We maintain our sell rating on United Spirits Ltd (USPL) and reduce our target price to Rs 1,400 (earlier Rs 1,500). We were ~20% below consensus in October 2013 and believe the downgrade cycle is not over yet. We cut our FY15/16e EPS by 44%/33% and are now below consensus by 38%/29%.
The only silverlining in Q314 was the increase in the market share of Prestige & above brands from 24% in Q3 FY13 to 27% in Q3 FY14; what worries us though is that the much-talked about premiumisation trend is not visible at the gross margins level (which declined by 190 bps y-o-y). Debt which was reduced by Rs 800 crore to Rs 7,430 crore in Q2 FY14 (in spite of Rs 2,100-crore infusion from Diageo) further increased to Rs 7,730 crore in Q3 FY14 due to high working capital infusion.
USL primarily relies on brands at the mass end to drive volumes and we do not expect a significant deviation from this strategy. Further, even if the proceeds from a potential Whyte & Mackay sale are used to reduce debt, as per our calculations USL would still remain leveraged by Rs 3,000 crore.
The company has reduced the price of McDowells No1 whisky by c.10-15% late last year in three states. Also, the company has dropped prices by c.5-20% in as many as 10 states for Royal Challenge, one of its pricier brands. Prima facie, the company seems to be again chasing volumes, a strategy pursued by the previous management before Diageo acquired a stake in USL.