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Decent results; stock pricey

United Spirits (USL) reported higher-than-expected Q2FY22 revenue and adjusted EBITDA (ex-one-offs) growth of 14% YoY and 29% YoY, respectively. Gross margin expanded by 207bps YoY, but dipped 41bps QoQ—as we had indicated earlier. Meanwhile, lower ad spends (down 88bps YoY) lifted adjusted EBITDA margin by 190bps YoY. Overall volume growth was up 3.5% YoY (1% dip on two-year basis).

The P&A segment’s volume grew 6.1% YoY (up 5.7% on two-year basis). Overall, we like USL’s new strategic direction; however intensifying competition from Pernod, 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 INR870.

Recovery momentum back on track What we like:

Sales came in ahead of our estimates, while adjusted EBITDA and gross margins expanded YoY. Prestige and above segment sales grew 20.8% YoY. Scotch saw high double-digit YoY growth during the quarter.

What we don’t like:

Two-year volume growth dipped 1%, Sales and adjusted EBITDA were up only 6.5% and down 3%, respectively, on a 2-year basis sales. Ad spends were down 88bps YoY.

Other highlights:

The company is seeding Guinness beer; however, it is not looking at mass end of beer. Guinness is a premium brand and India is largely a mass market. The company would need to address the taste aspect of the beer as it is quite bitter and dark; Indians are more used to milder variants.

Q2FY22 strategy refresh and earning call:

Key takeaways USL’s ambition is to be the top-performing CPG company in India delivering sustained double-digit, profitable top-line growth. The company wants to achieve breakout growth on P&A by accelerating the luxury and premium segment, strengthening play in upper prestige and reshaping value proposition in lower & mid prestige.

Outlook and valuation:

Pricey; maintain ‘REDUCE’ Improving mobility should aid the business in the near term; however, longer-term concerns continue to haunt the sector. Popular segment review will be a key variable in the near term. Considering the outperformance, we are revising up the TP to INR870 (from INR835). Maintain ‘REDUCE/SU’.

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