After 2 yrs of muted sales, United Spirits eyes double-digit growth in FY19

The United Spirits stock has shed 15 per cent from its highs earlier this year, mainly owing to regulatory uncertainty weighing on the sentiment of the liquor sector. Demonetisation, and the ban on sale of liquor near state and national highways, besides issues related to the implementation of the goods and services tax, were among the headwinds. The company reported a sales growth of just 3.8 per cent in FY17 and a fall of 4.5 per cent in FY18. 

This, however, is expected to change as the management is confident of a better environment in terms of pricing and regulations in the current financial year. A number of states have declared their excise policy for FY19, with taxation at stable levels. The overall regulatory environment, according to the company authorities, has improved with the effect of changes in route to market (method of distribution) stabilising.

A few signs of improvement following the much-needed stability in the sector were visible in the March quarter. Overall sales growth of 7 per cent was above expectations, led by healthy volume growth in the higher-price segments (prestige, premium and luxury segments). It recorded sales growth of 16 per cent and volume growth of 15 per cent. A stable regulatory environment is the single biggest trigger for the stock.  

At the operational level, the company will continue to focus on higher-price categories on a pan-Indian basis. In general, the firm will eye markets such as Maharashtra and Karnataka. The strategy of its core brands, according to analysts at Nomura, will continue as it is, to help maximise the growth and optimise the total brand investments.

The company is also coming up with innovative ideas to fuel growth. One example of this is recently launched Captain Morgan rum. With this, the company will try to take its consumers in the segment from regular to premium. The company believes the rum market, given its size of 41 million cases annually, offers significant opportunities for ‘premiumisation’.

Given the improving regulatory environment, the company has planned mid-teens revenue growth in the higher-price segments, and low single-digit growth in the regular segment. 

Overall, the company expects to post low double-digit, consolidated revenue growth. Given the improved growth of the higher-price segments, analysts expect the company shares in total sales to improve to 75 per cent from the current 63 per cent. Share of the premium brands was at 53 per cent in FY16. 

This trend of an improved product mix and 'premiumisation' is expected to help the company increase gross margins. In addition to this, United Spirits is also looking at lower and judicious trade expenditure to cut down on costs. Some of the cost savings are likely to be used to increase brand investments. In addition to keeping its overheads down, the company is also working on debt and interest cost reduction.

Lower working capital intensity, healthy operating cash flows, and non-core asset sales helped bring down the overall debt by about Rs 8 billion to Rs 32.7 billion in FY18. Interest costs were lower by Rs 1.08 billion. The company is expected to divest about Rs 20 billion of non-core assets over the next few years through sale of treasury shares and Rs 10 billion of residential and commercial properties. 

While the prospects for the company are healthy, most analysts believe that at 51 times its FY20 estimates, the stock has priced in some of the positives. Investors can look at the stock on dips with a three-year perspective, given the strong long-term potential led by low penetration, low per capita consumption, and a large unorganised sector.