>UNITED SPIRITS (EDELWEISS)

■ Revenues in line; volume growth hit by largely one-time events
United Spirit’s Q2 revenues were in line with our estimates at INR 10.8 bn (our estimates of INR 10.9 bn), a growth of 19.7% Y-o-Y. Volume growth for the quarter stands at 10% (17% in Q1) and 14% in H1FY10. Given the fact that Q2 is the weakest quarter in terms of off take and trade opposition in Maharashtra in current quarter (which is now resolved), led to subdued volume growth. However price abuse by syndicate private traders in UP and parts of Punjab is a cause of
concern and we will track it closely.

■ Gross margins improved 50 bps Y-o-Y and 323 bps Q-o-Q
Spirit costs in Q2FY10 were up Y-o-Y however ENA costs were static through the quarter. A 323 bps Q-o-Q improvement in gross margins is commendable, this was achieved by capitalizing on the increased availability of molasses during FY09-10 crushing season, long term contracting, switching between alternative feed stock like grain and molasses, and reduction in excise duties.

■ EBITDA margins dip by 300bps Y-o-Y; hit by one offs
EBITDA margins took a 300 bps knock even after a 50 bps expansion Y-o-Y in gross margins. This was on account of two one off items: a) 204 bps increase in employee costs due to a one time provision of INR 127.6 mn towards special incentives (likely due to higher competition) b) 229 bps increase in A&P spend due to national roll out of W&M Special and Romanov Red Prestige Vodka. Interest expense increased whopping 90% Y-o-Y to INR 751 mn and thus denting the net profit at INR 696 mn (down 26% Y-o-Y), below our estimates of INR 885 mn.

■ Outlook and valuations: Positive; maintain ‘BUY’
Post QIP in which company raised USD 350 mn at INR 913.7 per share, USD 285 mn will be used to reduce debt and thus interest costs will come down going forward. USL is a secular play on improving consumer sentiments, backed by favorable demographics. The stock is likely to be re-rated as debt levels have started to dip to more manageable levels and re-pricing of contracts of Whyte & Mackay can potentially surprise earnings estimates.

At CMP of INR 999, the stock is trading at P/E of 27.4x and 19.4x and EV/EBITDA of 11.2x and 9.1x, based on its FY10E and FY11E earnings, respectively. We maintain our ‘BUY’ recommendation on the stock and advice near term weakness as a buying opportunity. On relative return basis, the stock is rated ‘Sector outperformer’.

To read the full report: UNITED SPIRITS