 "Vijay Mallya")
Most analysts see Diageo's agreement to part ways with Vijay Mallya in a positive light, as the deal will benefit United Spirits (USL) in multiple ways.
One, the agreement will allow the company to disassociate itself from future legal tussles arising out of Mallya's wilful defaulter status. And, hence, improve its relationship with banks and financial institutions.
Second, under the agreement, the $75 million to be paid to Mallya will be by Diageo, the parent company, not USL. So, this will not have an impact on the latter's financials. As most of the liabilities, including third party transactions earlier entered into by Mallya, were largely not accounted for in USL's financial statements, the deal should not have a material impact on these. Moreover, the management has already written off Rs 1,800 crore on account of potential/actual liabilities.
The deal will also allow the management to focus on the core business and growing it. It also clarified in a call with investors that the 13 properties in question were valued at Rs 290 crore and the company could sell 10 of these at market value, with Mallya having first right of refusal over three (which will be sold at a 10 per cent discount to market value).
However, there are some concerns. Some analysts believe USL should have pursued its charges against Mallya. Though the company will pursue charges against United Breweries Holding (owes loans worth Rs 1,300 crore), analysts believe it will be difficult for USL to recover the money. “United Spirits should have made public the inquiry report to let investors know of the charges they have relieved Mallya of. However, there will be no material financial impact on United Spirits,” says one with a leading foreign brokerage.
In this backdrop, the USL stock rallied 2.5 per cent on Friday to Rs 2,730 versus a one per cent rise in the benchmark S&P BSE Sensex. Analysts' bullish view is also due to USl's reasonable valuation, improving of volumes in the prestige-plus segment and success of the Royal Challenge relaunch.
Analysts at Credit Suisse believe the coming re-launch of McDowell's No 1 will be a game changer for the company. Despite expectations of rising spending on advertising, analysts believe the rising proportion of premium products will aid margin expansion. Analysts at Credit Suisse believe the operating earnings margin could expand by 300 basis points in FY18, to 14 per cent.
Tightening of regulations on alcohol consumption, though, is a key downside risk for the company and the sector.
