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Cost pressures and competitive intensity remain high
* United Spirits’ Q4FY19 performance was weak, with EBITDA/APAT coming in 9%/20% below our estimates due to elevated cost pressures and election restrictions. Revenues grew 4%, 5% below our estimate, with P&A brands volume growth moderating to 7%.
* Gross margins contracted by 340bps due to input cost inflation and partial absorption of an excise duty hike in Maharashtra. EBITDA margins remained unchanged on account of reduction in employee and advertising spends by 8% and 19%, respectively.
* We expect volume growth to improve, but cost pressures are likely to sustain due to limited price hikes and rising ENA prices. Higher competitive intensity, particularly from Pernod remains an additional risk.
* We cut FY20/21E EPS by 4%, adjusting for lower other income and slower reduction in interest costs. Current valuations at 40x FY21E EPS are not attractive enough, given downside risks to earnings. Maintain Sell with a TP of Rs530 based on 40x Mar-21E EPS.
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