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United Spirits: Maintain ‘add’ with revised TP of Rs 650

Key downside risks are significant downtrading due to tax hikes, continued weakness in on-trade due to operating restrictions and a potential ban of spirits in states.

Decent Q4 recovery amid the constraints: Revenue /EBITDA/PAT were up 12% / 52% / 125%, respectively; two-year revenue CAGR was down 0.6%. Underlying sales (ex-bulk Scotch sale in base) was up 16%. Volume growth of 8% (2-year CAGR still down 3%) was on the back of resilience in off-trade with on-trade continuing to see weakness.

However, contraction of Andhra Pradesh business continued to impact volumes. Prestige & Above volumes were up 19% (2-year CAGR: -2%) and Popular was down 2% (2-year CAGR of -4%). Recovery in the Scotch portfolio benefitted the P&A segment while popular portfolio was impacted by weak performance particularly in West Bengal (higher taxes).

Ebitda margin expands to 18.5%: Gross margin expanded 180bps to 43.9% on the back of (1) superior product and state mix, (2) benign commodity prices, and (3) overall productivity focus. Reported ebitda margin expanded 490 bps to 18.5%. This was driven by operating leverage benefit (other opex -170bps and largely flat staff costs as % of revenues); cut of 15% in ad-spends also aided margin expansion. Ad-spends in the previous two quarters were high to support renovation of McDowell’s No. 1 and Royal Challenge Whisky.

Other highlights: Cash generation improved driven by increase in other liabilities and lower capex intensity (down 33% YoY). OCF /FCF grew 2.6x / 3.5x to Rs 17.3billion / Rs 16.2billion. Cash was utilised towards repayment of short-term borrowings (net debt is down to only Rs 5billion).

Valuation and risks: We largely maintain our earnings estimate; modelling revenue / ebitda/ PAT CAGR of 16% / 39% / 65% over FY21-23E. Maintain ‘add’ with a DCF-based revised target price of Rs 650. At our target price, the stock will trade at 41x P/E multiple Mar-23E. Key downside risks are significant downtrading due to tax hikes, continued weakness in on-trade due to operating restrictions and a potential ban of spirits in states.

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