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United Spirits + Radico Khaitan

October 23, 2007

Kingfisher Boss, Vijay MallyaUnited Spirits Ltd – USL, despite its dominance and 5x the size of the next competitor, operates at EBITDA margin of merely 14% (in FY08E), far lower than market leaders in other parts of the world. Whyte & Mackay bulk scotch supplier, is benefiting from the up-cycle in scotch prices. We estimate W&M accounts for 1/3rd of Group EBITDA. Expect EPS CAGR of 60% over FY07-09E. USL trades at P/E of 28x FY09E. Expect USL to report an EPS of Rs 32.35 and Rs 62.35 for FY08 and FY09 respectively.
USL has run up 37% over the last three months. It now trades at P/E of 28x FY09E. Buy with a target price of Rs2200, which is based on target multiple of 35x FY09E. This implies a PEG of 0.7x in FY09E which is lower than India consumer sector at ~1.2x.

Radico Khaitan:
Radico Khaitan is India’s second largest spirits company has a larger share of mass market brands which imply volume growth will be slower than USL’s. Radico’s key growth driver is Magic Moments vodka, which will grow strongly led by huge on-going marketing investments. But risks are high to our EPS growth forecast of 44% over FY07-09E. The stock appears to be fully valued at 26x FY09E. Personally we don’t invest in Tobacco and Spirits stocks.

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