Write-downs behind, USL to focus on margin improvement: Analysts

THE MANAGEMENT’S focus at India's largest liquor fir m, United Spirits (USL), may now shift to margin improvement following the balance sheet clean-up under its new owner Diageo, which dragged its March quarter ear nings, reckon analysts. The liquor company, while making provisions for loans, had directed an inquiry into receivables from several debtors who claimed to have lent to alle ged entities of Vijay Mallya's UB Group.

“The quantum of writedowns is larger than what we expected, but it also leads us to believe that no further material write-downs are likely,” said a research report by Nomura. “In our opinion, management’s focus will now shift to improving operational perfor mance where, we believe, majority shareholder Diageo now has a team and strategy in place to deliver on its aims set out at the time of the acquisition in November 2012.”

Nomura said the balance sheet appeared to be in a better shape after the adjustments and write-downs. “Investors should also draw comfort from the fact that the uncertainty surrounding the amount of write-downs has been removed and the company now has a strong base, from which to build over the next five years,” it said.

For the March 2014 quarter, USL made provisions of Rs 4,321.63 crore for write-of fs following the sale of Whyte & Mackay (W&M) as the proceeds were insufficient to fully repay intra-USL loans, and also the diminution in value of investments of an overseas subsidiary.

The liquor fir m has also provided for receivables of Rs 690.55 crore towards doubtful advances to some debtors while setting aside Rs 330.32 crore to cover a loan to UB Group's parent company, United Breweries Holdings (UBHL).

“As the new management drives strategic change and overhauls gover nance processes at USL, we expect near-ter m disruption/volatility in financials. Bulk of the write-offs/provisions has been done in our view. We expect USL to progressively write off the remaining sum of Rs 995 crore owed by UBHL,” said a report by Motilal Oswal. In ter ms of operations, the brokerage house expects margin recovery efforts to gain momentum in the second half of FY15 and in FY16.

USL, which markets whisky brands such as Royal Challenge, Bagpiper and McDowells No.1, posted a loss of Rs 5,380 crore for the March quarter on net sales of Rs 1,917 crore, due to the provisions. For the fiscal ended March, it posted a consolidated loss of Rs 4,488.77 crore on net sales of Rs 10,500.92 crore.

Analysts said they expected the company's debt to reduce from the current level with the completion of the W&M sale. “Net debt stands at Rs 7,200 crore which should subsequently reduce as W&M proceeds get utilized for debt repayment,” said Motilal Oswal.