UNITED SPIRITS - STILL A GOLDMINE

By S. P. Tulsian and Geetanjali Kedia

We have seen lot of pessimism having been built up on the prospects of United Spirits Ltd (USL), because stock is going out from Futures & Options, as also from Nifty 50, w.e.f. 19-09-2014. This may be a cause of concern to the traders, but must not be to an investor. Inspite of this, experts and anchors on electronic media have started expecting the share price to fall, while it is indicated by them that it may correct below Rs.2,000, which is a bizarre and meaningless view.

Why this action of Nifty 50 & F&O exclusion

As the company has not yet finalised its accounts for the financial year ended 31^st March, 2014, as also, not considered and approved its unaudited Q1 results for FY 15, it is imperative for the stock exchanges to take this action. Even, stock may be put in T2T segment going forward.

Why accounts are not finalised

Due to change in promoter and controlling stake in the company – with promoter changing from United Breweries Group (UB Group) to Diageo, with later having acquired 54.78% stake in the company, after its recent buy back of 26% at Rs.3,030 per share, Diageo has sought clarifications in respect to two dues recoverable by USL from UB Group, which are as under:-

1. Rs.1,351 crore lent by USL to United Breweries (Holdings), with interest dues thereon.

2. Rs.590 crore recoverable by USL as sundry debtors, for supply made to UB Group associates.

Obviously, both these amounts, will either get recovered by Diageo from UB Group, or will get written off. In either case, it is not damaging the cash flow of USL, though accounts may show write off, with P&L showing big loss due to this write off. Conversely, if USL shows this amount as recoverable from UB Group, after deliberations, it will be seen positive, as well.

Whyte & Mackay stake sale

• USL is divesting its stake in its wholly owned subsidiary Whyte & Mackay Ltd. (W&M) for £430 million, equivalent to Rs.4,350 crore.

• USL had granted a loan of Rs.4,200 core to its London subsidiary in 2007, for acquiring W&M at £595 million, equivalent to Rs.5,000 crore then.

• So write off, of about Rs.650 crore will be seen in FY 14 accounts. Conversely, USL will have an inflow of Rs.4,350 crore, which may get used to make USL largely debt free.

• It may be seen that W&M deal has happened at a multiple of 19.3x on EV/ EBITDA basis. This is inspite of the poor financials of W&M and USL seen struggling to find out buyer for W&M. USL is now able to salvage its 75% cost, in Pound terms.

Strength of USL

• Sold 123.7 million cases in FY13, having 140 brands.

• USL sold over 10 million cases each of its top five brands.

• Top 21 brands of USL – sell over 1 million cases per year of each brand, a milestone in industry parlance.

• USL has manufacturing and bottling plants in each state in India, significant as liquor is a state subject with restrictions on movement from one state to the other.

• USL exports its products to 37 countries.

• Diageo has appointed Mr. Anand Kripalu as MD & CEO of USL for a period of 5 years, with induction of few independent directors as well.

• Diageo will consolidate working of USL with itself, with effect from 02-07-2014, giving great syngergy on marketing and financials.

• USL will enjoy the distribution strength of Diageo in India, as also in other parts of the world.

Strength of Diageo

• For year ending 30-06-2013, Diageo had total income of Rs.1,12,000 crore, PAT of Rs.21,150 crore, with net worth of Rs.57,050 crore, with an EPS at Rs.79.40.

• Diageo recently purchased 26% stake in USL, in a buy back, of 3.78 crore shares at Rs.3,030 per share, for Rs.11,450 crores.

• Diageo will not allow USL to starve for the funds, or allow the company to get referred to BIFR.

• USL’s net worth is close to Rs.8,700 crores as at 31-12-2013. So even after write offs, as stated herein above, it will not turn its net worth negative and is unlikely to get referred to BIFR.

Trading data of USL on 22-08-2014

• USL saw a delivery based buying of 12.13 lakh shares on NSE and 1.10 lakh shares on BSE, close to 50% of total volume, on Friday 22-08-2014.

• Open interest in future segment on NSE, fell to 27.85 lakh shares, having reduced by 8 lakh shares on Friday 22-08-2014. This indicates that long position in Future is converted into delivery.

• Open interest (OI) of 27.85 lakh is seen in strong hands on long side, which may also see it getting converted in delivery.

• OI of about 4 lakh shares is seen in September and October series, which are also seen in the strong hands on long side.

