United Spirits
BSE SENSEX
31,191
S&P CNX
9,637
6 June 2017
Update
| Sector:
Consumer
CMP: INR2,429
TP: INR2,415 (-1%)
Neutral
Longer-term opportunity intact
However, significant challenges on the horizon, too; maintain Neutral
Stock Info
Bloomberg
Equity Shares (m)
52-Week Range (INR)
1, 6, 12 Rel. Per (%)
M.Cap. (INR b)
M.Cap. (USD b)
Avg Val ( INRm)/Vol m
Free float (%)
We attended UNSP’s analyst meet. Our key takeaways:
UNSP IN
145.3
2703 / 1775
24/7/-18
353.0
5.1
944
41.5
n
n
n
Financials Snapshot (INR b)
Y/E Mar
2017 2018E
Net Sales
85.5
93.4
EBITDA
9.8
11.8
PAT
3.9
5.4
EPS (INR)
26.7
37.4
Gr. (%)
87.1
39.7
BV/Sh .INR
133.4 193.7
RoE (%)
21.3
19.3
RoCE (%)
11.8
13.8
P/E (x)
90.9
65.0
P/BV (x)
18.2
12.5
n
2019E
107.8
14.4
7.5
51.8
38.7
263.0
19.7
15.7
46.9
9.2
n
n
The management reiterated its target of double-digit sales growth over the next five
years and continued premiumization-led margin improvement to mid-to-high teens.
It expects the ban on the sale of alcoholic beverages along highways to impact sales
for 2-3 quarters, and the implementation of GST to impact EBITDA. It did not share
the quantum of the possible impact.
Receivables have increased in FY17 and are likely to increase in FY18, as well. Some
of the impact would get mitigated by higher franchising in the popular segment. Over
the longer term, the management expects working capital to be stable.
Of the 155bp gross margin improvement in FY17, 90bp was led by price increases
that UNSP was able to obtain, including in its largest state, Karnataka. This may not
be replicable in FY18.
UNSP has guided slower monetization of non-core assets, now likely over a 3-4 year
horizon, as assets up for sale include residential plots, industrial assets, and litigated
property and shares.
We maintain our Neutral rating, with a DCF-based target price of INR2,415.
Shareholding pattern (%)
As On
Mar-17 Dec-16 Mar-16
Promoter
58.5
58.5
58.5
DII
5.5
5.0
5.3
FII
22.1
22.5
23.8
Others
14.0
13.9
12.4
FII Includes depository receipts
Stock Performance (1-year)
United Spirits
Sensex - Rebased
3,000
2,500
2,000
1,500
Sizable macro opportunity
The management believes that the macro opportunity in India is sizable, especially
in spirits, which constitute ~70% of the alcoholic beverages market. The
demographics are favorable – two-third of India’s population is younger than 35
years and half its population is below 25 years of age. 180m people are likely to
enter the legal drinking age in the next 10 years. The newer generation is willing to
spend more and alcohol consumption is increasingly gaining acceptability. UNSP
does not intend to enter the beer category in India – globally, Diageo is a spirits
company.
Premiumization trend to continue
UNSP expects the ongoing premiumization trend to continue. While it expects the
Popular segment to grow at a CAGR of 3% over the next five years, it expects the
Prestige segment to grow at a CAGR of 12% and the Premium segment to grow at a
CAGR of 14%. The contribution of the Prestige and above segments to UNSP’s
profit pool is likely to increase from the current 60% to 70% by 2021.
Two big disruptions in FY18 – GST, ban on sale of alcohol along highways
The ban on sale of alcoholic beverages along highways and GST implementation
are likely to impact UNSP’s performance in FY18. On the former, the company is (a)
attempting to mitigate the impact by mapping out stores into which the demand
will move, and is (b) working with state governments on faster store relocation.
While it is relatively easy to relocate alcohol vending outlets, it is more
cumbersome to move restaurants. UNSP expects 2-3 quarters of impact on sales as
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.
Krishnan Sambamoorthy
(Krishnan.Sambamoorthy@MotilalOswal.com); +91 22 3982 5428
Vishal Punmiya
(Vishal.Punmiya@MotilalOswal.com); +91 22 3980 4261

