Substantial volume growth is needed to justify USL`s lofty valuations

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Shareholders of United Spirits Ltd may not be in ‘good spirits’ as fiscal 2019-20 first-quarter results were below market expectations. As a result, the stock was down about 0.8% in early deals at 584.





An increase in election-related dry days hit sales growth. A one-time bulk scotch sales also failed to perk up sales and revenue growth came in below expectation. Though revenue in the first quarter of FY20 rose 10% year-on-year, it was down 1.9% sequentially.

The positives for the company during the general elections were lower overheads and ad spends. USL also raised prices of several of its products in the last quarter. But all these failed to boost operating margin which fell to 17.8% in April-June from 20.5% in the year-ago quarter.

One-offs seemed to have kept the momentum in the first quarter of the current fiscal. Though bulk sales of scotch boosted volume growth to 8% year-on-year in the reporting quarter, it was still below analysts’ expectations. Besides, ad spends that were low during the general elections will need to increase to buoy sales. This will keep a cap on Ebitda margin expansion in the coming quarters.


“High input cost pressure (ENA prices up by 5-10% qoq) along with a required increase in ad spends is likely to restrict margin expansion in the near term, in our view," said brokerage firm Emkay Global Financial Services Ltd in a note to its clients.

Despite a favourable product mix, much depends on volume growth in the coming quarters. Consumption slowdown is likely to keep volume expansion in low gear.

Analysts have also pointed out that cost pressures remain elevated and the increasing competition could keep margins weak. Growth in the premium segment, where margins are higher, could also be hit due to the slowdown.

The stock is already trading at a high price-earnings multiple of 54 times trailing 12 months earnings. That does not provide much comfort if the growth conditions remain on the slow track.



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