UNITED SPIRITS Q1FY21 Results

29th July 2020

We at Stallion have a consistent investment philosophy of

buying companies that fit our Philosophy of 4 M’s:

▪ Market Opportunity
Market Leadership
BUY
▪
▪ Management

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CMP: 585 ▪ Margin Of Safety

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United Spirits (USL) is the largest spirits company in India, with
Market Cap: 42,527 Crores nearly 50% market share. United Spirits was formed through merger
of McDowell & Co, Herbertsons Limited, Triump Distillers &

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Net Debt: 2,073 Crores
Vintners, Baramati Grape Industries, Shaw Wallace Distillers and four
TTM PE: - other companies; making it the largest liquor company in India.
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Once a family jewel of Mallya family, it was acquired by Diageo in
2014. The company has a portfolio of premium brands such as
Key Financials: Johnnie Walker, Vat 69, Black & White and Smirnoff.
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(Rs Billion)Q1FY20 Q2FY20 Q3FY20 Q4FY20 Q1FY21 Thesis-

Revenues: 24.3 23.1 25.8 19.9 10.3
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▪ New MNC on The Block-

4.9 4.1 4.2 2.5 -0.9 USL is now a subsidiary of global leader, Diageo. United Spirits
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EBITDA:
was largely a Mismanaged company under the Leadership of
PAT: 2.0 1.6 2.3 0.6 -2.4
Vijay Mallya. Diageo has turned around the company in last 5
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years, through various measures that involved separating the

EBITDA%: 16% 16.8% 16.6% 15.9% -7.5% company from Vijay Mallya, cleaning up the balancesheet-by
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(Comparable) writing off nearly Rs5000 cores of investments & UB group loans
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and establishing global Diageo practices to improve efficiencies.

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We believe that the worst in now behind for USL and the
company has truly become a MNC with Large opportunity Size
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Valuation:
& Leadership Position.

We continue to believe that USL can ▪ Profits To Double in 3 Years-

increase its profits to Rs1200-1400
The company has set its focus on premiumization of its portfolio
crores in 2-3 years and that it should get
by franchising its lower end Brands whereas it focused on
a valuation of atleast 50x, ie. a market
Premium & Above. This has led to constantly improving margin
cap of about Rs60-70,000 crores. The
profile due to efficiencies & we believe there is enough
company’s current market cap is about
headroom for the company to improve its margin profile
Rs42000 crores.
further; and even with slow sales growth, the company should
double the company’s profits in next 3 year.

Please see important disclosures towards the end of this report. Stallion Asset
 29th July 2020

United Spirits reported a weak set of numbers for Q1FY21. The revenues were lower by 54% (y-o-y) in Q1FY21 to
Rs1030 crores and company reported a loss of Rs215 crores in Q1FY21- against Rs197 crores profits in same
quarter last year.

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The de-growth in revenues in-line with expectations given the following reasons-
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1. The entire business was shut completely for more than 1 month.
2. The on-premise business (restaurants, bars etc) which represents 25% of company’s business was totally shut
for the entire quarter.
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But, the huge drawdown in profits was not expected. And there are a couple of reasons for the same. First, being
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few one-off items in the Pnl which contributed to a large part of loss. And secondly, the business model itself,
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which has very high fixed costs.

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The few one-offs in the PnL-

1. The company has started an initiative called “Raising the Bar”, under which the company is supporting the bars
and restaurants that serve alcohol. The cost of this program which is Rs75 crores, was expenses entirely during
the quarter.
2. Company has done some write-off of inventory that it holds and some which is lying with distributors. These
according to management has been made on a conservative basis given the extent for which lockdown has
been in place, but they also expect most of it to be reversed in future. These amounts totalled to Rs65 crores.

So, a total of Rs140 crores was on account of these one-offs.

Please see important disclosures towards the end of this report. Stallion Asset
 29th July 2020

Secondly, Alcohol industry works on a state-by-state basis. It is not feasible to manufacture a product in one state
and sell the same in another. This requires USL to have a large manufacturing base of 47 plants. So even if the
business is down say 50%, it is not that USL can shut down some 20-25 plants; they have to operate most of their
plants to service the demand of each state separately. So, the fixed cost business is very high and thus a 50% loss
of revenues had a large impact of profitability.

Coming to specific line items, the revenue fall of 54% was led by 49% fall in volumes. The Prestige & Above (P&A)
portfolio was lower by 52% and Popular portfolio was lower by 47% in terms of volume. The larger fall on P&A
portfolio was on account of no business from bars, pubs etc. wherein P&A portfolio has a larger share.

