United Spirits: Long-term prospects intact

Liquor bans, BIFR move are near-term dampeners; business is shaping up well

United Spirits Ltd (USL), in a surprise move on Tuesday, announced plans to declare itself sick and approach the Board for Industrial and Financial Reconstruction (BIFR)  as the country's largest liquor maker's net worth fell to below half the peak level of Rs 5,850 crore in the preceding four years. USL's net worth as of March stood at Rs 846 crore, after taking into account the accumulated losses of Rs 5,045 crore. Rules require a company to report to BIFR if its net worth falls more than 50 per cent from peak levels in the preceding four years.

The good part is this decline has been because of losses and doubtful debts and provisioning made by the company, and none due to operational issues, a fact already known to the Street. Analysts thus see this as a tactical move and, though watchful, they don't see any meaningful impact on USL's prospects. The company, too, said that the provisioning is due to exceptional factors and does not reflect on its long-term prospects.

The stock though has lost 4.7 per cent over two sessions to Rs 2,920. Street sentiments on USL have been weak for a while, looking at proposed liquor bans in various states, which experts believe is not necessary. What also provides confidence is USL's performance. After reporting losses in FY15, its performance has improved in first half of FY16.

The positives from exiting non-core businesses have been accruing while debt too is down by Rs 1,000 crore from Rs 5,000 crore at the end of FY15. The management expects a similar reduction in 12-18 months. USL has also changed its strategy and is focusing on premium brands (against popular brands earlier), which should drive its profitability.

Analysts at ICICI Securities say that USL, with Diageo's tutelage, is poised to grow upon the premiumisation path and distribution of Diageo's premium brands through USL. Prestige and above segments have grown 16 per cent in the first half of FY16.

This is also a reason analysts are not perturbed with liquor bans in some states like Bihar. Also, Bihar accounts for about five per cent of USL's sales, major sales are in popular segment that is margin-dilutive and the company is focusing on premium brands. Hence, they see very low impact. Further, most bans were revoked because of alcohol coming across the border and prohibition increases the sale of illegal liquor. History suggests that most bans have not worked out. USL would be hoping for history to repeat.