United Spirits Q1 hit by Covid-19, analysts sceptical about early recovery

Management believes worst is behind, but analysts say recovery will be tough

The knock-on effect of the Covid-19-triggered lockdown was visible in United Spirits’ June 2020 quarter (Q1) numbers, which were announced on Monday after market hours. Although the management believes the worst is behind, analysts say the pain is far from over.

A 53.6 per cent year-on-year (YoY) drop in net revenue to Rs 1,030.2 crore was better than consensus estimate of Rs 930 crore. However, the spirits major posted a loss before tax and exceptional items of Rs 181.8 crore, which was worse than the Street’s expectation of a Rs  81.3-crore loss. The company had reported a profit before tax of Rs 303.2 crore in the year-ago quarter.

United Spirits incurred a loss of Rs 77.6 crore at the Ebitda level itself. A steep fall in franchise income, one-time inventory write-offs and provision for absolute inventory, input cost inflation, and weaker operating leverage weighed on the operating performance. While its franchise income plunged around 80 per cent YoY, a 49 per cent YoY fall in sales volume affected operating leveraging.

 

 

The volume impact was bigger for its premium portfolio — Prestige and Above (P&A) category — which declined 52 per cent YoY, as against a 47 per cent fall in the Popular segment. “The P&A segment was disproportionately impacted by the closure of the on-premise channel (such as bars, pubs, and restaurants; 20 per cent of revenue) and the drying up of social occasions for consumption,” Anand Kripalu, United Spirits’ chief executive officer, said in a press release. Though the management believes things are now improving month-on-month, analysts do not see a smooth and fast recovery, mainly for its P&A category, which accounted for 66 per cent of net sales in Q1.

Amarjeet Maurya, assistant vice-president (mid-caps) at Angle Broking, says: “The closure of on-premise channels and downtrading (customers switching to lower-priced brands) would be key hurdles for United Spirits’ premium segment.” Analysts at Edelweiss Securities are also concerned about the slowdown in discretionary consumption, consumers not returning to the on-premise channel in a hurry, intensifying competition, and a likely increase in taxes due to deteriorating finances of states.

But, some shift in consumption from beer to spirits, newer distribution channels of home and online delivery, softening key raw material prices, and expected reversal of one-time inventory loss provisioning are some positives. Yet, these may not be enough to fully offset the pain.