 "Nuvama upgrades United Spirits to 'Buy' on stellar margin delivery in Q1")
Nuvama bullish on United Spirits: Domestic brokerage Nuvama has upgraded United Spirits to ‘Buy’ from ‘Hold’ with an increased target price (TP) of Rs 1,630. The previous target price was Rs 1,195.
“Given the margin outperformance, huge headroom in new premium categories (tequila, craft spirits) and the upcoming wedding/festive season, we are raising FY25E/26E earnings per share (EPS) by 5.3 per cent/6.5 per cent and the target price-to-earnings (PE) from 50x to 60x. This along with a rollover to Q1FY27E yields a revised TP of Rs 1,630 (earlier Rs 1,195); upgrade to ‘Buy’ (from ‘Hold’),” Nuvama said in a note
Analysts highlighted the Prestige and above (P&A) segment posted value/volume growth of 10.1 per cent/5.1 per cent year-on-year (Y-oY-), driven by an improved footprint and saliency of innovation and renovation offerings and portfolio reshaping. Further, brands such as Don Julio, Johnny Walker, RC American Pride, Godawan and McDowell X Series also performed well.
Gross/earnings before interest, taxes, depreciation and amortisation (Ebitda) margin expanded 85 basis points /174 basis points year-on-year (Y-o-Y) to 44.5 per cent/19.5 per cent, driven by internal revenue management, cost of goods sold (COGS) productivity initiatives and cost control, analysts said.
A shot in the arm
United Spirits announced two acquisitions including V9 Beverages (15 per cent stake for Rs 2.29 crore)—it operates a brand called Sober (zero alcohol beverage); and Indie Brews and Spirits (25 per cent stake for Rs 5 crore)—it operates a brand called Quaffine (mid-proof alcohol in premium craft segment) engaged in the business of development, marketing and selling specialty cold brew coffee liqueur.
“These new categories are gaining traction and investments are at an early stage to be future-ready. Craft ecosystem shall grow with Diageo support and brand equity. Based on performance, United Spirits will decide whether to increase investments in their existing M&A investments,” analysts said.
“These new categories are gaining traction and investments are at an early stage to be future-ready. Craft ecosystem shall grow with Diageo support and brand equity. Based on performance, United Spirits will decide whether to increase investments in their existing M&A investments,” analysts said.
In Andhra Pradesh, analysts expect the new government to likely cut taxes and thus large alco-bev players such as United Spirits shall benefit thereof. The India UK FTA (likely in near to mid-term), strategic M&As and faster innovation, analysts believe, remain the key levers.
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They also expect operating margins to expand significantly over FY25–27E driven by improved pricing and strong cost control initiatives in place.
On the flipside, the Popular segment, analysts noted, declined 4.6 per cent/2.4 per cent YoY by volume/value due to continued slowdown in demand as inflation has been impacting the price sensitive consumer. Raw materia (RM) cost, particularly extra neutral alcohol’s (ENA), continues to be inflationary.
Key triggers, analysts noted, include demand recovery in H2FY25, favourable tax slabs in Karnataka, new policy in Andhra and a potential India-UK FTA deal.
Financials
United Spirits posted net sales/Ebitda growth of 8.3 per cent/18.9 per cent Y-o-Y. P&A volumes shot up 5.1 per cent YoY on a base of 10.3 per cent. Cost control measures—surprising analysts positively—lifted Ebitda margin by 174bp YoY to 19.5 per cent.
That said, United Spirits profit rose 1.7 per cent to Rs 485 crore in the June quarter (Q1FY25), from Rs 477 crore a year ago (Q1FY24). Its consolidated revenue from operations stood at Rs 6,238 crore during the quarter under review.
Conference call highlights
During the conference call, United Spirits discussed the impact of its premiumisation strategy on growth, noting a recent moderation despite some mixed benefits.
The company highlighted its dynamic approach to allocating resources in Advertising & Promotion (A&P) spends and trade expenditures, which has bolstered gross and operating margins.
The company further said if the UK-India Free Trade Agreement happens, it could lead to a 5–15 per cent reduction in overall pricing.
On the outlook, United Spirits said it is targeting double-digit revenue growth for FY25, with stronger performance expected in the second half of the fiscal year.