Stock Ideas: Emkay Global has a buy call on United Spirits, target price Rs 650

Emkay Global has given a buy rating to United Spirits with a 12-month target price of Rs 650 based on 40 times June-22 EPS.

According to the brokerage, United Spirits’ performance was weak with a 20 per cent decline in P&A volumes. Besides the lockdown impact, sales decline was steeper at 15 per cent due to sales loss in Andhra Pradesh, inventory correction in key brands before relaunch and reduction in credit to trade, some of which should reverse. According to the brokerage, while Q1 will be significantly impacted by the shutdown in April, volume recovery post reopening in some markets has been encouraging. These are short-term trends and may include benefits of upstocking, but the category has bounced back post previous disruptions.

Investment Rationale

According to the brokerage, the worst of the margin pressure is behind and management shared a benign input cost outlook going ahead. This, coupled with increased cost-saving focus this year, should drive further margin expansion. The brokerage forecasts EBITDA growth of 13 per cent with 200 bps expansion over FY21-23 (FY20 adjusted EBITDA of Rs 14.1 billion and margins of 15.9 per cent). While steep tax increases in Karnataka/Telangana/West Bengal pose risk of downtrading, the brokerage expects some long-term positives in increased acceptance toward online/home delivery. Efforts on improving margins, along with recovery in volumes, should drive earnings growth recovery, says the brokerage. Emkay Global has cut estimates by 7-8 per cent and maintains a buy rating.

Financials

For the quarter ended March 31, 2020, the company reported consolidated sales of Rs 1990.50 crore, down -23.08 per cent from last quarter sales of Rs 2587.60 crore and down -14.11 per cent from last year's same quarter sales of Rs 2317.50 crore. The company has reported net profit after tax of Rs 50.30 crore in the latest quarter.

Promoter/FII Holdings

Promoters held 56.76 per cent stake in the company as of March 31, 2020, while FIIs held 20.54 per cent, DIIs 9.19 per cent and public and others 13.51 per cent.