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United Spirits + Tilaknagar Industries – Ready to get Indians High in Party Mood

September 16, 2010

As Indians continue to get affluent and spend on Lifestyle, unfortunately they do a mistake of enjoying Alchol, which is definitely injurious to health. However, those who want can create some wealth here.

United Spirits – USL’s brand equity is unparalleled across cities and socio economic classes. Brand loyalty is high across all alcohol segments. The combination of easy availability, local tastes and affordability will likely continue to drive the high incidence of consumption of local brands in India. The IMFL/spirits industry is likely to grow at a 16% CAGR over the next five years, based on our alcohol consumption model, and USL could deliver a 16% CAGR during the same period.

Even after a potential 35-40% increase in sugar and molasses production in the sugar season starting October 2010, the demand
supply of alcohol will likely be tight. Industry volume growth to be driven by CL to IMFL migration, but USL is likely to focus more on premium end categories. USL is likely to witness premiumization over the next five years.

USL is planning to launch new products in regular scotch and in the premium scotch and vodka categories to capitalize on the premiumization potential in the domestic business. USL has planned capex of Rs10bn over the next 3 years, ~Rs6.5bn for
primary distillation. USL is keen on acquiring some primary distillation capacity through the inorganic route, as the gestation period for greenfield expansion is about two years. Although we see the Whyte & Mackay as value dilutive given the price paid for the acquisition, we believe the acquisition is a good fit from a longer-term perspective.

USL is expected to report an EPS of Rs 39 and Rs 55 for FY 11 and FY 12 respectively.

Warning – United spirits is a Market Leader led by Vijay Mallya who has pledged a huge stake of his own to run a loss making Airline – Kingfisher.

TilakNagar Industries Ltd Fast growing spirits company (revenue CAGR 55.5% FY08-10) with greatest exposure to South India. ROIC has deteriorated from 28% in FY07 to 9% in FY10. This is on the back of higher working capital (55% in FY10 vs 20% in FY07) and capex (net fixed assets to sales 51% in FY10 vs 22% in FY07)

Management stated that Extra Neutral Alcohol (ENA) cost could decline 25% yoy in FY11 but glass prices could be 7% higher. Overall, this could result in margin expansion on the back of soft input cost.

Currently, its stronghold is southern India, which generates more than 90% of sales volume. Its 40 plus brands straddle the consumption pyramid: regular, economy, semi-premium, premium, and deluxe. Within this, two brands “Mansion House Brandy” and “Madira XXX Rock Rum” are in the ‘Millionaire’ list, i.e., brands with sales of over 1m 9-litre cases.

Mnagement is optimistic about growth prospects and said that demand for its brands is robust and the market is absorbing
whatever it can produce. Tilaknagar is expected to report an EPS of Rs 15 and Rs 20 for FY 11 and FY 12 respectively.

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