India Equity Value investor, Trivikram Consultants

Prashant Vaishampayan

India Equity Value investor

Picking Long Term Multi-bagger stocks

Trivikram Consultants

Trivikram Consultants is an equity research service founded by Prashant Vaishampayan, a registered Research Analyst with SEBI in India. Prashant has done equity research since 1992.  He worked with Jardine Fleming, SG Securities, UBS and Kotak Securities. Since 2010, he is managing his portfolio and doing outsourced equity research for institutional clients. A team of six professionals helps him in equity research. We focus on pharma, agro-chemicals, auto and auto components, banks and financial services, specialty chemicals and niche manufacturing sectors.   

Equity Bottom-Up

United Spirits Limited <a href="https://www.smartkarma.com/entities/5146" target="_blank">United Spirits (UNSP IN)</a> is one of India’s leading alcohol beverage companies with a portfolio of premium brands. UNSP sells over 1 million cases annually with its product offering of 15 brands that span across price points in all market segments: Popular, Prestige, Premium and Luxury. In FY14, <a href="https://www.smartkarma.com/entities/977" target="_blank">Diageo Plc (DGE LN)</a> acquired 54.8 percent shareholding in UNSP, making India one of its largest markets. 
We expect UNSP revenues/EBITDA/PAT to grow by 14%/28%/29% CAGR (FY18-21E) respectively. ROCE is likely to expand by 60 bps to 33.6% by FY21E from 33% in FY18 and ROE ratio is likely to remain stable at 22.4%.
 We like the business of UNSP for the following reasons:
<ul>
<li>The company’s objective is to deliver sustainable profitable growth with improved margins. The management believes that the industry is growing at the rate of mid to high teens and there is a lot of opportunity in the Indian market to grow over the medium term.</li>
<li>UNSP has a strong focus on premiumization of the product mix. In FY18, Prestige and Above Segment accounted for 63% of the total sales which has increased to 66% in 1HFY19.</li>
<li>UNSP has a strong distribution network with more than 85,000 outlets and market share of ~50%.Price increase, product mix, premiumization and productivity across various lines of manufacturing units has led to EBITDA margin expansion from 10.7% in FY16 to 12.5% in FY18. Management is confident of EBITDA margin expansion to continue going forward as well, as the economies of scale and operating leverage will continue to play out.</li>
<li>UNSP aims at reducing the financial leverage by monetizing non-core/surplus assets. Net debt has reduced by 24% in 1HFY19 by utilizing operating profit to repay some of the short-term debt.</li>
<li>UNSP is focused on investing in their brands to better engage with consumers and build brand equity. In 1HFY19, Advertisement and Promotion expense as a percentage to total sales was 9.7% v/s 8.2% in the same period last year.</li>
</ul>
The fair value estimates for UNSP comes to Rs 620/- per share over the next 12 months. This valuation is based on applying 40x multiple to the year ending Sep-20E standalone business EPS of Rs 14.7, Non-core assets of Rs 18, Royal Challengers Bangalore value of Rs 13 and Pioneer Distilleries value for UNSP of Rs 2. Despite UNSP's many strength, we believe that the share price is fairly valued and has already fully factored in the company's growth prospects. 
<table class="table table-striped">
<tbody>
<tr>
<td>
 
</td>
<td style="text-align: right;">
FY17
</td>
<td style="text-align: right;">
FY18
</td>
<td style="text-align: right;">
FY19E
</td>
<td style="text-align: right;">
FY20E
</td>
<td style="text-align: right;">
FY21E
</td>
</tr>
<tr>
<td>
PE (x)
</td>
<td style="text-align: right;">
           281
</td>
<td style="text-align: right;">
             85
</td>
<td style="text-align: right;">
       64
</td>
<td style="text-align: right;">
       50
</td>
<td style="text-align: right;">
39
</td>
</tr>
<tr>
<td>
ROE
</td>
<td style="text-align: right;">
9%
</td>
<td style="text-align: right;">
22%
</td>
<td style="text-align: right;">
23%
</td>
<td style="text-align: right;">
23%
</td>
<td style="text-align: right;">
22%
</td>
</tr>
<tr>
<td>
ROCE
</td>
<td style="text-align: right;">
34%
</td>
<td style="text-align: right;">
33%
</td>
<td style="text-align: right;">
33%
</td>
<td style="text-align: right;">
33%
</td>
<td style="text-align: right;">
34%
</td>
</tr>
</tbody>
</table>
<div class="content-caption">Source: Trivikram Consultants Research (PE based on the close price of UNSP as of 4th December 2018) </div>
<div class="content-caption">Note: E = Estimates</div>

United Spirits Limited United Spirits (UNSP IN) is one of India’s leading alcohol beverage companies with a portfolio of premium brands. UNSP sells over 1 million cases annually with its product offering of 15 brands that span across price points in all market segments: Popular, Prestige, Premium and Luxury. In FY14, Diageo Plc (DGE LN) acquired 54.8 percent shareholding in UNSP, making India one of its largest markets. 
We expect UNSP revenues/EBITDA/PAT to grow by 14%/28%/29% CAGR (FY18-21E) respectively. ROCE is likely to expand by 60 bps to 33.6% by FY21E from 33% in FY18 and ROE ratio is likely to remain stable at 22.4%.
 We like the business of UNSP for the following reasons:

The company’s objective is to deliver sustainable profitable growth with improved margins. The management believes that the industry is growing at the rate of mid to high teens and there is a lot of opportunity in the Indian market to grow over the medium term.
UNSP has a strong focus on premiumization of the product mix. In FY18, Prestige and Above Segment accounted for 63% of the total sales which has increased to 66% in 1HFY19.
UNSP has a strong distribution network with more than 85,000 outlets and market share of ~50%.Price increase, product mix, premiumization and productivity across various lines of manufacturing units has led to EBITDA margin expansion from 10.7% in FY16 to 12.5% in FY18. Management is confident of EBITDA margin expansion to continue going forward as well, as the economies of scale and operating leverage will continue to play out.
UNSP aims at reducing the financial leverage by monetizing non-core/surplus assets. Net debt has reduced by 24% in 1HFY19 by utilizing operating profit to repay some of the short-term debt.
UNSP is focused on investing in their brands to better engage with consumers and build brand equity. In 1HFY19, Advertisement and Promotion expense as a percentage to total sales was 9.7% v/s 8.2% in the same period last year.

The fair value estimates for UNSP comes to Rs 620/- per share over the next 12 months. This valuation is based on applying 40x multiple to the year ending Sep-20E standalone business EPS of Rs 14.7, Non-core assets of Rs 18, Royal Challengers Bangalore value of Rs 13 and Pioneer Distilleries value for UNSP of Rs 2. Despite UNSP's many strength, we believe that the share price is fairly valued and has already fully factored in the company's growth prospects. 




 


FY17


FY18


FY19E


FY20E


FY21E




PE (x)


           281


             85


       64


       50


39




ROE


9%


22%


23%


23%


22%




ROCE


34%


33%


33%


33%


34%




Source: Trivikram Consultants Research (PE based on the close price of UNSP as of 4th December 2018) 
Note: E = Estimates

United Spirits Ltd – Sustainable Profit Growth from Premium Products, Richly Priced