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Volume misses estimate; recovery continues

* Q3 results were marginally below expectations with net sales declining 4% to Rs25bn due to weaker P&A performance, impacted by high comparables and AP. EBITDA declined 10% to Rs3.8bn, missing estimates by 7%. APAT fell 11%.

* Excluding Andhra Pradesh, P&A growth was better at 4.5%. Pipeline correction post higher stocking in Q2 ahead of the festive season has also resulted in the slight miss, in our view. Recovery trends across markets remain encouraging and should see a further improvement with a pick-up in on-premise consumption and full benefit of the relaunches.

* Sequential improvement in gross margins and benign input inflation outlook point to stronger operating margin gains ahead as volume growth recovers fully. Price hikes awaited in key markets can improve margin and earnings visibility.

* We reduce FY22-23 estimates by 5-7%, factoring in slower margin expansion but remain positive on UNSP given improved volume and margin outlook. Maintain Buy with a revised TP of Rs660, valuing it at 40x Mar’23E EPS.

P&A volume growth weak on high comparables and AP impact: UNSP’s Q3 sales declined 4%, with P&A down 1% due to a high festive comparable and impact of AP. Excluding AP, P&A grew 4.5%. Popular sales/volume declined 7%/2% due to an increase in prices and unfavorable state mix. Lower on-premise sales and a decline in franchise income have adversely affected volumes and realizations in Q3FY21. Management indicated a continued improvement in recovery trends and positive impact of McDowell’s No.1 relaunch from Q4 onward.

Operating margin lower on higher opex: Gross margin expanded 20bps YoY and 250bps QoQ, driven by the softening of raw material prices, particularly ENa and glass, and better mix. However, EBITDA margin contracted 100bps YoY due to a 23% increase in employee costs. Margin contraction was limited as ad spends and other overhead spends declined 7% and 3%, respectively. Management expects commodity inflation to remain benign in the near term, which may support a healthy gross margin trend. Price hikes awaited in several key markets can drive stronger margin gains into FY22.

Earnings cut by 5-7%; maintain Buy: We trim our FY22-23 forecasts marginally, factoring in a slower margin expansion. Volume recovery across markets remains encouraging and a further pick-up in on-premise consumption along with low comparables should drive volume growth from Q4 onwards, improving earnings visibility ahead. Valuations at 36x FY23E EPS offer reasonable upsides. Maintain Buy with a revised TP of Rs660 (Rs640 earlier), rolling forward to Mar’23E EPS.

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