28 October 2014
Update | Sector: Consumer
United Spirits
BSE Sensex
26,881
S&P CNX
8,028
CMP: INR2,677
TP: INR3,000
Buy
UNSP to operate Diageo brands in India
Enters into four key agreements with Diageo entities
Stock Info
Bloomberg
Equity Shares (m)
52-Week Range (INR)
1, 6, 12 Rel. Per (%)
M.Cap. (INR b)
M.Cap. (USD b)
UNSP IN
145.3
2,941/2,226
11/-23/-26
389.0
6.3
In a postal ballot document shared with exchanges, UNSP has given detailed
contours of its proposed arrangement to manufacture, import and distribute
Diageo brands in India. Following are the key highlights from the same and our
interaction with the management.
Four agreements between UNSP and Diageo entities
1.
License to manufacture and sell Bottled in India (BII bulk) brands
of Diageo
Brands BV (VAT
69, Haig Gold Label,
and
Black & White):
Under this, UNSP
will purchase and import bulk spirit from Diageo Brands BV at mutually
agreed prices.
2.
License to manufacture and sell Bottled in India (manufactured in India)
brands
of Diageo North America Inc and Diageo Scotland Limited (Smirnoff
and related variants, Captain Morgan Rum):
Under this, UNSP will
manufacture these brands by procuring raw materials from entities other
than the brand owners. It will pay royalty to Diageo on a quarterly basis.
Royalty will consist of two components – (i) a fixed component, which will
be fixed at the commencement of the agreement, and (ii) a variable
component, which will be set at the start of each year. The amount of
royalty will be calculated as a percentage of the net sales for a particular
year and will be mutually agreed between UNSP and the brand owners from
time to time.
3.
Agreement to distribute Bottled in Origin (BIO) products
in India: Under
this, UNSP will exclusively import and distribute Diageo brands (Johnnie
Walker and related variants, J&B, Ciroc, Baileys, Lagavulin,
and
Talisker).
UNSP will purchase these products from Diageo entities at mutually agreed
prices and will undertake, at its own expense, all marketing/promotion
activities necessary to distribute these brands.
4.
Cost sharing agreement
with Diageo India: This pertains to proportionate
sharing by UNSP and Diageo India (DIPL) of the expenses incurred by DIPL
during the transition period for advertising, marketing and promotion
activities for Diageo-owned brands.
The first three agreements are for an indefinite period while timelines for the
cost sharing agreement will differ from state to state and will extend from
January 2015 to July 2015 or later.
Financial Snapshot (INR Million)
Y/E Mar
2015E 2016E 2017E
Net Sales
85,078 96,268110,452
EBITDA
Adj PAT
EPS (INR)
BV/Sh.(INR)
RoE (%)
RoCE (%)
P/E (x)
P/BV (x)
8,578 11,472 14,378
3,583 6,397
24.7
44.0
78.5
15.8
17.0
60.8
9.6
9,034
62.2
41.2
338.5
18.4
20.2
43.1
7.9
Growth (%) -375.2
10.5
13.2
108.6
11.4
234.7 278.7
Shareholding pattern (%)
As on
Jun-14 Mar-14 Jun-13
Promoter
33.0
38.6
21.1
DII
0.1
4.0
6.0
FII
11.5
40.7
42.4
Others
55.4
16.7
30.5
Note: FII Includes depository receipts
Stock Performance (1-year)
3,600
3,200
2,800
2,400
2,000
United Spirits
Sensex - Rebased
Gautam Duggad
(Gautam.Duggad@MotilalOswal.com); +91 22 3982 5404
Manish Poddar
(Manish.Poddar@MotilalOswal.com); +91 22 3027 8029
Investors are advised to refer through disclosures made at the end of the Research Report.

