United Spirits Ltd’s December quarter sales rose by only 11.3% to Rs.2,174.01 crore from a year earlier. This was despite a 7% growth in overall volume and a 29% increase in the sales of premium brands. A richer product mix should have normally seen sales increase at a faster rate, but a higher excise incidence affected its net sales growth during the quarter.
Gross sales rose by 21.7% over the year-ago period, but excise as a percentage of gross sales increased by four percentage points to 56.95%, and by 6.5 percentage points sequentially. That’s why its net sales growth came in at a much lower figure. But United Spirits’ excise incidence does fluctuate between quarters, as the June quarter’s figure was 56.3%. Therefore, a year to date figure may be more useful for comparison. In the nine months till December, volumes rose by 3% and revenue by 14%.
Though sales growth was relatively low, it grew ahead of the increase in its cost of goods sold, which grew by 8.8%. The company said that spirit costs had increased during the quarter, causing a Rs.27 crore hit, but it expects this to moderate as the cane crushing season is in full swing. United Spirits’ operating profit margin widened by 2.3 percentage points to 12.5%, despite other expenses increasing by 16%.
The company’s focus on selling more of premium brands, which now contribute to about one-fourth of revenue, has helped improve its margins. These could improve further as the firm has got government permission to sell higher priced brands and the impact of this development will be felt from the March quarter onwards. In Tamil Nadu, its problems continue as the firm is being forced to operate at a lower capacity, and is being forced to mark a portion of that capacity for cheaper brands.
United Spirits’ operating profit rose by 37.1%, and a relatively low increase in interest and depreciation costs led to its net profit increasing by 71.2% to Rs.80.6 crore. In absolute terms, interest continues to be a serious overhang on the firm’s performance, as it ate away 59.6% of the operating profit during the quarter.
The company’s shares rose by 2.11% on Tuesday, which could be partly attributed to its results and also news that Diageo Plc’s open offer may have got the market regulator’s approval. Investors will be keen to watch how the acquisition by Diageo, which is awaiting regulatory approvals, reflects in United Spirits’ performance in the quarters and years ahead. One benefit that is expected in the near term is a reduction in interest costs.
Optimism on the post-acquisition integration benefits is what may be holding up United Spirits’ share price at these levels, as it trades at an expensive price-to-earnings multiple of 37 times its 2013-14 estimated earnings per share, based on consensus estimates prepared by Thomson Reuters.