2QFY2013 Result Update | FMCG

November 20, 2012

United Spirits
Performance Highlights
Quarterly Highlights (Standalone)
Y/E March (` cr) Revenue EBITDA OPM (%) PAT
Source: Company, Angel Research

NEUTRAL
CMP Target Price
Investment Period
2QFY12 1,791 256 14.3 148 % yoy 24.0 (1.1) (290)bp (73.4) 1QFY13 2,057 335 16.3 110 % qoq 7.9 (24.4) (488b)p (72.9)

`1,762 -

2QFY13 2,221 253 11.4 39

Stock Info Sector Market Cap (` cr) Net Debt (` cr) Beta 52 Week High / Low Avg. Daily Volume Face Value (`) BSE Sensex Nifty Reuters Code Bloomberg Code FMCG 23,048 8,063 0.3 4.3 530,889 10 18,329 5,572 UNSP.BO UNSP@IN

For 2QFY2013, United Spirits (USL) posted a standalone top-line growth of 24.0% yoy to `2,221cr (`1,791cr in 2QFY2012), aided by one time sale amounting to `315cr of bulk spirit stocks. Adjusted for the same, the sales growth stood at 6.4%, below our growth estimate of 8.9%. The PAT declined by 73.4% yoy due to higher interest costs (up by `26cr on a yoy basis), forex loss of `34cr (vs `39cr gain in 2QFY2013) with respect to loans to overseas subsidiaries and lower other income. Key highlights for the quarter: Sales growth (adjusted for bulk spirit) was driven by better realization as volume remained flat at 28.4 million cases (28.7 million cases in 2QFY2012). The management claimed that certain restrictions on its products resulted in continued weak sales in the key state of Tamil Nadu, despite the good demand for its products. Sales volume in West Bengal too was down by 3% yoy due to higher duties imposed in the state a year back. Although the reported OPM fell by 290bp yoy, when adjusted for bulk spirit sale, it was higher by 150bp yoy. OPM expansion was on account of 14% yoy growth in the Prestige and Above segments and price hikes taken by the company. Outlook and valuation: We expect USLs bottom-line to grow at a CAGR of 103.4% over FY2012-14E due to the lower interest costs on account of substantial reduction in debts post the UBH-Diageo deal. At the CMP, the stock is trading expensively at 38.9x FY2014 EPS; we maintain a Neutral view on the stock. Key financials (Consolidated)
Y/E March (` cr) Net sales % chg Net profit % chg EBITDA margin (%) EPS (`) P/E (x) P/BV (x) RoE (%) RoCE (%) EV/Sales (x) EV/EBITDA (x)
Source: Company, Angel Research

Shareholding Pattern (%) Promoters MF / Banks / Indian Fls FII / NRIs / OCBs Indian Public / Others 27.8 4.9 50.2 17.1

Abs. (%) Sensex UNSP

3m 3.6

1yr 12.0

3yr 7.7 47.4

91.1 125.4

FY2011 7,376 15.9 431 94.4 15.6 34.3 38.9 10.8 10.2 5.3 3.8 24.2

FY2012E 9,187 24.5 159 (63.1) 11.5 12.6 118.0 4.3 7.8 4.8 3.2 27.7

FY2013E 10,289 12.0 377 137.1 12.8 26.0 67.9 5.8 8.9 3.1 2.9 22.5

FY2014E 11,421 11.0 658 74.4 12.8 45.3 38.9 7.6 9.4 2.9 2.6 20.2

V Srinivasan
022-39357800 v.srinivasan@angelbroking.com

Please refer to important disclosures at the end of this report

United Spirits | 2QFY2013 Result Update

Exhibit 1: 2QFY2013 Performance (standalone)

Y/E March (` cr) Net Sales Consumption of RM (% of Sales) Staff Costs (% of Sales) Advertising (% of Sales) Other Expenses (% of Sales) Total Expenditure Operating Profit OPM Interest Depreciation Other Income Forex gain/(Loss) PBT (% of Sales) Provision for Taxation (% of PBT) Reported PAT PATM EPS (`)
Source: Company, Angel Research

