We have a sell rating on United Spirits Ltd (USL), with a target price of R2,100 per share. In our view, the current valuations at 50x one-year forward earnings limit the near-term upside for the stock. We are positive on the long-term spirits opportunity and believe the Diageo-alliance would transform USL into a strong-and-profitable leader.
We interacted with USL management and learnt that a) domestic volume is likely to stay flat in FY14, though premium portfolio should grow double digit, b) price of ENA is rising, while that of glass bottle is stable, c) A&P set to rise, d) capex is likely to annualize at R10 billion annually over FY14-16, e) debt levels to stay around current levels in the medium-term, f) USL has started to distribute Diageo India’s portfolio at a 4-6% agency fees with effect from October 1, which may add 2-4% to our current FY14-16 estimates.
After a 13% CAGR over FY07-11, USL’s volume growth has been lacklustre in the past two years, with FY13 growth at ~3%. This may continue as the management expects FY14 volume to stay flat y-o-y. There is, however, increasing focus on premiumisation as prestige and above (~26% volume) grew 20%+ in FY13 and a double digit growth is likely even in FY14 (as well as over the medium-term).