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CLSA downgrades United Spirits

Sharp rally in stock makes risk-reward unfavourable, broker says

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has downgraded its rating on Ltd (USL), one of the best performer on the bourses this year, to “sell”, citing .

The broker cited risks surrounding the , which is set to buyout the company, and the impact on profits following business restructuring as reasons for this outlook.

“We believe the sharp rally in the stock price ahead of the consummation of the deal (with Diageo) makes risk reward unfavourable,” said CLSA’s analysts and in a note to clients on Monday, following an interaction with Diageo’s investor relations official.

United Spirits shares, which have gained 300 per cent in 2012, rose 0.4 per cent to Rs 1,999.80 on Monday on the .

CLSA said the stock has overshot its price target of Rs 1,900 and could decline about five per cent.

“The surge in United Spirits shares has raised concerns over the success of the preferential issue where pricing is almost at a 30 per cent discount to the spot,” the CLSA analysts said in the report.

Diageo agreed to pick up a majority stake in -owned USL through a multi-structured deal.

In a joint statement in November, Diageo said it entered into an agreement with United Breweries Holdings Ltd () and USL to acquire 27.4 per cent stake in USL at Rs 1,440 per share.

According to the announcement, Diageo will acquire 19.3 per cent stake in USL from UBHL. Diageo will also seek approval from USL shareholders for a preferential allotment at Rs 1,440 a share amounting to 10 per cent of the post-issue enlarged share capital of USL.

“The Diageo management sounded upbeat on the long-term potential of United Spirits but sounded a word of caution due to the potential losses in business (volumes) in the near term, as the group institutes global practices, along with natural disruption due to these changes,” said the CLSA analysts. “This, along with higher marketing spends, would weigh on margins in the coming years, a trend seen in other geographies as well.”

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