27 October 2016
Q2FY17 Results Update | Sector: Consumer
United Spirits
Buy
BSE SENSEX
27,916
Bloomberg
Equity Shares (m)
M.Cap.(INRb)/(USDb)
52-Week Range (INR)
1, 6, 12 Rel. Per (%)
Avg Val, (INR m)
Free float (%)
S&P CNX
8,615
UNSP IN
145.3
330.7 / 4.9
3645/2120
1/-13/-30
900
41.2
CMP: INR2,276
TP: INR2,800 (+23%)
Financials & Valuation (INR b)
Y/E Mar
2016 2017E 2018E
Total Income
83.4
91.6 104.6
EBITDA
8.8
10.6 13.7
PAT
2.4
5.0
7.5
EPS (INR)
16.7
34.4 51.9
EPS Gr. (%)
LP
105.7 50.8
BV/Sh.(INR)
123.1
163.0 219.8
RoE (%)
19.8
24.0 23.6
RoCE (%)
8.5
12.1 15.3
P/E (x)
136.0
66.1 43.8
P/BV (x)
18.5
14.0 10.4
Estimate change
TP change
Rating change
8%
Operating performance below expectation
United Spirits’ (UNSP) S/L net sales rose 7.7% YoY (est. of +11.5%) to
INR20.4b (Ind-AS).
Gross sales grew 12.7% YoY to INR60.3b; excise duty
increased 160bp YoY. Recurring EBITDA (after adjusting for accounting
reclassification of one-off item of INR280m on restructuring costs that were
clubbed as part of staff costs) stood at INR 2.25b (Ind-AS), down 22.5% YoY
(est. of +8.3%).
Overall 2QFY17 volumes were up only 1% to ~22m cases.
Popular segment
volumes declined 5% YoY, while Prestige and above segment volumes rose 10%
YoY (net sales of Prestige and above portfolio grew 12% YoY).
Gross margin expanded only 40bp YoY to 42.2%,
despite continued
improvement in mix and price increases taken in Karnataka, the largest
market. Ad spends were up 170bp over a very low base, but lower than the
usual range of ~8-9% of sales. EBITDA margin (excluding other operating
income) after adjusting for one-offs contracted 430bp YoY to 11.0% (Ind-AS),
albeit off a very high margin base in 2QFY16. Adjusting for one-off
restructuring costs, EBITDA (excluding other operating income) declined 22.5%
YoY to INR2.25b (est. of +8.3%).
Adjusted PAT well below expectations:
Other operating income declined
54.5% YoY to INR106m in 2QFY17. Interest costs declined 19.5% YoY to
INR885m, led by debt reduction and favorable rates. PBT fell 23.3% YoY to
INR1.42b. Reported PAT grew 15.9% YoY to INR825m. Adjusted PAT declined
22% YoY to INR978m (est. of INR1.5b).
Krishnan Sambamoorthy
(Krishnan.Sambamoorthy@MotilalOswal.com); +91 22 3982 5428
Vishal Punmiya
(Vishal.Punmiya@MotilalOswal.com); +91 22 3980 4261
Investors are advised to refer through important disclosures made at the last page of the Research Report.
Motilal Oswal research is available on www.motilaloswal.com/Institutional-Equities, Bloomberg, Thomson Reuters, Factset and S&P Capital.

