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Premiumisation trend continues to strengthen…

About the stock: United Spirits (USL) is India’s leading alcoholic beverage company and subsidiary of global leader Diageo plc. It manufactures, sells premium liquor brands such as Johnnie Walker, Black Dog, Black & White, Vat 69, Antiquity, Signature, Royal Challenge, McDowell’s No 1, Smirnoff and Captain Morgan.

* Prestige and above segment comprises 67% of its revenues

* It aims to grow its revenues in double digits and expects its operating margin to remain in mid to high-teen levels in the medium term

Q2FY22 Results: USL beat I-direct estimates on all fronts.

* Revenues were up 14% YoY to | 2447 crore amid 4% rise in volumes and 10% growth in realisation

* EBITDA grew 58% to | 426 crore with margins at 17.4% (12.6% in Q2FY21)

* Consequent PAT doubled to | 273 crore, which includes one-off reversal benefit in the interest expense

What should investors do? With its broad portfolio and focus on placing existing brands in the upper prestige segment, along with introduction of its several iconic brands from Diageo stable, USL is well placed to capitalise on the rapidly growing premiumisation trend in the sector.

* We remain positive on the long term growth prospects of the stock and maintain our BUY recommendation

Target Price and Valuation: We value USL at | 1050 i.e. 58x P/E on FY23E EPS

Key triggers for future price performance:

* Better product mix and higher RoI brands to drive EBITDA performance

* Double-digit return ratios & strong cash generation

* Newer distribution channels (e-commerce), portable packaging (Hipster) to provide connect with young customer base

Alternate Stock Idea: Apart from USL, we remain positive on Radico.

* It has been reporting volume growth, well ahead of the industry and is strategising on entering premium whisky category

* It has been continuously reducing its overall net-debt from peak of ~| 950 crore to ~| 198 crore in FY21 and generated ~| 380 crore of CFO in FY21

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