A gradual improvement in margins could delay gains for United Spirits

Most analysts are positive on the popular segment sale and premiumisation focus

Announcement of the long awaited sale of entry level or popular segment of brands by United Spirits is viewed positively by the brokerages. This coupled with progress on the premiumisation trend, higher revenue growth trajectory and improved margins are the key triggers for the stock of the country’s largest liquor maker.

The company recently sold 32 popular brands by way of a slump sale for Rs 828 crore. The sold brands contributed Rs 768 crore to the company’s topline and accounted for 8 per cent of overall sales for FY22. The sales consideration values the deal at 7 times its enterprise value to operating profit and is considered attractive for the buyer. The company also inked a five year franchise arrangement with Inbrew for 11 other brands with an option of perpetual rights or for acquiring the brands at a pre-determined price of Rs 1,350 crore. The divested/franchised brands contributed about Rs 195 crore to the company’s operating profit and with margins at 14-15 per cent.

The sale of United Spirits brands to Singapore-based Inbrew Beverages follows a strategic review undertaken by the company in February last year. The review of select brands of its Popular segment portfolio excluded McDowells No 1 and Director’s Special brands while including other brands in this portfolio such as Haywards whiskey, Bagpiper whiskey, Old Tavern whiskey and Honey Bee brandy among others.

Analysts led by Percy Panthaki of IIFL Research expect a reduction of Rs 150 crore from the operating profit of United Spirits by FY24 as some of the loss would be offset by franchising income from Inbrew. With an increase in interest income, the reduction in profit before tax will be lower at Rs 100 crore. However, on the lower base, the company can grow faster and would hence deserve a higher multiple, say the analysts.

The company has stuck to its earlier guidance of sustaining double digit growth with mid to high teen profit margins. The same is expected to be achieved following the strategic review of Popular portfolio brands, growth in luxury and premium portfolio, new growth engines (craft whiskey and gin) and value chain efficiencies.

Volume growth trends especially in the Prestige and Above (P&A) segment could be a trigger for the stock. Karan Taurani and Jayalaxmi Gupta of Elara Capital believe that the company may continue to perform well in the P&A segment, helped by outperformance in the scotch segment and better offtake in the mid and upper prestige segments. Higher volume growth in the latter segment may drive upgrades to volume estimates, they add.

Growth in the P&A segment, which accounted for more than half of volumes and just under three fourths of revenues in Q4 grew about 13 per cent to Rs 1,710 crore and exceeded pre-Covid levels of Q4FY19 levels by 23 per cent. About 9 per cent of the growth was on account of volumes while the rest was on account of realisations.

What could aid volumes are regulatory tailwinds which include tax cuts across several states such as Delhi, Maharashtra, West Bengal, Rajasthan among others, route to market changes, composite outlets and possibility of reduction in duty on scotch imports from the UK.

While the medium term prospects remain strong, the near term could see some headwinds on account of higher raw material costs (extra neutral alcohol and glass bottles), supply chain issues and regulated price increases limited to a few states.

At the current price, the stock is trading at just over 50 times its FY24 earnings estimates. Motilal Oswal Research has a neutral rating on the stock given near term uncertainties, gradual improvement in profitability and fair valuations.