United Spirits
Takeaways from management interaction
Subsequent to the execution of these agreements, Diageo India will remain
a legal entity while all operating activities (manufacturing, distribution, etc)
currently undertaken by Diageo will be transferred to UNSP.
UNSP is not assuming any of Diageo India’s assets/liabilities on its books,
but only undertaking licensing for manufacturing/importing and distributing
Diageo brands for a fee.
UNSP expects 10% EBIT contribution from these additional revenues
(Diageo India did a turnover of ~INR7b in FY14).
UNSP will not be making any additional investments except for the required
working capital to conduct the additional business.
Diageo India does not have any owned manufacturing facility. UNSP will
manufacture some of the Diageo brands in its facility and for the rest of the
brands, it will continue with the existing arrangement of leased facilities.
Management believes transactions are value accretive:
According to the
management, “the agreements are value accretive for the company and are
consistent with the company’s strategy to build and extend its competitive
advantage in the ‘Premium and Above’ market segments”. It believes UNSP has
developed into an institution with efficient systems, competent management
practices and stringent operational control processes and the agreements are a
part of the company’s three year strategic plan to deliver the long term vision of
becoming “the most admired, respected and best performing consumer goods
company in India”.
Big opportunity unfolding; maintain Buy
We believe the current agreements address the overarching concern voiced by
some investors pertaining to Diageo operating two subsidiaries in India.
Notwithstanding near-term challenges – moderation in industry growth,
inflation in RM costs, slower than expected pace of margin expansion, etc – the
long-term IMFL opportunity in India is solid. With Diageo gaining majority
control and bulk of balance sheet clean-up behind, we expect underlying P&L
and margin improvement to commence.
In our recently released note (“Paradigm
Shift: Beginning of a new era”
dated
22 September 2014) we outlined our detailed bullish thesis on UNSP. We also
highlighted the case study of six consumer companies with dominant market
positioning and quality management generating 25%+ CAGR over the past
decade. With new management and better controls in place, we believe UNSP
offers a unique multi-year play on the IMFL growth story. Buy with a DCF-based
target price of INR3,000. Regulation and taxation, policy-related risks, and spike
in raw material cost constitute key risks.
Please refer to our note
“Paradigm Shift: Beginning of a
new era”
dated 22 September
28 October 2014
2

United Spirits
Financials and valuation
Income statement
Y/E Mar
Net Sales
Change (%)
EBITDA
EBITDA Margin (%)
Depreciation
EBIT
Interest
Other Income
PBT
Tax
Tax Rate (%)
Reported PAT
Adjusted PAT
Change (%)
Min. Int. & Assoc. Share
Adj Cons PAT
2012
86,372
25.9
10,603
11.5
1,474
9,129
7,773
2,106
3,461
1,481
42.8
1,872
1,988
-42.6
7
1,988
2013
98,524
14.1
10,037
9.6
1,784
8,253
8,861
1,446
838
1,781
212.4
-1,050
-904
-145.5
38
-904
2014
99,116
0.6
8,711
8.3
2,026
6,685
12,771
7,550
1,463
2,762
188.8
-44,888
-1,302
44.1
-3
-1,302
2015E
85,078
-14.2
8,578
9.4
1,472
7,106
4,508
2,750
5,348
1,765
33.0
3,583
3,583
-375.2
0
3,583
(INR Million)
2016E
96,268
13.2
11,472
11.2
1,642
9,830
3,306
3,025
9,548
3,151
33.0
6,397
6,397
78.5
0
6,397
2017E
110,452
14.7
14,378
12.2
1,809
12,570
2,413
3,328
13,484
4,450
33.0
9,034
9,034
41.2
0
9,034
Balance sheet
Y/E Mar
Share Capital
Reserves
Net Worth
Debt
Deferred Tax
Total Capital Employed
Gross Fixed Assets
Less: Acc Depreciation
Net Fixed Assets
Capital WIP
Investments
Current Assets
Inventory
Debtors
Cash & Bank
Loans & Adv, Others
Curr Liabs & Provns
Curr. Liabilities
Provisions
Net Current Assets
Total Assets
2012
1,259
45,359
46,764
75,231
-592
121,403
29,620
-9,432
20,188
1,080
2,358
75,729
27,548
17,737
3,632
26,812
36,570
34,119
2,451
39,159
121,403
2013
1,259
46,614
47,984
72,517
-589
119,911
31,026
-10,721
20,305
1,312
2,179
82,059
25,112
24,170
2,816
29,960
44,330
40,517
3,812
37,729
119,911
2014
1,453
28,869
30,330
81,563
-967
110,927
35,317
-13,413
21,905
1,097
2,380
87,129
29,351
22,652
7,047
28,078
36,683
30,542
6,141
50,447
110,927
2015E
1,453
32,450
34,103
41,563
-879
74,787
31,317
-14,884
16,433
500
2,380
71,160
23,732
18,736
5,561
23,132
35,785
29,228
6,557
35,375
74,788
(INR Million)
2016E
2017E
1,453
1,453
38,844
47,536
40,497
49,190
36,063
30,063
-721
-499
75,839
78,754
35,317
39,317
-16,527
-18,335
18,791
20,982
500
500
2,380
2,380
75,296
83,635
25,357
28,980
21,131
25,116
4,860
3,778
23,948
25,760
41,227
48,841
34,936
41,860
6,291
6,981
34,070
34,793
75,839
78,754
E: MOSL Estimates
28 October 2014
3

