United Spirits: High on debt

The liquor firm has done well in the March quarter but it remains highly leveraged.

After a disastrous December 2008 quarter, in which operating margins crashed 750 basis points because a delayed crushing season pushed up prices of molasses, United Spirits has turned in a decent set of numbers for the March 2009 quarter.

Standalone revenues were up just under 20 per cent at Rs 908 crore, though the operating profit margin fell 110 basis points to around16 per cent driving down the profit after tax by about 14.5 per cent to Rs 55.6 crore. As a result, net profit for 2008-09 fell just under 5 per cent to Rs 297 crore despite revenues having grown a smart 21.5 per cent.

Analysts estimate that Whyte and Mackay(W&M) — a scotch whisky firm that United Spirits acquired in May 2007 — will contribute to the consolidated numbers at the operating profit level but perhaps not at the net level. While prices of scotch have risen by about 30-40 per cent since the acquisition, the benefits to W&M would depend on the price at which it has entered into contracts — an estimated 70 per cent of its revenues are through contract sales.

Also, it’s possible that consumption of scotch slows down globally in the current scenario and that prices correct, both of which could hurt W&M. The manage-ment has said that W&M is not a drag on the financials of the company, though only the audited numbers would give a clear picture.

This year, United Spirits is expected to turn in consolidated revenues of close to Rs 6,600 crore, a rise of 17 per cent over last year, while earnings should grow by 15-16 per cent. The firm remains highly leveraged with an estimated net debt to operating profit at around 4.5 times. Of course, there’s treasury stock that can be sold and there has been talk of an equity stake sale to a strategic partner. The stock lost 4 per cent in Tuesday’s session and at Rs 710, trades at just under 19 times estimated 2009-10 earnings, which is not cheap. Some clarity on W&M’s financials would be useful.