,
near-term margin pressures witnessed by the company, increase in total debt and higher tax outgo, we have revised
our estimates. We expect an EPS of Rs. 23.6 per share for FY12 as against our earlier estimate of Rs. 34.7 per share.

Table 4: W&M’s Key Indicators – P&L
                                Q3 FY11      Q3 FY12    9m FY11     9m FY12      Change (%) - Q3       Change (%) - 9m
 Net Sales                          38.2         49.2       97.8      128.5              28.6%                  31.4%
 Gross Profit                       19.8         31.4       48.6        64.0
 Marketing expenses                  8.9         10.8       19.0        26.9
 Contribution                       11.0         20.6       29.7        37.2
 Overheads                           2.5          3.2        7.1         9.1
 EBITDA                              8.5         17.4       22.5        28.0            104.9%                   24.5%
 Depreciation                        1.1          1.1        3.2         3.1
 Rest. Costs & Goodwill              0.2        (1.7)        0.6         0.7
 Interest Expenses                   2.4          3.8        7.2        10.7
 PBT                                 4.8         14.2       11.5        13.5            196.5%                   16.9%

 Gross Margin (%)                  51.9%        63.8%     49.7%       49.8%
 Contribution Margin (%)           28.6%        41.9%     30.3%       28.9%
 EBITDA Margin (%)                 22.2%        35.4%     23.0%       21.8%
 PBT Margin (%)                    12.5%        28.9%     11.8%       10.5%
Source: Company, ICRA Online Estimates

Table 5: W&M’s Key Indicators – Balance Sheet
 GBP Million                                                                          Mar-11                    Dec-11
 Sources of Funds
 Share Capital                                                                           62.3                      62.3
 Reserve & Surplus                                                                       34.1                      47.6
 Net worth                                                                               96.4                     109.9
 Net Debt                                                                               112.8                     138.2
 Application of Funds
 Fixed Assets                                                                            58.8                      59.8
 Goodwill                                                                                26.4                      52.8
 Bulk Stock                                                                             111.6                     119.4
 Other Net Assets                                                                        13.4                      15.0
 Net Pension (Deficit)/Gain                                                              -1.0                       1.1
Source: Company, ICRA Online Estimates

Table 6: USL’ 9m FY12 Consolidated Profit Statement
                                                                      9m FY11             9m FY12      Change (%) YoY
 Operating Income                                                      5,589.7             7,050.4               26.1%
 OPBDIT                                                                  871.0             1,066.8               22.5%
 Less: Depreciation                                                       69.9                100.3
 Less: Interest Expenses                                                 362.5                565.2
 Exchange Diff. - Gain/(Loss)                                              5.7               (41.5)
 Pension/Onerous Lease                                                    23.2                 23.0
 Exceptional Items                                                        36.8               (12.9)
 PBT                                                                     504.3                369.9
 Less: Tax                                                               186.6                184.6
 PAT                                                                     317.7               185.3              -41.7%
 Key Ratios

                                                                                                                          4
ICRA Equity Research Service                                                                                   United Spirits Limited



 COGS/Sales (%)                                                                     52.9%                54.5%
 Advertising & Promotions Cost/Sales (%)                                            11.7%                10.9%
 Other Expenditure/Sales (%)                                                        13.4%                14.2%
 OPBDIT Margin (%)                                                                  15.7%                15.4%
 PAT Margin (%)                                                                      5.7%                 2.7%
Source: Company, ICRA Online Estimates

Table 7: USL’ Consolidated Balance Sheet
 Rs. Crore                                                                            FY11             9m FY12
 Net worth                                                                           4178.6             4,836.6
 Minority Interest                                                                     17.5                14.3
 Secured Loans                                                                      5,284.4             7,130.2
 Unsecured Loans                                                                    1,096.7             1,274.1
 Term Liability towards Franchisee Rights                                             329.6               295.2
 Total                                                                             10,906.8            13,550.4