United Spirits
a result of the ban. There could be some relief for alcoholic beverages companies if
the appeal against bars and restaurants being part of the ban is accepted at the next
hearing, which is likely in July 2019.
On GST, the positives are that there is no GST on ENA and service tax on freight
remains unchanged at 5%. On the negative side, if a distillery does not have end-to-
end manufacturing and buys molasses, the ENA produced attracts 28% GST.
Packaging attracts 18% GST, and tetra pack (used in South India) 12% GST.
Moreover, there is still no clarity on the GST rate applicable to recycled bottles. Due
to absence of input cost credit and higher-than-expected GST on some materials,
UNSP expects some impact on FY18 EBITDA, but did not quantify the impact.
Strategy on brands
Prestige and above segments:
UNSP expects these segments to be the key driver of
its revenues and profitability. Here, it has adopted a four-pronged strategy:
n
Renovation – So far, Royal Challenge, McDowell No 1 Whisky, and Signature
have been renovated.
n
Launch of occasion-driven special packs and gift packs – The gift packs are
currently available only in a few stores, but in these stores, they account for ~8%
of the brand sales.
n
Innovation and thought leadership, which involves premiumization. For
example, the rum category in India is a 40-45m cases market, with no Prestige
and above segments. UNSP’s Celebrations is the market leader and the company
has launched Captain Morgan Rum to create a premium category within rum.
n
Innovation – Involving creation of disruptive products and packaging with every
innovation being potentially margin accretive.
Popular segment:
In the Popular segment, UNSP aims to retain 50-60% of net sales,
franchise out 30-40%, and exit 0-5%. It has already franchised two-thirds of the
franchise target. The management draws a parallel to the distributor-led model of
FMCG companies. UNSP charges fixed fees to encourage franchisees to drive
growth. At the same time, it retains the right to get the brand back if and when the
regulatory regime improves. The aim is to arrest gross margin decline and free up
working capital.
Strategy on route to consumer:
This involves (a) use of the perfect store program,
which now covers 20,000 stores out of 60,000 outlets reached, (b) activation at the
store level, and (c) training bartenders to mix perfect drinks, with rewards including
entry into competitions worldwide, so that they become brand ambassadors. Partly
as a result of better route to consumers, UNSP’s market share in scotch brands has
grown.
Strategy to improve productivity:
This involves (a) generating cost savings to invest
back in businesses, (b) making all marketing spend RoI-focused, and (c) initiatives
like using similar bottles for all brands, but with distinct labeling, to enable better
recycling.
6 June 2017
2

United Spirits
Corporate citizenship initiatives:
These encompass (a) encouraging healthy drinking
in moderation, (b) campaigns against drunk driving, and (c) ensuring better
regulatory compliance, which has not been a historical strength for the IMFL space
in India. The management hopes that becoming a better corporate citizen would
lead to more reasonable discussions with state governments.
FY17 financial highlights
n
Gross margin expanded 155bp in FY17. Of this, 90bp was from price increase
and the rest was mainly from premiumization. The price increases that UNSP
was able to get in FY17 may not be repeated in subsequent years.
n
EBITDA margin for FY17 was 11.5%, up 75bp. Marketing spend was up 9% YoY.
n
Overall volumes declined 3%. The impact of prohibition in Bihar on full-year
volumes was 1.7%. Franchisee agreements impacted volumes by 2.5% in the
Popular segment. Volumes in the Prestige and above segments grew 3.1% in
FY17.
n
Double-digit sales growth target in the Prestige and above segments in FY18
might be challenging to achieve, given the ban on sale of alcoholic beverages
along highways and GST implementation.
n
Of the Popular segment sales of INR35b, UNSP intends to retain 60-65%. In 13
states (20% of portfolio), the company has entered into franchisee agreements.
In the remaining states, it is waiting for the right franchisee partner. In volume
terms, the Popular segment is 58-60m cases, of which UNSP has retained 36m
cases, franchised 13m cases, and is awaiting the right franchisee partners for 9-
11m cases.
n
Receivables had increased sharply in FY17 due to (a) delay in payments by state
governments, and (b) because of sharp excise increases – even while the net
sales value remained the same, the receivables were higher due to increase in
gross sales. Receivable days are likely to increase in FY18, as well. Some of the
impact is likely to get mitigated by higher franchising.
n
Huge excise increase will have to be dealt with by industry players getting
together.
n
Since the assets up for sale include residential plots, industrial assets, and
litigated property (pledged to IDBI) and shares (worth INR7b-8b), the company is
now guiding a 3-4 years’ timeframe for asset sales worth INR20b.
Valuation and view:
Longer-term margin growth potential remains intact, mainly
led by continued mix improvements. The management reiterated its target of mid-
teen margins in the medium term. In our recent report on
Alcoholic Beverages,
we
had pointed out the risks emanating from a host of factors like (a) the impact of GST
implementation on profitability, and (b) the impact of ban on sale of alcoholic
beverages along highways and the prohibition decrees by various states on volumes.
There has also been a substantial delay in the planned sale of non-core assets, which
the management now believes will happen over a 3-4 year period. Working capital is
increasing due to weak state finances. Our DCF-based valuation indicates a target
price of INR2,415.
6 June 2017
3

