>UNITED SPIRITS: Downgrade to Neutral on nearterm overhangs; core business valuation remains attractive

■ Action: Cutting estimates and downgrading to Neutral

We cut our FY12F and FY13F earnings estimates by ~30% and downgrade the stock to Neutral to reflect our lowered expectations for domestic business profitability. While we expect FY12F to be a year of consolidation marked by stable EBITDA per case in the domestic business, we expect marginal improvement into FY13F. We believe nearterm overhangs, particularly the group company Kingfisher Airlines, will hold back stock price performance; however, valuation at 15.3x FY13F P/E remains attractive, in our view.

Hangover to last for a while

■ Catalysts: Softening raw material prices a positive catalyst for FY13F

As the company continues to build more in-house capacity post the acquisitions of Pioneer and Sovereign distilleries, we believe it will be able to capture more of the distillation margins over the next couple of years. This should, in our view, help improve profitability of the domestic

business. However, we are not building in any material improvement in profitability in our numbers as visibility on that remains low.

■ Valuation: Near-term concerns outweigh valuations

On our revised numbers, UNSP trades at 15.3x FY13F P/E, a steep 38% discount to the FMCG sector average. While we expect UNSP to deliver 20% earnings growth in FY13F, we expect FY12F to be a year of consolidation. While valuation at 15.3x FY13F looks attractive, near-term

concerns over the balance sheet and funding requirement at group company Kingfisher Airlines will likely remain overhangs, in our view. We prefer to remain on the sidelines in the near term.

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