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Right strategy but stiff competition

United Spirits’ (USL) Q3FY22 revenue (up 15.9% YoY) came in below our estimates, while EBITDA (up 27.9% YoY) and PAT (up 26.6% YoY) came in ahead of our estimates. As we had highlighted, ad spends are up sharply (up 26.3% YoY) on the back of rising competitive intensity. Overall volume growth was 3.7% YoY. The P&A volumes grew 7.9% YoY (up 4.2% on 2-year CAGR basis).

Overall, we like USL’s new strategic direction; however intensifying competition from Pernod (Pernod Ricard is planning to set up its own branded retail outlets in India), recovery in duty-free sales, faster growth of beer segment, glass inflation and higher state taxes remain key structural concerns. Maintain ‘REDUCE’ with a TP of INR815.

Key concerns remain

What we like: EBITDA and PAT came in ahead of estimates. EBITDA margin was up 159bps YoY. Strong premiumisation push as value volume difference accelerated sequentially.

What we don’t like: Rising competitive intensity from Pernod Ricard and Radico Khaitan (ad spends are up 26.3% YoY and at 10.3% of sales; at least a 9 quarter high). Gross margins continue to be under pressure (compressed by 49bps YoY and at a 3 quarter low). USL managed to cut staff cost, down 7.6% YoY and 13.3% QoQ. However, we do not normally see this kind of volatility on staff cost for other companies. Popular and above segment’s volumes grew only 4.2% on 2 year CAGR basis (7.9% YoY growth on a 0.6% base). Popular volumes dipped 1.1% YoY on a negative base of 2.3%.

Q3FY22 conference call: Key highlights

State tax rationalization trend is a positive for the industry and USL will see good impact on volumes. Price mix should settle at 7-8% in the future. In some states, where restrictions are heavier, the retail footfalls have been affected. But, bounce back should be fast as the restrictions ease.

Outlook and valuation: Pricey; maintain ‘REDUCE’

Omicron wave could impact the business in the near-term; longer-term concerns like rising competitive intensity and state taxes continue to haunt the sector. Popular segment review will be a key monitorable. Considering these concerns, we revise down TP to INR815 (from INR870) and maintain ‘REDUCE/SU’.

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