2QFY13 2,221 1,418 63.84 116 5.2 172 7.7 262 11.8 1,968 253 11.4 170 19 29 (34) 59 2.7 20 34.0 39 1.8 3.1

2QFY12 1,791 1,044 58.31 105 5.8 169 9.4 217 12.1 1,535 256 14.3 144 15 96 28 221 12.3 73 33.0 148 8.3 11.3

% yoy 24.0 35.8 10.7 2.1 20.6 28.2 (1.1) 17.9 23.9 (69.6) (73.1) (72.3) (73.4) (72.5)

1QFY13 2,057 1,209 58.77 109 5.3 171 8.3 233 11.3 1,722 335 16.3 166 16 26 34 214 10.4 69 32.2 145 7.0 11.1

% qoq 7.9 17.3 8.6 6.2 (1.6) 0.4 (7.0) 12.5 4.2 14.2 (24.4) 2.7 15.8 11.2 0.0 (72.2) (74.2) (70.7) 5.5 (72.9) (74.9) (71.9)

Exhibit 2: 2QFY2013 Actual vs. Angel estimates

(` cr) Revenue EBITDA OPM (%) PAT
Source: Company, Angel Research

Actual 2,221 253 11.4 39

Angel Est. 1,952 273 14.0 108

% Diff. 13.8 (7.3) (260)bp (63.6)

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United Spirits | 2QFY2013 Result Update

Top-line growth at 24.0% yoy

For 2QFY2013, USL posted a top-line growth of 24.0% yoy to `2,221cr (`1,791cr in 2QFY2012), aided by one time sale amounting to `315cr of bulk spirit stocks. Sales growth (adjusted for bulk spirit) was driven by better realization as volume remained flat at 28.4 million cases (28.7 million cases in 2QFY2012). The management claimed that certain restrictions on its products resulted in continued weak sales in the key state of Tamil Nadu, despite the good demand for its products. However, the situation was better than in 2HFY2012. The West Bengal market is coming to terms with the higher duties imposed in the state a year back; volume witnessed a de-growth of 3%, much lower than the de-growth of 50%, 20% and 20% reported in the state during 3QFY2012, 4QFY2012 and 1QFY2013 respectively.

Exhibit 3: Top-line performance

2,500 32.2 2,000 24 (` cr) 1,500 1,935 1,954 1,791 1,000 500 0.3 0 1QFY12 2QFY12 3QFY12 Topline 4QFY12 1QFY13 yoy growth (RHS) 2QFY13 (5) 1,863 17 2,057 25 35

6.3

6.3

2,221

15

Source: Company, Angel Research

Reported OPM down 290bp yoy

Although the reported OPM fell by 290bp yoy, when adjusted for bulk spirit sale, it was higher by 150bp yoy. The OPM expansion (post adj) was on account of 14% yoy growth in the Prestige and Above segments and the price hikes taken by the company. Spirit costs during the quarter were higher by `6.25/case on a yoy basis. Thus EBITDA remained flat at `253cr. Interest costs rose by 17.9% yoy to `170cr due to increased borrowing for working capital and interest rate hikes. The company also reported a forex loss of `34cr (vs `39cr gain in 2QFY2013), with respect to loans to overseas subsidiaries. Other income too was down by 69.6% yoy to `29cr. Thus PAT declined by 73.4% yoy.

November 20, 2012

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United Spirits | 2QFY2013 Result Update

Exhibit 4: Gross Margin and OPM

45 40 35 30 25 20 15 10 5 0 1QFY12 2QFY12 3QFY12 4QFY12 1QFY13 2QFY13 OPM Gross Margin 17 16 10 10 11 40 42 39 39 41 36

Exhibit 5: Bottom-line performance

160 140 120 100 (` cr) 148 138 145 80 60 40 10 39 20 0 1QFY12 2QFY12 3QFY12 4QFY12 1QFY13 2QFY13 Bottomline yoy growth (RHS) 47 125 105 85 65 45 25 5 (15) (35) (55) (75) (95)

(%)