United Spirits
Exhibit 1: Volumes decline by 3% in FY17; underlying volumes up 1%
19.1
11.1
14.2
12.0
7.3
3.0
(0.1)
FY08
FY09
FY10
FY11
FY12
FY13
FY14
Volume growth (%)
(2.4)
FY15
(1.1)
FY16
(3.1)
FY17
Source: Company, MOSL
Exhibit 2: Opportunity size in India
Source: McKinsey, excludes consumers not buying branded goods, Company, MOSL
Exhibit 3: Spirits estimated to grow at 8% CAGR over
2016-21...
Exhibit 4: ..with Prestige and Premium segment expected to
grow faster over the same period
Source: IWSR, Diageo internal estimates. Excluding country liquor
Source: IWSR, Diageo internal estimates. Excluding country liquor
6 June 2017
4

United Spirits
Exhibit 5: UNSP’s portfolio across the three Indias – aspiring, middle-income and affluent consumers
*Average consumer prices in India, 750ml bottle, Consumer prices in rupees
Source: Company, MOSL
Exhibit 6: Three brands renovated in last two years; Antiquity is the latest brand to be renovated
Source: Nielsen value share within prestige segment, Company, MOSL
6 June 2017
5

United Spirits
Exhibit 7: Break-up of volumes in FY17
Source: Company, MOSL
Exhibit 8: Net sales grew 4% in FY17 while underlying net sales grew 8%
Source: Company, MOSL
Exhibit 9: Components affecting EBITDA margin
Source: Company, MOSL
6 June 2017
6

United Spirits
Exhibit 10: Movement of cash
Source: Company, MOSL
Exhibit 11: Movement of debt
Source: Company, MOSL
6 June 2017
7

