 "United Spirits: Current weakness an opportunity for investors")
With the United Spirits (USL) board-Vijay Mallya imbroglio, the pressure was evident on the stock, which fell 3.5 per cent to close at Rs 3,294 on Monday.
Based on a Price Waterhouse forensic report, the USL board levied serious charges of financial impropriety on dealings between the company and other parts of Mallya’s empire during the 2010-12 period. Mallya has denied the allegations and refused to resign from USL’s board. A legal battle and further investigations are likely. The Securities and Exchange Board of India plans to take a look.
These will be an overhang on the stock. However, looking at the weakness in the scrip, analysts continue to be positive on USL’s prospects. They expect a turnaround in the fundamentals. Parent Diageo and the measures it is taking are the key factor in providing comfort.
Analysts at Motilal Oswal Securities (MOSL), in a report last month, reiterated their bullish long-term view on USL, with a target price of Rs 4,250. A combination of portfolio premiumisation, investments behind long-term brand building and cost-cutting should drive the margin trajectory upwards, they said.
The company saw its Ebitda (earnings before interest, taxes, depreciation and amortisation) margin decline from 9.6 per cent in FY13 to 8.3 per cent in FY14. It is estimated to be 9.1-9.7 per cent in FY15 and then move to double digits.
Abneesh Roy at Edelweiss, who had a target price of Rs 5,000-plus, says the management's focus in the first 12 months of integration was governance and balance sheet clean-up, which affected the volumes and margins. He adds the management believes not much improvement will come on margins till FY16, due to the higher investment behind the brand. And, expects margin improvement in FY17.
The company is trying to prioritise eight to 10 brands of USL and four to five of Diageo, intended to assure complementarily and, thus, lead to a winning combination. Beside, USL is focusing on how the distribution channel can be leveraged -- changing the display, communication strategy, etc.
The initial response to these steps has been encouraging, say analysts. Premiumisation and focus on production, scale and costs will further help boost margins, even in lower brands, as capital expenditure and cost rationalisation are likely to benefit in the long run. With all these initiatives, analysts estimate Ebitda margins of 11.5-12.8 per cent for FY16 and 12.7-14.8 per cent in FY17.
On a gradually rising turnover, Rs 10,600 crore in FY16, it could provide significant boost to profits, expected to benefit from lower debt, led by sale of the Whyte & Mackay business. W&M was sold for Rs 4,345 crore last May, enabling a cut in the debt of Rs 8,300 crore at end-March 2014.
Looking at the expected improvement in profitability, analysts at MOSL see USL’s earnings per share improving from Rs 17.3 in FY15 to Rs 62.6 in FY17. Roy at Edelweiss estimates an EPS of Rs 71.6 for FY17.
All these indicate that if the Mallya-USL board dispute gets resolved, and without any major negative surprises, there is scope for gain. Further correction in the stock could, thus, be used as an opportunity for investors to enter the counter.
Based on a Price Waterhouse forensic report, the USL board levied serious charges of financial impropriety on dealings between the company and other parts of Mallya’s empire during the 2010-12 period. Mallya has denied the allegations and refused to resign from USL’s board. A legal battle and further investigations are likely. The Securities and Exchange Board of India plans to take a look.
These will be an overhang on the stock. However, looking at the weakness in the scrip, analysts continue to be positive on USL’s prospects. They expect a turnaround in the fundamentals. Parent Diageo and the measures it is taking are the key factor in providing comfort.
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The stock had seen lows of close to Rs 500 at the start of 2012 as stress on the balance sheet increased and Mallya’s problems with his airline venture started to cast a shadow. It started gaining as news spread of Diageo buying a stake. Diageo completed the stake purchase in 2013 and has continued to take severe steps to not only clean the balance sheet but revamp USL’s complete portfolio of products, packaging and strategy. Thus, despite regular write-offs, and revenue and margin growth remaining subdued, the stock saw a high of Rs 4,080 last month. However, with correction in the broader indices, the stock has also cooled.
Analysts at Motilal Oswal Securities (MOSL), in a report last month, reiterated their bullish long-term view on USL, with a target price of Rs 4,250. A combination of portfolio premiumisation, investments behind long-term brand building and cost-cutting should drive the margin trajectory upwards, they said.
The company saw its Ebitda (earnings before interest, taxes, depreciation and amortisation) margin decline from 9.6 per cent in FY13 to 8.3 per cent in FY14. It is estimated to be 9.1-9.7 per cent in FY15 and then move to double digits.
Abneesh Roy at Edelweiss, who had a target price of Rs 5,000-plus, says the management's focus in the first 12 months of integration was governance and balance sheet clean-up, which affected the volumes and margins. He adds the management believes not much improvement will come on margins till FY16, due to the higher investment behind the brand. And, expects margin improvement in FY17.
The company is trying to prioritise eight to 10 brands of USL and four to five of Diageo, intended to assure complementarily and, thus, lead to a winning combination. Beside, USL is focusing on how the distribution channel can be leveraged -- changing the display, communication strategy, etc.
The initial response to these steps has been encouraging, say analysts. Premiumisation and focus on production, scale and costs will further help boost margins, even in lower brands, as capital expenditure and cost rationalisation are likely to benefit in the long run. With all these initiatives, analysts estimate Ebitda margins of 11.5-12.8 per cent for FY16 and 12.7-14.8 per cent in FY17.
On a gradually rising turnover, Rs 10,600 crore in FY16, it could provide significant boost to profits, expected to benefit from lower debt, led by sale of the Whyte & Mackay business. W&M was sold for Rs 4,345 crore last May, enabling a cut in the debt of Rs 8,300 crore at end-March 2014.
Looking at the expected improvement in profitability, analysts at MOSL see USL’s earnings per share improving from Rs 17.3 in FY15 to Rs 62.6 in FY17. Roy at Edelweiss estimates an EPS of Rs 71.6 for FY17.
All these indicate that if the Mallya-USL board dispute gets resolved, and without any major negative surprises, there is scope for gain. Further correction in the stock could, thus, be used as an opportunity for investors to enter the counter.