Web Exclusive: Three cheers for United Spirits!

Markets have cheered the recent developments. Should you stay invested?

Offlate, the going has been good for the shareholders of Vijay Mallya controlled United Spirits and United Breweries (Holdings). Since March 2012, both these stocks gained a massive 101 per cent (nine-month gain: 148 per cent), while United Breweries Holdings has rallied 100 per cent (nine-month gain: 125 per cent) till the beginning of this month.

The rise comes on the back of reports that the promoters have resumed talks with British drinks giant, Diageo, for a possible stake sale.

In another important development today, reports suggest that the two decade-old legal battle between liquor barons Vijay Mallya and Kishore Chhabria is likely to come to an end, as both parties are likely to file an application requesting withdrawal of several cases against each other. At the centre of the dispute is the ownership dispute of Officer’s Choice whisky that Mallya claims to be his instead of Chhabria, who currently owns the brand under Allied Blenders and Distillers.

The markets have given cheered the development and the United Spirits has soared nearly 6 per cent on the National Stock Exchange (NSE), while United Breweries (Holdings) has rallied 5.5 per cent.

But, why this move all of a sudden?

"This is positive move for Vijay Mallaya, as he has to set his house right before he can get a deal for McDowell /United Spirits," said AK Prabhakar, Senior Vice President (Equity Research), Anand Rathi.

"Given this comprise, Vijay Mallya is likely to get cash benefit that can be deployed towards Kingfisher Airlines, which has put him under big mess. Corporate comprise is nothing new and it is perhaps a new way forward for McDowell /United Spirits and Vijay Mallya who awaits a major deal," Prabhakar added.

“We believe the deal, if inked, will be positive for USL as it will strengthen the company’s presence in the premium portfolio, where it has been losing out to key competitor Pernod Ricard. Funds infused via the deal will also help deleverage the balance sheet,” said a 26 September report by Edelweiss Research.

“Foreign management could improve operational efficiency and boost margins, since current promoters are focusing more on other stressed group companies. USL will also enjoy benefits of scale by setting up bigger manufacturing plants. Further, it could gain access to some international (emerging) markets,” it added.


So, what should you do with these stocks then?

"Given the low EV/Sales at 2.2x FY13E (cigarette major ITC trades at 6.5x), the stock could further re‐rate despite a sharp movement in the past two months. However, the deal going through is the key trigger," states the Edelweiss report. It maintains a HOLD rating on the stock.

“The stock is highly speculative and it can move up to Rs 1,400 – 1,500. I am negative on the prospects given the fundamentals and suggest that investors use any upside to exit this counter,” said Kishore Ostwal, CMD CNI Research.

Technically analysts suggest the stocks look poised for an up move.

"Both these stocks are trading firm today. From a trading perspective, one can buy on dips with a short-term upside of 2 – 4 per cent. United Spirits could be bought at Rs 1,200 levels for a target of Rs 1,250-1,260 and a stop loss at Rs 1,180," says Kunal Bothra, technical analyst, LKP Securities.