 Net Fixed Assets                                                                   2,069.0             3,023.3
 Goodwill on Consolidation                                                          4,432.0             4,979.7
 Investments                                                                          154.4               153.9
 Cash and Bank Balances                                                               637.0               690.9
 Deferred Tax Asset                                                                    32.5                40.1
 Net Current Assets                                                                 3,537.1             4,400.7
 Misc. Exp to the extent not written off                                               44.8               261.8
 Total                                                                             10,906.8            13,550.4


VALUATION GRADE

Table 7: Relative Valuation
 Parameter                             USL*              Radico Khaitan#              CNX FMCG Index#              S&P CNX Nifty#
 Current Market Price                 651.9                     111.2                       10,389.5                  5,158.3
 Market Capitalisation                8,527                     1,475                         N.A.                      N.A.
                                 FY12e        FY13e      FY12e             FY13e       FY12e           FY13e       FY12e        FY13e
 Price/Earnings                     27.7       20.0           17.1          13.2         26.5           22.3        14.8         12.7
 EV/EBITDA                          12.4       10.0           10.9           8.8         17.3           14.7        10.0            8.8
 Price/Sales                         0.9        0.8            1.2           1.0            3.6          3.1          1.5           1.4
 Price/Book Value                    1.8        1.6            2.1           1.8            7.5          6.6          2.3           2.0
 Price Cash Flows                   18.8       13.8           12.8           9.9         24.2           20.0        10.4            9.0
* ICRA Online estimates based on share price as on January   25th   2012 # Based on Bloomberg consensus estimates

Since our last update (on November 16, 2011), USL’ stock has declined sharply amid concerns surrounding the
funding constrains in UB’s group aviation business and its likely impact on the other group entities. The investment
sentiment has also been impacted by weak operating performance in the last few quarters, leading to downward
revision in earnings estimates by the street. In comparison, to the benchmarks, the company’s share price has come
down quite sharply although the valuation metrics have remained at similar levels owing to downward revision in
company’s earnings with a weak performance in Q3 FY12. At current market price of Rs. 651.9, the company’s
valuations at 20.0x FY13e earnings which are now at only a marginal premium to other companies in the alcoholic
beverages space and the broader indices (i.e. CNX Nifty). In our view, EV/EBITDA is a better metrics to value USL
given its high debt levels and variability in earnings. Historically, the company has traded in a forward EV/EBITDA
band of 10-25x and current valuation of 10.0x is significantly below its historical average of 15x. We expect USL
earnings to grow at CAGR of 14.3% between FY11-14e after adjusting for one-time extraordinary gains in FY11
though increasing competitive intensity from both global as well as local players will remain a challenge. However,

                                                                                                                                          5
ICRA Equity Research Service                                                                            United Spirits Limited



USL may not return to its traditional premium valuations till the time there are definite signs of margin improvements
and alleviation of concerns surrounding the group’s aviation business.

While volume growth in the current year has been impacted by increased duties in certain states and other issues, we
believe that the long-term growth prospects remain steady for the alcoholic beverages industry and with company’s
strong brand position, wide product portfolio and pan-India manufacturing and distribution footprint; we retain the
fundamental grade of “4/5” assigned to USL. Additionally, the company’s strategy to strengthen backward integration
and enhance share of more profitable premium segment brands both in India and in Whyte & Mackay (W&M) also
supports a favourable long term view. However, while we have retained our fundamental grade, we have revised the
company’s valuation grade to ‘C’ from ‘B’ largely reflecting the downward revision in volumes and subsequently
earnings despite the sharp correction in share price. The grading however assumes that USL would not extend any
financial support to any of its group companies. Any change in this however would lead a review of the grades.

Increasing in competitive pressures, further rise in duties (and prices) and deterioration in capital structure remain
key risks to our view on company’s earnings estimates and valuations.

