United Spirits: Not much of a hangover
Business is brisk but high interest costs are eating into profits.
That Diageo will not be picking up a stake in United Spirits, just yet, is disappointing because it would have helped improve the company’s balance sheet. However, the Street doesn’t seem to be too worried — the stock has fallen by about 1.5 per cent in the last couple of sessions.
That’s probably because the company’s consolidated debt came down by about Rs 570 crore to around Rs 6,800 crore at the end of June 2009 with the liquor firm recently monetising treasury stock worth Rs 900 crore. It repaid $186 million (Rs 890 crore) of debt, which should save it $15-16 million on interest annually.
However the borrowings remain high and the company will probably sell the remaining treasury stock — 8.3 million shares worth Rs 750 crore at the current market price — and also rope in a couple of private equity investors to mop up around $300 million.
Also, analysts are impressed with the June 2009 quarter numbers even though the net profit may have fallen 8 per cent year-on-year in the June 2009 quarter at Rs 108 crore due to high interest costs. The standalone revenues were up a smart 23 per cent at Rs 1,242 crore — a part of the gains coming from the merger of Shaw Wallace and other operations. What was remarkable was the strong volume growth of 17 per cent with key brands growing 16 per cent, on the back of a 20 per cent volume growth in 2008-09. However, with molasses prices at Rs 600 per quintal, material costs to sales have increased more than 600 basis points year-on-year.
And though the strong brand portfolio allowed the company to save on advertisements and promotions, operating profit margins were lower at around 18 per cent. In a seasonally weak quarter, Whyte and Mackay reported a strong revenue growth of 10 per cent and a 36 per cent rise in the opertaing profit.
With scotch prices firm, there’s every chance that contracts being renewed next year will be done at significantly higher prices. In the current year, United Spirits is expected to turn in revenues in the region of Rs 6,500 crore and net profits of around Rs 430 crore. At the current price of Rs 918, the stock trades at 13 times 2009-10 estimated EV/EBITDA (enterprise value /earnings before interest, tax and depreciation) with reasonable upside.