14

Source: Company, Angel Research

Source: Company, Angel Research

Investment Rationale
Dominant player with strong brands under its kitty: The Indian branded spirit industry sold nearly 290mn cases in FY2012 of which USL sold around 120mn cases giving it a market share of around 41%, making it one of the most dominant player in the industry. The company has a market share of around 59% for its first line bands in India. The company is the largest spirit company in the world by volumes and has presence in scotch, whiskey, brandy, rum, vodka, gin and wine. The company has strong brands under its kitty with brands such as McDowells, Bagpiper, Royal Challenge, Antiquity, Signature, Black Dog, White Mischief, Vladivar, Whyte & Mackay etc. All brands of the company have high recall and it has four brands in the top 25 worldwide spirits brands. McDowell No 1 family is the largest spirits brand in the world with sales of 44mn cases in FY2012. Diageo deal a game changer: The recently announced deal between UBH and Diageo is positive for USL as it brings multiple benefits to the company. On the financial front, Diageo would infuse funds of `3,300cr into USL for the subscription of preferential allotment and towards the purchase of treasury shares. USL would use these funds to repay its debts which stand at ~`8,000cr in its consolidated Balance Sheet. Lowering of debts would result in reducing the interest costs and thereby boost the companys earnings The deal would provide synergistic benefits as USL can leverage the potential of Diageos premium brands with its strong distribution strengths, which would result in expansion of overall business and also result in better operating margins. Post this deal, UBH will lose control over USLs board of directorship and Diageo will nominate majority of the directors. The new board is expected to be more focused in decision making considering that UBH group is currently present in diverse businesses in India and its aviation arm Kingfisher is currently facing a huge financial crisis.

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United Spirits | 2QFY2013 Result Update

Outlook and Valuation: We expect USLs bottom-line to grow at a CAGR of 103.4% over FY2012-14E due to the lower interest costs on account of substantial reduction in debts post the UBH-Diageo deal. At the current market price, the stock is trading expensively at 38.9x FY2014 EPS; we maintain our Neutral view on the stock.

Exhibit 6: One year forward (P/E) chart

2,500 2,000 1,500 1,000 500 0
Oct-09 Oct-10 Oct-11 Oct-12 Apr-09 Apr-10 Apr-11 Apr-12

Price (`)

10x

25x

40x

55x

Source: Company, Angel Research

Exhibit 7: Peer valuation

Company Asian Paints Britannia Colgate Dabur GCPL GSKCHL* HUL ITC Marico Nestle* TGBL USL Reco Neutral Buy Neutral Neutral Neutral Neutral Neutral Neutral Neutral Neutral Neutral Neutral Mcap (` cr)
36,933 5,746 18,148 21,520 23,125 12,762 112,376 218,993 13,057 44,373 9,839 23,050
#

CMP (`)
3,850 481 1,334 124 680 3,035 520 280 212 4,602 159 1,762

TP (`)
584 -

Upside (%)
21 -

P/E (x) FY13E

31.1 26.3 36.7 27.7 29.8 27.2 35.3 30.0 34.4 40.7 24.1 67.9

EV/Sales (x) FY13E

3.2 0.9 5.6 3.5 3.8 3.7 4.2 7.1 2.7 5.1 1.3 2.9

RoE (%) FY13E

38.1 39.1 101.9 43.2 26.4 36.3 84.5 35.8 25.4 70.5 8.2 5.8

CAGR # Sales
17.0 15.3 15.2 15.9 24.7 16.8 15.5 17.2 18.6 16.0 9.7 11.5

FY14E
26.3 19.5 31.4 23.6 24.6 23.0 30.5 25.6 27.3 33.4 20.4 38.9

FY14E
2.7 0.8 4.9 3.0 3.2 3.1 3.7 6.1 2.3 4.3 1.1 2.6

FY14E
35.4 42.7 98.5 41.4 26.1 34.0 75.8 35.3 22.6 60.2 9.5 7.6

EPS
19.2 25.6 13.8 18.9 31.1 24.9 19.7 17.7 25.4 14.2 16.6 103.4

Source: Company, Angel Research; Note: Denotes CAGR over FY2012-14E, *December Year Ending.

