United Spirits
BSE SENSEX
26,714
S&P CNX
8,180
6 June 2016
Update
| Sector:
Consumer
CMP: INR2,474
TP: INR3,200(+29%)
Buy
Management maintains mid teen margin guidance
We attended the analyst meet of United Spirits. Following are the key takeaways from
the meet:
Continuing with the identified strategic priorities: a) Power brands b) Strengthen
route to consumer c) Drive out costs d) Transform USL and Industry reputation e)
Building a future ready organization.
Demographic fundamentals strong; Long term opportunity intact.
Strong premiumization trend continues.
Aspiration of mid-teens EBITDA margin in medium term remains.
Business is now being run in a very transparent and compliant manner.
Not much from a near term catalyst perspective apart from the price hike received in
its largest state – Karnataka – 25% of volumes. Andhra Pradesh and Telangana, two
other large markets could also grant price hikes in the next few months.
FY17 should see enhanced momentum both from brands which have been
relaunched in FY16 viz Royal Challenge, McDowell No 1 and Signature as well as the
Diageo portfolio.
While we are strong believers in the long term potential we believe a trend of
quarterly improvements in operating metrics (volumes/margins/ debt/working
capital), albeit small, is necessary for premium valuations to sustain. Speculation
around potential open offer may provide cushion to stock price. Maintain BUY and
DCF based TP of INR3,200.
Stock Info
Bloomberg
Equity Shares (m)
52-Week Range (INR)
1, 6, 12 Rel. Per (%)
M.Cap. (INR b)
M.Cap. (USD b)
12M Avg Val (INR M)
Free float (%)
UNSP IN
145.3
3,838/2,232
-10/-26/-31
359.5
5.2
841
41.5
Financials Snapshot (INR b)
Y/E Mar
2016 2017E
Net Sales
92.4
104.0
EBITDA
9.2
11.9
PAT
3.2
6.0
EPS (INR)
21.7
41.0
Gr. (%)
LP
88.9
BV/Sh .INR
123.1
164.1
RoE (%)
25.8
28.6
RoCE (%)
10.7
13.8
P/E (x)
114.0
60.5
P/BV (x)
20.1
15.1
Shareholding pattern (%)
As On
Promoter
DII
FII
Others
2018E
117.8
15.7
8.9
61.5
49.9
222.7
27.6
17.6
40.4
11.2
Mar-16 Dec-15 Mar-15
58.5
5.3
23.8
12.4
58.8
4.6
24.1
12.5
58.9
4.2
24.5
12.4
FII Includes depository receipts
Stock Performance (1-year)
United Spirits
Sensex - Rebased
4,000
3,500
3,000
2,500
2,000
UNSP’s ambition and strategy: To create one of the best performing most trusted
and respected consumer products companies in India. UNSP continues with its
five point strategy:
1) Strengthen and accelerate core brands to win across each of the 3 Indias
Continue to invest behind brands. Renovate and rejuvenate existing
brands. Innovate and introduce new to market brands.
Renovated three brands – Royal Challenge, McDowell’s No.1 (Core variant
growing in double digits, already reached 88% of market) and Signature.
Believe USL was underinvesting in brands earlier.
2) Strengthen Route to consumer
Leverage outlet as a media to build brand imagery.
Create a sell-out culture and leverage stores in a media dark market [20%
of India’s alcobev outlets made into “Perfect Stores”] – QDVP3 focus
[Quality, Distribution, Visibility, Price, Promotion, Persuasion].
De-focused on lower end – changed the mindset of sales force towards
value vs. volume earlier.
3) Drive out costs
Mitigate
pricing
shortfall
and
improve
margins
through
productivity. Productivity program launched in FY15. While management
did not mention quantum they did state that FY16 gains were higher than
FY15 and FY17 gains would be higher than FY16.
Big wins in cost saving were in Glass light weighting, procurement
efficiency and network optimization.
Gautam Duggad
(Gautam.Duggad@MotilalOswal.com); +91 22 3982 5404
Krishnan Sambamoorthy
(Krishnan.sambamoorthy@motilaloswal.com); /
Vishal Punmiya
(Vishal.Punmiya@motilaloswal.com)
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
4) Transform USL and Industry reputation
Influencing public policy: White papers created on topics of interest to
states to build symbiotic relationship. Broader partnerships with states,
address overlapping impacts of center and state policies.
Alcohol in society: Road to safety etc.
Project SHE: Grass root community outreach program.
5) Building a future ready organization
Right sizing organization by reducing layers and improving spans.
Bring in new capabilities.
Created performance culture focused on value delivery.
Demographic fundamentals strong; Long term opportunity intact:
Indian liquor
market remains attractive given its favorable demographics (rising income,
changing consumption dynamics) and increasing income segments (Aspiring,
Middle, Affluent – pyramid turning to diamond). Total alcohol market grew at a
5-year CAGR of 11% moving from an INR240b market in 2010 to INR410b
market in 2015. In the same period the spirits market grew at 13% CAGR from
INR160b to an INR290b market while the beer market grew at 9% CAGR from
INR 70b to INR 110b. The wine /RTD market which is currently small in India
grew at a CAGR of 20%. 25m people come into the drinking age in India every
year of which around one third drink. Between CY15 to CY2025, the
management believes that the affluent segment share will double from 1% to
2%. The top end of the middle segment will grow from 1% to 9% and the lower
end of the middle segment from 19% to 32% over this period while the
aspirational segment proportion will decline. With sharper growth in the middle
the demand pyramid will convert to a diamond.
Premiumization trend has been strong:
Between FY10 and FY15 prestige and
above segments grew from 33% to 42% of Net Sales Value while the share of
PAT from these premium segments moved from 52% to 61%. While total IMFL
sales grew by 12% CAGR over this period, luxury grew by 33% CAGR off a low
base, premium and prestige by 21% CAGR each while popular segment grew by
9% CAGR
Other points
6% of global TBA (Total Beverage Alcohol) growth driven by India despite
India being only 1% of industry.
Per Capita Consumption: Currently <2 alcohol LPA/head, Increase to 3-4
alcohol LPA/head.
IMFL Spirits = 70% of India TBA, lower taxes compared to beer. 11% of
global spirits growth will come from India.
Industry has seen slowdown in last 2-3 years. Strategic investments in
industry have gone down to near zero due to issues facing company in the
past. Investment shifted from strategic to tactical spending to drive short
term performance.
Demographic fundamentals are strong and should get industry back to
healthy growth rates. Expect double digit growth for industry.
Change in the way UNSP does business – faced some barriers
6 June 2016
2

