Published on 3/06/2020 3:01:09 PM | Source: Motilal Oswal Financial Securities Ltd

Neutral United Spirits Ltd For Target Rs. 543 - Motilal Oswal

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Weak results; tough times to continue

* UNSP’s 4QFY20 results were worse than expectations. If bulk scotch sales (that could be lumpy but not extraordinary) are excluded, then results would be even weaker.

* While UNSP’s PAT CAGR for 5 years ending FY20 stood at 33%, FY21 and FY22E are likely to be the lost years for UNSP and other alcohol companies with negligible earnings growth. Impact of extremely sharp excise increases across states would only exacerbate the pressure on FY21 profitability.

* Further, we believe profitability is already sharply impacted by (a) the absence of any sales until 3rd May, and (b) absence of sales from on-trade channel (20- 25% of sales), which is expected to last for a significantly large part of the year after the latest MHA guidelines.

* Maintain Neutral on UNSP on account of fair valuations


4QFY20: COVID-19 adversely impacts volumes hurting sales

* Standalone net sales declined 11.4% YoY to INR19.9b (v/s est. INR21.3b). Underlying net sales, excl. the one-off sale of bulk Scotch, declined 14.8%.

* Overall reported volumes declined 13.3% (v/s est. -10%). P&A/Popular volumes declined 20%/6.6% YoY.

* Reported gross margin contracted by 430bp to 42.2%, primarily due to COGS inflation as well as the dilutive impact of the last tranche of bulk Scotch sales. Underlying gross margin, excluding the one-off sale of bulk Scotch, was down 364bp to 42.9%.

* Despite significant gross margin compression, reported EBITDA margin expanded 100bp YoY to 13.6% (v/s est. 11.9%), primarily delivered through savings in operating costs. As a % of sales, other expenses declined 130bp YoY, while staff costs and ad spends declined 200bp YoY each.

* Adjusted for one-off impact of bulk Scotch sales and restructuring costs, underlying EBITDA declined 16.2% YoY and underlying EBITDA margin was down 21bp YoY to 13.2%.

* Reported EBITDA declined 4.3% YoY to INR2.7b (v/s est. INR2.5b).

* Reported PBT declined 18.1% YoY to INR1.6b (v/s est. INR1.8b).

* Adjusted PAT declined 16.9% to INR1.1b (v/s est. INR1.5b). Reported PAT declined 81.1% to INR239m on account of higher taxes. The taxes were higher than usual as the company opted to settle its past income tax disputes under the Direct Tax Vivad se Vishwas Act, 2020. This led to recognition of INR857m of tax relating to earlier years in 4QFY20.


FY20 performance

* FY20 sales/EBITDA/Adj. PAT growth stood at 1.2%/ 17.1%/16.9% YoY.

* The company repaid debt amounting to INR4.9b, comprising a reduction in Commercial Papers of INR9b and an increase in bank loans of INR4.1b. Net debt as of Mar’20 stood at INR20.7b, down 20% YoY.

* On an average basis, inventory/receivable/payable days declined by 1/10/5 days to 75/96/50 days respectively, improving the cash conversion cycle by 6 days to 121 days.

* Operating cash flow declined by 22.2% to INR6.7b.



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