Company Background
USL is the leading alcoholic beverages producer and distributor in India with a volume market share of 41%. The company has strong brands under its kitty such as McDowells, Bagpiper, Royal Challenge, Antiquity, Signature, Black Dog, White Mischief, Vladivar, Whyte & Mackay etc. It has the largest manufacturing presence in the country with 40 owned plants and 42 contract plants and has a capacity to service 64,000 outlets.

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United Spirits | 2QFY2013 Result Update

Profit and Loss statement (Consolidated)

Y/E March (` cr) Total operating income % chg Total Expenditure Materials Manufacturing and Other Exp. Other EBITDA % chg (% of Net Sales) Depreciation& Amortisation EBIT % chg (% of Net Sales) Interest & other Charges Adj.Other Income (% of PBT) Share in profit of Associates Recurring PBT % chg Extraordinary Expense/(Inc.) PBT (reported) Tax (% of PBT) PAT (reported) Add: Share of earnings of asso. Less: Minority interest (MI) % chg Prior period items PAT after MI (reported) Extraordinary Income/Exp. ADJ. PAT % chg (% of Net Sales) Basic EPS (`) Adjusted EPS (`) % chg FY2009 FY2010 FY2011 FY2012 FY2013E FY2014E 5,468 18.2 4,698 2,691 2,007 770 (28.0) 14.1 93 678 (31.9) 12.4 718 104 162.1 64 (88.5) (381) (317) 92 (28.9) (408) (0) (0) (235.6) (408) (381) (27) (110.5) (0.5) (40.8) (2.7) (109.3) 6,362 16.4 5,331 3,178 2,153 1,032 33.9 16.2 95 937 38.2 14.7 607 85 20.5 414 547.2 (245) 170 193 113.6 (23) (0) (1) (23) (245) 222 907.2 3.5 (1.9) 18.4 770.0 7,376 15.9 6,224 3,853 2,371 1,152 11.7 15.6 102 1,050 12.1 14.2 498 144 20.7 695 67.7 138 834 265 31.8 568 (1) (3) 570 138 431 94.4 5.8 45.2 34.3 86.4 9,187 24.5 8,126 5,132 2,995 1,060 (8.0) 11.5 147 913 (13.1) 9.9 876 269 87.9 306 (55.9) 29 335 148 44.2 187 (1) (1) (67.1) 188 29 159 (63.1) 1.7 14.9 12.6 (63.1) 10,289 12.0 8,973 5,619 3,354 1,316 24.1 12.8 184 1,132 24.0 11.0 843 275 48.8 563 83.7 563 186 33.0 377 101.5 377 377 137.1 3.7 26.0 26.0 105.4 11,421 11.0 9,960 6,237 3,723 1,461 11.0 12.8 203 1,258 11.2 11.0 556 280 28.5 982 74.4 982 324 33.0 658 74.4 658 658 74.4 5.8 45.3 45.3 74.4

94.3 2,550.4

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United Spirits | 2QFY2013 Result Update

Balance Sheet (consolidated)

Y/E March (` cr) SOURCES OF FUNDS Equity Share Capital Preference Capital Reserves& Surplus Shareholders Funds Minority Interest Total Loans Other long term liabilities Total Liabilities APPLICATION OF FUNDS Gross Block Less: Acc. Depreciation Net Block Capital Work-in-Progress Goodwill Investments Current Assets Cash Loans & Advances Other Current Assets Debtors Inventory Current liabilities Net Current Assets Deferred Tax Assets Foreign curr. Mon item Mis. Exp. not written off Total Assets 2,292 665 1,627 29 4,474 950 4,037 449 740 215 888 1,746 1,646 2,391 92 560 73 10,196 2,374 649 1,725 94 4,244 127 4,949 769 772 322 1,340 1,746 1,764 3,185 71 141 45 9,632 2,697 757 1,940 129 4,432 154 6,184 637 1,627 321 1,483 2,117 2,010 4,174 33 45 10,907 3,726 905 2,821 5,167 236 7,573 363 2,203 279 1,973 2,755 3,426 4,147 59 12,431 4,192 1,089 3,103 5,167 236 8,285 508 2,203 279 2,210 3,085 3,808 4,477 59 13,042 4,611 1,292 3,319 5,167 236 9,033 674 2,203 279 2,453 3,425 4,200 4,833 59 13,615 100 3 2,283 2,386 6 7,360 443 10,196 121 3,653 3,774 8 5,506 344 9,632 126 4,053 4,179 18 6,381 330 10,907 126 4,536 4,662 15 7,523 231 12,431 145 8,175 8,320 15 4,523 184 13,042 145 8,795 8,940 15 4,523 137 13,615 FY09 FY10 FY11 FY12 FY13E FY14E