Table 8: Comparison with Global Players
 Company Name              Market      EBITDA Margins     RoE (%)              FY12e                        FY13e
                            Cap.            (%)
                                                                                  EV/                        EV/
                           $ Million   FY12e    FY13e   FY12e   FY13e   P/E              P/S     P/E                    P/S
                                                                               EBITDA                     EBITDA
 Diageo Plc                 53,991     32.9%    33.7%   38.9%   37.0%   15.5      12.0   3.2     14.0        11.0         3.1
 Pernod Ricard SA           25,248     27.7%    28.0%   12.1%   12.5%   16.1      12.8   2.4     14.4        11.9         2.3
 Brown Forman Corp          11,743     23.8%    24.3%   25.2%   25.6%   22.6      14.0   3.2     20.7        13.1         3.1
 Davide Campari Milano       3,862     25.8%    26.1%   13.2%   13.3%   16.8      10.9   2.3     14.9        10.2         2.2
 Remy Cointreau              4,252     21.4%    22.2%   11.8%   14.1%   24.9      15.3   3.2     19.5        13.5         2.9
 Contellation Brands Inc     4,194     33.1%    33.5%   16.0%   14.9%   10.3       8.3   1.6      9.5         7.8         1.5
 United Spirits              1,703     14.3%    15.9%    6.7%    8.4%   27.7      12.4   0.9     20.0        10.0         0.8
 Jinro Ltd.                  1,506     14.5%    15.6%   15.9%   16.0%   11.5      14.9   1.2     11.0        11.8         1.0
Source: Bloomberg, ICRA Online estimates

Given the sharp contraction in United Spirit’s market capitalisation in the recent period, the premium valuations
attracted by the company are now getting closer with other global spirits companies. Overall, while USL’s current
brand portfolio and profitability numbers are weaker relative to global peers, we expect the valuations to remain a
function of the stronger growth potential by virtue of its presence in emerging markets like India.

COMPANY PROFILE
Bangalore-based, USL Limited is the largest spirits company in the branded spirits market in the world. Incorporated
in 1898, USL belongs to the Bangalore-based Vijay Mallya owned UB Group. The promoters, own a 28% stake in the
company. With over 112.2 million cases of liquor sold in FY11, the company commands over 40% market share in
India. The company has a very strong and wide portfolio of spirits with 21 of those brands selling more than a million
cases a year in its portfolio and enjoying a strong 55% market share for its first line brands in India. Its largest selling
brand – Mc Dowell’s has also attained the largest alcoholic beverage brand status in the world besides India’s largest
FMCG brand status.

The company has also been fairly aggressive in pursuing in-organic opportunities over the past 6-7 years. In 2005,
USL acquired the second largest Indian liquor manufacturer – Shaw Wallace which it followed with the acquisition of
Bouvet Ladubay (a French wine maker) and Whyte & Mackay, the fourth largest Scotch whiskey maker in the World in
FY08. The company has also won several prestigious awards for flavours including Mondial, International Wine and
Spirit Competition (IWSC) and International Taste and Quality Institute (ITQI). The company has been recognized in
the industry as an innovator with several firsts to its credit such as the first pre-mixed gin. USL has a well established
                                                                                                                                6
ICRA Equity Research Service                                                                         United Spirits Limited



global network with exports to over 59 countries. It has a sizeable presence in India with distilleries and
manufacturing and bottling plant in every state in India. It has 37 owned manufacturing units and 57 contract
manufacturing facilities. The company has also established a robust distribution network covering almost 98% of the
~66,000 retail outlets across the country.

Grading Positives
The company’s key strengths include a) its strong market position in the Indian alcoholic beverages industry
supported by leadership position across segments, wide product portfolio and well established brands. With the
industry being highly regulated and governed by restrictions across the value chain, USL’ pan India foot print in
manufacturing and distribution supports its position against rising competitive pressures. The company’s overall
strategy to enhance the share of more profitable premium segment brands both in India and in Whyte & Mackay
supports a favourable long term view. USL is also focussing on a backward integration strategy to enhance its in-
house distillation capacity besides pursuing plans to set up a glass bottle manufacturing plant to improve its cost
structure and reduce vulnerabilities to cost-based headwinds.

Grading Sensitivities
With prices governed by the state governments to the extent of ~60% of industry volumes, sharp variation in input
material prices (molasses, glass etc.) tend to have an adverse impact on margins given that the pricing power is
limited. Any increase in taxes (as witnessed recently in some states), could hurt volume growth and consequently
earnings estimates. We believe, the most significant dissimilarity between alcoholic beverage player via-a-vis a
branded FMCG business is the former’s lack of pricing power despite strong brand loyalty associated. Rising
competitive pressures particularly in the premium-end of the market from international majors is also a challenge for
the company.

