Broker's call: United Spirits (Sell)

CMP: ₹609.45

Target: ₹560

Pernod Ricard’s FY19 results indicate stronger growth in India compared with United Spirits, which has continued to gain market share. Pernod’s India sales grew at 14 per cent and 20 per cent in FY18 and FY19 (July-June) versus United Spirits’ P&A sales growth of 10 per cent and 13 per cent, respectively. This points to market share losses for United Spirits in the P&A portfolio.

Moreover, Pernod’s Asia/ROW margin expansion of 40bps in H2 and 120bps in FY19 does not indicate that it is funding this higher growth in India through steep increases in promotions and discounting. We estimate India contributes close to 30 per cent of Asia/ROW sales for Pernod.

Pernod’s rollout of ‘Transform and Accelerate’ strategic plan from FY19 aims at accelerating growth, driving operational excellence and achieving cost savings. Focus is on four key markets, with India being the third strategic market (about 10 per cent of its sales and profits). This is likely to maintain/increase its aggression in India, which should drive higher competitive spends.

United Spirits may have to increase its investments behind brands and also drive portfolio/pricing changes to win market share, in our view. We note that United Spirits’ margin expansion in the last two quarters was supported by a steep cut in ad spends (down 19 per cent). Given the slow growth, we believe this is unlikely to sustain and ad spends will have to be stepped up significantly. Valuations at 46x FY21E EPS appear unattractive given the slow P&A growth and market share losses.

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