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United Spirits | 2QFY2013 Result Update

Cash flow (consolidated)

Y/E March (` cr) Profit before tax Depreciation Change in Working Capital Less: Other income Direct taxes paid Cash Flow from Operations (Inc.)/ Dec. in Fixed Assets (Inc.)/ Dec. in Investments (Inc.)/ Dec. in loans and adv. Other income Cash Flow from Investing Issue/(Buy Back) of Equity Inc./(Dec.) in loans Dividend Paid (Incl. Tax) Others Cash Flow from Financing Inc./(Dec.) in Cash Opening Cash balances Closing Cash balances FY2009 (317) 93 (354) 92 (670) (569) (738) (1,307) 756 25 1,882 (95) 544 449 FY2010 FY2011 FY2012 FY2013E FY2014E 170 95 (474) 193 (402) (148) 824 676 14,487 (1,854) 37 46 320 449 769 834 102 (1,121) 265 (450) (358) (28) (385) (794) 875 38 585 704 (132) 769 637 335 147 (247) 148 88 (900) (81) (981) 1,142 38 (561) 619 (274) 637 363 563 184 (186) 186 376 (466) (466) 3,300 (3,000) 38 (103) 235 145 363 508 38 (123) (85) 166 508 673 982 203 (191) 324 670 (419) (419)

1,101 (12,623)

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United Spirits | 2QFY2013 Result Update

Exhibit 8: Key Ratios

Y/E March Valuation Ratio (x) P/E (on FDEPS) P/E (on basic, reported EPS) P/CEPS P/BV Dividend yield (%) Market cap. / Sales EV/Sales EV/EBITDA EV / Total Assets Per Share Data (`) EPS (Basic) EPS (fully diluted) Cash EPS DPS Book Value Dupont Analysis (%) EBIT margin Tax retention ratio Asset turnover (x) ROIC (Post-tax) Cost of Debt (Post Tax) Leverage (x) Operating ROE Returns (%) ROCE (Pre-tax) Angel ROIC (Pre-tax) ROE Turnover ratios (x) Asset Turnover (Gross Block) Asset Turnover (Net Block) Asset Turnover (Total Assets) Operating Income / Inv. Capital Inventory / Sales (days) Receivables (days) Payables (days) WC cycle (ex-cash) (days) Solvency ratios (x) Gross debt to equity Net debt to equity Net debt to EBITDA Interest Coverage (EBIT / Int.) 3.1 2.5 7.7 0.9 1.5 1.2 4.5 1.5 1.5 1.3 4.9 2.1 1.6 1.5 6.5 1.0 0.5 0.5 2.9 1.3 0.5 0.4 2.5 2.3 2.7 4.1 0.6 0.6 108 58 99 118 2.7 3.8 0.6 0.7 100 64 98 125 2.9 4.0 0.7 0.8 96 70 93 147 2.9 3.9 0.8 0.8 97 69 108 145 2.6 3.5 0.8 0.9 104 74 128 138 2.6 3.6 0.9 0.9 104 75 128 130 7.1 19.3 (1.2) 9.4 21.5 7.2 10.2 21.1 10.8 7.8 14.9 4.3 8.9 16.4 5.8 9.4 17.1 7.6 12.4 0.6 10.3 13.2 2.5 3.1 14.7 0.7 (1.5) (1.3) 1.4 (1.7) 14.2 68.2 0.8 7.6 5.7 1.2 9.9 9.9 55.8 0.8 4.6 7.0 1.3 1.4 11.0 67.0 0.9 6.3 9.4 0.6 4.3 11.0 67.0 0.9 6.7 8.2 0.4 6.1 (40.8) (40.8) 6.5 2.1 238 (1.9) (1.9) 26.3 2.6 313 45.2 45.2 42.4 2.6 332 14.9 14.9 24.3 2.6 370 26.0 26.0 38.6 2.2 573 45.3 45.3 59.2 2.2 615 (43.2) (936.4) (43.2) (936.4) 271.1 7.4 0.1 3.2 4.5 31.9 2.4 67.1 5.6 0.1 3.3 4.1 25.2 2.7 38.9 38.9 41.6 5.3 0.1 3.0 3.8 24.2 2.6 118.0 118.0 72.4 4.8 0.1 2.4 3.2 27.7 2.4 67.9 67.9 45.6 3.1 0.1 2.5 2.9 22.5 2.3 38.9 38.9 29.8 2.9 0.1 2.2 2.6 20.2 2.2 FY2009 FY2010 FY2011 FY2012 FY2013E FY2014E