USL Brand Pyramid




                                                     WHISKY     SCOTCH             PREMIUM

                                              Royal Challenge   Black Dog 12yr
                                                    Signature   Black Dog 8yr
                                                    Antiquity   Isle of Jura
                                                                Dalmore
                                                                W&M Special


                                               WHISKY                VODKA                     PRESTIGE

                                             Mc Dowell No 1       Red Romanov
                                               DSP Black            Vladivar



                                  RUM             WHISKY          BRANDY         VODKA

                     W&M       Mc Dowell          Bagpiper        Mc Dowell       White     GIN
                               Celebration       Old Tavern          No 1        Mischief                     REGULAR
                      John                                                                  Blue
                                Old Cask          Haywards        Honey Bee      Romanov
                      Barr                                                                  Riband
                                                 Green Label     John Exshaw



          Source: Company, ICRA Online



                                                                                                                         7
ICRA Equity Research Service                                                                             United Spirits Limited



Table 9: Key Milestones for USL
 Year        Milestones
 1898        Establishment of Mc Dowell & Co.
 1951        Late Mr. Vittal Mallya (founder of UB Group) acquired Mc Dowell & Co.
 1983        Mr. Vijay Mallya took over as the Chairman of UB Group
 2002        Acquired Triumph Distillers & Vinters; indirectly acquired Diageo PLC’s IMFL business in India
 2005        Acquired 54.6% stake in India’s second-largest spirits company, Shaw Wallace for a consideration of Rs. 1,300 crore
             Acquired balance 15% stake in Triumph; increased stake in Herbertsons during the year
             To strengthen presence in wine segment, USL acquired 100% stake in a French winemaker – Bouvet Ladubay for
 2006
             Euro 16.5 million
             Acquired world’s fourth largest scotch maker – Whyte & Mackay to become a formidable player in the scotch
 2007
             whiskey segment; USL acquired W&M for a consideration of GBP 595 million
 2007        Shaw Wallace merged with USL
 2010        Became the second-largest spirits company in the world surpassing Pernod Ricardo; second only to Diageo
Source: Company, ICRA Online

Table 10: Details of Key acquisitions by USL
 Year           Company                Acquisition Rationale
 June 2005      Shaw Wallace           USL became a dominant player in the spirits market in India with the acquisition of Shaw
                                       Wallace; the acquisition added strong brands such as Royal Challenge, Director’s Special
                                       and Antiquity to USL’s portfolio
                                       Acquisition Price: Rs. 1,300 crore
 May 2007       Whyte & Mackay         Got access to huge reserves of pure scotch whiskey, strong brand portfolio, international
                                       distribution footprint and an essential source for its spirits production
                                       Acquisition Price: US$ 1.18 billion
                Bouvet Ladubay         Allowed USL to kick start its presence in the wine segment
                                       Acquisition Price: Euro 16.5 million
                Liquidity Inc.         Acquired established and premium vodka brands for introduction in the Indian market
                Balaji Distilleries    Allows USL to raise in-house primary distillation capacities
                Tern Distilleries      Allows USL to raise in-house primary distillation capacities
                Pioneer Distilleries   Allows USL to raise in-house primary distillation capacities

GOVERNANCE AND MANAGEMENT STRUCTURE
USL has a seven member board comprising of four independent directors. While the promoters – Dr. Vijay Mallya is
closely involved in running the business, key managerial positions are handled by a team of professional managers.
The accounting policies followed by USL are generally in line with best practises and there has been no material
auditor qualification in recent period. The disclosure levels in USL’ annual report are broadly in line with that
followed by the industry.

The UB Group has presence across a number of business segments including alcoholic beverages, aviation,
engineering and fertilisers. While the management’s stated policy indicates that no financial support would be
extended by USL to other group companies, the stress in some of the other businesses of the group, notably aviation
has weakened the outlook on the group and subsequently affected valuation for some of the group companies
including USL.