United Spirits
Financials and valuation
Ratios
Y/E Mar
Basic (INR)
EPS
Cash EPS
Book Value
DPS
Payout (incl. Div. Tax.)
Valuation(x)
P/E
Cash P/E
Price / Book Value
EV/Sales
EV/EBITDA
Dividend Yield (%)
Profitability Ratios (%)
RoE
RoCE
Turnover Ratios (%)
Asset Turnover (x)
Debtors (No. of Days)
Inventory (No. of Days)
Creditors (No. of Days)
Leverage Ratios (%)
Net Debt/Equity (x)
2012
16.2
28.3
382.0
2.5
15.4
164.9
94.7
7.0
4.6
39.6
0.1
4.3
9.3
0.8
70.5
109.5
75.4
1.6
2013
-7.4
7.2
392.0
2.5
-33.9
-362.6
372.3
6.8
4.0
41.8
0.1
-1.9
8.1
0.9
84.7
88.0
60.7
1.5
2014
-9.0
5.0
208.7
2.5
-27.9
-298.8
537.3
12.8
4.1
49.2
0.1
-4.3
12.8
0.9
78.7
102.0
54.1
2.7
2015E
24.7
34.8
234.7
0.0
0.0
108.6
77.0
11.4
4.3
45.2
0.0
10.5
13.2
1.2
75.0
95.0
60.7
1.2
2016E
44.0
55.3
278.7
0.0
0.0
60.8
48.4
9.6
3.7
33.3
0.0
15.8
17.0
1.4
75.0
90.0
67.5
0.9
2017E
62.2
74.6
338.5
2.0
3.2
43.1
35.9
7.9
3.2
26.2
0.1
18.4
20.2
1.5
78.0
90.0
74.1
0.6
Cash flow statement
Y/E Mar
OP/(Loss) before Tax
Depreciation
Others
Interest
Direct Taxes Paid
(Inc)/Dec in Wkg Cap
CF from Op. Activity
(Inc)/Dec in FA & CWIP
(Pur)/Sale of Invt
Others
CF from Inv. Activity
Inc/(Dec) in Net Worth
Inc / (Dec) in Debt
Divd Paid (incl Tax)
CF from Fin. Activity
Inc/(Dec) in Cash
Add: Opening Balance
Closing Balance
2012
3,461
0
-2,106
7,773
-1,481
-156
7,384
-16,736
-814
-448
-17,998
3,303
8,124
-379
7,876
-2,738
6,370
3,632
2013
838
0
-1,446
8,861
-1,781
614
6,978
-1,406
179
0
-1,227
2,611
-2,714
-379
-6,568
-816
3,632
2,816
2014
1,463
0
-7,550
12,771
-2,762
-8,487
-48,153
19,211
-201
-1
19,009
27,278
9,047
-41
33,374
4,231
2,816
7,047
2015E
5,348
0
-2,750
4,508
-1,765
13,585
18,926
19,597
0
1
19,597
189
-40,000
0
-40,010
-1,487
7,047
5,561
(INR Million)
2016E
2017E
9,548
13,484
0
0
-3,025
-3,328
3,306
2,413
-3,151
-4,450
605
-1,806
7,284
6,314
-4,000
-4,000
0
0
0
0
-4,000
-4,000
-3
-3
-5,500
-6,000
0
-339
-3,985
-3,396
-701
-1,082
5,561
4,860
4,860
3,778
E: MOSL Estimates
28 October 2014
4

United Spirits
NOTES
28 October 2014
5

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United Spirits
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6