United Spirits - Spirited Growth - BUY
CMP Rs1,298, Target Rs1,512, Upside 16.5%
United Spirits (UNSP) is well placed to outpace the IMFL industry growth as domestic portfolio is set to report a 14.5% volume CAGR over FY10-12. Moreover, 1) favourable molasses/ENA cost due to bumper sugar harvest in the upcoming crushing season and 2) stable glass prices would aid in a ~130bps OPM expansion by FY12. Our interaction with the management suggests UNSP has not finalized its business plan for W&M. Albeit, we reckon the reported move to transform W&M into a branded spirits marketer would improve OPM over the longer term. Debt reduction remains firmly in focus as we expect gross D/E to decline from current 2.2x to 1.4x in FY12, helped by cumulative ~Rs8bn in FCFs in FY11/12. The stock trades below its historic 1-yr fwd EV/EBIDTA, which supports our BUY for a target price of Rs1,512.
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