Brokerages advise ‘ keeping spirits up’ with USL as stock hammered

Mumbai, Sept 5: Major domestic and foreign brokerages are advising clients to stay positive on United Spirits (USL), stating the significant write-downs by the company is a one-off event and expect a firm base to be established for FY15e, which will give more visibility in the company’s future profitability.

Shares of USL declined for the third consecutive day on Friday. The counter dropped nearly 8% before ending the session with losses of 4.65% ( R111.20) at R2,279.05 on the BSE. Expensive valuations amid significant write-downs prompted the Street to book profits ahead of the weekend, analysts said.

United Spirits and group company United Breweries trade at a jaw-dropping 49 times and 59 times one-year forward expected earnings, and feature among the top 10 most expensive stocks, shows a compilation by FE based Bloomberg’s earnings estimates.

“(We) keep the spirits up,” said Manish Jain and Anup Sudhendranath, analysts, Nomura Financial Advisory & Securities (India). “The quantum of write-downs is larger than we expected, but it also leads us to believe that no further material write-downs are likely. We see this as a one-off event and believe that a firm base is in place for FY15f. In our opinion, USL remains a key stock to own in the consumer space; we ex- pect its operational performance to improve over the next tow-three years,” Nomura analysts said in the research note.

Kotak Institutional Equities (KIE) Research highlighted a similar point and stated it saw “light at the end of the tunnel”. Nomura and KIE maintain their ‘buy’ rating on the stock. Motilal Oswal has maintained its ‘neutral’ view on the stock on expectations of near term volatility in financials as the new management drives strategic changes at the Indian alcoholic beverages company.

“We view it (the write-downs) as positive and are assuming that a comprehensive job has been done so as to avoid negative surprises post July when Diageo starts consolidating USL’s numbers. In our view, post July, base profitability of the business would be established and investors would start getting much more visibility on the future trends in profitability,” stated KIE in its research note.

Analysts said USL’s appeared in good shape compared with last year. The company’s total debt now stands at R80.35 billion, most of which are short-term loans, and gross debt-to-equity (D/E) stands at 2.7x and net D/E now stands at 1.5x.

On the other hand, CLSA and Credit Suisse turned cautious on the stock with the latter reducing the target price on the stock to 2,200 (earlier R2,700) as well as FY15-16 earnings per share estimates by 30-50%. CLSA revised its rating to ‘underperform’ from ‘sell’.

United Spirits reported 25.4% and 28.6% decline in FY14 stand-alone ebitda and net profit. Ebitda margins contracted 330 bps y-o-y to 9.3%. The company provided for R36.2 billion as provision for loans given to intra-group entity (net proceeds of W&M divestment being insufficient to pay off group loans).

The company wrote-off entire investment made in the subsidiary — Palmer ( R6.9 billion) and Montrose International ( R133.9 million), and made provision for debtors of R6.5 billion for parties who have reneged on their commitment and are proposing to repay the dues only after receiving their own payments from other UB Group entities.

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