United Spirits
GST impact- Commissioned work on GST six months back to understand the
business model implications. GST has been Inflationary globally for first 2
years. Worst case could be input material taxed and not allowed to claim
benefits. Nevertheless, management believes that the centre wants to
include alcohol in GST or states will have rates specific to end use. If worst
case pans out then all players will pass on and state will suffer.
Free pricing is not really free pricing – one has to jump the slab and then
eventual impact on end consumer is much higher.
In the past 2 years consumer prices have gone up in line with inflation but
duties went up too – thus, manufacturers suffered as the price increase
benefits were taken away by government.
Talking to government of Maharashtra on developing Model Excise policy –
to demonstrate the benefit of free pricing, optimal duties and then use that
as an example for other states to follow.
Karnataka: Allowed price hikes but it will be effective 1st July. However,
excise duties hiked w.e.f. from 1st April. Slabs have been raised by INR
35/case for all players. Question is how much of this will be retained by
manufacturers and how much will be passed on to trade.
Management believes that if state governments are not looking at
prohibition then their motive is revenue maximization. Uttar Pradesh lost
market share to neighbouring states when they increased excise 3 years in a
row. Now reduced excise by 22-23% in the current financial year.
Aim to convince at least 1 state to reduce excise and UP could be a very
good example.
Management gave the example of HUL’s Fair and Lovely brand which paid
115% excise at one time. Every year excise duty came down and excise
earnings to government went up as volumes went up.
The management is using neuro science tests to check improvement
including eye movement impact of packaging in comparison with older
packs and benchmark competition. Believe product improvement is a
continuous process.
Net working capital was around 37% of sales. Management believes that
there could be savings going forward on inventory days
Royalty is paid to Diageo only on Smirnoff. Other Diageo brands are either
bottled in origin in which case transfer pricing happens in case of finished
product or bottled in India in which case transfer pricing happens on
imported materials
The longer term aim is for popular segment products to be manufactured by
third party manufacturers and prestige and above segments will be own
manufacture. The company had 90 units earlier which have been now
reduced to 80. While they believe they need at least 1 site in every state,
the number of units can be reduced substantially.
6 June 2016
3

United Spirits
Exhibit 1: Alcohol demand growing in double digits
Exhibit 2: Spirits are growing at a faster pace….
Source: Company, MOSL
Source: Company, MOSL
Exhibit 3: ….compared to beer
Exhibit 4: Premium segments growing much faster
Source: Company, MOSL
Source: Company, MOSL
Exhibit 5: Components contributing/ detracting from sales growth in FY16
Source: Company, MOSL
6 June 2016
4

United Spirits
Exhibit 6: Components contributing to/ detracting from EBITDA in FY16
Source: Company, MOSL
Exhibit 7: Components affecting EBITDA margin
Source: Company, MOSL
Exhibit 8: Movement of cash
Source: Company, MOSL
6 June 2016
5

