Why analysts are bullish on United Spirits

Brokerages expect better financials as management is determined to improve profitability

United Spirits' shares declined 0.51 per cent on Monday, after minority shareholders struck down nine related-party transactions at the company's extraordinary general meeting on Friday. There was no surprise, claimed analysts tracking the stock, as voting advisory firms had come out with their notes well ahead of the November 28 meeting. While there is no clarity on whether the promoters will seek legal recourse, the Street remains optimistic on the stock, favoured by foreign institutions with 10 per cent being held by six large foreign arms of leading merchant banks.

According to Bloomberg, of the 24 brokerages tracking the stock, 10 have a 'buy' rating, while six have a 'hold'. Only eight brokerages have a clear 'sell' rating on the stock. According to analysts, many of these related-party transactions will come under scrutiny thanks to Diageo's new management, which is expected to improve the firm's efficiency and profitability.

Analysts expect the company to now have better financials and profitability. Diageo is focusing on the premium end of India's liquor market. Currently, foreign brands constitute 60 per cent of the Indian Made Foreign Liquor market and United Spirits under the new management wants to focus on this segment, rather than the mass market brands. The company is also exiting several unprofitable markets such as Andhra Pradesh and Kerala, planning to implement franchisee operations in those states. According to Motilal Oswal, this move can result in a decline in operating margins but will drive working capital savings. The brokerage says the management has stated the resources released from such markets can be gainfully deployed in other geographies. The Diageo management is also struggling to improve the consolidated cash conversion cycle at the subsidiary level. With the sale of Whyte & Mackay, the cash conversion cycle would improve.

Analysts expect the working capital requirements to fall from the second quarter of FY15 and FY16, as loan and advances were higher in FY14, thanks to trademark and licence fees. The company also plans to raise Rs 2,000 crore by selling treasury stock and investments in United Breweries to cut debt. IIFL, in a note, said the worst of balance sheet write-offs are over. "The near-term weakness has to be viewed in conjunction with longer term potential for improved revenue growth and higher earnings before interest, tax, depreciation and amortisation case," it said.