                                                                                                                                   8
ICRA Equity Research Service                                                                           United Spirits Limited



Annexure I: P&L Estimates (Consolidated)

 Rs. Crore                              FY09A             FY10A          FY11A          FY12e          FY13e           FY14e
 Net sales                              5,054.1          5,853.0         6,858.6        8,527.7        9,887.9      11,484.4
 Other related income                     452.0            547.1           562.1          637.0          722.7          822.1
 Total net revenue                      5,506.1          6,400.2         7,420.8        9,164.7      10,610.6       12,306.5
 OI Growth                                                16.2%           15.9%          23.5%          15.8%          16.0%
 EBITDA                                 808.4            1,072.1         1,197.1        1,310.9        1,683.0        2,042.1
 Depreciation                             92.6               95.0          102.3          139.3          183.2          202.8
 EBIT                                   715.9              977.1         1,094.8        1,171.6        1,499.8        1,839.3
 Interest expenses                      737.7              618.7           557.5          777.5          940.6          983.8
 Other income/expense                 (295.1)            (258.8)           258.0           47.9           70.5           74.9
 PBT (before extraord)                (317.0)                99.6          795.3          442.0          629.7         930.3
 Extraordinary Gain/Loss                   0.0               70.0           36.8           52.4            0.0              -
 PAT                                  (408.6)             (23.6)           566.9          296.6          409.3          604.7
 Minority interest                       (0.2)              (0.9)           -2.6              -              -                -
 PAT (concern share)                  (408.4)             (22.7)           569.5          296.6          409.3          604.7
 No of shares                    100,163,256        120,669,098     125,869,737    125,869,737    125,869,737    125,869,737
 DPS                                       2.0                2.5            2.5            2.6            2.6            2.6
 EPS                                   (39.7)               (2.1)           45.3           23.6           32.5           48.0
 CEPS                                  (31.5)                 5.9           53.2           34.6           47.1           64.2

Annexure II: Balance Sheet Estimates

 Liabilities (Rs. Crore)                          FY09A       FY10A       FY11A          FY12e         FY13e          FY14e

 Net worth                                      2,312.3      3,728.7     4,133.9        4,647.9       5,019.1         5,585.6
 Minority interest                                  6.3          8.5        17.5           17.5          17.5            17.5
 Total Debt                                     7,360.5      5,554.2     6,455.7        8,720.7       9,352.3         9,435.5
 Deferred Tax Liability                          (91.8)       (71.5)      (32.5)         (32.5)        (32.5)          (32.5)
 Trade Creditors                                1,091.8      1,142.4     1,468.3        1,729.2       1,973.7         2,275.1
 Other Liabilities and Provisions                 997.7        975.2       871.5          897.0         925.4           921.7

 Total liabilities                           11,676.7      11,337.5     12,914.3      15,979.9       17,255.4       18,202.8

 Assets (Rs. Crore)

 Net Fixed Assets                               6,100.8      5,969.5     6,371.9        7,989.4       8,466.2         8,435.9
 Capital Work in Progress                          28.8         94.3       129.1          120.0          60.0            12.5
 Total Net Fixed Assets                         6,129.6      6,063.8     6,501.0        8,109.4       8,526.2         8,448.4

 Total Long-Term Investments                      950.1        126.5       150.9          150.9         150.9           150.9

 Cash and Bank Balances                           449.0        768.6       637.0          700.0         700.0           700.0

 Receivables (incl. bills discounted)             888.0      1,388.1     1,557.1        2,164.3       2,520.3         2,938.4
 Inventories                                    1,745.8      1,746.2     2,116.8        2,678.0       3,056.6         3,523.4
 Loans & Advances                                 617.6        563.2     1,381.4        1,535.0       1,599.3         1,669.3
 Other Current Assets                             896.6        681.0       570.1          642.3         702.1           772.4
 Total Current Assets                           4,597.0      5,147.2     6,262.4        7,719.5       8,578.3         9,603.5

 Total Assets                                11,676.7      11,337.5     12,914.3      15,979.9       17,255.4       18,202.8
                                                                                                                              9
ICRA Equity Research Service                                                         United Spirits Limited



