United Spirits Shares Fall Over 7% As Cost Pressures Cloud Q1 Sales

Shares of United Spirits Ltd. fell the most in at least a year as analysts saw inflationary raw material scenario as a near-term risk for the liquor maker.

The Diageo Group flagship company posted profit worth Rs 266.2 crore in the quarter ended June, up 46% sequentially. That compares with the Rs 186-crore consensus estimate of analysts tracked by Bloomberg.

United Spirits Q1 FY23 (Consolidated, QoQ)

• Net sales down 11% at Rs 2,169.3 crore

• Ebitda down 36% at Rs 274 crore

• Ebitda margin at 12.6% vs 17.5%

“We have delivered another quarter of steady performance in a challenging operating environment. Our business today is ahead of pre-pandemic levels...," Hina Nagarajan, chief executive at the owner of McDowell's and Black Label brands, said in an exchange filing on Tuesday. "Double-digit inflation, scotch supply constraints in select markets and a one-time special grant to our people in recognition for the outstanding contribution in extremely challenging times, impacted the Ebitda margin delivery."

In the shorter term, she said, United Spirits expects inflationary pressures to continue. "Our confidence in the medium- to long-term prospects of our industry...and our ability to navigate headwinds remains high. We remain focused in our strategy of reshaping the portfolio toward premiumisation, revenue growth management initiatives."

Shares of United Spirits fell as much as 7.6%, the most in at least a year, before closing 6.7% lower at Rs 792.9 apiece on Wednesday.

Of the 24 analysts tracking the company, 16 maintain a 'buy', five suggest a 'hold' and three recommend a 'sell', according to Bloomberg data. The 12-month consensus price target implies an upside of 14.5%.

Trading in the company's put options was triple the average. Trading volume was six times the average for this time of the day, according to Bloomberg data.

Here's what brokerages made of United Spirits' Q1 FY23 results:

• Has a 'neutral' rating with a target price of Rs 804, implying a potential downside of 5.4%.

• Overall miss on Motilal's estimates.

• Reported gross margin contraction was partially offset by favourable product mix and productivity savings.

• Exceptional items include ongoing business restructuring expenses in the form of employee separation costs covering permanent workmen at four factories, and a one-time special payout to employees.

• The management expects inflationary pressures to continue in the short term. It is focused on its strategy of re-shaping the portfolio toward premiumisation.

• Has an 'add' rating with a target price of Rs 940, implying a potential upside of 10.5%.

• Decent quarter amid cost inflation revenue growth print was decent but unexciting.

• Relatively better performance in the Prestige and Above portfolio. Resilient off-trade channel and gradual recovery in on-trade channel aided overall recovery.

• Management highlighted scotch supply constraints in select markets. Costs controls and operating leverage helped deliver underlying Ebitda margin of 13.8% with gross margins down to 40.9%.

• Inflationary raw material scenario is a near-term risk and can lead to some short-term pain (in terms of margins) with United Spirits looking to invest behind premium brands.

• United Spirits' two transactions of brand sales (slump sale + franchising (for now) are an attempt to free organisation’s resources on what can add more value in the long-term. Classic case of: “What not to do is more important than what to do?” given resources are constrained in real life.

• Select part of the street getting concerned on no immediate optical benefit, is too myopic. Focused approach can accelerate the journey.