>United Spirits Ltd. (MERRILL LYNCH)

UNITED SPIRITS Ltd.

Scenario analysis: assessing risks and opportunities......

Cut FY10 EPS by 16% & PO to Rs600(745); reiterate Neutral
Molasses prices continue to rise ahead of our and market expectations. We build in another 10% increase and hence cut our FY10EPS by 16% to Rs38. Secondly, we undertake a scenario analysis for three situations – no sale of treasury stock, sale at mkt price of Rs600 & sale at premium i.e. price of Rs1000. We conclude; assuming FY11 P/E of 15x, the worse & best case stock price is Rs557 & Rs740.Our PO of Rs600 is based on 15xFY11 EPS assuming sale of treasury stock at market price. Treasury stocks accounts for 16% of fully diluted share capital.

Why then a Neutral? Primarily for two reasons
Market has not yet fully factored the continuing pain from rising molasses price – our 4Q FY09 and FY10 profit is 25% and 16% below consensus. State Budget news so far is neutral but Budgets of two key States (24% of vol.) are still awaited.

Scenario #1 (base & worse case): No sale of treasury stock
We get FY10 & FY11 EPS of Rs38 and Rs37.1. In FY10: Higher molasses prices will restrict EBITDA growth to mere 6% but lower interest costs (Libor reset) leads to EPS growth of 23%. In FY11: Lower molasses prices leads to EBITDA growing 18% but higher interest cost (debt refinancing) leads to EPS decline of 2%.

Scenario #2: Treasury stock sale at Rs600
We get FY10 and FY11 EPS of Rs35.8 and Rs39.9. Total cash inflow is $204m vs. repayment of $330m, hence interest cost still rise slightly in FY11. This is 6% dilutive in FY10 but 8% accretive in FY11 versus the base case.

To see full report: United Spirits