United Spirits
Conference call highlights:
1) The company took 10% price increase in
Maharashtra from October 1, 2016 to mitigate impact of local body tax, which
was implemented with retrospective effect in August; 2) Some Popular brands
will be franchised, and thus margins will improve as it will contribute directly to
EBITDA in the form of royalty. Details are likely to be revealed in a few months;
3) On GST, management is cautiously optimistic that the impact may not be as
high as envisaged earlier as some of the materials may be in the lower GST slab;
4) Capex guidance of INR3-4b in FY17. 60% of this investment will be in
technologies and capacity, remaining 40% on environment and safety norms.
Brand-wise performance:
Prestige & above segment represents 41% of total
volumes and 57% of total net sales, up 400bp and 500bp YoY, respectively.
Continued focus on premiumization led to volume increase of 11%, with net
sales up 12% as Diageo brands portfolio is now present in the base. Popular
segment contributed 59% of volumes and 43% of sales (-400bp YoY). Popular
segment declined due to McDowell’s brand variants.
Valuation and view:
We cut our estimates by ~8% to adjust for the margin miss
and also build in lower volume and margin assumptions given the underlying
subdued discretionary demand trends and UNSP’s focus on optimizing state-
brand mix. While we did not anticipate linear margin expansion trajectory,
growth to mid-teen margins in the medium term seems to be beset with
challenges quarter after quarter. Questions remain on inability to grow
operating margins, despite price increases in the largest state and mix
improvement led by faster growth in Prestige and above segment, as well as
continued strong growth in Diageo brands. Proliferation of one-offs in every
quarter also remains a bother. Maintain
Buy
with a revised DCF-based TP of
INR2,800.
Volumes/Revenues/Mix
Prestige and above segment volumes were up 10% while sales expanded 12%.
Popular segment volumes were down 5% while sales declined by 3% which were
impacted Bihar prohibition. Priority sates saw volume and value growth in the
segment during the quarter.
Management highlighted that they faced some industry challenges in
2QFY17. The company has reportedly seen good growth in some states and
partial recovery in others. Uttar Pradesh has rebounded after the excise duty
reduction and Hayward’s delivered strong growth during the quarter.
Management also called out that they have taken price increases effective from
1st October’16 to offset the Local Body Tax (LBT). Also route to market changes
in Punjab during the quarter had a negative impact on the performance.
2Q17 Brand-wise performance
The Prestige & Above segment represents 41% of total volumes and 57% of total
net sales, up 400bp and 500bp YoY respectively. Continued focus on
premiumization led to volume increase of 11% with net sales up 12% as Diageo
brands portfolio now present in the base.
Good performance of the McDowell’s No 1. Whisky core variant (excluding
Platinum) continued to be driven by successful renovation strategy which led to
volume growth of 9% and net sales growth of 10% in 1HFY17.
2
27 October 2016

United Spirits
Following the growth of Royal Challenge in last quarter, momentum continued
in this quarter as well with volumes growing 9% and net sales growth of 13%.
Signature which returned to growth in the first quarter grew volumes by 20%
and sales growing 26% YoY.
Popular segment contributed 59% of volumes and 43% of sales, down 400bp
YoY. Popular segment declined due to McDowell’s brand variants. Haywards
stabilized and returned to growth in the quarter. In line with the management’s
selective participation, strategy investments were focused behind McDowell’s
No 1 rum, Bagpiper, Director’s Special and Old Tavern Whisky which grew in
mid-single digit in volume as well as net sales terms in the priority states.
Concall highlights
Costs, pricing and margins
There has been a 200 bp increase in input costs sequentially on account of ENA.
This is in line with management expectations. Glass and paper costs have not
changed materially.
The company has taken 10% price increase in Maharashtra from October 1 2016
to mitigate impact of local body tax which was implemented with retrospective
effect in August. Impact was around INR200m-INR250m in 2QFY17. While these
costs will continue in the quarters going forward, EBITDA will not be affected
going forward owing to the requisite price increases taken. Management
reckons that as the price increase was taken ahead of the key festive season,
impact of price increase on volumes in this key state may not be significantly
detrimental.
Staff costs witnessed an extraordinary item of INR280m on account of
restructuring. We have added these costs in our EBITDA calculation.
A&P will go up to 8% in the next 2 quarters from 6.4% in 2QFY17.
Recent regulations in ENA pricing on their own analysis shows there will be a
benefit. However quantum is unclear yet and depends on how it plays out.
Cost savings are likely to come from harder negotiations with suppliers, more
efficiency and lighter bottles. On the other hand because the entire prestige and
above segment is grain spirits and is not using recycled bottles costs increase
and net savings appear small.
Some Popular brands will be franchised, thus margins will improve as it will
contribute directly to EBITDA in the form of royalty. There were already states
like parts like Andhra Pradesh, Kerala and Tamil Nadu where franchising was
already being done. Expanding to new states is on. In 2 months the
management stated that they will have greater clarity on process, quantum as
well franchise partners.
There was an INR 270m reversal in 1HFY16 as a result of which EBITDA was
overstated.
The company is in regular touch with the state government of Telangana to
grant a price increase. It was mentioned in the 1QFY17 conference call that
Telangana is one of the states that could grant a price increase in a few months.
27 October 2016
3

