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INDIA RESEARCH
Rs730
United Spirits NEUTRAL
Tracking the market momentum, recovering from the knee jerk reaction post the poor financial performance in
Q3FY09 and triggered by the ongoing talks with Diageo for stake sale in United Spirits (USL), USL’s stock is up by
~70% from the bottom. However, at the CMP of Rs730 and trading at a valuation of 16x (net of treasury stock), we
see a strong trading ‘short’ opportunity given the pressure on near term profitability (rising prices of molasses)
and continued uncertainty over the ‘stake sale’ transaction. While USL’s growth momentum remains robust (sold
90m cases - 88.5m cases in USL and 1.5m cases of W&M in FY09 – 20% growth), we see increasing pressure on
the near term profitability as molasses prices are set to stay over Rs5200/ ton (25% higher yoy), less likelihood of
material price hikes (given the election period) and limited scope for portfolio uptrade (first line brands account
for 93% of the business now). We see continued gross margin erosion in USL’s domestic business in FY10
(expect 200bp). Globally too prices of Scotch whisky could see correction as economic recession hits
consumption, thereby limiting the upside gains for W&M as and when the contracts come for renegotiation.
Besides operationally, there could be likely GBP5-10m risk on numbers on account of pension scheme
provisioning in FY09. All these factors pose a risk to our earnings estimates in FY10. Also, while USL is in talks
with Diageo and various private equity players for stake sale, there could be likely delay in the completion of the
transaction. Citing all these risks, maintain our Neutral stance on the stock with a near term trading ‘short’
opportunity. Global liquor majors – Diageo and Pernod Ricard have seen 20-25% correction in their stock price
since December 2008 (while broader markets have moved up) and are trading at PER of 11x.
“For Private Circulation only” and “Important disclosures appear at the back of this report”
IDFC - SSKI INDIA
95
65
50
Jan-09
Jan-09
Jan-09
Jan-09
Jan-09
Mar-09
Mar-09
Mar-09
Mar-09
Apr-09
Apr-09
Apr-09
Feb-09
Feb-09
Feb-09
475
30.0
350
25.0
225 20.0
100 15.0
Q1FY08
Q2FY08
Q3FY08
Q4FY08
Q1FY09
Q2FY09
Q3FY09
Q4FY09
Dec-07
Dec-08
Apr-07
Apr-08
Jun-07
Aug-07
Aug-08
Feb-08
Oct-08
Jun-08
Feb-09
Oct-07
2
IDFC - SSKI INDIA
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IDFC - SSKI INDIA
Global liquor giants – see a sharp price correction, even after market recovery
DIAGEO PLC RI FP
1,200 80
1,050 65
900 50
750 35
600 20
Oct-08
Jun-08
Dec-08
May-08
Jul-08
Aug-08
Jan-08
Feb-08
Mar-08
Apr-08
Sep-08
Jan-09
Feb-09
Mar-09
Apr-09
Nov-08
Oct-08
Jun-08
Dec-08
Jul-08
Apr-08
May-08
Aug-08
Apr-09
Jan-08
Feb-08
Mar-08
Sep-08
Jan-09
Feb-09
Mar-09
Nov-08
4
IDFC - SSKI INDIA
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Explanation of Ratings:
1. Outperformer: More than 10% to Index
2. Neutral: Within 0-10% to Index
3. Underperformer: Less than 10% to Index
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