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* United Spirits (UNSP): We expect UNSP to report a volume growth of about 3.5% YoY. The company is likely to experience growth in key markets of Karnataka and Maharashtra, but that may be offset by route-to-market changes and price increases in Andhra Pradesh (AP). The AP government has increased excise tax twice in Q3FY20 (October 2019 and December 2019), whereas Telangana has done that once in December 2019. However, driven by sequential improvement in gross margin, with stable RM prices, better state/product mix, and costs optimisation, we expect EBITDA to remain healthy.
* Radico Khaitan (RDCK): We expect RDCK to report a 10.3% YoY volume growth (H1FY20 11.5%). RDCK’s growth is likely to be broad based, across states and brands, as the company benefitted from its aggressive marketing and distribution expansion for 8PM Black and MM Vodka, and also from resilient sales of 1965 Pluton Bay Rum and Morpheus brandy.
* United Breweries (UBL): We expect UBL to report a weak performance, given about 63% de-growth in industry volumes in AP, which contributes about 6-7% of UBL’s volumes. Beer volumes in other key markets of Karnataka, Maharashtra, and Kerala are also subdued.
* Key parameter to watch: Outlook on
(1) volume growth, especially in AP and Telangana, after the recent excise tax hikes;
(2) RM price trend, especially of ENA, on account of capacity diversion for ethanol; and
(3) price increases from the state governments.
Our View After a healthy FY18 and FY19, driven by high base, elections, and RM headwinds, FY20E is likely to be a year of consolidation. Stocks have gone through both price and/or time corrections. We expect the earnings growth to revive from hereon.
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