United Spirits
Guidance
The company aims to save between 100 bps-200 bps off costs every year.
Marketing expenses will be high.
Capex guidance INR 3-4bn in FY17. 60% of this investment will be in
technologies and capacity, remaining 40% on environment and safety norms.
INR 20b asset monetization plan is still on. While only INR 200m was monetized
in 2QFY17 monetization will be much higher going forward.
Management maintained mid-teens margin guidance in the medium term but
did not mention exact target is and what the period defined by medium term
Prestige and above is now 57% target was 60%.
GST update
Management reckons that states are cognizant of the issue and states do not
want the business to collapse. Management is cautiously optimistic that impact
may not be as high as envisaged earlier as some of the materials may be in the
lower GST slab.
Valuation and view
We cut our estimates by ~8% to adjust for the margin miss and also build in
lower volume and margin assumptions given the underlying subdued
discretionary demand trends and UNSP’s focus on optimizing state-brand mix.
While we did not anticipate linear margin expansion trajectory, the growth to
mid teen margins in the medium term seems to be beset with challenges
quarter after quarter.
Questions remain on inability to grow operating margins despite price increases
in the largest state and mix improvement led by faster growth in prestige and
above segment as well as continued strong growth in Diageo brands. The
proliferation of one offs in every quarter also remains a bother.
Maintain BUY with a revised DCF based TP of INR 2,800.
Exhibit 1: Cut our estimates ~8% to adjust for the margin miss and also build in lower
volume and margin assumptions
New
INR M
Total Income
EBITDA
Adjusted PAT
FY17E
91,624
10,628
5,001
FY18E
104,626
13,706
7,543
FY17E
93,299
11,289
5,444
Old
FY18E
106,552
14,704
8,212
% Change
FY17E
FY18E
-1.8%
-1.8%
-5.9%
-6.8%
-8.1%
-8.1%
Source: Company, MOSL
27 October 2016
4

United Spirits
Exhibit 2: DCF derived price target of INR2,800
INR m
2016
2017E
2018E
2019E
2020E
2021E
2022E
2023E
Total Revenue
EBITDA
Other income
Tax
WC change
Capex
FCF
PV of each FCF
Sum of PV of FCF
Terminal value
PV of terminal value
EV
Net debt
Equity value
No of shares
Per share value
83,360
8,780
1,060
-1,930
-3,966
-1,687
2,257
2,257
71,202
671,636
378,269
449,470
42,440
407,030
145
2,801
91,624
10,628
1,177
-2,463
5,632
-4,000
10,974
10,974
104,626
13,706
1,388
-3,715
1,837
-4,000
9,216
8,551
121,986
17,444
1,527
-5,011
-4,279
-4,000
5,681
4,770
143,786
22,431
1,680
-6,706
-3,783
-4,000
9,622
7,311
169,899
28,883
1,848
-8,870
-4,202
-3,000
14,658
10,080
201,224
36,824
2,033
-11,511
-3,672
-3,000
20,674
12,866
238,857
46,816
2,236
-14,815
-5,684
-3,000
25,553
14,392
Source: Company, MOSL
Key risks
Alcoholic Beverages is a heavily regulated industry in India. In states that
together constitute 70% of the IMFL industry revenues, the state governments
control manufacturing, distribution, retailing, and pricing. Excise and other taxes
from the IMFL industry hold great importance for state governments; any
abnormal increase in taxation on liquor constitutes a downside risk.
Discrimination in favor of local breweries/distilleries at the expense of branded
manufacturers, as currently underway in Tamil Nadu, could prevent UNSP and
other liquor companies from realizing the full benefits of premiumization.
27 October 2016
5