United Spirits
Financials and valuations
Income Statement
Y/E March
Net Sales
Other Operating Inc
Total Revenue
Change (%)
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
Investments
Curr. Assets, L&A
Inventory
Account Receivables
Cash and Bank
Others
Curr. Liab. and Prov.
Account Payables
Other Liabilities
Provisions
Net Current Assets
Application of Funds
2014
79,228
5,036
84,263
1.3
-76,608
7,655
9.1
-855
-5,277
1,367
2,890
-40.1
3.4
746
18.2
2,144
-32.8
2.5
-53,172
-51,028
2015
74,571
4,946
79,516
-5.6
-72,863
6,654
8.4
-1,097
-4,471
1,118
2,203
-23.8
2.8
283
-0.1
1,920
-10.4
2.4
-21,485
-19,565
2016
81,886
596
82,482
3.7
-73,618
8,864
10.7
-1,017
-4,469
1,057
4,435
101.3
5.4
2,358
53.2
2,077
8.2
2.5
-858
1,219
2017
85,030
446
85,476
3.6
-75,650
9,826
11.5
-1,323
-3,690
995
5,808
31.0
6.8
1,923
33.1
3,885
87.1
4.5
-2,186
1,699
2018E
91,595
1,791
93,385
9.3
-81,619
11,767
12.6
-1,482
-3,358
1,174
8,101
39.5
8.7
2,673
33.0
5,428
39.7
5.8
0
5,428
(INR Million)
2019E
105,913
1,840
107,753
15.4
-93,314
14,439
13.4
-1,704
-2,787
1,292
11,239
38.7
10.4
3,709
33.0
7,530
38.7
7.0
0
7,530
(INR Million)
2019E
1,453
36,758
0
38,211
25,841
-661
63,391
24,822
-11,136
13,686
851
0
87,684
25,861
32,473
2,903
26,446
38,830
14,693
20,462
3,675
48,854
63,391
2014
1,453
36,692
38,145
49,013
-546
86,612
16,473
-4,611
11,862
517
9,195
86,188
15,354
17,136
4,973
48,725
21,150
8,737
10,810
1,603
65,038
86,612
2015
1,453
17,967
19,421
53,204
-873
71,752
16,289
-5,610
10,679
660
5,511
72,456
15,542
17,455
2,397
37,062
17,555
7,180
7,230
3,145
54,901
71,752
2016
1,453
15,687
0
17,140
37,082
-1,539
52,683
17,389
-6,627
10,762
2,449
93
67,082
18,999
23,140
3,362
21,581
27,703
10,018
14,643
3,042
39,379
52,683
2017
1,453
17,925
0
19,378
36,841
-1,241
54,978
19,822
-7,950
11,872
851
0
74,001
18,538
29,605
2,252
23,606
31,746
11,798
16,911
3,037
42,255
54,978
2018E
1,453
26,685
0
28,138
29,341
-998
56,481
21,822
-9,432
12,390
851
0
78,078
22,412
28,143
2,738
24,784
34,838
12,895
18,602
3,341
43,240
56,481
6 June 2017
8

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
2014
14.8
20.6
262.5
2.5
16.9
2015
13.2
20.8
133.6
0.0
0.0
2016
14.3
21.3
118.0
0.0
0.0
2017
26.7
35.8
133.4
0.0
0.0
2018E
37.4
47.6
193.7
0.0
0.0
2019E
51.8
63.6
263.0
0.0
0.0
164.7
117.7
4.2
46.1
9.3
0.1
183.9
117.0
4.6
54.6
18.2
0.0
170.0
114.1
4.3
39.6
20.6
0.0
90.9
67.8
4.1
35.9
18.2
0.0
65.0
51.1
3.7
29.3
12.5
0.0
46.9
38.2
3.2
23.6
9.2
0.0
4.2
6.9
6.9
74
1.0
6.7
8.4
8.2
80
1.1
11.4
6.7
6.7
102
1.6
21.3
11.8
11.5
126
1.6
19.3
13.8
13.2
110
1.7
19.7
15.7
15.2
110
1.7
1.3
2014
2,890
-1,367
5,277
-746
17,628
23,682
-53,172
-1,236
-30,726
6,764
-1
-47,645
25,294
5,196
-41
-3,355
27,095
3,132
1,841
4,973
2.7
2015
2,203
-1,118
4,471
-283
7,561
12,834
-21,485
40
-8,611
3,684
1
-17,760
841
4,191
0
-2,682
2,350
-2,576
4,973
2,397
2.2
2016
4,435
-1,057
4,469
-2,358
16,487
21,976
-858
-2,888
18,230
5,418
0
1,672
-3,500
-16,122
0
-3,061
-22,683
965
2,397
3,362
1.9
2017
5,808
-995
3,690
-1,923
-3,986
2,594
-2,186
-835
-427
93
0
-2,928
539
-241
0
-1,074
-776
-1,110
3,362
2,252
1.0
2018E
8,101
-1,174
3,358
-2,673
-499
7,112
0
-2,000
5,112
0
0
3,112
3,756
-7,500
-424
-5,571
-9,739
485
2,252
2,737
0.7
(INR Million)
2019E
11,239
-1,292
2,787
-3,709
-5,448
3,578
0
-3,000
578
0
0
-2,422
2,966
-3,500
-424
-33
-990
165
2,738
2,903
6 June 2017
9