• OI of about 7 lakh shares seen for 2400, 2450 and 2500 CE, while about 4.50 lakh shares are seen for 2300, 2350 and 2400 PE. Due to sharp swing likely to be seen by expiry, these strike rates of PE and CE may give good returns as well.

• Hence, OI in F&O are seen tilting more towards bullish move till expiry of August series, as also till 18^th September, 2014, when September and October series will now expire.

Financials of USL

• USL had an EBITDA of Rs.1,370 crores, with an EPS of Rs.24.53, for FY13.

• USL had an EPS of Rs.19.50 for first 9 months of FY14.

• Due to exceptional expected in Q4 of FY14, one should not extrapolate Q4 working. One can safely take an EPS of Rs.25 for FY14 as well, from core operations.

• With a CAGR of 20%, EPS of the company for FY24 can be expected at or above Rs.150 per share.

Goldman Sachs on Jubilant Food

• Goldman Sachs released a report in August 2013, expecting Jubilant Food (JF) to be a $7.4 billion company in 10 years, or of about Rs.45,000 crore, considering exchange rate at Rs.61 per US dollar, which was the rate prevailing in August, 2013 and even now in August, 2014.

• JF’s present M Cap is Rs.8,500 crore, with an EPS of Rs.20.73 in FY13 and Rs.19.25 in FY14.

• If one expects a CAGR of 20% over next 10 years, EPS of JF, will be at Rs.125 in FY24.

• To have a M Cap of Rs.45,000 crores, share has to have a PE of 55 times in FY24, considering its equity capital remains constant at Rs.65.44 crores.

Comparison of other similar stocks

• Asian Paints was ruling at a PE of about 20 times, at Rs.310 per share, based on its FY04 EPS of Rs.15.40, in the year 2004.

• Now, it is ruling at a PE of 49 times, with share having given a CAGR of 24%, in last 10 years, with an EPS of FY14 at Rs.12.70, on reduced FV of Re. 1.

• Nestle India had an EPS of Rs.26 for CY03 and was ruling at a PE of 20 times, at Rs.530 per share in August 2004, i.e. 10 years ago.

• Now it is ruling at a PE of 50 times, on an EPS of Rs.116 for CY13, having given a CAGR of 16% in last 9 years.

• Hence, growth in earnings coupled with expansion in PE multiple could help USL mirror exponential value growth, as was seen for Asian Paints and Nestle India, all three FMCG plays in the broader sense of the term, with latter also being an MNC. 

Other advantages of USL

• UB Group presently holds 4.18% stake in USL, excluding stake of 2.38% held by USL Benefit Trust, as at 30-06-2014. Seeing bank dues and pledge of shares of USL by UB Group, it is a matter of time when UB Group stake will get reduced to Nil in USL.

• Even willful defaulter move by bankers against Vijay Mallya may force him to vacate the post of Chairman of USL, as he may not be able to hold the same in that event. Even UB Group stake falling below 1% can compel him to vacate the seat of Chairman of USL. This will be seen quite positive for the company.

• FII were holding 40% stake in USL prior to recent buy back. This got reduced to about 24% post buy back. So, appetite of FIIs will re-emerge in the company.

• Diageo holding 54.78% stake in the company will always be keen to raise its stake via creeping acquisition rate, with an intent to ultimately raise stake to 75% in next 4 years, on the lines of other MNCs.

• 60,000 retail shareholders are holding over 50 lakh shares in USL, being 3.50% stake, who have not even tendered their shares in the buyback offer, even at Rs. 3,030 per share.

• With such a low float, 30 lakh shares can always get absorbed by HNIs and FIIs by 18^th September, 2014.

Conclusion

• Share is seen an extremely good and a quality buy.

• It is presently ruling at a PE of 100 times on historic earning and at a PE of about 50 times on FY16 earnings.

• If Jubilant Food can rule at a PE of 65 times on historic earning and 60 times on FY16 earnings, does USL looks expensive? Both are unique picks in their respective sectors, with leadership positions and difficult-to-replicate businesses.

• There seems to be a big move by vested interests to create negative perception for the stock.

• Investors with a view of 3 years can expect share price to hit Rs.5,000 mark.

• Recent developments may be seen a curse for the traders, but seen to be a big boon to the investors.

• Also, with stock going out of F&O, will be seen advantageous, as share price will be able to show a quick rise.

• Exclusion from Nifty 50 will have no material impact, as FIIs are as such bullish on the stock, even in isolation.

So stop listening to the experts and buy it now with view of 2-3 years.