United Spirits
Financials and valuations
Income Statement
Y/E March
Net Sales
Other Operating Inc
Total Revenue
Total Expenditure
EBITDA
Margin (%)
Depreciation
Int. and Fin. Charges
Other Income - Recurring
Profit before Taxes
Change (%)
Margin (%)
Tax
Tax Rate (%)
Adjusted PAT
Change (%)
Margin (%)
Non-rec. (Exp)/Income
Reported PAT
Balance Sheet
Y/E March
Share Capital
Reserves
Minority Interest
Net Worth
Loans
Deffered Tax Liabilities
Capital Employed
Gross Block
Less: Accum. Depn.
Net Fixed Assets
Capital WIP
Goodwill
Investments
Curr. Assets, L&A
Inventory
Account Receivables
Cash and Bank
Bank Deposit
Others
Curr. Liab. and Prov.
Account Payables
Other Liabilities
Provisions
Net Current Assets
Application of Funds
E: MOSL Estimates
2011
68,586
5,175
73,762
-63,109
10,653
14.4
-1,023
-4,985
904
5,549
12.1
7.5
2,098
37.8
3,463
14.5
4.7
2,238
5,701
2012
86,372
5,493
91,865
-81,262
10,603
11.5
-1,474
-7,773
2,106
3,461
-37.6
3.8
1,481
42.8
1,988
-42.6
2.2
-108
1,880
2013
98,524
5,591
104,115
-94,078
10,037
9.6
-1,784
-8,861
1,446
838
-75.8
0.8
1,781
212.4
-904
-145.5
-0.9
-108
-1,012
2014
99,116
5,894
105,009
-96,298
8,711
8.3
-2,026
-12,771
1,912
-4,174
-597.9
-4.0
2,762
-66.2
-6,940
667.8
-6.6
-37,951
-44,891
2015
85,765
5,829
91,594
-84,761
6,833
7.5
-2,229
-6,528
2,222
297
-107.1
0.3
520
175.1
-227
-96.7
-0.2
-16,650
-16,877
2016
82,760
600
83,360
-74,580
8,780
10.5
-1,010
-4,469
1,060
4,361
1,367.0
5.2
1,930
44.3
2,431
-1,171.1
2.9
-1,170
1,261
2017E
90,964
660
91,624
-80,996
10,628
11.6
-1,212
-3,128
1,177
7,465
71.2
8.1
2,463
33.0
5,001
105.7
5.5
0
5,001
(INR Million)
2018E
103,900
726
104,626
-90,920
13,706
13.1
-1,333
-2,503
1,388
11,258
50.8
10.8
3,715
33.0
7,543
50.8
7.2
0
7,543
(INR Million)
2018E
1,453
30,474
17
31,945
31,787
-1,235
62,498
31,067
-13,350
17,717
2,828
5,096
1,989
69,087
20,906
20,392
7,054
1,276
19,459
34,219
13,509
13,830
6,880
34,868
62,498
2011
1,259
40,527
175
41,961
67,107
-325
108,743
26,972
-7,573
19,399
1,291
44,320
1,544
61,842
21,168
14,825
4,944
1,426
19,479
20,102
13,304
5,026
1,771
41,741
108,742
2012
1,259
45,359
146
46,764
75,231
-592
121,403
29,620
-9,432
20,188
1,080
58,618
2,358
75,729
27,548
17,737
2,690
942
26,812
36,570
16,792
17,328
2,451
39,159
121,403
2013
1,259
46,614
111
47,984
72,517
-589
119,911
31,026
-10,721
20,305
1,312
58,386
2,179
82,059
25,112
24,170
1,115
1,701
29,960
44,330
15,653
24,864
3,812
37,729
119,911
2014
1,453
28,869
7
30,330
81,563
-967
110,927
35,317
-13,413
21,905
1,097
35,099
2,380
87,129
29,351
22,652
1,063
5,984
28,078
36,683
14,267
16,275
6,141
50,447
110,927
2015
1,453
5,142
8
6,603
50,569
-878
56,294
23,404
-8,952
14,452
1,141
4,757
2,162
55,494
17,581
17,515
1,166
2,463
16,770
21,714
7,582
8,128
6,004
33,780
56,294
2016
1,453
16,426
17
17,896
42,787
-1,235
59,449
23,067
-9,271
13,796
2,828
5,096
1,989
60,659
17,954
24,532
347
1,276
16,550
24,918
7,059
11,492
6,367
35,741
59,449
2017E
1,453
22,225
17
23,695
35,787
-1,235
58,248
27,067
-11,155
15,912
2,828
5,096
1,989
61,957
19,323
21,426
2,741
1,276
17,192
29,534
11,935
12,219
5,380
32,423
58,248
27 October 2016
6

