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The earnings outlook for United Spirits has got clouded by stagnant volumes and price cuts but it continues to find favour from foreign investors for a variety of reasons. An immediate trigger for this stock is the sale of Whyte & Mackay, which Diageo is expected to conclude between April and June. Analysts believe a lot of value will accrue from the sale than the estimated £450 million as it is sitting on precious inventory of scotch whisky.Whyte & Mackay holds 20 per cent of the world’s non-captive scotch inventory. The book value of this inventory is £200 million. Book value implies cost at production, which means this inventory is worth in multiples of the cost. Credit Suisse says: “W&M holds five per cent of global Scotch inventory, and over 20 per cent of the non-captive Scotch inventory. It, thus, clearly has scarcity value, as the bulk of Scotch inventory is held by the large multinationals.”
Also, bidders of Whyte & Mackay can put in multiple bids — for the company as a whole and also for separate assets of the firm. Large global players may not be eligible to bid if it will lead to lessening of competition. The unlocking of this value from Whyte & Mackay could help boost the earnings per share of United Spirits in the near-term. The conclusion of this deal would also help reduce United Spirit’s debt levels.
Many say the time is right to buy into this stock before Diageo begins its spring cleaning at the company and operational metrics start improving sooner than expected. However, Morgan Stanley is of the opinion that the Ebit margins of the regular segment, accounting for 75 per cent of volumes, look unsustainably low. According to the brokerage, a 10 per cent increase in net realisations in this segment would double domestic business profit for USL. A potential trigger for higher earnings could either be price hikes by the government or launch of new premium products. Morgan Stanley has a price target of Rs 3,000 on the stock.
