United Spirits: Fine blend

Margins will improve if more W&M branded whisky is sold.

While the enterprise value of £595 million may seem expensive for the acquisition of Whyte & Mackay by United Spirits, the fact remains that scotch is in short supply globally and there aren't too many companies up for sale.

So an EV/EBITDA multiple of around 21 times for FY06 is probably justified though it may put a strain on the United Spirits balance sheet in the near term.

While W&M has not been in good shape financially "" the company reported only a marginal profit before restructuring costs for FY06 "" it nonetheless had reasonably good operating margins, which can be improved.

The demand for scotch whisky continues to be strong in India as also China, which are two big markets that United Spirits plans to focus on, apart from Russia. The acquisition gives United Spirits some strong scotch whisky brands, the missing link in its liquor portfolio.

Scotch whisky prices are increasing at 10 per cent a year and are expected to remain firm. W&M's bulk scotch inventories of 115 million litres will help improve revenues.

As income levels and aspirations rise in India, the demand for Scotch whisky is estimated to be growing at 30 per cent annually higher than the overall demand for liquor at 12 per cent.

Scotch whisky is also used in blended whisky, and with consumers trading up to premium whisky, domestic demand is likely to remain strong. With some strong brands from the W&M portfolio, United Spirits will be able to gain significant presence in the domestic Scotch market.

For its blended whisky, United Spirits had imported 18 million litres of bulk scotch last year. W&M fits well here as 70 per cent of its revenues are estimated to be bulk sales.

If United Spirits can sell more of W&M's branded whisky, margins will improve. At Rs 895, the stock trades at 26 times estimated FY08 earnings and while the valuations are not cheap, the stock should be an outperformer.

Havell's India: Margin pinch

Havell's India reported a strong revenue growth of 47 per cent during the fourth quarter and 54 per cent for FY07. The key cable and wire segment, which contributed 46 per cent of total revenues, grew 67 per cent y-o-y in FY07. Even the electrical consumer durables segment, which includes compact fluorescent lamps, fans and light fittings, also grew 49 per cent y-o-y.

But raw material costs are impacting operating margins. Copper is a key raw material for cable and wires, and with copper prices being volatile in FY07, Havell's has seen its raw material costs rising 750 basis points and 500 basis points y-o-y for the quarter and year respectively.

The management said that the price of cable and wire falls immediately when copper prices decline, but an increase in copper prices takes up to two months to be passed on to the customer.

As a result, its segment margin in cable and wires declined 220 basis points y-o-y in FY07. However, Havell's managed to maintain operating margin at about the same levels y-o-y in Q4, thanks to a tighter control on staff costs and other expenditure. For the full year, operating margins were down 80 basis points to 9.1 per cent.

Shree Cement: Higher prices do the trick

Shree Cement, like other players in the sector, reported an improved performance in the March 2007 quarter, aided by higher cement prices and improved despatches. As a result, operating profit grew 110 per cent y-o-y in Q4 FY07 on a net sales growth of 67 per cent.

Its operating profit margin also improved 930 basis points y-o-y to 45.3 per cent in the last quarter. ACC, with an all-India presence, also saw its margin improve 600 basis points y-o-y to 30.3 per cent in the March 2007 quarter.

Shree Cement's despatches were at 1.26 million tonnes in Q4 FY07 compared with 0.92 million tonnes a year earlier. Its realisations were estimated at Rs 3,002 per tonne in the last quarter, a growth of 21.9 per cent y-o-y. ACC's realisations also grew an estimated 26.8 per cent y-o-y to Rs 3,317 a tonne in the last quarter.

The underlying concern for cement stocks is the industry's earlier decision to hold prices for a year. As a result, the stock has dipped 18.3 per cent during the past three months compared with 1.6 per cent fall in the Sensex. Nevertheless, with the stock trading at 21.6 times diluted FY07 earnings, it is expensive.

With contributions from Shobhana Subramanian and Amriteshwar Mathur