United Spirits
Financials and valuations
Ratios
Y/E March
Basic (INR)
EPS
Cash EPS
BV/Share
DPS
Payout %
Valuation (x)
P/E
Cash P/E
EV/Sales
EV/EBITDA
P/BV
Dividend Yield (%)
Return Ratios (%)
RoE
RoCE
RoIC
Working Capital Ratios
Debtor (Days)
Asset Turnover (x)
Leverage Ratio
Debt/Equity (x)
Cash Flow Statement
Y/E March
OP/(loss) before Tax
Int./Div. Received
Interest Paid
Direct Taxes Paid
Incr/Decr in WC
CF from Operations
Extraordinary Items
(Incr)/Decr in FA
Free Cash Flow
(Pur)/Sale of Investments
Msc Exp
CF from Invest.
Issue of Shares
(Incr)/Decr in Debt
Dividend Paid
Others
CF from Fin. Activity
Incr/Decr of Cash
Add: Opening Balance
Closing Balance
E: MOSL Estimates
2011
28.3
36.7
342.8
2.5
8.8
2012
16.2
28.3
382.0
2.5
15.4
2013
-7.4
7.2
392.0
2.5
-33.9
2014
-47.8
-33.8
208.7
2.5
-5.2
2015
-1.6
13.8
45.4
0.0
0.0
2016
16.7
23.7
123.1
0.0
0.0
2017E
34.4
42.8
163.0
0.0
0.0
2018E
51.9
61.1
219.8
2.5
4.8
80.4
62.1
4.9
33.6
6.6
0.1
140.1
80.5
4.0
34.7
6.0
0.1
-308.2
316.5
3.5
36.6
5.8
0.1
-47.7
-67.3
3.6
43.1
10.9
0.1
-1,457.1
165.2
3.8
50.5
50.1
0.0
136.0
96.1
4.1
38.5
18.5
0.0
66.1
53.2
3.6
30.9
14.0
0.0
43.8
37.3
3.1
23.4
10.4
0.1
8.7
6.4
6.3
73
0.7
4.5
5.6
4.8
70
0.8
-1.9
-9.0
-8.0
85
0.9
-17.7
12.4
10.0
79
0.9
-1.2
-6.1
-4.4
70
1.6
19.8
8.5
8.2
107
1.4
24.0
12.1
12.0
85
1.6
23.6
15.3
16.4
71
1.7
1.6
2011
5,549
-904
4,985
-2,098
-11,211
-3,679
2,238
-5,452
-6,893
-279
0
-3,493
-1,179
8,603
-381
-1,186
5,856
-1,316
7,686
6,370
1.6
2012
3,461
-2,106
7,773
-1,481
-156
7,492
-108
-16,736
-9,352
-814
-448
-18,106
3,303
8,124
-379
-3,172
7,876
-2,738
6,370
3,632
1.5
2013
838
-1,446
8,861
-1,781
614
7,086
-108
-1,406
5,572
179
0
-1,335
2,611
-2,714
-379
-6,085
-6,568
-816
3,632
2,816
2.7
2014
-4,174
-1,912
12,771
-2,762
-8,487
-4,564
-37,951
19,211
-23,304
-201
-1
-18,942
27,278
9,047
-41
-8,547
27,737
4,231
2,816
7,048
7.7
2015
297
-2,222
6,528
-520
13,248
17,331
-16,650
42,210
42,891
218
1
25,778
-6,850
-30,995
0
-8,683
-46,527
-3,418
7,047
3,629
2.4
2016
4,361
-1,060
4,469
-1,930
-3,966
1,874
-1,170
-1,687
-983
173
0
-2,684
10,032
-7,781
0
-3,447
-1,196
-2,006
3,629
1,623
1.5
2017E
7,465
-1,177
3,128
-2,463
5,711
12,664
0
-4,000
8,664
0
0
-4,000
797
-7,000
0
-68
-6,271
2,393
1,623
4,017
1.0
(INR Million)
2018E
11,258
-1,388
2,503
-3,715
1,869
10,526
0
-4,000
6,526
0
0
2,526
1,130
-4,000
-424
-5,446
-8,739
4,313
4,017
8,330
27 October 2016
7

United Spirits
Corporate profile
Company description
UNSP is the leading IMFL player, with 41% market
share by volume and 22 millionaire brands. It
services 64,000 outlets across India and 98% of the
on-and-off-premises network. It has manufacturing
and bottling presence in all states, with 40 owned
plants and 42 contract tie-ups.
Exhibit 1: Sensex rebased
Source: MOSL/Bloomberg
Exhibit 2: Shareholding pattern (%)
Promoter
DII
FII
Others
Sep-16
58.5
5.0
22.8
13.7
Jun-16
58.5
5.3
24.1
12.1
Sep-15
58.9
4.6
24.6
12.0
Exhibit 3: Top holders
Holder Name
USL Benefit Trust
Morgan Stanley Asia (Singapore) PTE
Clsa Global Markets Pte Ltd
Carmignac
Gestion
A/C
Carmignac
Patrimoine
Kotak Mahindra (International) Ltd
% Holding
2.4
2.2
1.6
1.6
1.2
Source: Capitaline
Note: FII Includes depository receipts
Source: Capitaline
Exhibit 4: Top management
Name
Vijay Mallya
Nicholas Bodo Blazquez
Anand Kripalu
V Ramachandran
Designation
Chairman
Vice Chairman
Managing Director & CEO
Company Secretary
Exhibit 5: Directors
Name
D Sivanandhan
Mahendra Kumar Sharma
Ravi Rajagopal
Name
Indu Shahani
Rajeev Gupta
Sudhakar Rao
Source: Capitaline
*Independent
Exhibit 6: Auditors
Name
BSR & Co LLP
Sudhir V Hulyalkar
Type
Statutory
Secretarial Audit
Exhibit 7: MOSL forecast v/s consensus
EPS
(INR)
FY17
FY18
MOSL
forecast
34.4
51.9
Consensus
forecast
34.6
51.6
Variation
(%)
-0.5
0.6
Source: Bloomberg
Source: Capitaline
27 October 2016
8

United Spirits
NOTES
27 October 2016
9

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