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Pending Regulatory inspections against Motilal Oswal Securities Limited:
SEBI pursuant to a complaint from client Shri C.R. Mohanraj alleging unauthorized trading, issued a letter dated 29th April 2014 to MOSL notifying appointment of an Adjudicating Officer as per SEBI regulations to hold inquiry
and adjudge violation of SEBI Regulations; MOSL replied to the Show Cause Notice whereby SEBI granted us an opportunity of Inspection of Documents. Since all the documents requested by us were not covered we have
requested to SEBI vide our letter dated June 23, 2015 to provide pending list of documents for inspection.
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The views expressed in this research report accurately reflect the personal views of the analyst(s) about the subject securities or issues, and no part of the compensation of the research analyst(s) was, is, or will be directly or
indirectly related to the specific recommendations and views expressed by research analyst(s) in this report. The research analysts, strategists, or research associates principally responsible for preparation of MOSt research
receive compensation based upon various factors, including quality of research, investor client feedback, stock picking, competitive factors and firm revenues
Disclosure of Interest Statement
UNITED SPIRITS
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Served as an officer, director or employee -
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For Hong Kong:
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Commission (SFC) pursuant to the Securities and Futures Ordinance (Chapter 571 of the Laws of Hong Kong) “SFO”. As per SEBI (Research Analyst Regulations) 2014 Motilal Oswal Securities (SEBI Reg No. INH000000412) has
an agreement with Motilal Oswal capital Markets (Hong Kong) Private Limited for distribution of research report in Kong Kong. This report is intended for distribution only to “Professional Investors” as defined in Part I of
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of these securities, products and services in any jurisdiction where their offer or sale is not qualified or exempt from registration. The Indian Analyst(s) who compile this report is/are not located in Hong Kong & are not
conducting Research Analysis in Hong Kong.
For U.S.
Motilal Oswal Securities Limited (MOSL) is not a registered broker - dealer under the U.S. Securities Exchange Act of 1934, as amended (the"1934 act") and under applicable state laws in the United States. In addition MOSL is
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Accordingly, in the absence of specific exemption under the Acts, any brokerage and investment services provided by MOSL, including the products and services described herein are not available to or intended for U.S.
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This report is intended for distribution only to "Major Institutional Investors" as defined by Rule 15a-6(b)(4) of the Exchange Act and interpretations thereof by SEC (henceforth referred to as "major institutional investors").
This document must not be acted on or relied on by persons who are not major institutional investors. Any investment or investment activity to which this document relates is only available to major institutional investors
and will be engaged in only with major institutional investors. In reliance on the exemption from registration provided by Rule 15a-6 of the U.S. Securities Exchange Act of 1934, as amended (the "Exchange Act") and
interpretations thereof by the U.S. Securities and Exchange Commission ("SEC") in order to conduct business with Institutional Investors based in the U.S., MOSL has entered into a chaperoning agreement with a U.S.
registered broker-dealer, Motilal Oswal Securities International Private Limited. ("MOSIPL"). Any business interaction pursuant to this report will have to be executed within the provisions of this chaperoning agreement.
The Research Analysts contributing to the report may not be registered /qualified as research analyst with FINRA. Such research analyst may not be associated persons of the U.S. registered broker-dealer, MOSIPL, and
therefore, may not be subject to NASD rule 2711 and NYSE Rule 472 restrictions on communication with a subject company, public appearances and trading securities held by a research analyst account.
For Singapore
Motilal Oswal Capital Markets Singapore Pte Limited is acting as an exempt financial advisor under section 23(1)(f) of the Financial Advisers Act(FAA) read with regulation 17(1)(d) of the Financial Advisors Regulations and is a
subsidiary of Motilal Oswal Securities Limited in India. This research is distributed in Singapore by Motilal Oswal Capital Markets Singapore Pte Limited and it is only directed in Singapore to accredited investors, as defined in
the Financial Advisers Regulations and the Securities and Futures Act (Chapter 289), as amended from time to time.
In respect of any matter arising from or in connection with the research you could contact the following representatives of Motilal Oswal Capital Markets Singapore Pte Limited:
Varun Kumar
Varun.kumar@motilaloswal.com
Contact : (+65) 68189232
Office Address:21 (Suite 31),16 Collyer Quay,Singapore 04931
6 June 2017
Motilal Oswal Tower, Level 9, Sayani Road, Prabhadevi, Mumbai 400 025
Phone: +91 22 3982 5500 E-mail: reports@motilaloswal.com
Motilal Oswal Securities Ltd
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