United Spirits disappoints in September quarter

Market remains optimistic as it expects Diageo to put growth on track and push the premium segment

The second quarter numbers of United Spirits were much awaited, as the Street was keen to see how the change in management would impact business performance. While the headline numbers have been muted, the premium segment has seen robust growth compared to the regular brands. While overall volumes fell marginally by one per cent annually to 28.1million cases, the company's premium brands grew 21 per cent year-on-year. The regular brands declined seven per cent annually. With this growth, the share of premium brands has gone up to 28 per cent, from 23 per cent in FY13 overall sales. After adjusting for one-off bulk sale of spirits, the company's revenues in the second quarter grew seven per cent.

The one thing that got a thumbs down by the market was the fall in operating profit, thanks to a decline in margins. USL's operating profit fell 18.9 per cent year-on-year to Rs 205 crore, with margins declining 130 basis points year-on-year to 10.1 per cent. Higher advertising and marketing spends impacted margins. According to Religare Institutional Research, a 270 basis points and 130 basis points increase in advertising and other expenses impacted margins.

However, USL's adjusted net profit jumped 45 per cent year-on-year to Rs 89. 8 crore, buoyed by a 20 per cent decline in interest compared to Rs 136 crore last year. The interest burden has come down as the company has repaid some of its debt from proceeds that came from Diageo. However, the market was expecting the debt to come down more than what the company reported. For Credit Suisse, a key disappointment was the lower-than-expected reduction in net debt, which came down just Rs 800 crore over 1H FY14 despite a Rs 2,700 crore of capital infusion. While part of this was due to the higher translation of foreign debt for Whyte & Mackay, there was also an increase in working capital. The brokerage has cut its earnings estimates by four per cent for the same reason, but has maintained an outperform rating on the stock. Most brokerages have a positive view on the stock from a long-term perspective, as they expect Diageo to improve earnings.