Annexure III: Cash Flow Estimates

 Cash flows (Rs. Crore)                  FY09A       FY10A     FY11A       FY12e       FY13e        FY14e

 OPBDIT                                    808.4    1,072.1    1,197.1     1,310.9    1,683.0      2,042.1
 Less: Taxes                               186.5      178.1      192.8       197.7      220.4        325.6
 Changes in Net Working Capital        (1,231.4)    (385.8)    (722.2)   (1,033.5)    (521.7)      (624.2)
 Net Interest Charges                    (726.4)    (606.9)    (585.7)     (720.4)    (893.3)      (971.3)
 Cash flow from operating activities   (1,336.0)     (98.8)    (303.6)     (640.8)       47.6        121.0

 Investments                            (295.1)        724.9    (42.7)      (83.7)     (41.0)       (41.0)
 Capital expenditures                     220.0       (29.2)   (539.6)   (1,747.7)    (600.0)      (125.0)
 Cash flow from investing activities     (75.1)        695.7   (582.2)   (1,831.4)    (641.0)      (166.0)

 Equity Raised / (Buyback)                  14.4     1,546.0       5.2        0.0          0.0          0.0
 Loans Raised / (Repaid)                   756.4   (1,806.2)     901.4    2,265.0        631.6         83.2
 Others (Including Extra-ordinaries)        23.3       106.8      36.9    (164.6)          0.0          0.0
 Dividend                                 (14.0)      (25.2)    (35.7)     (37.9)       (38.2)       (38.2)
 Cash Flow from Financing activities       780.2     (178.7)     907.8    2,062.5        593.4         45.0

 Cumulative cash flow                   (630.9)       418.2      22.0     (409.7)         0.0          0.0
 Opening Cash Balance                     543.8       449.0     768.6       637.0       700.0        700.0
 Closing Cash Balance                    (87.1)       867.2     790.7       227.3       700.0        700.0




                                                                                                        10
ICRA Equity Research Service                                                United Spirits Limited



Annexure IV: Key Financial Ratios

 Key Financial Ratios                FY09A     FY10A      FY11A    FY12e     FY13e          FY14e

 Growth indicators
 Sales Growth                         18.3%     15.8%      17.2%    24.3%    16.0%          16.1%
 EBITDA Growth                       -27.3%     32.6%      11.7%     9.5%    28.4%          21.3%
 EPS Growth                         -216.9%    -94.8%   -2307.3%   -47.9%    38.0%          47.7%
 Cash EPS Growth                    -174.6%   -118.8%     798.1%   -34.9%    35.9%          36.3%

 Profitability indicators
 EBITDA Margin                        14.7%    16.8%      16.1%    14.3%     15.9%          16.6%
 EBIT Margin                          13.0%    15.3%      14.8%    12.8%     14.1%          14.9%
 PAT Margin                           -7.4%    -0.4%       7.6%     3.2%      3.9%           4.9%
 RoE                                 -18.2%    -0.8%      14.4%     6.7%      8.4%          11.4%
 ROCE                                  4.6%     8.4%      14.1%    10.7%     11.4%          13.0%

 Liquidity ratios
 Debtor (days)                           36        48         42       47        47             47
 Inventory (days)                      184       167        174      175       175            175
 Net working Capital/Sales           49.2%     44.3%      51.4%    53.5%     51.8%          50.3%

 Capitalization Ratios
 Total Debt/ Equity                     3.2       1.5        1.6      1.9       1.9            1.7
 Interest coverage                      1.1       1.7        2.1      1.7       1.8            2.1
 Total Debt/EBITDA                      9.1       5.2        5.4      6.7       5.6            4.6

 Valuation Ratios
 Price/Sales                            1.2       1.2        1.1      0.9       0.8            0.7
 Price/Earnings                      (16.0)   (346.4)       14.4     27.7      20.0           13.6
 Price/Book Value                       2.8       2.1        2.0      1.8       1.6            1.5
 EV/EBITDA                             16.6      11.8       11.7     12.4      10.0            8.3
 Price/Cash Flows                    (20.7)     110.1       12.3     18.8      13.8           10.2




                                                                                               11
     ICRA Equity Research Service                                                                                  United Spirits Limited

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