United Spirits Ltd continues to face the hangover of heavy debt, besides rising input costs and higher interest rates. It wasn’t a surprise that the stock has plunged 13.6% in two sessions after the results were announced early morning on Wednesday.
Net profit slumped to Rs10 crore in the March quarter compared with Rs60 crore a year ago, a drop of 83%. Interest outgo jumped 44% year-on-year (y-o-y) to Rs166 crore, dragging down profit before tax by 72% to Rs26 crore.
For the full fiscal year, interest costs widened to Rs594 crore from Rs445 crore a year ago as United Spirits borrowed £370 million (around Rs3,233 crore) to refinance the debt it had taken to buy Whyte and Mackay Ltd, the firm said in a statement. Debt has also ballooned; total net debt at the end of the March quarter stood at Rs7,773 crore against Rs5,749 crore a year ago.
Higher input costs continued to eat into profitability as operating margins slipped 231 basis points (bps) y-o-y to 9.5%. One basis point is one-hundredth of a percentage point. Cost of materials consumed as a percentage of net sales rose 61% compared with 58% in the March quarter previous year, the highest in 12 quarters due to inflation and a jump of around 8% in the cost of glass and spirits.
While staff costs as a percentage of net sales fell 78 bps and advertising cost dropped 20 bps, they were unable to cushion the impact of rising input costs on operating margins.
Two key markets—West Bengal and Tamil Nadu—dampened volume growth in 2011-12. Net sales were up 17% to Rs1,863 crore in the March quarter, but were down 5% sequentially. Even for the full year, volume growth remained subdued, around 7% compared with 12% recorded in the preceding year, as excise and sales tax rose in West Bengal.
After a steep hike in sales tax in Maharashtra, West Bengal raised duties by 45% between August and September. While volume growth has stabilized in Maharashtra, it fell 19% in West Bengal in the March quarter after a 48% drop in the preceding three months. In Tamil Nadu, sales dropped due to the campaign to promote local brands. United Spirits’ offtake in the state was affected by two million cases in the second half of the fiscal.
The stock has fallen from a high of Rs784 in April and is trading at Rs570 mainly on concerns over mounting debt and the crisis at Kingfisher Airlines Ltd.
“United Breweries (Holdings) Ltd has given guarantees worth Rs9,135 crore on behalf of Kingfisher Airlines,” Angel Broking Ltd said in a recent note. “If the airline goes bust, United Breweries (Holdings) will have to repay the debt by offloading stake in United Breweries Ltd, United Spirits and other fixed assets and subsidiaries. If that happens, it will lead to better price discovery of United Spirits shares.”
The United Spirits stock is trading at around 16 times the one-year estimated price-to-earnings multiple. While volume growth is expected to pick up in the current fiscal and raw material costs have started coming down, unless the firm is able to successfully raise $225 million (around Rs1,269 crore today) through issuing foreign currency convertible bonds, debt concerns will continue to dampen spirits.
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