Home >Markets >Mark To Market >Shares of United Spirits feeling low as socializing catches flu

Investors’ spirits have dipped sharply for shares of alcoholic beverages company United Spirits Ltd. The stock touched a new 52-week low of 494.60 intraday on Wednesday. Investors’ fears are understandable, considering that the Covid-19 contagion is a risk to demand, as consumers refrain from socializing.

Analysts at Kotak Institutional Equities wrote in a report on 17 March: “Covid-19 outbreak would negatively impact United Spirits in the near term: (1) on-premise sales (25% of overall sales; lower in volume terms) could decline sharply due to restrictions on travel, cancellation of events/parties and likely shutdown of pubs and restaurants in a few markets, (2) partly offset by likely higher in-home consumption during this period." The net impact of this, said the Kotak report, is that revenues could decline sharply over the next few weeks.

On-premise sales refer to sales in, for example, a café, pub, bar or restaurant.

For United Spirits, much depends on how soon Covid-19 subsides. Already, the general consumption slowdown in the country is biting into sales volumes. Total volumes declined by 2% year-on-year in the December quarter. Overall, note that the prestige-and-above segment volumes had increased by 3%, whereas the popular segment’s volume fell by 6%.

(Graphic: Satish Kumar/Mint)
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(Graphic: Satish Kumar/Mint)

To be sure, analysts remained pleased with the company’s ability to effectively manage operating costs. “In the last few quarters, sharp focus on cost optimization has led to robust margin performance, especially in a COGS (cost of goods sold) inflationary environment," said analysts at Nirmal Bang Institutional Equities in a report on 29 January.

Analyst say raw material cost inflation has seen some moderation, which helps. It also augurs well that United Spirits is de-prioritizing a few low-margin products.

To sum up, while investors await normal business conditions to return, the only silver lining is that the sharp correction in the United Spirits stock has rendered valuations cheaper. At the current price, the stock trades at nearly 32 times estimated earnings for FY21, according to Bloomberg data. Although, meaningful upsides could well be at bay given the Covid-19 impact uncertainty and demand recovery thereon.

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