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Shares of United Spirits Ltd and United Breweries Ltd have both experienced a ‘catch-up’ rally since the end of October, appreciating by 18-25%. Even so, both stocks have declined compared to their pre-covid highs. Shares of United Spirits and United Breweries are 18% and 14% lower, respectively, compared to their highs in February on NSE.

“In general, market share concerns have been more pronounced for United Spirits compared to United Breweries. Diageo, as a parent, has always emphasized on the Scotch segment for higher profitable growth. However, the Scotch segment in India is still very premature and contributes only 2.5% of the overall whisky cases, which does not move the needle too much in terms of volumes for United Spirits," said Karan Taurani, analyst at Elara Securities (India) Pvt. Ltd. “There have been downtrading concerns too, which have hurt United Spirits," another analyst said, requesting anonymity.

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The company is also undergoing a leadership change. Last week, United Spirits said Hina Nagarajan will replace Anand Kripalu as CEO effective 1 July 2021. Nagarajan has spent more than three decades in the consumer packaged goods businesses.

Lacking the spirit
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Lacking the spirit

“Expectations will be high from an FMCG veteran to drive the spirit in the company and will determine whether a U-turn on market share will come anytime soon. Markets have been appreciative of CEO changes and the resultant changes that follow. A hope trade in an industry that has become more open ended, is something we would be wary of," Taurani said.

United Spirits and United Breweries stocks trade at 44 times and 52 times estimated earnings for FY2022, respectively, according to Bloomberg.

Even so, some analysts are positive on the overall alcohol beverages sector. “We are constructive on the sector as volume recovery continues to show improvement and the tax-hike overhang is seen to be reducing. Better volume trends, benign input prices and moderate taxation should drive strong earnings recovery in FY22-23E, with likely upsides to our forecasts," Ashit Desai of Emkay Global Financial Services Ltd said in a report on 14 December.

The first half of FY21 was marred by covid, but recovery in volumes is expected to drive profit growth in the second half. The reopening of pubs and bars should also aid growth. For FY20-23E, Emkay estimates 100-200 basis points gross margin gains for United Spirits, United Breweries, Radico Khaitan, which are still conservative versus FY19 and can see upsides.

“Alcobev stocks have underperformed since covid. Current valuations are at a discount to their long-term averages and can see upsides as volume/earnings growth visibility improves," said Desai

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