Buy United Spirits; target of Rs 700: ICICI Direct

ICICI Direct is bullish on United Spirits has recommended buy rating on the stock with a target price of Rs 700 in its research report dated January 25, 2019.

ICICI Direct's research report on United Spirits

Net revenue for Q3FY19 grew 11% YoY to Rs 2501 crore due to the strong performance in the Prestige & Above segment. Prestige & Above segment reported volume growth of 12% YoY to 11.1 mn cases while Popular segment reported volume de-grew 4% to 10.8 mn casesEBITDA margins increased 188 bps YoY to 13.9%. Though gross margins remained flat 47.3%, lower employee costs and lower advertisement expenses enabled expansion in EBITDA margin.The resultant EBITDA grew 28% YoY to Rs 348 crore.Fall in interest expense by 16% YoY and higher other income at Rs 61 crore vs. Rs 24 crore in Q3FY18 aided PAT. The company reported an exceptional loss of Rs 20 crore during the quarter compared to a one-off charge of Rs 12.6 crore in Q3FY18. Subsequently, PAT increased 43% to Rs 192 crore and was below I-direct estimate of Rs 228 crore.

Outlook

Q3 saw a resurgence in prices of glass and ENA (two key raw material elements for USL), which led to a QoQ compression in gross margins by ~170 bps. Further hike in ENA prices (by Rs 2-3/litre) is expected to occur as ethanol supply commences to OMCs in relation to the 10% ethanol blending programme initiated by the Government of India. However, the management could actively seek to counter the negative impact on the gross margins by lowering its A&P expenses (9-10% of sales), employee (8% of sales) and other expenses (16-19% of sales). The management also expects the election period to witness volatility in volume growth but has maintained its guidance of double digit revenue growth and mid to high teen margin over the medium term. We value the stock at ~40x FY21 EPS to arrive at a target price of Rs 700 with a BUY rating.

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