BackUnited Spirits’ 'raising the bar' good but won’t get investors high on the stock
It will spend Rs75 crore to support bars, pubs and restaurants serving alcohol under a programme called ‘Raising the BarAnalysts said the move would help brand recall as well as forge closer partnership with restaurants, pubs
PremiumMUMBAI: Every little bit helps. Perhaps, alcoholic beverages company United Spirits Ltd is thinking on those lines. It will spend Rs75 crore to support bars, pubs and restaurants serving alcohol under a programme called ‘Raising the Bar.’ This is to assist the recovery following the covid-19 pandemic and also to welcome consumers back.
True, this would augur well in the long-run. As Karan Taurani, analyst at Elara Securities (India) Pvt. Ltd, “This is a good move from a longer term perspective which helps United Spirits enhance their partnerships and improve their brand recall with the pubs and restaurants."
On the other hand, the initiative would increase costs to that extent and further weigh on profits in an already weak demand environment.
But what about demand? “In the near-term though, consumer demand for its products will not get a big boost due to this initiative, except certain categories/brands which are already doing well -- hence no incremental benefit due to above," added Taurani.
Analysts from Credit Suisse Securities (India) Pvt Ltd said in a note on 17 June, “United Spirits has ~20-25% of its business from restaurants, bars and banquets. The bulk of these sales is in the top 10 cities where the covid impact is now extending." As such, one can expect this segment to remain subdued for a longer period of time as consumers shy away from venturing out to avoid contracting the virus.
Shares of United Spirits were trading slightly lower on Wednesday morning whereas the Nifty 50 index was marginally higher.
In general, consumer companies have been struggling with subdued demand and United Spirits is not an exception here. For FY20, the company reported a mere 1% revenue growth. Sales were impacted by general elections, overall consumption slowdown, followed by covid-19 led disruption towards the end of the year. The nationwide lockdown in the current quarter will weigh on sales, percolating to profits. Investors will watch the revenue momentum. In any case, it would be foolhardy to expect too much improvement in sales in this financial year.
After staging a smart recovery from the lows in 2020, the United Spirits stock is about 17% away from its 52-week trading high seen on 20 February on the National Stock Exchange. Valuations are not cheap though, what with the stock trading at almost 42 times estimated earnings for financial year 2022, according to Bloomberg data. Softer demand environment and relatively high valuations should dissuade investors from getting high on the stock in the near-future.
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