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United Spirits | 2QFY2013 Result Update

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United Spirits | 2QFY2013 Result Update

Research Team Tel: 022 - 39357800

E-mail: research@angelbroking.com

Website: www.angelbroking.com

DISCLAIMER
This document is solely for the personal information of the recipient, and must not be singularly used as the basis of any investment decision. Nothing in this document should be construed as investment or financial advice. Each recipient of this document should make such investigations as they deem necessary to arrive at an independent evaluation of an investment in the securities of the companies referred to in this document (including the merits and risks involved), and should consult their own advisors to determine the merits and risks of such an investment. Angel Broking Limited, its affiliates, directors, its proprietary trading and investment businesses may, from time to time, make investment decisions that are inconsistent with or contradictory to the recommendations expressed herein. The views contained in this document are those of the analyst, and the company may or may not subscribe to all the views expressed within. Reports based on technical and derivative analysis center on studying charts of a stock's price movement, outstanding positions and trading volume, as opposed to focusing on a company's fundamentals and, as such, may not match with a report on a company's fundamentals. The information in this document has been printed on the basis of publicly available information, internal data and other reliable sources believed to be true, but we do not represent that it is accurate or complete and it should not be relied on as such, as this document is for general guidance only. Angel Broking Limited or any of its affiliates/ group companies shall not be in any way responsible for any loss or damage that may arise to any person from any inadvertent error in the information contained in this report. Angel Broking Limited has not independently verified all the information contained within this document. Accordingly, we cannot testify, nor make any representation or warranty, express or implied, to the accuracy, contents or data contained within this document. While Angel Broking Limited endeavours to update on a reasonable basis the information discussed in this material, there may be regulatory, compliance, or other reasons that prevent us from doing so. This document is being supplied to you solely for your information, and its contents, information or data may not be reproduced, redistributed or passed on, directly or indirectly. Angel Broking Limited and its affiliates may seek to provide or have engaged in providing corporate finance, investment banking or other advisory services in a merger or specific transaction to the companies referred to in this report, as on the date of this report or in the past. Neither Angel Broking Limited, nor its directors, employees or affiliates shall be liable for any loss or damage that may arise from or in connection with the use of this information. Note: Please refer to the important `Stock Holding Disclosure' report on the Angel website (Research Section). Also, please refer to the latest update on respective stocks for the disclosure status in respect of those stocks. Angel Broking Limited and its affiliates may have investment positions in the stocks recommended in this report.

Disclosure of Interest Statement 1. Analyst ownership of the stock 2. Angel and its Group companies ownership of the stock 3. Angel and its Group companies' Directors ownership of the stock 4. Broking relationship with company covered

United Spirits No No No No

Note: We have not considered any Exposure below ` 1 lakh for Angel, its Group companies and Directors

Ratings (Returns):

Buy (> 15%) Reduce (-5% to 15%)

Accumulate (5% to 15%) Sell (< -15%)

Neutral (-5 to 5%)

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