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Gross profit was lower on account of lower sales, some inventory write-off and lower franchisee income. The
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franchisee income for the quarter was only Rs10 crores in Q1FY21, against Rs50 crores in Q1FY20. Management has
indicated that its franchisee partners being smaller businesses are facing issues in terms of operations and liquidity.
So, the franchisee income for this year will be much lower.
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On expenses front, even though staff costs and other expense were lower on absolute basis, the only major cost
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reduction was on account of Marketing spends, which were lower by 70% to just Rs52 cores in Q1FY21. Since, the
products were not accessible in the first place, any money spent on marketing would not have yielded any results.
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Other Qualitative Highlights from the concall-

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1. On home delivery, the management has commented that 6 states have allowed online ordering and home
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delivery of alcohol and the same will have structural benefits for the industry in the longer run.
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2. The excessive tax hikes take by many states like Delhi and Orissa have been rolled back in most states.
3. The company has received some price hike of 4-5% in 7-8 states during the quarter.
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We believe that FY21 PnL will not be normal given the high loss in Q1. We have always focussed on margins
improvement here, but given the state on PnL this year, any judgement on margins front would be useless. Instead
the focus this year would be on balancesheet, in the way that whether the improvements in balancesheet in FY21
can bear fruits in future years. Management has stated that they have continued to reduce debt in Q1 as well and
thus we expect that FY22 PnL would benefit from the same. We continue to believe that USL can increase its profits
to Rs1200-1400 crores in 2-3 years and that it should get a valuation of atleast 50x, ie. a market cap of about Rs60-
70,000 crores. The company’s current market cap is about Rs42000 crores.

Please see important disclosures towards the end of this report. Stallion Asset
 29th July 2020

Explanation of Stallion Assets Investment Ratings:

Buy(B): Describes securities that we expect to provide a total return (price appreciation plus dividend yield) in
excess of CNX Midcap 100 over the next 12-Month period.

Hold(H): Describes securities that we expect to provide a total return (price appreciation plus dividend yield)
equal to CNX Midcap 100 over the next 12-Month period.

Exit(E): Describes securities that we expect to provide a total return (price appreciation plus dividend yield)
which is less than CNX Midcap 100 over the next 12-Month period and also implies that we have suspended
coverage on the security.

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Rating History of UNITED SPIRITS

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850 gm
750
B
650
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550

450
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350
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250

150
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Research Analyst Details:

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Name: Ankush Agrawal

Email Id: ankushagrawal@stallionasset.com

Contact No: 022-68680250

Analyst Ownership of Stock: No

Please see important disclosures towards the end of this report. Stallion Asset
 29th July 2020

Disclosures and Disclaimer for Research Report

Stallion Asset Private Limited is a Research Analyst, registered under SEBI (Research Analyst) Regulations 2014, Registration No.
INH000007270 and a Portfolio Manager, registered under SEBI (Portfolio Managers) Regulations, 1993, Registration No. INP000006129.
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The Analyst certify (ies) that he complies with Qualification and Certification requirements of Regulation 7 of SEBI (Research Analyst)
Regulations 2014; that are required to be complied with by the individuals employed as Research Analysts by an Entity (Stallion Asset Private
Limted; Registration No. INH000007270) registered as Research Analyst under SEBI (Research Analysts) Regulations 2014.

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Further, The Analyst certify (ies) that the views expressed herein accurately reflect his (their) personal view(s) about the subject security (ies)
and issuer(s) and that no part of his (their) compensation was, is or will be directly or indirectly related to the specific recommendation(s) or
views contained in this research report.

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Disclosure under SEBI (Research Analyst) Regulations 2014:

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Whether the research analyst or research entity or its associates or his relative has any financial interest in the subject company and the
nature of such financial interest- No gm
Whether the research analyst or research entity or its associates or relatives, have actual/beneficial ownership of one per cent or more
securities of the subject company, at the end of the month immediately preceding the date of publication of the research report or date of
the public appearance - No
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Whether the research analyst or research entity or his Associate or his relative, has any other material conflict of interest at the time of
publication of the research report or at the time of public appearance - No
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Whether it or its associates have received any compensation from the subject company in the past twelve months- No
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Whether it or its associates have managed or co-managed public offering of securities for the subject company in the past twelve months-
No

Whether it or its associates have received any compensation for investment banking or merchant banking or brokerage services from the
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subject company in the past twelve months- No

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Whether it or its associates have received any compensation for products or services other than investment banking or merchant banking or
brokerage services from the subject company in the past twelve months- No
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Whether it or its associates have received any compensation or other benefits from the Subject Company or third party in connection with
the research report.-No
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Please see important disclosures towards the end of this report. Stallion Asset