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United Spirits – Margin Expansion Surprise

July 21, 2010

United Spirits Revenue growth of ~18% YoY
to Rs14.7bn reflects various changes in accounting bases (re-grouping of sales/A&SP expenses ex tie up units). Like to like, revenues rose ~11% YoY, comprising 6% YoY volumes and the rest due to mix/price increases. Mgmt noted that volume growth during the Q was adversely impacted by de-stocking in the state of Andhra Pradesh due to a fresh tendering process for retail licenses. Ex AP, mgmt mentioned that growth was ~15% YoY.

Net profit of Rs1.2bn was up 12% yoy. EBITDA margins increased 135bps YoY and 420bps QoQ to 19.6% benefiting from the high gross margins (+320bps YoY, flat QoQ). Interest expense remained at heightened levels reflecting the refinanced W&M debt now sequestered in the parent’s balance sheet and higher working capital loans

Contribution per case increased by Rs29/case to ~Rs249/case. The results on a YoY basis are meaningless, given various changes in accounting policy. This Rs29 / case is ‘pure profit’ – driven by mix / pricing and generates an additional Rs1bn QoQ – which is the primary driver of the QoQ EBITDA growth.

United Spirits Estimates of EPS for FY 11 and FY 12
Morgan Stanley – 40 and 52
BOFA Merrill – 45 and 56 with a target of 1100
Citi – 54 and 70 with target of 1450
UBS – 46 and 58 with target of 1600
Street’s Consensus is around BOFA Merrill’s estimates.

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