United Spirits
Exhibit 9: Movement of debt
Source: Company, MOSL
6 June 2016
6

United Spirits
Financials and valuations
Income Statement
Y/E March
Total Revenue
Change (%)
Total Expenditure
EBITDA
Change (%)
Margin (%)
Depreciation
Int. and Fin. Charges
Other Income - Recurring
Profit before Taxes
Change (%)
Margin (%)
Tax
Tax Rate (%)
Minority Interest
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
73,762
15.9
-63,109
10,653
-4.2
14.4
-1,023
-4,985
904
5,549
12.1
7.5
2,098
37.8
-11.9
3,463
14.5
4.7
2,238
5,701
2012
91,865
24.5
-81,262
10,603
-0.5
11.5
-1,474
-7,773
2,106
3,461
-37.6
3.8
1,481
42.8
-7.2
1,988
-42.6
2.2
-108
1,880
2013
104,115
13.3
-94,078
10,037
-5.3
9.6
-1,784
-8,861
1,446
838
-75.8
0.8
1,781
212.4
-38.3
-904
-145.5
-0.9
-108
-1,012
2014
105,009
0.9
-96,298
8,711
-13.2
8.3
-2,026
-12,771
1,912
-4,174
-597.9
-4.0
2,762
-66.2
3.1
-6,940
667.8
-6.6
-37,951
-44,891
2015
91,594
-12.8
-84,761
6,833
-21.6
7.5
-2,229
-6,528
2,222
297
-107.1
0.3
520
175.1
3.8
-227
-96.7
-0.2
-16,650
-16,877
2016
92,401
0.9
-83,199
9,202
34.7
9.9
-1,577
-4,558
1,684
4,750
1,498.0
5.1
1,583
33.3
11.9
3,155
-1,490.2
3.4
6,522
9,678
(INR Million)
2017E
2018E
103,961
117,785
12.5
13.3
-92,020
11,940
29.8
11.5
-1,884
-3,236
2,077
8,897
87.3
8.6
2,936
33.0
0
5,961
88.9
5.7
0
5,961
-102,095
15,690
31.4
13.3
-2,195
-2,654
2,493
13,334
49.9
11.3
4,400
33.0
0
8,934
49.9
7.6
0
8,934
(INR Million)
2018E
1,453
30,890
17
32,360
31,500
-878
62,982
35,404
-14,950
20,455
1,141
5,262
1,989
68,876
20,975
20,459
6,871
1,208
19,362
34,741
13,553
13,876
7,312
34,135
62,982
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
5,141
8
6,603
50,569
-878
56,293
23,404
-8,952
14,452
1,141
4,757
2,162
55,493
17,581
17,515
1,166
2,463
16,768
21,714
7,582
8,128
6,004
33,779
56,293
2016
1,453
16,426
17
17,896
42,500
-878
59,518
27,404
-10,870
16,534
1,141
5,262
2,162
58,861
17,948
24,516
1,620
1,208
13,569
24,442
7,383
10,692
6,367
34,419
59,518
2017E
1,453
22,383
17
23,854
35,500
-878
58,476
31,404
-12,755
18,650
1,141
5,262
1,989
61,966
19,368
21,476
2,825
1,208
17,089
30,533
11,963
12,247
6,323
31,433
58,476
6 June 2016
7

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
21.7
32.6
123.1
0.0
0.0
2017E
41.0
54.0
164.1
0.0
0.0
2018E
61.5
76.6
222.7
2.5
4.1
-1,584.2
179.6
4.0
54.3
54.5
0.0
114.0
76.0
3.9
39.4
20.1
0.0
60.5
46.0
3.4
29.8
15.1
0.0
40.4
32.4
2.9
22.1
11.2
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
25.8
10.7
9.6
97
1.6
28.6
13.8
12.6
75
1.8
27.6
17.6
17.1
63
1.9
1.6
1.6
1.5
2.7
7.7
2.4
1.5
1.0
(INR Million)
2018E
13,334
-2,493
2,654
-4,400
1,344
10,439
0
-4,000
6,439
0
0
2,439
-4
-4,000
-424
-4,405
-8,832
4,046
4,033
8,079
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
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
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
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
2015
297
-2,222
6,528
-520
13,249
17,333
-16,650
42,210
42,892
218
1
25,778
-6,850
-30,995
0
-8,684
-46,529
-3,419
7,047
3,629
2016
4,750
-1,684
4,558
-1,583
-1,440
4,601
6,522
-4,504
6,619
0
0
2,018
1,616
-8,069
0
-967
-7,420
-801
3,629
2,828
2017E
8,897
-2,077
3,236
-2,936
4,191
11,311
0
-4,000
7,311
173
0
-3,827
-4
-7,000
0
725
-6,279
1,205
2,828
4,033
6 June 2016
8

United Spirits
NOTES
6 June 2016
9

Disclosures
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United Spirits
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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
Kadambari Balachandran
kadambari.balachandran@motilaloswal.com
(+65) 68189233 / 65249115
6 June 2016
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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