UNITED SPIRITS OPTIMISTIC ABOUT BUOYANT FY19

After two years of muted sales, firm expects double-digit growth this fiscal

The United Spirits stock has shed 15 per cent from its highs earlier this year, mainly owing to regulatory uncertainty weighing on the sentiment of the liquor sector. Demonetisation, and the ban on sale of liquor near state and national highways, besides issues related to the implementation of the goods and services tax, were among the headwinds. The company reported a sales growth of just 3.8 per cent in FY17 and a fall of 4.5 per cent in FY18.

This, however, is expected to change as the management is confident of a better environment in terms of pricing and regulations in the current financial year. A number of states have declared their excise policy for FY19, with taxation at stable levels. The overall regulatory environment, according to the company authorities, has improved with the effect of changes in route to market (method of distribution) stabilising.

A few signs of improvement following the muchneeded to fuel growth. One example stability in the sector of this is recently launched were visible in the March quarter. Captain Morgan rum. With Overall sales growth of 7 this, the company will try to per cent was above expectations, take The its from consumers company regular believes in topremium.the thesegment led by healthy volume growth in the higher-price segments (prestige, premium and rum market, given its size of luxury segments). It recorded 41 million cases annually, sales growth of 16 per cent and offers significant opportunities volume growth of 15 per cent. for ‘premiumisation’. A stable regulatory environment Given the improving regulatory is the single biggest trigger environment, the company for the stock. has planned mid-teens

At the operational level, the revenue growth in the higherprice company will continue to segments, and low single-digit focus on higher-price categories growth in the regular on a pan-Indian basis. segment.

In general, the firm will eye Overall, the company markets such as Maharashtra expects to post low doubledigit, and Karnataka. The strategy of consolidated revenue its core brands, according to growth. Given the improved analysts at Nomura, will continue growth of the higher-price segments, as it is, to help maximise analysts expect the the growth and optimise the company shares in total sales total brand investments. to improve to 75 per cent from

The company is also coming the current up with 63 innovative per cent. Share ideas of the premium brands was at 53 per cent in FY16.

This trend of an improved product mix and 'premiumisation' is expected to help the company increase gross margins. In addition to this, United Spirits is also looking at lower and judicious trade expenditure to cut down on costs. Some of the cost savings are likely to be used to increase brand investments. In addition to keeping its overheads down, the company is also working on debt and interest cost reduction.

Lower working capital intensity, healthy operating cash flows, and non-core asset sales helped bring down the overall debt by about ~8 billion to ~32.7 billion in FY18. Interest costs were lower by ~1.08 billion. The company is expected to divest about ~20 billion of non-core assets over the next few years through sale of treasury shares and ~10 billion of residential and commercial properties.

While the prospects for the company are healthy, most analysts believe that at 51 times its FY20 estimates, the stock has priced in some of the positives. Investors can look at the stock on dips with a threeyear perspective, given the strong long-term potential led by low penetration, low per capita consumption, and a large unorganised sector.