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United Spirits (UNSP) 1QFY25 operating performance surprised us positively with reported EBITDA margin coming at 19.5% (excluding one-off benefit, EM still stood robust at 18.5%). Prestige & Above (P&A) saw a strong 10.1% YoY value growth. Management sees some amount of 1H growth getting front loaded in 1QFY25 due to certain momentum in a western state, which will normalize in 2Q. On a full year basis company believes it will be on track to deliver its double-digit growth guidance. The stock is already up ~15% post our recent initiation (dated 4th June 2024). We now rollforward our target price (TP) to Sep’26E EPS and derive a revised TP of Rs1,510, targeting ~52x on Sep’26E EPS of standalone business + RCSPL. We maintain our ADD rating and remain fundamentally positive on the medium-term opportunity

Result Highlights

* Headline performance: Standalone net sales grew 8.3% YoY to Rs23.5bn. EBITDA grew by 18.9% YoY to Rs4.6bn. Adjusted PAT (APAT) grew by 19.1% to Rs3bn.

* Overall volumes for the quarter grew by ~3.5% YoY to 13.7mn cases.

* Prestige & above (P&A; ~88% of net sales) volumes grew by 5.1% YoY to 11.5mn cases driving value growth of 10.1% YoY. Popular (~9% of net sales) volumes down 4.6% YoY to 2.2mn cases leading to 2.7% YoY value decline.

* Gross revenue per case for the quarter was up by 6.1% YoY from Rs4,012 in 1QFY24 to Rs4,255 in 1QFY25 (it was Rs4,100 in 4QFY24).

* Standalone margins: Reported gross margin up 90bps to 44.5% (+110bps QoQ). Savings in staff cost of ~10bps and other expenses of 150bps on a YoY basis was offset by ~70bps increase in A&SP costs. Thus, EBITDA margin was up ~170bps to 19.5% largely driven by GM expansion and operating leverage partly offset by higher ad spends.

* EBITDA per case stood at Rs334 in 1QFY25 vs Rs291 in 1QFY24, up 15%

Key near-term outlook: (1) First half of FY25 will see less than double digit growth and second half would see double digit growth owing to softer base, pickup of consumption and renovation of portfolio. Thus, on a full year basis it will be on track with its double-digit guidance. (2) Trend of ENA staying inflationary while rest of commodities being stable, stays. (3) Gross margin in FY25 would likely be a tad lower than 1QFY25

View & Valuation

There is 2.9%/3.4% upward revision on our standalone earnings to bake in underlying EM improvement. We now build EBITDA/Earnings CAGR of 16.4%/14.8% over FY24- 26E for the standalone business. UNSP has recently resumed dividend, after almost a decade, as it wiped out all its accumulated losses in 1QFY24. Cash flow and return ratios are seeing improvement. The stock is already up ~15% post our recent initiation (dated 4th June 2024) and is currently trading at ~67x/57.5x FY25E/FY26E standalone EPS. We now roll-forward our TP to Sep’2026 EPS and derive a revised TP of Rs1,510, targeting ~52x on Sep’2026E EPS of standalone business + RCSPL. We continue to maintain our ADD rating on the stock.

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