Nomura downgrades United Spirits to neutral from buy2 min read . Updated: 03 Mar 2017, 02:37 PM IST
United Spirits sells brands like McDowell's No 1 and Royal Challenge whiskies
Bengaluru: Nomura Holdings Ltd. has downgraded its rating on liquor maker United Spirits Ltd’s stock to neutral from buy, citing near-term issues that could dampen earnings, including the implementation of the Goods and Services Tax (GST).
“United Spirits faces near-term issues which we see as key risks to earnings, with the key overhang being the implementation of the GST. While other FMCG categories benefit from input credits being offset by the introduction of GST, taxes on alcoholic beverages have been carved out as an exception to this law," Nomura analysts Manish Jain and Natasha Prakash wrote in a report on Friday.
The Supreme Court’s December ruling banning liquor outlets from operating within 500 metres of all state and national highways from 1 April will, meanwhile, soften revenue growth in the next financial year, they added.
Competition within the space also remains tough with rival Pernod Ricard SA catching up with United Spirits. Both companies are head-to-head in terms of brand equity and distribution advantages, Jain and Prakash wrote.
United Spirits sells brands like McDowell’s No 1 and Royal Challenge whiskies while Pernod retails names like Imperial Blue and Chivas Regal in India.
On a longer term basis, India remains an attractive market for liquor companies as alcohol prices increase, consumers become more brand conscious, positive demographics work in companies’ favour and ongoing premiumisation trends prove beneficial.
And with an around 36% market share, United Spirits looks well placed to benefit in the long term, Nomura said.
Diageo Plc-owned United Spirits’ shares have also been performing well recently and current valuations are fair, Jain and Prakash added. The stock has risen around 19% on a year-to-date basis. In January, the company reported a near fourfold growth in net profit to Rs147.7 crore in the October-December quarter.
“After demonetisation, the market was building in potential revenue declines and a contraction in gross margins for 3QFY17–while UNSP’s revenue growth was impacted by demonetisation as expected, the company was able to record a strong 12% revenue growth in the ‘Prestige & Above’ segment. The significant improvement of 270bp in gross margins indicates that the premiumisation story remains on track," Jain and Prakash wrote in the report.
Shares also rose during the period after media reports that parent firm, Diageo, was planning to increase its stake in United Spirits through an open offer. But the Nomura analysts do not believe that there is a need for an open offer.
“If not bound by regulation, we do not see Diageo making an open offer to the public either. The last open offer was made at a price of Rs3,030 in July 2014. If Diageo makes an open offer currently, the open offer price would be around Rs2,500 which implies that its earlier share would have to be tested for impairment, and, in our view, this would not be desirable for Diageo," they added.